Israeli defense firms stand to gain from the war with Hizbullah, mainly as a result of their relationships with the IDF, despite certain negative effects the conflict had on their business, Bank Leumi said Thursday in a report on the sector. "The war... will apparently have a positive effect on Israel's defense companies, both in the short term as well as in the medium term," wrote Leumi researcher Inbal Balbule. Balbule said the large quantities of munitions used during the fighting and the accelerated wear and tear on weapons would obligate the IDF to replenish its supplies and equipment. The companies will also benefit by using the war experience, Balbule said, to develop new technologies. Leumi said approximately half of the NIS 8 billion expected to be spent by the IDF on the war would go for purchases from Israeli defense firms. State-owned companies, including the Rafael Armament Development Authority, Israel Aircraft Industries, Israel Military Industries and Elta Systems, and publicly held companies such as Elbit Systems all have large contracts with the Israeli defense establishment. "The implications for the medium term include expectation for a change in the downward trend of the defense budget, and for an increase in defense expenditures in the coming years amounting to approximately NIS 2b. per year," the bank said. "This development is likely to lead to a parallel increase in orders by the IDF from Israeli defense companies." The defense budget's share of GDP has fallen from 8.5 percent in 2002 to 6.8% this year. That reduction has been severely criticized since the war in Lebanon, and in the draft 2007 state budget approved by the cabinet on Tuesday, the Defense Ministry budget was increased by some 2.9%. The companies are also expected to gain in the marketing arena as foreign countries take note of the operational abilities of Israeli-made fighting systems that were highlighted during the conflict. "An increase in foreign orders may be expected in the medium term," Leumi said. The bank quoted foreign sources listing Israel among the top five arms exporters in the world, with estimated sales abroad of close to $5b. The report noted, however, that the war was not all good for business as northern-based factories in the defense sector were closed or reduced operations during the rocket barrages. It also pointed to a delay in weapons orders by European customers because of the conflict, although "that impact has already passed," Leumi said as it downplayed the overall downside to the industry. "These negative effects on the sector appear to be negligible compared to the immediate and future positive economic impacts of the war on Israel's defense industries," Balbule said.