Israel Politics May 2019

Israel: Fresh elections called after Netanyahu fails to form a coalition; economic fallout to be limited

On 29 May, MPs voted to dissolve Parliament, triggering fresh elections for 17 September, after incumbent Prime Minister Benjamin Netanyahu failed to form a coalition government. The immediate consequence is a prolonged period of political uncertainty, which could drag on beyond the September elections and would spike if Netanyahu were to be indicted by the Supreme Court in the coming months. That said, the economy should be largely unaffected by this political noise and growth will likely continue at a robust pace going forward irrespective of developments.

At the heart of the failure to reach a coalition agreement—a first in Israel’s history—was a dispute between Avigdor Lieberman, leader of the secular Yisrael Beitenu party, and ultra-orthodox Jewish parties over military draft exemptions. While Netanyahu is likely to emerge as the candidate best placed to form a government after the September elections, the same disagreement threatens to hobble coalition talks once again.

Two recent opinion polls, which crucially were conducted before coalition talks collapsed, do see a rise in support for right-wing parties, which could potentially make Netanyahu’s task of forming a government easier. Moreover, Netanyahu’s Likud party recently announced a merger with the smaller Kulanu party, which could further boost the seat haul of the right. However, the polls also predict more seats for Yisrael Beitenu, which could still leave Lieberman with the role of kingmaker and cause further parliamentary gridlock.

The murky political panorama is unlikely to knock the economy significantly off its robust growth trajectory this year. Growth should continue to be underpinned by healthy government spending and fixed investment, and higher wages, while the Leviathan gas field coming onstream should boost the external sector further ahead.

That said, as highlighted by Gil M Bufman, chief economist at Bank Leumi: “With no fully functioning government, addressing longer-term economic policy issues will be delayed well into 2020. […] the economy could do even better with a fully functioning government, that would be focused on long-term structural changes and other growth, productivity and equality oriented steps.”

Turning to the currency markets, while the shekel lost some ground following the dissolution of Parliament, market reaction was still fairly limited. If the shekel does weaken further over the coming months, this could actually be welcomed by the Central Bank, which recently highlighted how the currency appreciation since the start of 2019 was frustrating efforts to raise inflation.

Mr Bufman argues that strong fundamentals will continue to buttress the currency: “the country has a current account surplus and it has no net external debt. […] The country also has an extremely high level of foreign currency reserves. These factors support the underlying strength of the currency and the recent depreciation seems to be just a very modest market reaction”.

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