Israel: Israel set for fifth election in less than four years; economy will not be unduly affected
What happened: At the end of June, Parliament was dissolved and snap elections were set for 1 November. This came after the eight-party coalition government lost its majority in April and suffered a key legislative defeat in June regarding the rights of Jewish settlers in the West Bank. Then Prime Minister Naftali Bennett resigned, and Foreign Minister Yair Lapid took over as caretaker PM.
The outcome of the elections: The elections will result in another highly fragmented parliament, and no single party will secure anywhere near the 61 seats needed for a majority. As such, government formation could take time, and yet another return to the polls is a possibility if no coalition can be formed. That said, former Prime Minister Benjamin Netanyahu’s Likud party seems to have the greatest chance of forming a government, along with other right-of-center groupings. This is particularly true because Naftali Bennett’s political replacement as head of the Yamina party appears more open to collaboration with Netanyahu.
Economic implications: A Netanyahu administration would likely yield a greater focus on limiting red tape and the tax burden, with les social spending. Tensions with Palestine and Israeli Arabs could also rise, leading to greater social unrest. The current lack of a fully functioning administration will hamper economic policymaking, although fiscal risks are limited; the government has run an over NIS 3 billion (roughly USD 1 billion) surplus so far this year, and over the last 12 months the budget has been broadly balanced. Near-term economic growth should also be largely unaffected. Israel is no stranger to snap elections, and the booming high-tech sector will continue to underpin activity. However, if a 2023 budget is not approved, this would cap government spending next year.
The persistent lack of a stable government is primarily a risk to the country’s long-term economic potential, as it is impeding much-needed reforms in areas such as infrastructure development, education and the ease of doing business.
On the outlook, analysts at the EIU said:
“The interim government cannot initiate new legislation, which will limit its policy tools for addressing slowing global demand and the rising cost of living, with the latter potentially dampening Mr. Lapid’s popularity. The interim government’s term could extend well beyond November if, as EIU expects, government formation proves challenging, although we expect Mr. Netanyahu to have the edge ultimately.”
On asset markets, analysts at Goldman Sachs said:
“We continue to think that direct asset market implications from this uncertainty remain limited. In our view, the relative stability of Israeli assets in the face of political uncertainty reflects a structural change in the economy, most notably the strong improvement in Israel’s balance of payments, which has reduced the sensitivity of the Israeli economy to political developments in the region.”