Israel Election Results: Market Celebrates Anticipating Unity Government

Tel Aviv Stock Exchange posts gains in election aftermath as economists express in expeoctation that a Likud and Kahol Lavan tie-up can bring more effective economic leadership than a narrow coalition

Prime Minister Benjamin Netanyahu and Kachol Lavan leader Benny Gantz.
\ AMIR COHEN/ REUTERS

Tuesday’s election ended with neither the left or right emerging victorious, but for Israeli investors and economists that was only good news.

In interviews and notes to investors on Wednesday, most reasoned that the stalemate will eventually lead to a national unity government of Likud and Kahlol Lavan, with the prime minister’s job rotating between the two party leaders.

Partial results late on Wednesday showed Kahol Lavan had won 32 out of 120 Knesset seats, while Likud captured 31. Netanyahu’s bloc, comprised of right-wing and ultra-Orthodox parties, currently stands at 55 seats. The center-left bloc has 56 seats.

Economists said that a unity government will be less favorable to narrow sectoral interests and avoid buckling to coalition demands from small parties that exacerbate existing budget strains. A unity government will be better able to undertake structural reform and will likely hold on to the policies of recent years that have delivered economic growth, they added.

“The election results show there’s no clear winner, so the odds of a unity government appear especially good. A unity government is good news for the economy, because it will be under less pressure and won’t find it difficult to deal with the fiscal adjustments needed for the 2020 budget,” IBI Investment House said in an investor note Wednesday.

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“It will be able to address medium- and long-term challenges critical for boosting productivity and a gradual increase in the rate of economic growth,” IBI said, adding that a unity government would ensure the continued independence of the Supreme Court. It said that legislation to undermine its powers would have likely hurt Israel’s credit rating.

The Tel Aviv Stock Exchange rose on Wednesday as the officials results gradually came in. The benchmark TA-35 and TA-125 indices both posted gains of about 0.5% while the banking index – often regarded as a barometer of the economy – surged 2.3% higher.

Prices for medium- and long-term government bonds rose a sharp 0.9% on expectations that a national unity government will be better positioned than any other alternative to tackle the growing budget deficit and maintain fiscal discipline.

Meitav Dash, another investment house, also looked forward to a national unity government.

“It’s the nature of a narrow government dominated by sectorial interests to be more costly [for the budget] and suffer more friction and great opposition to broad-based reforms. The broad government can allow itself to be a little less popular and undertake steps that will only bear fruit in a few years’ time,” said Meitav Dash chief economist Alex Zabezhinsky.

Bears, too

But not everyone shared the optimism. One market source, who follows politics closely and asked not to be identified, said Netanyahu could still pull a rabbit out of his hat.

“I don’t see how they’re going to oust Netanyahu so easily. I also don’t see how Netanyahu would ever be appointed a minister under [Kahol Lavan] leader Benny Gantz. There are a lot of scenarios whose odds in my view are better than that of a unity government. There are Knesset members from Kahol Lavan who would bolt for the right price. The political map could turn out to be very difficult and surprising,” the source said.

Israel’s economy is in good shape right now. Gross domestic product has been growing at an annual rate of 3.2-3.4%, unemployment is at a low of 4% and the country’s debt-to-GDP ratio is a low 61%, which has contributed to raising its international credit rating.

The strong performance has helped lift the TASE’s TA-90 index 60% in recent years and make the shekel one of the world’s strongest currencies. On Wednesday the dollar and the euro both strengthened against the shekel, but only slightly – by 0.1% and 0.2%, respectively.

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A unity government would ensure that the next finance minister is chosen from between the two big parties, which would guarantee that he or she has broad government backing and puts national interests ahead of sectoral interests.

Moshe Kahlon, who has held the finance portfolio since 2015, is unlikely to keep it in the next government. The poor performance of his Kulanu Party in the April election and its failure, after merging with the Likud, to add anything to the Likud vote on Tuesday likely spells the end of Kahlon’s political careers.

In addition, during his previous term he failed to solve the problem of high housing prices and allowed the budget deficit to grow in his final months in office.

Other candidates to lead the treasury include Avi Nissenkorn, the former Histadrut labor federation chief and No. 5 on the Kahol Lavan list; Avigdor Lieberman, chairman of Yisrael Beiteinu and a likely kingmaker in the coalition talks due to get underway soon; and Benjamin Netanyahu, who served as finance minister in from 2003 to 2005. Another possibility is the appointment of a technocrat, sources said.

Whoever it is, the most urgent task facing the new finance minster will be the widening budget deficit, which has rapidly reached 4% of GDP for 2019.

Hurting confidence

“A deficit of more than 4% could hurt confidence in fiscal policy and the State of Israel’s credit rating, so it’s the first thing that the new government has to take care of,” said Jonathan Katz, economist at Leader Capital Markets. “A broad-based unity government will have an easier time making spending cuts and fiscal adjustments, compared to a narrow government that has to pay off small parties.”

Danny Yardeni, vice president for investments at Altshuler Shaham, said it was critical that the deficit be brought down to inside the target, which is 2.9% of GDP for this year.

Speaking about investors, he said: “A one-off deficit in the deficit is acceptable, but if the deficit becomes a chronic symptom, it will be seen less favorably. So long as Israel’s rating remains unchanged, investment will continue to flow into the country. From this point of view, only good things have happened so far – the most recent being Israel’s expected inclusion in the World Government Bond Index and the entry of foreign mutual funds into the domestic capital market.”

Uri Greenfeld, chief economist at the investment house Psagot, said he was less convinced that the government needed to bring down the deficit right now, as long as it developed a plan for lowering it in the longer term.

“After years spent reducing the deficit and debt, the current fiscal situation should allow the government to run a bigger deficit and avoid raising taxes and cutting the budget, especially at a time when the global and local economies are in a slowdown,” Greenfeld said.

Turning to reforms, Katz said a national unity government would have an easier time imposing a core curriculum of math, science and English on ultra-Orthodox schools – a critical measure to ensure that young Haredim acquire workplace skills later in life.

The financial markets would also value efforts to lower the cost of living, as Kahlon pursued as finance minister without much success.

“Kahlon started with the ‘cornflakes reforms,’ which was designed to open the food import sector in Israel to more competition, but it was too little. Other sectors need to be opened up, not just food. There’s a lot to be done – it’s very expensive to live here,” said Katz.

‘Thirsty’ investors

Another critical reform is investing more heavily in transportation infrastructure, said Katz. Greenfeld added that the heavy costs involved could be co-financed by the capital market, which he described as “thirsty for investments like these.”

Yardeni put measures that ensure Israel’s status as Startup Nation on the government’s to-do list.

“High-tech has constituted an important component of Israel’s economic growth in recent years. It’s clear that something has to be done, but what is certain is that it mustn’t do anything to hurt it. It needs to ensure Israel remains an attractive target for investment,” said Yardeni. “Global investors like certainty, so there shouldn’t be any surprises.”

The economists said housing prices are another area the next government must address. Despite a host of undertakings aimed at reining prices in, they rose 13% during Kahlon’s four years as finance minister.

“The housing market is no longer the political hot potato it was a few years ago. But the resumption of rising prices after a brief interlude and the problem of housing supply means the new government must find new answers before price rises gain momentum and the potato heats up,” said Greenfeld.

He said the solution was to issue building permits for high-rise housing more quickly. But that will require more investment in mass transportation, which will come up against people opposed to crowding and municipalities fearing new residents will cost them more than local taxes will cover.