IBI Investment House Analyzes Election Impact on Israeli Economy

The IBI investment house has released a new study detailing the potential macroeconomic effects of the upcoming Knesset elections on Israel's economy. Unlike many analysts who have offered general assessments, IBI's researchers explicitly state that a government change is expected to reduce risk premiums, strengthen the shekel, and positively impact the stock market. Conversely, they warn that maintaining the current coalition structure could lead to increased risk premiums, a weaker shekel, and a downturn in the local market.

The study explores various scenarios, including a government transition, the continuation of the current coalition, and periods of political instability. IBI forecasts that a change in government might allow for further interest rate reductions, while the current coalition's continuation could bring about a 0.5% to 1% interest rate hike. These interest rate shifts are projected to have broad effects across sectors. In banking, a rate decrease could shift focus from interest income to credit growth and efficiency. For income-generating real estate, a lower Israeli risk premium might decrease capitalization rates and increase asset values, while easing financing costs. The shekel exchange rate and high-tech activity will also influence office space demand. Residential real estate could be affected by mortgage costs and transaction volumes tied to interest rates.

IBI also highlights that political instability and repeated elections would negatively impact investments, particularly in infrastructure, renewable energy, and oil and gas, due to delayed decision-making. The report notes that local markets are currently pricing in positive expectations, partly due to the likelihood of political change. Therefore, market reactions will depend on the divergence between actual results and current price expectations.

Regarding the state budget, IBI estimates that increased defense burdens and lax fiscal discipline have raised the debt-to-GDP ratio to approximately 70%, up from about 60% before the war. This level reduces the economy's buffer against further negative shocks. Future debt-to-GDP and deficit levels will depend on the next government's tax policies and fiscal adjustments, as well as economic growth. Defense spending is expected to remain high regardless of the government's composition, given the ongoing threat from Iran.

The investment house predicts a negative market reaction if the current coalition continues, citing its past policies as having weakened growth potential. They also warn of increasing emigration from Israel, a risk that has accelerated due to security concerns and government policy, potentially harming long-term growth if the current government remains in power.

In contrast, a "change government" scenario is expected to yield a positive response, partly already reflected in current pricing. This would stem from a reduced risk premium and renewed legitimacy from Western countries. Such a scenario could also improve business and consumer sentiment and boost growth potential, possibly through structural reforms and measures to lower the cost of living, depending on political feasibility. IBI also analyzes a minority government scenario, which might be viewed positively for preventing political deterioration and institutional damage, though it could face challenges in decision-making and stability. A prolonged caretaker government, however, is expected to be viewed negatively due to anticipated stagnation and continued pressure on state institutions.