Israeli Election Outcomes Could Shape Economy and Stock Market

The upcoming Israeli elections for the 26th Knesset could significantly impact the nation's economy and capital markets, according to a review by IBI. The composition of the next government is expected to directly influence the country's risk premium, exchange rate, interest rate environment, and credit rating.

IBI's analysis outlines three primary scenarios: a "change government" replacing the current coalition, the continuation of the current coalition, or the formation of a caretaker or minority government. A "change government" is predicted to be viewed favorably by the markets, potentially leading to a lower risk premium, a stronger shekel, and a rise in the stock market. This positive outlook is attributed to expectations of more responsible fiscal policy, cuts to coalition funds, and a fairer distribution of the national burden. Improved international standing could also lead to lower interest rates and a better credit rating.

Conversely, the continuation of the current coalition might trigger a negative market reaction, characterized by a higher risk premium, a weaker shekel, and a contraction in stock multiples. Concerns about institutional weakening, damaged foreign relations, and a lack of necessary fiscal adjustments could increase the risk of a credit rating downgrade. A weaker shekel might also fuel inflation and hinder interest rate reductions, possibly necessitating an increase.

A caretaker or minority government, or repeat elections, are expected to heighten uncertainty and complicate economic decision-making. A caretaker government without an approved budget for 2027 could delay reforms, public projects, and private and public investment, especially given Israel's fiscal challenge with a debt-to-GDP ratio around 70%.

The review also details potential impacts on key sectors. The banking sector might see lower funding costs and improved credit quality under a change government, though falling interest rates could pressure credit margins. Real estate could benefit from a lower risk premium, boosting asset values, but a stronger shekel might increase labor costs for foreign tech companies. The housing market's sensitivity to mortgage rates and land supply is noted, with potential shifts in purchase taxes for investors. The IT sector could see varied effects, with a change government potentially supporting private sector investment, while a stronger shekel might impact foreign-currency-exposed companies. Defense industries might experience shifts in procurement priorities and export opportunities depending on foreign relations. Energy sectors could see increased support for renewables under a change government, while gas export policies might be re-evaluated.