Negative repercussions if Kadima surrenders finance portfolio

Market analysts weigh in with their responses to the 2006 Knesset election results.

Goldman Sachs Associate Global Markets Economist Michael Vaknin, who covers Israel says, The economic repercussions are negative, and worse than we expected. The coalition will be less stable. Pre-election polls gave the impression that Kadima will link up with the Labor Party to create a majority bloc, but on the basis of the results, Kadima will have to bring in more parties, which will undermine stability, especially as there is no common denominator between the parties.

The election results indicate that the next government will focus on a social agenda, and we hope that the government will be able to maintain a budgetary balance and keep the economic principles of the Sharon government, which the world welcomed and attracted foreign investment. If the government keeps its predecessors targets, i.e. a budget deficit of 3% of GDP, and 1% growth in spending in real terms, then, so long as there are no distortions in budget allocations, any specific change wont be perceived as problematic.

Kadima will inherit the Likuds economic approach of the free market. Therefore, the choice of the next finance minister is critical. Its no secret that foreign investors support a free market, so if Kadima surrenders the finance portfolio, this will have negative repercussions on the market. That said, the Labor Party has been sending more responsible signals recently, and it seems that it will also try to preserve the budget framework. We therefore do not expect foreign investors to make their exit from Israel, even if Labor gets the finance portfolio, and the media will play its role in allaying apprehension over this.

Meitav CEO Zvi Stepak: The capital market fears Amir Perez in charge of the economy

The election results have created a political map that is less good than the one that would have resulted if the polls of the past two weeks were right. We see four main problems created by the resulting map.

The first is the fact that no one party has a strong mandate to assemble a stable government. In other words, no party has 35 Knesset seats, which makes it difficult to assemble a government. Second, as a result of this, parties will have much greater bargaining power vis-a-vis Kadima. Third, were not merely talking about bargaining power, but parties that stress social issues: Labor, Shas and the Pensioners Party. Each of these parties is liable to lead to an increase in the budget. Current law allows for a budget increase of 1% a year, but there is concern that this limit will be breached, which could have negative repercussions on foreign investors perspectives. Fourth, Labors bargaining power to man the Ministry of Finance has increased, because of its small gap with Kadima, and the capital market (not necessary us) fears economic policy possibly led by MK Amir Perez.

IBI analyst Elah Alkalay: The debt/GDP ratio is now well below target, so there are substantial budget surpluses

Every assessment predicts that the next coalition will be much more welfare oriented. This means that much more money will flow to groups such as pensioners, Shas, contract workers, and those earning the minimum wage. The election results increase the likelihood that Amir Perez will be the next minister of finance, which the capital market will not like. The cost of the convergence plan is also huge (estimated at NIS 100-150 billion). In other words, there will unquestionably be pressure to raise the deficit.

On the other hand, it should be remembered that the debt/GDP ratio is now well below the target, which means that there are substantial budget surpluses. In conclusion, we predict greater uncertainty in the near term, until the coalition picture becomes clear, portfolios are filled, and the size of the concessions Acting Prime Minister Ehud Olmert will have to make are known. We dont expect the Tel Aviv Stock Exchange (TASE) to crash, but it well probably see a fall in share prices.

Published by Globes [online], Israel business news - www.globes.co.il - on March 29, 2006

Copyright of Globes Publisher Itonut (1983) Ltd. 2006

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