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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Key Takeaways:
- The merger of Bennett and Lapid’s parties introduces significant political uncertainty, likely impacting the Israeli Shekel’s volatility and bond market sentiment as investors await clarity on government formation and policy direction.
- Promises of “good governance” and ending the ultra-Orthodox conscription exemption could signal long-term economic benefits through increased transparency and a broader workforce, potentially bolstering investor confidence.
- Market stability will hinge on the opposition’s ability to forge a decisive parliamentary majority and articulate a coherent economic platform, given the backdrop of regional conflicts and ongoing fiscal challenges.
The dramatic merger of former Israeli prime ministers Naftali Bennett and Yair Lapid’s political parties into a unified bloc, now branded “Together,” marks a pivotal moment in Israeli politics, sending ripples through both domestic and international financial markets. This ambitious bid to unseat the long-serving Benjamin Netanyahu ahead of impending elections introduces a new layer of political uncertainty and the potential for significant policy shifts that investors will be scrutinizing closely. While the move is poised to reshape opinion polls and establish the unified opposition as a formidable contender, its implications extend beyond mere electoral politics, directly influencing the economic outlook for the “Start-up Nation.”
The immediate market reaction to such a significant political realignment is often one of caution. While a clear front-runner can sometimes stabilize sentiment, the specter of another fragmented coalition or a protracted period of political horse-trading raises concerns about policy paralysis. Netanyahu’s Likud party has historically been associated with pro-business, free-market policies, yet recent years have seen market apprehension stemming from judicial reform attempts and ongoing corruption allegations. These factors have, at times, contributed to volatility in the Israeli Shekel and prompted warnings from key economic sectors. The formation of “Together,” potentially the largest bloc in opinion polls, challenges this status quo, compelling market participants to recalibrate their expectations regarding future government stability and the nation’s economic trajectory.
Bennett, who is slated to lead the new combined opposition, was already polling strongly prior to the merger. His previous, albeit brief, premiership (2021-22) demonstrated a capacity for cross-ideological coalition building, a quality that some investors might view positively for fostering governmental stability, particularly when contrasted with the perceived polarization of the current administration. However, the inherent ideological differences within the new “Together” party, as openly acknowledged by both Bennett and Lapid – ranging from Bennett’s hawkish “protect our ancestral lands” stance to Lapid’s public support for a two-state solution – could present challenges in forging a cohesive economic agenda or a stable governing majority. Markets abhor uncertainty, and the prospect of internal friction within a leading party, even before an election, can translate into investor hesitancy and potentially impact bond yields.
The leaders’ emphasis on “good governance” and addressing “corruption scandals” engulfing the current Netanyahu administration resonates strongly with investors who prioritize transparency, regulatory predictability, and a stable legal framework. A government perceived as less susceptible to corruption could significantly bolster foreign direct investment (FDI) and improve Israel’s standing on global governance indices, attracting capital inflows crucial for continued economic growth. Furthermore, their pledge to pass a law ending the ultra-Orthodox exemption from mandatory military conscription carries substantial long-term economic implications. This policy, if enacted, could notably expand Israel’s workforce participation, particularly in the high-tech sector, and broaden the tax base, addressing a long-standing demographic and fiscal challenge. While politically contentious, from an economic perspective, it could be seen as a move towards greater equity and efficiency in resource allocation, potentially boosting productivity and sustainable GDP growth in the long run.
The broader geopolitical context remains a paramount concern for investors. The Middle East, particularly in the wake of Hamas’s October 7, 2023 attack, is gripped by conflicts, necessitating substantial defense spending. Any incoming government will face immense pressure to maintain national security while balancing fiscal responsibility. The “manpower shortage in the Israeli army” highlighted by Bennett and Lapid underscores this challenge. A more unified and robust defense policy, while essential for national security, also implies continued significant budget allocations, which could impact other areas of public spending or necessitate tax adjustments. Such fiscal considerations are closely watched by bond markets and credit rating agencies, influencing Israel’s borrowing costs and investment attractiveness.
Lapid’s decision to cede leadership to Bennett, despite his Yesh Atid party’s larger existing parliamentary presence, is framed as “putting ego aside” for the good of the country. This pragmatism, born from Yesh Atid’s recent polling decline, could be interpreted by markets as a commitment to electability and, by extension, a more decisive path to government formation. However, the challenge remains significant. While the current Netanyahu coalition is badly trailing in polls, the opposition’s stated reluctance to join forces with Arab Israeli factions – a point seized upon by Likud’s social media attacks, painting the merger as “left-wing” and beholden to Arab parties – could severely limit their path to an outright parliamentary majority. A hung parliament, another round of inconclusive elections, or a highly fragmented coalition would prolong political instability, deterring both domestic and foreign investment, especially in the sensitive tech and energy sectors.
Israel’s vibrant tech sector, a global powerhouse of innovation, is particularly sensitive to political stability and regulatory certainty. Concerns over judicial reforms under Netanyahu had already led to capital flight and warnings from prominent tech leaders about a potential brain drain. A government focused on “repair” and “unity” could restore confidence, encouraging venture capital inflows and retaining critical talent. Similarly, the energy sector, leveraging Israel’s significant natural gas reserves (such as the Leviathan field), relies heavily on regional stability and clear regulatory frameworks for exploration, extraction, and export. These areas are directly impacted by the broader geopolitical outlook and domestic policy certainty, making the upcoming elections a critical determinant for future investment.
The uncertainty surrounding the precise division of power within “Together” and the call for figures like former military chief Gadi Eisenkot to join further complicates the picture. While a broad “unity” government might ultimately be seen as stabilizing, the initial lack of clarity on roles and responsibilities can create short-term market jitters. Investors will be seeking a clear and coherent economic platform from “Together” as the election approaches, one that effectively addresses inflation, manages budget deficits, and fosters the nation’s long-term growth prospects amidst ongoing regional tensions and domestic social challenges. The ability of this new bloc to articulate a unified vision for Israel’s economic future will be crucial in winning over skeptical market participants.
Market Impact:
The formation of the “Together” party introduces a period of heightened political uncertainty in Israel, directly impacting investor sentiment and market stability. While the long-term prospect of a more stable, corruption-free, and economically inclusive government could be a positive catalyst, the immediate challenge for markets lies in the uncertainty surrounding the election outcome, the ability to form a clear parliamentary majority, and the articulation of a cohesive economic agenda. The Israeli Shekel is likely to experience increased volatility as opinion polls fluctuate and coalition negotiations unfold. Bond yields could reflect higher political risk premiums, particularly if a prolonged period of political deadlock appears likely. Key sectors such as technology, defense, and energy will be especially sensitive to policy pronouncements, regional geopolitical developments, and the perceived stability and economic direction of any incoming administration. International investors will be closely monitoring the election results and subsequent coalition-building efforts for signs of a decisive and stable government committed to fiscal prudence, pro-growth policies, and the transparent governance necessary to sustain Israel’s competitive edge in the global economy. Any failure to achieve this could dampen foreign direct investment and hinder long-term economic growth prospects.