Israel – Government Falls

Prime Minister Benjamin Netanyahu’s coalition government was on shaky ground from its inception in May 2015, and met an early demise in December, prompting the scheduling of a general election for April 2019. Against expectations, a conflict over security policy, rather than a budget dispute or tensions related to the prime minister’s legal woes, proved to be the undoing of the government.

Polling data suggests that Likud is on track to win anywhere from 30–33 seats, but the latest seat projections suggest that Netanyahu will not be able to form a majority right-wing government that does not include Avigdor Lieberman’s Yisrael Beiteinu. Given the circumstances under which Lieberman departed the now dissolved government, it is debatable whether Netanyahu can revive the partnership without making concessions on security policy that would cost him the backing of the centrist Kulanu, even assuming party leader Moshe Kahlon would otherwise agree to once again join a right-wing coalition.

In addition, Likud faces a possible challenge from a new party at the center of the political spectrum. Benny Gantz, a former chief of general staff, has formed the Israel Resistance Party (Hosen Yisrael). Although only officially registered as a party in late December, Hosen is already projected to win 12–13 seats. Of greater possible significance, polls that included a hypothetical electoral alliance of Hosen and the two main opposition parties—Yesh Atid and the Labor Party—as an option found that the three-party bloc would win 34 seats, compared to 32 for Likud.

As he has done previously, with great success, Netanyahu will present himself and his party as Israel’s best choice to manage the economy and keep the country safe from the numerous threats to its security. The Likud leader’s credibility on security-related matters is solid, notwithstanding Lieberman’s harsh criticism of Netanyahu’s approach to the volatile situation in Gaza, but a slowing economy may cause problems for the incumbent.

Tax incentives and favorable credit conditions will sustain robust household spending, and investment growth will receive a boost from projects in the energy sector. Whether that is sufficient to maintain real GDP growth of more than 3% in 2019 will depend to a large degree on the impact of global developments on the climate for exports. Downside risks include the potential for US-China trade tensions to trigger a global economic slowdown, and the growing risk that political dysfunction in Washington could push the US economy into recession. A significant deceleration of growth would add to fiscal pressures, likely necessitating budget tightening that would reinforce the slowdown of economic activity.

Since 1979, The PRS Group, Inc. has been a global leader in quant-based political and country risk ratings and forecasts. This excerpt is from our latest Political Risk Letter publication, for more information please contact us at (315) 431-0511 and sales@prsgroup.com

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