Another round of elections appears increasingly likely

ISRAEL - In Brief 21 Nov 2019 by Jonathan Katz

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The head of Blue and White (Gantz) announced that he has failed to form a coalition in the 28 days allotted to him, following a similar period in which Netanyahu tried to form a government.We now go to a 21-day period in which anyone can try to form a coalition, but this will require the approval of at least 61 Knesset (Parliament) members (out of 120). The chances appear slim, although the possibility of a unity government cannot be ruled out (especially if we see escalation in the North following Israel's strike on Iranian positions in Syria yesterday). Otherwise, Israel will go again to the polls sometime in February or March. Complicating matters, the Attorney General is expected to announce soon his decision regarding Netanyahu's indictment, possibly today. Even if he is indicted, the Likud party and the right-wing block will continue to support him, but Blue and White will be less willing to join a unity coalition. Economic implications: On the fiscal side, the lack of a government is not necessarily negative. Fiscal spending in 2020 will be based on the 2019 budget (1/12 allotted every month), which is basically restrictive, as no additional spending will be allowed. On the negative side, major infrastructure projects and reforms will be postponed. The big question will be the reaction of the rating agencies if Israel has another round of elections (the third in one year). Israel's macro fundamentals remain strong, but political instability could justify a "negative outlook" or certainly a strong warning. This could trigger some reaction in the FX/FI market. It is not clear how this political uncertainty will impact Monday's rate decision, if at all. We still se...