With a ceasefire in place, markets will focus on internal politics

ISRAEL - In Brief 23 May 2021 by Jonathan Katz

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Geopolitics: Following 11 days of confrontation, a ceasefire was declared Friday morning which appears to be holding.The actual cost of this operation is not expected to be significant, but it will strengthen the position of the Ministry of Defense and its demand for a significant increase in the military budget in coming years. We assess the impact of the military operation on the fiscal deficit this year at less than 0.5% GDP (including reparations, repairs and military spending), and still expect a fiscal deficit of around 7% GDP on the back of a rapid recovery. Politics: The escalation in violence has reduced the probability of an anti-Netanyahu coalition, as Bennett (Yamina) appears less supportive of this option (although not ruling it out totally). On the other hand, without defectors from the anti-Netanyahu block, it is unlikely that Netanyahu can form a coalition. Another round of elections looks increasingly likely. Moody's reaffirmed Israel's A+ rating, but noted that further political (internal) instability could threaten Israel's sovereign rating. Despite GDP contraction of 6.5% saar, a closer look reveals a fairly positive quarter. A shift in new vehicle imports (due to higher taxation) had a significant impact.Private consumption (exc. vehicles) actually increased by 4.6%.Both manufacturing and hi-tech service exports expanded by over 20%.Investments in machinery and equipment increased by 53%. We still think GDP growth this year will reach 6%, with a strong rebound in the next quarters. The impact of the latest round of escalation is not expected to be significant. Incoming tourism will be slower to recover but this is not a major GDP contributor. Job v...