Israel’s Blunted Blue and White Whirl

Israeli stocks and bonds now featuring in developed world indices maintained solid gains with Prime Minister Netanyahu’s surprise coalition re-election victory, after the opposition Blue and White alliance headed by former military chief Ganz first claimed triumph. He becomes the longest-serving in the post following bargaining with small right-wing parties that may shield him from prosecution on corruption charges while in office. The contest was largely run on the force of the two personalities, with US President Trump also throwing his weight behind the incumbent with recognition of Golan Heights control taken from Syria 40 years ago. The challenger’s economic policies were unclear, but income disparity and high housing costs regularly surfaced as issues despite 3.5% GDP growth and unemployment near that number. Consumption, investment and exports have been strong despite the shekel’s 5% rise to 3.5/dollar this year. Inflation is only 1% with the central bank’s benchmark rate barely positive, but the fiscal deficit has doubled to 3.5%, with public debt close to 65% of output. The Prime Minister signaled no major budget changes during the campaign, after previously backing big state enterprise privatizations through the stock exchange. The investment-grade sovereign rating could be further elevated with such steps, while stocks should continue to advance on good bank and technology listing earnings. Investors also await possible business incentives and capital infusions under a promised US proposal for a fresh Palestinian conflict approach. Netanyahu’s new arrangement has ruled out a formal two-state solution, so the search for creative constructs has become urgent especially with half the population in poverty in the West bank and Gaza, according to World Bank analysis.

Across the border Lebanon is at the other end of the ratings scale at a B minus/C with its MSCI component off 3% in the first quarter, and big Eurobonds maturing in April and May. A cabinet was formed finally, with heavy Hezbollah participation slammed by US Secretary of State Pompeo during a visit. The move will allow over $10 billion in international aid pledged at a conference in France to flow, as Iraq and Syria rebuilding plans are also contemplated. The cabinet cobbling may again be short-term on meager 1.5% growth and double-digit fiscal and current account deficits. A tax crackdown and partial privatizations are expected, but major budget reform like electricity price hikes are off the table. Saudi Arabia lifted its travel ban to help revive Gulf tourism, but oil is still not at the break-even level at home curbing discretionary spending. Both Saudi and Qatari sovereign funds have committed to buying Lebanese bonds, with $5 billion in foreign debt service this year. Both foreign reserves and non-resident bank deposits recently dipped $1 billion, as officials reaffirmed the exchange peg. The former pool covers over a year of imports, and the latter is a vital fixed-income investor base largely drawn from wealthy expatriates. Along with the Hezbollah presence, the government risks alienating donor agencies with a harder line against the estimated million Syrian refugees arriving since the civil war. They are barred from formal employment and receive limited education, as authorities have begun to urge a return home despite dire infrastructure and security embrace.