The results of the Knesset elections are giving the Israeli public the feeling that things will remain the same. In economics, however, important decisions that were postponed because of the elections, resulting in paralysis, will have to be made. Things therefore cannot remain the same.
Once the political fog lifts, the Israeli economy will await economic developments that will affect most sectors, and consequently the pricing of debt instruments and shares.
The incoming government's main decision, which will affect price of shares on the Tel Aviv Stock Exchange (TASE) in the long term, is what to do about the emerging large deviation from the government deficit target. In the existing fiscal situation, it is no longer possible for the government to hide its head in the sand and pray for a large-scale exit that will improve the numbers. The divergence between revenues and spending is clear. Actions there therefore needed in order to prevent a renewed rise in the debt-GDP ratio, after years of reduction.
Increasing the direct and/or indirect tax burden on the public will detract from the pace of growth in private consumption and the feeling of wealth, while raising corporate tax will affect corporate profits, reduce the incentive for investment, and directly influence share prices on the TASE.
Cutting government spending is likely to result in lower investments in essential infrastructure, which needs more spending. Confining changes in the state budget to minor ones will result in an increase in government debt raising and higher financing costs for the government debt.
Another key decision lying in wait for the new government involved the housing crisis in Israel. The housing market, which has been propelled by the Buyer Fixed Price Plan in recent years, is also waiting for regulatory clarity.
Without continuity in increasing the supply of housing, prices will resume their upward climb. The Buyer Fixed Price Plan's clear disadvantages, however, are giving rise to real doubts concerning its continuation. The connection between the Buyer Fixed Price Plan's future and the TASE is a direct one, because unless the program is continued, or an alternative plan devised, worried buyers will get off the fence and throng the sales offices on building sites. Housing developments with residential land reserves will benefit from a vacuum in government programs, and home buyers will pay a high price.
Competition in mobile communications, VAT exemption for online sales
The local retail market expects the new government to cancel the VAT exemption on online sales. This exemption, which benefits the public, but has a severe negative impact on the competitiveness of the local retail chains, is a questionable one, and threatens the future of quite a few chains.
The growing difficulties in local retailing, which is discriminated against in taxation, will in turn affect rents in shopping centers, which constitute the main asset of many public companies. The hole in the state budget paves the way for canceling this VAT benefit. The Ministry of Finance can thus kill two birds with one stone, but the Israeli public will pay more as a result.
In the collapsing local communications market, investors are waiting for measures by the Ministry of Communications aimed at restraining the uncontrolled competition in mobile communications, which is threatening to cause the collapse of a major operator and bring about stagnation in communications investments. Without regulatory intervention by the Ministry of Communications, the sector's decline will continue, as will the prices of shares in it. The point is that here also, government intervention to stabilize the market means higher communications prices, which will affect consumers' pocketbooks.
The latest hit on the TASE, local cannabis, is also looking towards the incoming government. The Israeli cannabis companies are waiting for rapid completion of the legislative process for exports, so that they can take advantage of the opportunity presented by medical cannabis exports before Canadian and other companies achieve an unchallengeable competitive edge.
The issues I have mentioned show that under every stone on the TASE lies an important regulatory decision that affects the future of local public companies, and that is waiting for an updated government stance. Issues such as reducing concentration, developing the local energy sector, increasing competition in the financial system, and so forth, which I did not mention for reasons of space, are also waiting on the incoming ministers' agenda. For investors in the Israeli capital market at least, the election results are far from indicating what the economic future holds in store for us.
The author is chief strategist of the Ayalon Investment House. The author of the article and/or the company are likely to hold or trade in the securities mentioned in the article. Nothing in the article constitutes a substitute for investments marketing and/or investment counseling that takes into account each individual's special particulars and needs.
Published by Globes, Israel business news - en.globes.co.il - on April 10, 2019
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