While recent elections in Israel have led to Benjamin Netanyahu's reelection, there are many uncertainties around the profile of his new coalition and its impact on foreign and economic policies. A lot has been said about Israel's vote to reenergize the peace process with the Palestinians and the need to adopt social and economic policies that help Israel's middle class to deal with inequality, poverty and inflation. Clearly, a more secured Israel, both politically and economically, will be able to reach a better rating in global markets and more foreign investments, the backbone and ultimate engine of the Israeli economy. Yet,will the Israeli Government change its policies towards foreign investors?
The previous Israeli government initiated several structural and economic reforms in order to respond to local market's demand. It restructured the off-shore drilling market, for example, and proposed legislation that separates real holdings from financial holdings. While these reforms can improve Israeli economy's performance in the long run, it has been perceived by many foreign investors as a sign of policy inconsistency, protectionism and business ambiguity. Will this trend continue, and how can the Israeli government respond?
The need to respond to local political forces post-election would likely empower many of these reforms. Since the legislation process and its implementation may take several years, it would leave many foreign investors in an uncertain position. Moreover, the potentially over-fragmented and fragile new coalition might not last long enough to adopt many of its own proposed laws and reforms. It is a fact; very few Israeli governments reached their full term.
Another important factor to keep in mind is Israel's macroeconomic circumstances. Deficit is high and a potential recession is looming, which would probably lead to higher corporate taxes and less incentives available for foreign investors looking for tax havens. Last year Israel rejected Intel's proposal to build another new plant in Israel for significant subsidies and a tax break. Intel invested in Ireland instead, and positive results are already being reported there. The increasing military conflicts in the Middle East following the 'Arab Spring' would reduce the chances of serious budget cuts in Israel. Another military conflict in the North may lead to an even higher budget in 2013-2014.
All the same, local companies could use all the foreign financing they could get. A shrinking corporate sector and structural reforms may force many companies to look for new sources of funding abroad. Low valuations and an attractive developed regulatory environment may trigger a wave of investments by leading Western and Chinese multinational corporations. It will be Israel's responsibility to assure foreign investors that they are welcome and secure a stable and consistent economic and regulatory environment.
Recent precedents are not encouraging, though. A potential transaction between Potash Corp., a leading Canadian manufacturer of fertilizers, and CIL, an Israeli public company and a world leader in the potash industry, has created a stir, accompanied by mixed feelings. While many think that merging a leading Israeli potash corporation into its large Canadian competitor reflects very well on the strength and promise of the Israeli market and economy, others claim that this is an attempt to take over strategic national assets that may eventually harm CIL's operations, employment and jobs, commodities' pricing, and Israel's national security. A (secret?) meeting between CIL's Chairman and Canada's Foreign Minister in Davos has been leaked to media recently. You can imagine what has been discussed in the meeting.
Recently, I have argued that the Israeli Government can do a lot to help and facilitate such transactions. For instance, Israel can establish a permanent National Investment Committee that independently and apolitically screens and approves foreign investment in "strategic industries," similar to other Western economies. A National Investment Committee for foreign investments, I argued, would enhance the transparency and consistency required for the investment process as these values are at the heart of any foreign investor's business model.
As analysts and investors look carefully at the result of recent Israeli elections , they should not get distracted by endless discussions about Middle East politics and military draft. They may want to hone on the government's annual returns. The devil is in the details.