Israel: Kadima's Lacklustre Election Win Complicates Coalition Talks As Small Parties Gain Ground; Financial Market Concerns Over Budgetary Implications Look Overdone

Summary

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The record low turnout for the 28 March general elections enabled smaller parties to make gains at the expense of the main parties. Kadima, formed late last year by the now-incapacitated Ariel Sharon, became the largest party with 29 seats but failed to live up to opinion poll expectations. The Labour Party did well in winning 20 seats and the main loser was Likud, the former ruling party that was split so badly over Sharon's decision to withdraw settlers from Gaza, which has fallen to joint-third place with the ultra-orthodox Shas party with 12 seats in the Knesset. Likud leader Benjamin Netanyahu now faces a very difficult period as his party reassesses its position. Acting Prime Minister Ehud Olmert is now almost certain to become the new premier and his task over the next few weeks is to form a stable and workable coalition. There are plenty of options, with Labour the obvious first choice as partner, but the main difficulty will come with the allocation of cabinet portfolios, with Labour already demanding that of finance for its leader Amir Peretz, and additional spending demands. And as Kadima will be in a minority within the coalition that does emerge, Olmert's control will be further weakened. The fear that this horse-trading will undermine the budget position has already led to some weakness in the NIS and the local stock market, although we think that there is unlikely to be any major weakness. The budget deficit fell to just 1.94% of GDP in 2005, helped by the impact of the strong 5.2% GDP growth on revenues, and budget surpluses were posted in both January and February this year.

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Israel: Kadima's Lacklustre Election Win Complicates Coalition Talks As Small Parties Gain Ground; Financial Market Concerns Over Budgetary Implications Look Overdone

Kadima wins by smaller than expected margin, Likud vote collapses

In a record low turn-out, put at 63.2% compared with an average of close to 70% in the previous three elections, the general election held on 28 March did not produce the expected hefty winning margin for Kadima, the party founded late last year by Prime Minister Ariel Sharon, still in a coma after his massive stroke in early January. The final results show that Kadima won 29 seats in th...

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