Read the latest on Israel's election here
Israel’s next government will determine whether the country attracts fresh foreign investment and eases economic pressures, or faces deeper uncertainty over growth, public finances and its global standing.
Israeli markets weakened on Wednesday after an inconclusive election result left the shape of the next government unclear.
The shekel fell about 2 per cent against the dollar, its biggest intraday loss in two weeks and one of the steepest currency declines globally, reversing much of Tuesday’s gains. The benchmark Tel Aviv stock index, which was closed on Tuesday, fell about 3 per cent and was on track for its biggest decline since June.
Shares of Bank Hapoalim fell about 4 per cent, while Phoenix Financial slumped more than 5 per cent.
Israel’s economic outlook could diverge sharply depending on who forms the next government, with a right-wing coalition potentially deepening economic uncertainty and accelerating capital flight, while an opposition-led administration could help revive investor confidence, an economist tells The National.
“If [Prime Minister Benjamin] Netanyahu succeeds to head the government again with a coalition of right-wing parties, then the uncertainty surrounding the economy will soar, resulting in a weaker shekel and GDP growth,” says Naser Mufrej, professor of finance and economics at the Arab American University in Ramallah.
A Netanyahu-led coalition could also discourage investment in Israel’s high-tech sector and drive skilled workers and professionals abroad, further weighing on the economy, he adds.
The prospect of wider boycotts and deeper international isolation could put more pressure on exports and foreign capital inflows, according to Mr Mufrej. “The credit rating of Israel will be reduced, thus raising the cost of financing,” he says.
To get the economy back on track and ensure stability and financial strength, the new government will need a "comprehensive, bold economic emergency plan", says Vijay Valecha, chief investment officer at Century Financial.
"The new government will need to tackle a series of challenges that have gripped the country over the past few years. Over three years of war, the country has suffered some structural damage such as high deficit within the country, rising defence budget, and high costs of living. Currently, Israel has debt approaching around 70 per cent of GDP and defence demands of around 200 billion shekels a year.
"Despite these challenges, Israel remains supported by a diversified, resilient and high value-added economy and strong external finances against a high public debt/GDP ratio," he adds.
By contrast, a government formed by opposition parties with the support of Arab parties could offer a more positive economic trajectory, he says. Such an outcome could generate renewed investor optimism, support steadier economic growth and strengthen the shekel and the Tel Aviv stock market, he adds.
It could also help lower inflation, attract more foreign investment and boost trade, Mr Mufrej says.
“The elections by themselves are not assumed to have any impact on the Israeli economy. What is important is who will form the government based on the results of the elections,” he says.
Capital Economics made a similar point in a report this month, saying the Israeli election was unlikely to have a major effect on the country’s near-term growth outlook or fiscal trajectory, but could have significant implications for the economy over the medium term.
The International Monetary Fund’s July 2026 assessment projected Israel’s economy would grow by 3.5 per cent this year and 4.4 per cent in 2027. That was based on the assumption that regional ceasefires would largely hold. It warned that persistent geopolitical uncertainty, elevated defence spending and labour supply constraints would continue to weigh on the recovery.
"Israel's economy has shown it can withstand considerable pressure, but managing one crisis after another is not the same as addressing the problems behind them," says Mr Valecha
For investors, the next government’s success in reducing uncertainty and restoring international economic ties may determine whether this week’s market weakness persists or gives way to a recovery.
