How a Netanyahu Indictment Would Play Out in Israeli Markets

(Bloomberg) -- There’s a good chance next month that Israel’s attorney general will notify Benjamin Netanyahu that he’s considering indicting the prime minister for corruption.

If he does, economists and money managers say it’s likely that stocks, bonds and the currency will drop. The fallout will be contained, however, if the proceedings don’t eat away at the commanding lead Netanyahu’s Likud party has in polls ahead of parliamentary elections in April.

Here’s a breakdown of what’s at play and some of the major risks that will keep traders on their toes:

Why would Israeli assets decline?

Netanyahu is known for being pro-business and fiscally disciplined. Under his present tenure, Israel’s economy grew some 70 percent, one of the fastest expansions among developed economies. So with elections coming up, any threat to his leadership raises the prospect of a less market-friendly administration filling his shoes.

How a Netanyahu Indictment Would Play Out in Israeli Markets

How big of a drop is expected?

Most analysts are bracing for moderate declines. The benchmark TA-35 Index and the shekel could fall between 2 and 3 percent as traders absorb the news over a few days, according to Noam Meirovich, a fund manager at Migdal Capital Markets, a unit of one of Israel’s biggest investment firms. The currency, which was down 0.25 percent Tuesday afternoon at 3.6709 to the dollar, suffered its biggest drop last year since 2014, and Israeli stocks valuations sank to their cheapest level in about five years.

But investor attention will then quickly turn to the healthy fundamentals underpinning Israel’s economy, which should halt losses as they try to figure out what comes next, Meirovich said.

Why wouldn’t this be a bigger market event?

An indictment doesn’t necessarily spell the end of Netanyahu’s political career, who has vowed to stay on as prime minister even if he’s charged. His party is forecast to get 32 seats in Israel’s 120-member parliament, nearly triple its closest rival, according to a Jan. 8 poll, making him the favorite to lead the next government.

“Who else could make a coalition and keep it stable?” said Jonathan Katz, chief economist for Leader Capital Markets Ltd. Although an indictment would increase uncertainty, it’s still “a long way from ousting him,” he said.

So where does the uncertainty come in?

There are still a number of adverse scenarios for Netanyahu that investors will have to weigh should Attorney General Avihai Mandelblit charge him, as is widely expected:

Not only could Likud supporters turn on him and cost his party government seats, but other parties may refuse to join a coalition headed by someone under criminal suspicion. What’s more, Israel’s president, who decides which candidate gets to form the next government, could choose an untainted politician instead.

(In an earlier version of this story, the description of Migdal Capital Markets was corrected.)

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