Israeli Ultra-Orthodox party quits government as Netanyahu loses majority

Israel's Ultra-Orthodox Shas party has announced its withdrawal from Prime Minister Benjamin Netanyahu's coalition government, citing an unresolved dispute over mandatory military service exemptions for religious students. This move, following a similar resignation by the United Torah Judaism party, delivers a significant blow to Netanyahu, potentially leaving his government with a minority of 50 seats in the 120-seat Knesset and highlighting growing political instability stemming from the contentious conscription issue amidst ongoing conflict. While Shas stated it will not actively seek to collapse the government, the development underscores heightened domestic political risk.

Analysis

The departure of the Ultra-Orthodox Shas and United Torah Judaism parties from Prime Minister Netanyahu's coalition introduces significant political instability, potentially reducing the government to a minority of 50 seats in the 120-seat Knesset. This action, driven by a contentious dispute over mandatory military service exemptions for religious students, elevates the risk of legislative paralysis and a potential future government collapse. The associated "moderately negative" sentiment is currently tempered by Shas's statement that it will not actively seek to topple the government from the opposition and the timing of the move just before a three-month parliamentary recess starting July 27. This recess provides a critical window for negotiation, deferring an immediate legislative crisis. However, the underlying issue, amplified by a Supreme Court ruling and public sentiment during the ongoing war, remains a fundamental challenge to the government's long-term viability, increasing the medium-term risk of an early election.

Key Decisions for Investors

• Investors with exposure to Israeli assets should closely monitor political negotiations during the upcoming parliamentary recess, as the stability of the potential minority government remains precarious.
• It is crucial to assess the risk of legislative gridlock, which could stall economic policies and impact market sentiment, particularly if the government proves unable to pass a budget or other critical legislation post-recess.
• Consider reviewing portfolio allocations and potentially hedging against increased volatility in the Israeli Shekel and local equities, as the heightened political uncertainty could precipitate a snap election.