Foreign investors fear Netanyahu victory

[Reuter / Marjorie Olster]

NEW YORK, May 30 (Reuter) - The prospect of a setback in
the Middle East peace process if right-wing leader Benjamin
Netanyahu is confirmed as the new Israeli prime minister will
frighten away foreign investors, international investment
analysts said Thursday.
Uncertainty about both the peace process and Netanyahu's
economic agenda, specifically his commitment to cutting
government spending to reduce the deficit, will send foreign
investors to the sidelines for the near term, analysts said.
``Certainly it may suggest we need to adjust our view on
Israel, which has been quite positive, and perhaps make it
more of a stock selection, an individual stock opportunity
rather than the broad-based asset allocation play that we have
made it out to be on a 12-month view,'' Douglas Johnson, senior
international investment strategist at Merrill Lynch in New
York, told Reuters Financial Television.
With most votes counted on Thursday, right-wing Likud
party leader Netanyahu appeared to have eked out a narrow
victory over Labour Prime Minister Shimon Peres, capturing 50.3
percent of the vote vs. 49.6 percent for Peres.
About 150,000 votes remained to be counted and the final
result of Wednesday's first-ever direct election of an Israeli
prime minister was expected within days.
Israeli stocks and the shekel tumbled Thursday in volatile
trade, with the benchmark Mishtanim index of the top 100
Israeli shares ending down almost 5 percent.
``I think the downside we have seen in the equity market
today gives us a sense of how nervous investors may be, at
least initially, if indeed we were to have a new
administration,'' said Johnson.
Hillel Waxman, first vice president for foreign exchange
and securities at Bank Leumi Trust Co. of New York, said the
election outcome made foreign investors in Israel nervous.
``I think that is why we saw a 5 percent pullback in the
stock market,'' Waxman said. ``Until the government clarifies
its positions, foreign funds are going to sit on the
sidelines. We will see a significant change in the tone of
peace talks and that is going to make people less bullish in
the short run.''
Itay Makov, a London-based research analyst at Salomon
Brothers, said he expects a freeze in direct foreign
investment in Israel for the next few months.
``On the direct foreign investment side, I would say we
should see some kind of a halt for the next few months until
it is more clear where the Bibi Netanyahu government is going
and how it will deal with the whole issue of the peace
process,'' Makov said.
``The question is, 'Are they going to be really extreme and
try to collapse it or try to work toward a solution by taking
a tougher line?'''
Foreign investment in Israel has boomed over the last four
years as Israel sealed a historic land-for-peace deal with the
Palestinians, signed a peace treaty with Jordan and opened
diplomatic relations with a host of Arab and Moslem countries
that had shunned the state for decades.
The so-called peace dividend for Israel was abundantly
apparent in the flows from overseas investors. Total foreign
investment in Israel increased six-fold from 1991 to 1995.
Foreign investment in Israeli financial assets soared to 15
times the 1991 level by 1995, much of it going into stocks.
The nation's Gross Domestic Product growth on average was
about 6 percent per year from 1991-1995, a very healthy pace.
Makov said a pullback in foreign investment would put some
drag on GDP growth this year, perhaps shaving between a half
percent to 1 percent off forecasts.
He also expressed concern about Netanyahu's economic
agenda, specifically his commitment to cutting government
spending and the deficit.
``Netanyahu will have to form a government with religious
parties who will demand a lot of money for their support and
it will be difficult for him to cut spending,'' he said.
In the longer-term view, some analysts were less
pessimistic, saying the uncertainty factor will wane as
Netanyahu's policies are clarified.
Also, some foresee significant pressure from the United
States to keep the peace momentum alive.
Israel's Economic Minister to North America, David Rubin,
said Wednesday that he did not believe Netanyahu would derail
peace negotiations because he would face pressure from both
the Clinton administration and U.S. investors.
``I think the current administration has indicated very
very clearly that continuing the peace process is one of its
more important foreign policy goals,'' Rubin said. ``Whoever is
prime minister in Israel, he will hear that from President
Clinton.''