Boston, MA -- (SBWIRE) -- 06/07/2013 -- BMI View: Israel's 4.2% budget deficit is likely to drop this year following the elections in Israel on January 22. The incumbent party retained their majority but it was weakened, necessitating a coalition with pro-cuts centrist parties. While this is likely to reduce the deficit, it is unlikely to reduce the likelihood of confrontation with Iran, nor will the pro-peace centrists be able to influence the government's hawkish stance on the Israeli-Palestinian conflict.

BMI's Q2 Israel Defence & Security report examines the impact the January elections will have on the country's domestic security and foreign policies, as well as recent defence and procurement developments. A number of recent events have occurred which will affect these.

The first was the 8-day war in November 2012, which resulted in over 140 Palestinian dead and 5 Israeli dead. A ceasefire was agreed, despite a bus bomb exploding in Tel Aviv, wounding 15 Israelis, and continued Israeli air strikes on Gaza. However this conflict, together with the re-election of Benjamin Netanyahu, makes it highly unlikely that a long-term peace agreement will be reached with the Palestinians in the near future. However, Israel will now have to face a Palestinian Authority (PA) with a foothold on the international stage, now that the UN agreed to give Palestine non-state membership (despite vociferous protests by Israel and the US). Although this was a victory for the Palestinian Authority on the West Bank, we believe that the outlook is still bleak, both for the PA and Palestine-Israeli relations as, in Gaza, Hamas continues to gain popularity.

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Although Netanyahu was re-elected, his party was somewhat weakened and he is likely to forge a coalition with centrist parties. Although these pro-cut factions are likely to influence the economy, and reduce the deficit, which will be good for domestic political stability, they are unlikely to have much impact on Netanyahu's anti-Iranian stance. BMI believes that the Prime Minister is likely to continue to advocate curbing Iran's nuclear programme, and we think that a war between Iran and Israel is increasingly likely, particularly if a hardliner president is elected in Iran in June. We see Iran as the biggest threat to Israel.

The report's general conclusion is that Israel must soon take the critical decision about whether to conduct air strikes against Iran's nuclear facilities. On the one hand, Tel Aviv appears minded to move ahead and attempt to degrade Iran's nuclear programme through military action. In a now-famous speech at the UN in late September 2012, Prime Minister Binyamin Netanyahu used a cartoon illustration of a bomb to demonstrate that once Iran was 90% of the way towards obtaining a nuclear weapon, it would have crossed Israel's red line. This point would be reached in mid-2013, he warned, adding that Israel reserved the right to take action before things reach that stage.

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