Israel’s economy under pressure: judicial reform sparks uncertainty and credit downgrade worries

by | Jul 25, 2023 | Economy | 0 comments

In a concerning turn of events for Israel’s economy, Morgan Stanley downgraded the nation’s sovereign credit rating on Tuesday, expressing a “dislike stance” towards the country’s economic trajectory. This decision came in the wake of the Knesset’s vote to pass the first law of its controversial judicial reform, which has sparked widespread concerns over political and social tensions that may have negative consequences for both the economy and security situation.

Morgan Stanley highlighted increased uncertainty about Israel’s economic outlook in the coming months, causing potential investors to be wary. The agency expressed concerns that the government’s recent actions may scare off investors and lead to a depreciation of the shekel along with a decline in the Tel Aviv Stock Market.

Adding to the unease, a prominent credit rating agency, Moody’s, issued a warning about the potential risks posed by the judicial reform. The agency believes that the scope of the government’s proposals may weaken the judiciary’s independence and disrupt the balance of power among government branches, crucial elements of strong institutions. Furthermore, they expressed worry that the executive and legislative institutions have become less predictable and more willing to take significant risks, affecting economic and social stability.

The warning from Moody’s came as a surprise since it was outside of their usual schedule for rating updates. Despite the agency affirming Israel’s sovereign credit rating at “A1” in April, it downgraded the outlook to “stable” due to concerns over weakening institutional strength and policy predictability, as well as a deterioration of the country’s governance.

Israel’s Finance Minister Bezalel Smotrich (Flash 90)

In response to the impending effects of the judicial reform on the economy, 68% of start-ups in Israel have already taken precautionary measures, such as withdrawing cash reserves, relocating their headquarters outside the country, moving employees abroad, and conducting layoffs. The uncertainty surrounding the reform has made doing business with Israel more complicated and riskier, leading to potential declines in overseas income.

The situation has left banks and foreign investment bodies in shock, with uncertainty at its peak. Tel Aviv’s stock market has experienced sharp declines, losing more than 4% in just two days. Additionally, the shekel has depreciated significantly against the dollar.

Looking forward, analysts speculate on what may unfold, questioning whether the High Court will intervene in the matter, potentially leading to a constitutional crisis. The possibility of the legal advisor to the government, attorney Gali Beharev-Miara, being fired has also raised concerns, as it could further unsettle the markets and prompt reactions from credit rating companies.

While rating agencies have yet to release official opinions on the situation, the media in Israel is suggesting that they may give a negative forecast due to the unilateral legislation. A report by rating company Fitch in August is expected to provide further insights into the potential consequences.

Prime Minister Benjamin Netanyahu’s call for talks and negotiations during the Knesset recess indicates an interest in compromise, but opposition members’ resistance adds to the uncertainty surrounding the situation.

The events of the last few days have undeniably put Israel’s economic situation to the test, making investors increasingly nervous about investing in Israeli assets. With the potential for further credit downgrades, it remains crucial for the government to address the concerns and restore stability to the nation’s economy in the face of mounting challenges.

Regardless of one’s view on judicial reform, the situation in Israel sheds light on a troubling hypocrisy within certain financial institutions and businesses operating in the international arena. While they are quick to criticize Israel’s actions and downgrade its credit rating due to political and social tensions, they conveniently overlook similar issues when dealing with countries like China and Saudi Arabia, known for their poor human rights records and domestic policies. This double standard raises serious concerns about the fairness and consistency of their judgements. It is indeed ironic that while prominent political leaders, credit agencies, and numerous enterprises exert pressure on the only democracy in the Middle East, they seem unbothered by expanding their businesses and forging relationships with the aforementioned countries. This blatant disparity in treatment calls for a fair and balanced approach in global dealings and urges a thorough re-evaluation of these institutions’ principles and practices.


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