For many years, Israel’s capital market have been relatively immune to domestic political and security developments, instead being heavily connected with global markets movements. However, professionals at local and foreign financial firms are beginning to express concerns that anticipated changes to the judiciary could negatively impact investor sentiment.

The mounting pressure appears to have given way, as Israeli stocks slumped on Sunday. Despite key Wall Street indices gaining at the close of the week, the Tel Aviv Stock Exchange (TASE) lost 2.1% for the benchmark TA-125 index, 2% for the blue-chip TA-35 index, and 1% for longer-term government bonds. Overall, Tel Aviv had a solid start to the year. However, recent events have reduced the gains, while the tech-heavy Nasdaq has gained for the fourth week in a row, climbing 12%.

Meanwhile, with Monday trade officially underway, the shekel fell another 1.2%, completing a 3.5% loss in three business days.

Israeli bankers and other business executives met with Prime Minister Benjamin Netanyahu on Friday, warning of the potential economic consequences of his government’s plans for a major overhaul of the country’s judiciary as foreign investors begin to withdraw their funds from Israel. Despite his openness to discuss, the Prime Minister remains committed to implementing the reform.

Last week, the governor of the Bank of Israel, Amir Yaron, met with Prime Minister Netanyahu as well, warning him about the risks of changing the judiciary and the negative effects on the economy it may have, including a drop in foreign investment and a deterioration of the country’s strong credit rating.

This is why experts attribute the recent precipitous decline in government bond prices, the weakening of the shekel, and the sell-off on the TASE solely to domestic developments.

When there is negative market sentiment, stocks and bonds decrease across the board, while the USD rises. Because Israel is reliant on exports and many products that are imported from abroad are denominated in dollars, the depreciation of the shekel causes a rise in inflation. These factors contribute to the overall uncertainty.

Yossi Fraiman, CEO of Prico Financial Risk Management, told Bizportal that the fear of the effect of investors fleeing calls for greater caution on the part of politicians. The reason for this is that the capital markets are quite responsive to uncertainty when it arises. It will take a long time and a significant amount of money to correct the repercussions. The capital found in the banking system belongs predominantly to foreign investors and Israeli companies. Its availability allows for the provision of credit on attractive terms for the Israeli economy. The early 2000s financial crisis and capital flight caused a huge increase in the cost of acquiring capital for banks and the government, resulting in a dramatic spike in interest rates throughout the economy.”

Benjamin Netanyahu is well aware of this. His election as finance minister in 2003 and the actions he took halted the downward trend. It took many years, however, for Israel to achieve its current strong position as an investment destination and to develop a vibrant high-tech sector.

Currently, a strong currency, such as the shekel, boosts investor confidence. Nonetheless, if economic stability is threatened, this could soon deteriorate.

On the one hand, a depreciation of the shekel allows Israeli exporters to sell foreign currency at favorable rates. On the other hand, it raises the overall cost of imports and credit. Rising prices are passed on to consumers, causing inflation to rise (which is what was happening during the last year). As a result, the central bank is forced to intervene and raise interest rates, increasing the cost of mortgages and negatively impacting consumer spending. This vicious cycle causes the economy to slow down and potentially go into recession.

Therefore, policymakers must take action. Judicial reform is something that should be considered, but it must be done in an orderly manner. Otherwise, ordinary citizens will end up paying the price for someone else’s ambition.