Great fears sweeping the Israeli economy

  • Investors are increasingly worried that rating agencies will cut service to Israel due to a serious political crisis.
  • Mass protests intensified as Israel’s parliament, the Knesset, moved closer to enacting a law that would change the way the country’s judicial system operates.
  • “Credit rating agencies are likely to react to these developments,” writes Shira Greenberg, chief economist at Israel’s Finance Ministry.

Hundreds of anti-Netanyahu protesters gathered on Wednesday outside a hair salon after the prime minister’s wife, Sara, was spotted at a hair salon nearby.

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New concerns about the Israeli economy are prompting global investors to question the money they have in the country.

Mass protests have intensified in recent weeks as Israel’s parliament, the Knesset, moves closer to enacting a law that would profoundly change the way the country’s judicial system operates. Critics – who polls show represent a majority of Israel’s population – say the changes will jeopardize the country’s democracy.

The law will transform Israel’s judicial system by giving current governments full control over judicial appointments. It would also weaken the country’s Supreme Court to an extent Effectively ending its role as an officer of the executive and legislative branches.

In a sign of the seriousness of opposition to the proposed law, graduates of elite military programs and reservists in important parts of the Israeli army have threatened not to show up for service and have begun filing petitions protesting the changes.

In a recent report, Shera Greenberg, chief economist at the Treasury Department, wrote that “credit rating agencies are likely to react to these developments.”

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So far, the three rating agencies – S&P Global, Moody’s and Fitch – have held steady, keeping Israel in a high credit category, which gives global investors a certain amount of reassurance.

You cannot separate startups, start-ups and big companies in Israel from the stock market. As financing slows down, we’ll see the impact on the stock market, and that’s happening right now.

Stephen Schoenefeld

CEO, MarketVector

Fitch reaffirmed its rating on Wednesday but published a special section on the economic risks of judicial reform in its note. The company warned that the proposed judicial reform “could have a negative impact on Israel’s credit standing by weakening governance indicators or if weakening institutional controls leads to worse political outcomes or persistent negative investor sentiment.”

Fitch noted the passage of similar rules in other countries, which it said had led to a “significant weakening of the World Bank’s governance indicators” in those places. These indicators play an important role in shaping country rankings.

Fitch noted that the judicial proposal in Israel was met with “strong civil society and political opposition,” which in turn divided Israeli society. Israel is the second largest economy by GDP in the Middle East after Saudi Arabia.

In an earlier report, Moody’s ratings service raised similar concerns regarding the legal system, writing that “implementing such changes would be clearly negative for our assessment of institutional strength and governance, which we have so far considered a positive feature of Israel’s sovereign credit profile.”

A downgrade in Israel’s credit rating will increase the cost of borrowing and hurt fundraising. Both are important because of Israel’s need for foreign investment from institutions based in the United States, Europe, and elsewhere.

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Much of the Israeli economy is tied to the value of the Israeli shekel against the US dollar. The shekel fell in February, ending the month down nearly 10% from its level on February 3. This, in turn, harmed important parts of the Israeli economy, including real estate, as companies and citizens converted their money into US dollars or other currencies.

The shekel’s decline also reduced investor confidence. the Tel Aviv Stock Exchange It fell about 8% in February.

MarketVector CEO Stephen Schoenfeld said he believes investors are right to be concerned about the situation in Israel. MarketVector maintains stock indices, including the Blue Star Fund, which Schoenfeld set up to track Israeli stocks.

“Most of the concern is in Israel’s important venture capital and private equity areas,” Schonfeld said.

“You can’t separate startups, start-ups and big companies in Israel from the stock market,” he added. “As financing slows down, we’ll see the impact on the stock market, and that’s happening now.”

Bank of Israel Governor Amir Yaron tried to calm the markets and business leaders.

A source familiar with the matter told CNBC that Yaron warned at a meeting hosted by Prime Minister Benjamin Netanyahu last week that the political crisis could turn into an economic crisis, and that “the issue must be dealt with.”

Members of Netanyahu’s government maintain that compromise is still possible – though critics question this claim. Informed sources told CNBC that the cabinet is in contact with important Israeli executives in an effort to mitigate the impact on the economy.

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Through the Central Bank, Yaron declined to be interviewed for this report. However, he said in a statement last week that “the shekel has fallen,” which will force the government to act “with great responsibility” regarding the budget.

The budget is another consideration that rating agencies have cited as potentially problematic for the Israeli economy.

The government may come under pressure to make expenditures tailored to benefit select pockets of the population that are part of the existing coalition base.

Otherwise, Israel could face a sixth election in less than four years.

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