- Investors are increasingly concerned that rating agencies are cutting Israel due to a serious political crisis.
- The massive protests have intensified as Israel’s parliament, the Knesset, moves closer to creating a law that would change the way the country’s justice system works.
- Israel’s Finance Ministry’s chief economist, Shira Greenberg, wrote that “credit rating agencies are likely to react to these developments.”
Hundreds of anti-Netanyahu protesters gathered outside a hair salon on Wednesday after the prime minister’s wife, Sara, was spotted at a nearby hair salon.
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New concerns about Israel’s economy have global investors questioning how much money they have in the country.
Massive protests have intensified in recent weeks as Israel’s parliament, the Knesset, moves closer to creating a law that would profoundly change the way the country’s justice system works. Critics – who polls show represent the majority of Israel’s population – say the changes will endanger the country’s democracy.
The law would change Israel’s judicial system by giving incumbent governments full control over judicial appointments. It would also weaken the country’s Supreme Court to the point of ending its role as checks and balances on executive and legislative power.
In a sign of the seriousness of the opposition to the bill, graduates of elite military programs and reservists from crucial sectors of the Israeli army threatened not to show up for work and started petitions to protest the changes.
In a recent report, the Department of Finance’s chief economist, Shira Greenberg, wrote that “credit rating agencies are likely to react to these developments.”
So far, all three rating agencies – S&P Global, Moody’s and Fitch – have held steady, keeping Israel in high credit, giving global investors some reassurance.
You can’t separate Israel’s unicorns, startups and scale-ups from the stock market. As funding slows, we’ll see the impact on the stock market, and it’s happening now.
Steven Schönfeld
CEO, MarketVector
Fitch reaffirmed its note on Wednesday, but it published a special section on the economic risks of judicial reform in its note. The firm warned that the proposed judicial reform “could negatively impact Israel’s credit profile by weakening governance indicators or if weakening institutional controls lead to poorer policy outcomes or lasting negative investor sentiment.” “.
Fitch pointed to the adoption of similar rules in other countries, which he said led to “a significant weakening of World Bank governance indicators” in those places. These indicators play an important role in the development of country ratings.
Fitch pointed out that the judicial proposal in Israel has been met with “strong opposition from civil and political society”, which in turn is dividing Israeli society. Israel is the second largest economy in the Middle East by GDP after Saudi Arabia.
In an earlier report, Moody’s ratings service raised similar concerns about the legal system, writing that “implementing such changes would clearly negatively affect our assessment of the strength of institutions and governance, which we have so far considered a positive feature of Israel’s sovereign credit profile.”
A decline in Israel’s credit rating would increase the cost of borrowing and hurt fundraising. Both are crucial due to Israel’s need for outside investment from institutions based in the United States, Europe and elsewhere.
Much of Israel’s economy is tied to the value of the Israeli shekel against the US dollar. In February, the shekel plunged, ending the month down almost 10% from its February 3 level. This in turn hurt critical sectors of Israel’s economy, including real estate, as businesses and individuals transferred their money to US dollars or other currencies.
The fall of the shekel also led to a drop in investor confidence. The Tel Aviv Stock Exchange fell about 8% in February.
Steven Schoenfeld, CEO of MarketVector, said he thinks investors are right to be concerned about the situation in Israel. MarketVector maintains stock indices, including the Blue Star Fund, which Schoenfeld created to track Israeli stocks.
“Most of the concerns relate to the crucial areas of venture capital and private equity in Israel,” Schoenfeld said.
“You can’t separate Israel’s unicorns, startups and scale-ups from the stock market,” he added. “As funding slows, we’ll see the impact on the stock market, and it’s happening now.”
Bank of Israel Governor Amir Yaron tried to calm the markets and business leaders.
A source with direct knowledge of the matter told CNBC that Yaron warned at a meeting hosted by Prime Minister Benjamin Netanyahu last week that the political crisis could turn economic and “the issue needs to be addressed.”
Members of Netanyahu’s cabinet argue that a compromise is always possible – although critics dispute that claim. Insiders told CNBC that the firm was in contact with key Israeli business executives in a bid to mitigate the impact on the economy.
Through the central bank, Yaron declined to be interviewed for this report. However, he said in a statement last week that “the shekel has depreciated”, which would force the government to act with “enormous responsibility” in terms of the budget.
The budget is another consideration that rating agencies have cited as potentially problematic for Israel’s economy.
The government could come under pressure to make expenditures intended to benefit certain pockets of the population that are part of the base of the current coalition.
Otherwise, Israel could face a sixth election in less than four years.