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Israeli shares, shekel slide as passage of overhaul law crushes compromise hopes

Approval of 1st element of contested judicial overhaul, despite mass protests, raises country’s risk premium; credit rating agencies likely to put Israel on close watch, says IBI

Sharon Wrobel is a tech reporter for The Times of Israel.

The Tel Aviv Stock Exchange, December 25, 2018. (Adam Shuldman/Flash90)
The Tel Aviv Stock Exchange, December 25, 2018. (Adam Shuldman/Flash90)

Israeli shares turned to losses and the shekel weakened on Monday, after a contested judicial overhaul bill passed the Knesset and earlier efforts to reach a compromise collapsed.

Tel Aviv Stock Exchange’s benchmark TA-125 index dropped 2.3% and the TA-35 index of blue-chip companies fell 2.2%, while the TA-90 index was down 2.8% at the market close in Tel Aviv. The TA index of the five largest banks slumped 3.9% and the TA-Insurance & Financial Services declined 3.1%.

Despite large protests and mass public opposition, the Knesset on Monday ratified a law that prevents Israeli courts from reviewing the “reasonableness” of government and ministerial decisions, the first major bill of the government’s judicial overhaul to pass into law. The bill passed its third and final reading with 64 votes in favor and 0 against, as the entire 56-member opposition boycotted the vote in protest.

Israel’s shekel went through a rollercoaster on Monday gaining more than 1% to 3.58 against the US dollar earlier in the day before weakening as much as 1% to trade around 3.68.

“There was hope in Israeli markets until the last moment that some kind of a compromise on the planned judicial changes could be reached,” IBI Investment House Ltd. chief economist Rafi Gozlan told The Times of Israel. “If, ahead of the vote, we saw market optimism for more agreement, following the final approval of the bill, the local market is now pricing in increase in Israel’s risk premium and the damage it may cause to the economy and tech investments.”

Ahead of the vote, the TA-35 and the TA-90 indices rose 4% and 2.5% respectively last week, as US stock exchanges were up about 2% and markets in Europe were down. The shekel strengthened by about 0.5% against the greenback during the same period.

Workers from tech sector protest against the government’s planned judicial overhaul, in Tel Aviv, on March 9, 2023. (Tomer Neuberg/Flash90/File)

Some 200 businesses in the high-tech sector, which has been at the forefront of anti-overhaul protests over the past 29 weeks, and large legal organizations allowed workers to strike on Monday, in a bid to pressure the government to halt the legislative push, which has prompted hundreds of thousands to protest for several days. Among the tech companies participating were Wix, Wiz, Papaya Global, and Lemonade. A leading business forum representing 150 of Israel’s largest companies had also announced a strike for Monday.

The main concern among the business and tech community is that the proposed judicial overhaul will erode democracy and weaken checks and balances, which in turn will make venture capitalists and other money makers leery of investing their money in the country, triggering an outflow of funds.

Almost 70 percent of Israeli startups are already taking active steps to pull money and shift parts of their businesses outside the country due to the uncertainty created around the proposed judicial changes, according to a survey released this week ahead of the crucial vote by Start-Up Nation Central, which tracks the local tech ecosystem.

“A higher risk premium means that it will be more difficult for Israeli companies, in particular in tech, to raise money as investors will be more cautious to invest in the local industry,” said Gozlan.

Israeli startups traded on US exchanges

Israeli tech companies that trade on US stock exchanges also took a hit. Several exchange-traded funds that bundle Israeli firms listed on US exchanges saw their share prices drop by around 1.5% in morning trading, while the rest of the US market trended upward. Leading Israeli companies on New York exchanges include Elbit, Wix, monday.com, SolarEdge, and NICE Ltd.

“In the case of Israeli companies’ shares, their performance may be particularly sensitive to political developments within Israel,” said Guy Franklin, the founder of Israeli Mapped in NY, which tracks Israeli startups in New York. “As the passing of the bill suggests a change in legislation or government policies, investors react to potential implications for businesses and economic prospects in the country.”

The president of the United States-Israel Business Alliance, Aaron Kaplowitz, said his group was monitoring the impact of the judicial overhaul, but that he expected the two countries’ business ties to remain strong despite the turmoil.

“The foundational pillars of the alliance remain sturdy. As we’ve seen throughout the years when the US-Israel relationship has been tested, it endures and often emerges stronger,” he said, adding that his group was fielding more calls from state governors about business missions to Israel in recent months than it had before the pandemic.

International credit rating agencies, including Standard & Poor’s and Moody’s Investors Service, have been warning in recent months about a deterioration in Israel’s governance and the potential weakening of the country’s judiciary and institutional strength and raised concerns over heightened domestic social and political tensions.

The rating agencies have until now held off credit rating downgrades as the Israeli government, led by Prime Minister Netanyahu has expressed that it would make every effort to reach a broad agreement or some form of consensus with the opposition and will not advance unilateral legislation on the judicial overhaul.

Moody’s lowered Israel’s credit outlook from “positive” to “stable” in April, citing  upheaval over the government’s bid to dramatically overhaul the judiciary. Back in May, S&P affirmed Israel’s favorable rating at AA- with a “stable” outlook on the baseline assumption that “elevated domestic tensions will ultimately be de-escalated and some form of consensus will be established.”

“Israel has very favorable credit ratings because of its resilient and diversified economy and the strength of its institutions,” said Gozlan. “The country’s credit ratings have been hinging on the government’s message and intentions to reach broad agreement on the overhaul.”

“Now that there is distrust of the expressed intentions we expect the agencies to take some action which could mean that initially they put Israel on ‘negative watch’ before any further rating action,” he added.

Luke Tress contributed to this report

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