JPMorgan warns of growing risk to investing in Israel due to judicial shakeup plans
Internal memo from US banking behemoth cites ‘geopolitical hostilities’ and proposed overhaul of judicial system, which it says could adversely impact Israeli credit rating
Leading US financial institute JPMorgan has warned of a growing risk of investing in Israel due to the new government’s far-reaching plans for overhauling the judicial system.
The internal memo released Friday came days after Prime Minister Benjamin Netanyahu pointed to both JPMorgan and fellow US banking giant Goldman Sachs as evidence that the judicial proposals were not chasing away potential investors.
In the memo, which was first published by Channel 12 news, JPMorgan cited both the judicial overhaul plans presented by Justice Minister Yariv Levin, as well as an increase in “geopolitical hostilities.”
The document — which stressed that the views expressed in the memo are indeed the bank’s official positions — compared Israel to Poland, which passed similar judicial reforms and subsequently had its credit rating downgraded in January 2016.
JPMorgan flagged the possibility that the judicial shakeup could put negative pressure on Israel’s credit rating, which it said currently “stands comfortably in the investment grade bucket,” potentially slowing the flow of international investment.
The bank stressed, however, that it expects “the market impact of that to be limited.”
פרסום ראשון – בנק ההשקעות ג׳יי פי מורגן, הפעם בדוח רשמי של מחלקת המחקר: הסיכון להשקעות בישראל עולה עקב התכנית המשפטית.
המסמך כולל השוואה למצב בפולין, והתראה על חשש מפגיעה בדירוג האשראי.
הדוח נשלח הלילה למשקיעים ולקוחות ברחבי העולם עם הבהרה שזו העמדה הרשמית של הבנק pic.twitter.com/2thbpXDRyQ
— עמליה דואק (@AmalyaDuek) February 3, 2023
A source close to Netanyahu derided the report as “spin” and said many commentators aren’t knowledgeable about the actual proposals.
“A thousand reports like this won’t help. People will see if it’s worth investing or not,” the source said. “The smart money will come in because what we’re doing is balancing an unbalanced situation. The justice system will remain independent like today, the ‘judicialization’ will decrease and the economy will flourish.”
Netanyahu, who is in France for an official visit, said that he’d met with 60 French business people, who told him, “What they’re saying about investors running away is nonsense. We want to increase our investments in Israel.”
The proposals presented by Levin in December would sharply restrict the High Court’s capacity to annul laws and government decisions with an “override clause” enabling the Knesset to re-legislate struck-down laws with a bare majority of 61; give the government complete control over the selection of judges; prevent the court from using a test of “reasonableness” to judge legislation and government decisions; and allow ministers to appoint their own legal advisers, instead of getting counsel from advisers operating under the aegis of the Justice Ministry.
Last week, Goldman Sachs cautioned that the “growing concern over domestic political developments” puts a focus on the exposure of the shekel.
“The five most recent elections over the past three-year period have had typically limited read-through to financial markets,” Goldman Sachs economist Tadas Gedminas wrote in a report. “This is not to say that the current situation could not have a more meaningful impact this time around, and we will closely monitor ongoing developments.”
“That said, we think these structural changes and their implications for financial markets are underappreciated,” Gedminas warned.
The JPMorgan memo was published after Netanyahu asserted in a video statement Sunday that neither bank was warning of investment risk.
“They say that the judicial reform will keep investors away,” Netanyahu said in a Hebrew-language video posted to Twitter on Sunday, “but two of the biggest and most influential investment banks, JPMorgan and Goldman Sachs, say the exact opposite.”
Domestic finance institutions have also been vociferous in their concerns that Levin’s plans may negatively impact the country’s economy.
Israeli bank chiefs last week warned Netanyahu of potential economic fallout from his government’s proposals for a sweeping makeover of the country’s judiciary.
Discount Bank CEO Uri Levin said at the time: “It’s impossible to ignore all the economic figures expressing so much concern over the moves, and therefore you need to stop immediately and only advance changes cautiously and with broad agreement.”
Economists at Bank Hapoalim and Leader Capital Markets last week said the news that foreign investors are beginning to take their money out of Israel in response to the makeover of the judicial system led to a sharp drop in the prices of government bonds, share sale in the local market (also by foreign entities) and a considerable weakening of the shekel.
Economy Minister Nir Barkat sought to calm fears on Wednesday, telling the Cybertech Global conference in Tel Aviv that when speaking to contacts abroad, “this issue isn’t even mentioned.”
“I don’t feel that it affects the situation. That’s because investors from all over the world are interested in the best entrepreneurs, ideas, or products and are looking for solutions – as long as Israel can provide that, it will remain a leader,” he said.
On Tuesday, Verbit founder and CEO Tom Livne said he was uprooting his $2 billion hybrid AI-based and human transcription and captioning software company from Israel to protest the government’s plans, and encouraged other tech CEOs to follow suit.