Moody’s ‘wake-up call’: Tel Aviv Stock Exchange head warns of looming financial crisis

In direct appeal, TASE CEO Ittai Ben-Zeev urges prime minister and finance minister not to dismiss credit-rating agency’s warnings and seek to regain trust to avert a downgrade

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

Stock quotes seen outside the Tel Aviv Stock Exchange on August 26, 2015. (Miriam Alster/FLASH90)
Stock quotes seen outside the Tel Aviv Stock Exchange on August 26, 2015. (Miriam Alster/FLASH90)

In a strongly worded appeal, the head of Israel’s stock exchange urged the government on Wednesday to come to its senses or else face a downgrade of the country’s economy by credit-rating agencies and a financial crisis.

A day after Moody’s Investors Service warned about “negative consequences” and “significant risk” for Israel’s economy following the passage of the first bill of the government’s contested judicial overhaul, Ittai Ben-Zeev, the chief executive of the Tel Aviv Stock Exchange, issued a direct plea to Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich.

“Talk to Moody’s and other international credit rating companies and do what is necessary to prevent a downgrade that would be destructive to everything that has been built here with great effort and talent for many years,” Ben-Zeev said in a statement. “No plan to strengthen the Israeli economy will help, if the rating goes down.”

“If there is no change soon, unfortunately we will get there with all that it implies,” he warned.

Global credit-rating agencies have until now held off downgrades as the Israeli government led by 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.

Ben-Zeev’s appeal comes as lawmakers advancing the proposed changes to the country’s judicial system without broad consensus have been ignoring numerous warnings in recent months by credit-rating agencies, the Bank of Israel governor, world-leading economists and serial tech investors about the irreversible economic and social damage that is likely to be caused.

TASE CEO Ittai Ben-Zeev at a press conference in Tel Aviv, December 22, 2020 (YouTube screenshot)

In a joint statement, Netanyahu and Smotrich on Tuesday downplayed Moody’s report as a “momentary response,” after the coalition earlier this week passed its reasonableness limitation bill into law despite mass public protest, adding that when the “dust settles it will become clear that Israel’s economy is very strong.”

In an attempt to calm the storm, Netanyahu and Smotrich said that Israel’s economy was performing well and will “continue to grow under experienced leadership that is enacting a responsible economic policy.”

Against this, Ben-Zeev called the Moody’s report a “wake-up call” to the Israeli government that if it doesn’t get its act together soon to restore trust it will be facing a “UK-style financial crisis.”

Back in April, Moody’s cut Israel’s credit outlook from “positive” to “stable,” citing a “deterioration of Israel’s governance” and upheaval over the government’s bid to dramatically overhaul the judiciary, while warning that the country’s credit rating could come “under downward pressure if the current tensions were to turn into a prolonged political and social crisis.”

“We believe the wide-ranging nature of the government’s proposals could materially weaken the judiciary’s independence and disrupt effective checks and balances between the various branches of government, which are important aspects of strong institutions,” Moody’s said in Tuesday’s report. “The executive and legislative institutions have become less predictable and more willing to create significant risks to economic and social stability.”

Additionally, Moody’s cautioned said that some of its earlier concerns regarding the proposed reforms’ impact on Israel’s economy are also starting to materialize, citing the slump in venture capital investments during the first half of the year since the judicial plan was presented and referencing to data that showed that 80% of new Israeli startups chose to register overseas during the same period.

Tech workers march in Tel Aviv to protest against the government’s planned overhaul of the judicial system, January 31, 2023. (Tomer Neuberg/ Flash90)

While Moody’s kept Israel’s favorable credit rating at A1 and projected economic growth of 3% in 2023 and 2024, the agency emphasized that the forecast “does not incorporate a negative effect from a prolonged period of social and political tensions.”

“Moody’s is an objective and neutral international body that bluntly says that although our economy is strong, we as a country are on a slippery slope that will eventually cause significant economic damage to all citizens of the State of Israel,” Ben-Zeev stated. “This is a reflection of Israel’s economy in the eyes of the world, and we must not ignore it.”

Also on Tuesday, US investment bank Morgan Stanley lowered Israel’s sovereign credit to a “dislike stance,” citing “increased uncertainty about the economic outlook in the coming months.”

In a note, US bank Citi told institutional clients that the environment in Israel is “much more tricky and dangerous” after the government passed a bill blocking courts from exercising judicial review over the “reasonableness” of its decisions, counseling investors to hold off until the dust settles.

Other credit rating agencies, including Standard & Poor’s, 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.

Political uncertainty around the government’s proposed judicial overhaul has seen the shekel already weakening by about 10% against the US dollar since it was first announced in January. As it’s becoming increasingly clear that the coalition is pushing ahead with the judicial overhaul despite mass protests and social tensions, Bank of Israel governor Amir Yaron warned earlier this month that further shekel depreciation, which translates into higher inflation, may result in higher borrowing costs hitting citizens directly in their pockets.

Yaron said that the advancement of the legal changes has led to an increase in the level of uncertainty in the Israeli economy as reflected also in the underperformance of the Israeli stock market versus global markets in recent months.

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