Netanyahu and Smotrich dismissive: 'A momentary response'

Moody’s after overhaul law: Israel faces negative economic fallout, significant risk

Morgan Stanley cuts Israel sovereign credit to ‘dislike stance’; Citi cautions investors about ‘constitutional crisis’ scenario over legislation approved despite lack of consensus

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

A protester stands in front of a police water cannon being used to disperse demonstrators blocking a road during a protest against moves by Prime Minister Benjamin Netanyahu's government to overhaul the judicial system, in Jerusalem, July 24, 2023. (AP/Ariel Schalit)
A protester stands in front of a police water cannon being used to disperse demonstrators blocking a road during a protest against moves by Prime Minister Benjamin Netanyahu's government to overhaul the judicial system, in Jerusalem, July 24, 2023. (AP/Ariel Schalit)

Credit rating agency Moody’s Investors Service on Tuesday warned about “negative consequences” and “significant risk” for Israel’s economy and security situation following the passage of the first bill of the government’s contested judicial overhaul.

Back in April, Moody’s lowered 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.

“More specifically, 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 wrote in the issuer comment it released late on Tuesday. “Israel has no written constitution and its institutional set-up relies to an important extent on judicial oversight and review.”

“The executive and legislative institutions have become less predictable and more willing to create significant risks to economic and social stability,” the rating agency warned.

Additionally, Moody’s said that some of its earlier concerns regarding the proposed reforms’ impact on Israel’s economy are also starting to materialize.

“Venture capital investments in Israeli high-tech firms have declined materially, with the sector raising $3.7 billion in the first six months of the year, the lowest figure since 2019,” Moody’s cautioned. “While the slowdown reflects global trends in the sector triggered by tighter financing conditions and a degree of normalization after the pandemic, there are also signs that Israel is decoupling from global trends.”

View of the Tel Aviv Stock Exchange. November 29, 2020. (Miriam Alster/Flash90)

For now, Moody’s still expects the country’s economy to grow at a rate of 3% both this year and in 2024, but cautioned that the projection does not “incorporate a negative effect from a prolonged period of social and political tensions.”

In response to the awaited Moody’s report, the government put out a statement, rebuffing it as a “momentary response,” adding that when the “dust settles it will become clear that Israel’s economy is very strong.”

“The Israeli economy is based on strong fundamentals and will continue to grow under experienced leadership that is enacting a responsible economic policy,” read the joint statement by Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich.

US investment bank Morgan Stanley on Tuesday 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.

“The current events in Israel are challenging… and making investors increasingly nervous with regards to Israeli assets,” Citi VP Michael Wiesen wrote in the note. “We urge caution here and to wait for better levels/calmer market.”

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.

“Netanyahu lied to the credit rating companies when he said that the legislation would pass with broad consensus and we will all pay dearly for this lie,” said Labor Party head Merav Michaeli. “The price that every family in Israel will pay for Netanyahu’s lie will be expensive and painful in the pocket.”

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.

Earlier on Tuesday, Israeli shares continued to take a dive and the shekel weakened for a second day amid market concern that Moody’s is likely to cut the country’s credit outlook after the first bill of the contested judicial overhaul was ratified without broad consensus.

The shekel depreciated about 1.5%, trading around 3.71 against the US dollar in evening trading, and is down about 2.6% from the Bank of Israel representative rate set on Monday as Israel’s parliament passed a bill that prevents judges from striking down government decisions on the basis they are “unreasonable.”

Tel Aviv Stock Exchange’s benchmark TA-125 index dropped 3.1% and the TA-35 index of blue-chip companies fell 3%, while the TA-90 index was down 3.4% at the market close in Tel Aviv. The TA index of the five largest banks slumped 4.8% and the TA-Insurance & Financial Services declined 3.6%.

In its report back in April, Moody’s had warned that Israel’s credit rating could come “under downward pressure if the current tensions were to turn into a prolonged political and social crisis,” while noting that deliberations were being held and should a compromise be reached “without deepening these tensions, the positive economic and fiscal trends that Moody’s had previously identified remain.” The agency has kept the country’s actual credit rating at A1, citing “strong economic growth.”

“The Israeli government has in the past ensured the credit rating agencies that the proposed judicial reform would not be advanced without broad consensus,” Psagot investment house chief strategist Ori Greenfeld told The Times of Israel before the release of the Moody’s report. “With yesterday’s passage of the bill, there is a high probability that the agencies will act and put out updates.”

Despite large protests and continued mass public opposition, the Knesset on Monday ratified a law that prevents Israeli courts from reviewing the “reasonableness” of government and ministerial decisions. 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.

“The passing of the bill increases sentiment about the materialization of the negative impact of the judicial reform on the economy, which means that investors will attach a higher risk premium to the economy,” said Greenfeld. “In the immediate term, we are likely to see further weakening of the local currency which in turn fuels inflation and is a risk to additional interest rate hikes.”

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

“Following this political overhaul, Israeli entrepreneurs will set up entities abroad,” Eynat Guez, co-founder and CEO of Israeli payroll platform Papaya Global, wrote in an open letter on Monday. “It’s simply too risky to expose investors to a shady judicial system, with no real oversight, in which they have no protection and no legal remedy.”

“This is clear and present danger and the consequences will be harsh,” Guez warned.

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