Shekel heads to 3-year low, government bonds slip after vote on judiciary changes

Investor concern mounts after first piece of legislation that would weaken country’s legal system passes its first vote in Knesset

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

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

The shekel dropped more than 2% and government bonds and shares slid in Tel Aviv on Tuesday after the Knesset passed the first reading of a bill to make contentious changes to the judiciary system.

The local currency fell more than 2% trading around 3.64 against the US dollar in the afternoon in Tel Aviv, trading around the weakest level since April 2020. Since the beginning of the month the shekel is down more than 5% against the greenback.

The Tel Aviv Stock Exchange’s benchmark TA-125 index declined 1.8%, while the TA-35 index of blue-chip companies slipped about 1.5% and longer-term government bond prices plunged between 1% and 2%. U.S. stock and bond markets were closed on Monday for Presidents Day. On Friday, the Nasdaq composite declined 0.6%.

Early Tuesday, the Knesset passed the first reading of a bill that makes up a significant part of the controversial judicial overhaul, to cement government control over judicial appointments and revoke the High Court’s ability to review Basic Laws.

The proposed changes championed by Prime Minister Benjamin Netanyahu’s religious-nationalist government has sparked mass protests in recent weeks calling for the protection of Israel’s democracy and system of checks and balances.

The ruling coalition’s plan to upend the judiciary has been weighing on market sentiment amid fears over its negative impact on the country’s credit rating, which could trigger an outflow of capital and scare away investors.

Illustrative: Israeli 100 shekel banknotes, December 31, 2017. (Nati Shohat/Flash90)

Local and foreign institutional investors, as well as banking heads and prominent economists, have issued numerous warnings about the potential economic and financial fallout, with some calling on the opposing sides to hold compromise talks as proposed by President Isaac Herzog.

“If until now, the market was pricing in the possibility for a compromise or dialogue on the judicial changes, with the Knesset vote we are further away from that,” IBI Investment House Ltd. chief economist Rafi Gozlan told the Times of Israel. “Should the proposed judicial changes be fully passed this is very worrying as Israel is going to have a very different economy from where we are now, with a strong government and no separation of institutional power.”

“The market is now repricing the risk premium on domestic assets and we are seeing strong demand for foreign exchange and a sale of local government bonds, which is putting pressure on the government,” Gozlan added.

Some local firms and startups have already begun to withdraw their money, at the behest of their overseas investors, to diversify risk and hedge their assets before the bills head to final approval.

The proposed legal overhaul would grant the government total control over the appointment of judges, including to the High Court, severely limit the High Court’s ability to strike down legislation, and enable the Knesset to re-legislate laws the court does manage to annul with a bare majority of 61 MKs.

Speaking at the Knesset’s Science and Technology Committee, Chemi Peres, the son of former prime minister and president Shimon Peres and the CEO of Israel’s largest venture capital fund Pitango, warned that Israel is facing major economic damage from the judicial transformation.

Israelis protest against the government’s judicial overhaul plans, near the Knesset in Jerusalem, February 20, 2023. (Ahmad Gharabli/AFP)

“I sit on the boards of huge companies that want to get their money out of Israel. There is a quiet drip of companies [out of the country],” Peres said. “Once there is an understanding that we are going toward anti-democratic legislation, the majority of investment and [high-tech] taxes won’t be paid in Israel, and we’ll lose an industry that is embraced everywhere in the world.”

Meanwhile, Foreign Minister Eli Cohen on Monday took aim at the Bank of Israel for hiking the benchmark interest rate by 50 basis points to 4.25%, calling on Finance Minister Bezalel Smotrich to put together a plan to halt the rise in borrowing costs.

In an attempt to reassure foreign investors and ratings agencies about the independence of the central bank’s monetary policy, Smotrich defended the Bank of Israel against “populist” criticism from within the government.

“As finance minister, I stand firmly against populist statements threatening the Bank of Israel’s independence,” Smotrich tweeted in English and Hebrew.

Bank of Israel chief Amir Yaron also addressed the impending judicial reforms, telling the Kan public broadcaster on Monday that an independent Bank of Israel is “crucial” to the country’s economy.

Times of Israel staff contributed to this report.

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