Tel Aviv shares dive as investor concern over a looming constitutional crisis rises
Shekel weakens amid attempts to oust top gatekeepers; a weaker local currency makes imported goods, including food, more expensive for Israeli households and will keep rates high
Sharon Wrobel is a tech reporter for The Times of Israel
Growing investor fears of a looming constitutional crisis amid rising internal tensions over the government’s attempts to oust Shin Bet chief Ronen Bar and Attorney General Gali Baharav-Miara sent shares and bonds tumbling on Sunday.
On Sunday, the Tel Aviv Stock Exchange’s benchmark TA-125 index dropped 3.7%. The TA-35 index of blue-chip companies was down 3.3%, the biggest daily decline since October 2023. The TA-90 index, which tracks the shares with the highest capitalization not included in the TA-35 index, fell 4.7%. The TA-Insurance and Financial Services index plunged 7.6%, almost as much as on October 8, 2023, the day after the brutal onslaught by the Hamas terror group.
The planned dismissal of the country’s top gatekeepers has sparked concern over a crumbling Israeli democracy and ignited mass protests by the general public. Meanwhile, business leaders and the largest labor union have threatened a nationwide strike. This uneasiness was further exacerbated by the breakdown of the truce in Gaza.
The moves by the government led by Prime Minister Benjamin Netanyahu, which critics say undermines Israel’s democracy, rekindled public protest that was last seen during the judicial overhaul proposed in January 2023. The proposed overhaul pushed the risk premium of investing in Israel up and it appears it could be happening yet again.
If the risk perception increases, consumers will be worse off as investments are likely to decline, the local currency could weaken further — fueling price increases and higher inflation — while borrowing costs stay high. That’s as Israeli households already struggle to pay off monthly mortgage payments and make ends meet during the challenging war period.
“The battle over Israel’s legal system has resumed, threatening judicial independence,” IBI investment house chief economist Rafi Gozlan told The Times of Israel. “That’s after Israel’s multi-front war, which followed the Hamas onslaught of October 7, 2023, has recently shown signs of receding and the risk to invest in Israel has come down.”
“There has been a complete twist in the geopolitical situation with the resumption of fighting and in the internal situation with the reawakening of a threat to Israel’s judicial and democratic institutions, which investors thought was off the table for good,” Rozlan added.
“A return to fighting and an escalation of the internal conflict could harm economic growth, lead to a higher deficit, increase the risk of a downgrade of Israel’s credit rating and delay interest rate cuts,” said Meitav Investment House chief economist Alex Zabezhinsky.
In 2023, Israeli financial markets parted ways with global market trends, hit by the proposed judicial overhaul in January of that year, which was abandoned amid growing public pushback and uproar and with the outbreak of war with the Hamas terror group in October 2023. At the time, local shares and bonds as well as the shekel were hit amid growing political uncertainty and fears that the planned changes to the legal system would threaten the independence of the judiciary and make business and investment less predictable.
On Friday, the shekel depreciated about 1%, trading at around NIS 3.71 per dollar, the weakest level since the end of November as investors braced for uncertain times amid renewed fighting in Gaza. It also raised concerns that a prolonged war and higher defense spending, as well as the heightened internal rift, will take a toll on the country’s already dented finances and economy.
“Rising internal tensions in Israel coupled with heightened geopolitical tensions drove a significant depreciation of the shekel exchange rate and a rise in bond yields,” said Bank Hapoalim chief strategist Modi Shafrir.
Most of the public’s pension savings are held in government and corporate bonds and a continued increase in Israel’s risk premium could lower their price and value over the medium term.
Meanwhile, depreciation in the local currency affects the rising cost of living and interest rates. A weaker shekel increases the price of imported goods such as food and gas and travel abroad and leads to higher inflation, hitting consumers in their pockets at a time when households are already grappling with higher costs.
A weakening of the shekel by 1 percent increases inflation by 0.1-0.2 percentage points, according to Bank of Israel estimates. This in turn translates into higher prices of consumer goods and leads to a decline in households’ disposable income and standard of living, while mortgage payments and interest rates on debts and other credit lines remain high.
“If investors perceive that Israel is not a good place to do business, investments into the Israeli economy will be curtailed. This is especially worrying for investments into the high-tech industry, which provides about a third of the country’s tax revenues, and accounts for about half of Israeli exports,” said Gozlan. “We saw the damage the proposed judicial overhaul in 2023 caused to investments flowing into the country while many Israelis and local companies also shifted their funds and operations abroad.”
Amid the political uncertainty, the public in 2023 withdrew a massive NIS 30 billion ($8.1 billion) from funds that invest in shares and bonds in Tel Aviv and poured NIS 20.5 billion ($5.6 billion) into funds that invest in securities abroad and NIS 53 billion ($14.5 billion) into money market funds, according to Tel Aviv bourse data.
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