Economists: PM, Smotrich response to Moody’s downgrade ‘disconnected from reality’

Letter calls Netanyahu and finance minister’s comments on credit agency report ‘extremely worrying’; business forum urges total stop to overhaul to avoid permanent economic damage

File: Prime Minister Benjamin Netanyahu and Minister of Finance Bezalel Smotrich give a press conference at the Prime Minister's office in Jerusalem on January 11, 2023. (Olivier Fitoussi/Flash90)
File: Prime Minister Benjamin Netanyahu and Minister of Finance Bezalel Smotrich give a press conference at the Prime Minister's office in Jerusalem on January 11, 2023. (Olivier Fitoussi/Flash90)

Top Israeli economists and businesspeople on Sunday slammed the government over its controversial judicial overhaul plans, after Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich appeared to play down a decision by leading ratings agency Moody’s to downgrade Israel’s economic outlook from positive to stable.

The group of hundreds of economists, which in January published an “emergency letter” warning of the potential consequences of the legislation, panned Netanyahu and Smotrich’s response to the Moody’s decision as “extremely worrying and disconnected from reality.”

In their joint response, Netanyahu and Smotrich said Saturday that “the analysts at the Moody’s ratings agency correctly recognize the strength of the Israeli economy in all indexes and the correct and responsible economic leadership that we lead, with the wise management of public spending and in the advancement of growth-encouraging reforms.

“The concern that Moody’s analysts raise about the public controversy and its effect on Israel’s political and economic stability is natural for those who do not know the strength of Israeli society,” the statement read, adding that “with God’s help” the economy will remain strong.

The economists said the premier and his finance minister’s response took credit for the previous government’s achievements, “such as deficit reduction and the passing of important reforms, in addition to boasting of unsubstantiated promises that have been repeated and voiced for many years, and above all it ignores the content of the warning.”

The economists’ letter said it was “strange” that Netanyahu and Smotrich appeared to take some pride in the Moody’s report, since “the positive points in the report concerned the ability of Israeli society to oppose the government’s measures, while all the negative points related to the government’s plans.”

They urged the coalition “to shelve its failed [overhaul] plan,” and “come back to reality.”

File: Workers from tech sector protest against the government’s planned judicial overhaul, in Tel Aviv, on March 9, 2023 (Tomer Neuberg/Flash90)

In its decision, Moody’s cited the “deterioration of Israel’s governance” amid the government’s highly contentious effort, which critics warn will erode and even end Israel’s system of checks and balances, and its democracy.

“While mass protests have led the government to pause the legislation and seek dialogue with the opposition, the manner in which the government has attempted to implement a wide-ranging reform without seeking broad consensus points to a weakening of institutional strength and policy predictability,” Moody’s strongly worded eight-page report read.

The Israel Business Forum also urged on Sunday that the legislation to be completely stopped until a broad deal on reform is reached, to avoid further harm to the economy.

The forum, which penned a letter in March against the overhaul, includes over 40 chiefs of the largest companies in the country.

“Only an immediate, clear, and binding statement like this will stop the deterioration of Israel’s economy, which is already harming every household, especially those that are also reeling under the burden of expenses,” the statement read.

“The harm to the public will intensify and cause irreversible damage as long as such an announcement is not issued immediately, that will assure the markets and restore the Israeli economy to a direction of growth,” it added.

Late last month, Netanyahu announced a pause to the legislation on judicial reform as the coalition and opposition hold talks to try to achieve a consensus, but the premier also stressed that the effort would resume even if no agreement is reached.

The Moody’s rating agency report Friday confirmed fears that Israel’s credit outlook could be knocked down, as it had warned last month.

While the credit outlook took a hit on Friday, Moody’s kept the actual credit rating at A1, citing “strong economic growth and improving fiscal strength.”

Tens of thousands of Israeli protest against plans by Prime Minister Benjamin Netanyahu’s government to overhaul the judicial system in Tel Aviv, Israel, Saturday, April 15, 2023. (AP Photo/Oded Balilty)

Weekly mass protests around the country against the government’s plans to weaken the judicial system raged for the 15th week on Saturday night, despite the pause in the legislative process. Coalition members have vowed to press forward with the legislative push after the Knesset’s Passover recess.

Moody’s warned Friday that Israel’s credit rating could also come “under downward pressure if the current tensions were to turn into a prolonged political and social crisis with material negative impact on the economy, possibly linked to substantially lower capital inflows into the important high-tech sector and relocation of Israeli firms abroad.”

This Aug. 13, 2010 photo shows a sign for Moody’s Corp. in New York. (AP Photo/Mark Lennihan)

Moody’s noted that while the Israeli government was indeed holding deliberations, it has also “reiterated its intention to change how judges are selected. This means that the risk of further political and social tensions within the country remains.” But should a compromise be reached “without deepening these tensions, the positive economic and fiscal trends that Moody’s had previously identified remain.”

Earlier this month, the OECD cautioned that the country’s pace of economic growth is expected to moderate, warning that “risks are skewed to the downside, related to high global and domestic uncertainty.” The organization sees GDP slowing from the 6.4% growth rate last year to 3% in 2023 and 3.4% in 2024.

On Friday, the release of the March consumer price index (CPI), a measure of inflation that tracks the average cost of household goods, showed an increase of 0.4% from February. CPI has been hovering above 5% in annual terms for the past six months, falling short of the government’s target range of 1% to 3%.

The rise in inflation came despite steps taken by the Bank of Israel to rein it in. The central bank has over the past year steadily hiked its benchmark interest rate from a record low of 0.1% last April to 4.5% earlier this month in a bid to bring down price growth.

Inflation has been slower to ease in part due to a weaker shekel, which is making imported goods more expensive. Since the beginning of this year, the local currency has depreciated about 4% against the US dollar. The US dollar index, which measures the greenback against six major world currencies, has declined about 2% since the start of 2023.

Sharon Wrobel contributed to this report.

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