Israeli Economy Faces Downgrades and Tech Sector Weakness Amidst Judicial Reforms Turmoil

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Israeli Economy Braces for Downgrades and Tech Sector Weakness Amidst Judicial Reforms Turmoil

Israel’s economy is facing potential downgrades in ratings, a decline in foreign investment, and a weaker tech sector as a result of the government’s controversial judicial reforms, according to investors and analysts.

The government recently passed the first of several laws aimed at limiting the powers of Israel’s Supreme Court in favor of Prime Minister Benjamin Netanyahu’s executive branch. This move has sparked widespread protests, with workers from various sectors, including doctors and tech firms, joining forces in demonstrations. As a consequence, the shekel currency has dropped more than 2% against the dollar, totaling a decline of over 9% since the reform plans were first announced in January.

The prevailing uncertainty surrounding Israel’s economy is a significant concern for foreign investors. Hamish Kinnear, a senior analyst at Verisk Maplecroft, highlights the lack of a clear endpoint to the judicial reforms as a major issue. He suggests that until the uncertainty is resolved, it will hang over Israel’s economy as a question mark.

The turmoil has had a detrimental effect on Israel’s stock market, with the MSCI Israel index lagging behind global stock indices by approximately 14%. Despite this, foreign investment in Israeli equities remained strong until the end of June, thanks to the country’s compelling economic outlook. However, the potential for further civil unrest could deter incoming cash, warns Kinnear. Morgan Stanley has cautioned that if domestic tensions remain unresolved, Israel’s GDP growth could be limited to just 1.0% and 1.6% for this year and next, respectively, whereas previous forecasts predicted growth rates of around 2.5% and 3%.

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Roger Mark, a fixed-income analyst at Ninety One, emphasizes that Israel is still an attractive investment opportunity but highlights the government’s pursuit of judicial reform as an undermining factor. Investors and ratings agencies had initially expected a dilution of the reform to a greater extent. With such expectations unlikely to materialize, investors may be cautious about engaging with the country’s bonds.

The government’s justification for the reform centers around the view that the Supreme Court has been overly interventionist and that its powers need curbing. However, the prospect of a direct conflict between the court and the government looms as the Supreme Court plans to hear an appeal against the judicial reform law in September. Kinnear warns of the potential for an immediate constitutional crisis, further fueling the uncertainties surrounding the economy.

Israel’s tech sector, which contributes almost a fifth of the country’s GDP, over half of its exports, and a quarter of income tax revenues, is particularly vulnerable to the upheaval caused by the reform backlash. The sector, known for its innovations in areas such as cybersecurity and artificial intelligence, has been the fastest-growing industry in Israel for more than a decade. However, a recent survey conducted by the Israeli Innovation Authority indicates that the uncertain business environment has led up to 80% of new Israeli startups to register overseas. Additionally, tech firm fundraising plummeted by 65% in the second quarter.

Nicholas Farr, an emerging Europe economist with Capital Economics, suggests that this reform backlash could permanently limit economic growth in Israel. Such concerns extend to the country’s credit rating, as all three major agencies—S&P Global, Moody’s, and Fitch—have already raised red flags regarding the government’s policy direction. Israel’s sovereign credit has been downgraded by Moody’s, while S&P predicts that the ongoing protests will hamper economic growth this year. Fitch has warned that the judiciary changes could weaken governance indicators, policymaking, and investor sentiment, negatively impacting the country’s credit profile.

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Natalia Gurushina, the chief emerging market economist at VanEck, believes that the ratings or their outlooks might face downgrades due to the new laws. She highlights the potential institutional deterioration resulting from the reforms, which could affect capital inflows, especially in sectors such as tech.

The uncertainty caused by the judicial reforms is now threatening Israel’s economy and its thriving tech sector. While the government seeks to limit the Supreme Court’s power, protests, downgrades, and reduced investment pose significant challenges. The subsequent impact on GDP growth and credit ratings further underscores the need for resolution and stability in Israel’s political and judicial spheres.

Frequently Asked Questions (FAQs) Related to the Above News

What are the recent judicial reforms in Israel that are causing turmoil in the economy?

The Israeli government has passed laws aimed at limiting the powers of the Supreme Court in favor of the Prime Minister's executive branch.

How have these reforms affected Israel's economy?

The reforms have led to potential downgrades in ratings, a decline in foreign investment, and weakness in the tech sector. The shekel currency has dropped, and the stock market has lagged behind global indices.

What is the main concern for foreign investors regarding Israel's economy?

The lack of a clear endpoint to the judicial reforms is a major concern for foreign investors. The prevailing uncertainty hangs over Israel's economy and raises questions about its stability.

How has the reform backlash impacted the tech sector in Israel?

The uncertain business environment has led up to 80% of new Israeli startups to register overseas. Tech firm fundraising has also significantly decreased.

What are the possible consequences of the judicial reforms for Israel's credit rating?

The three major credit rating agencies have raised red flags and warned of potential downgrades. Israel's sovereign credit has already been downgraded by Moody's, and other agencies predict negative impacts on governance indicators, policymaking, and investor sentiment.

What are experts saying about the potential long-term effects of the reform backlash?

Experts suggest that the reform backlash could permanently limit economic growth in Israel. Concerns extend to the country's credit rating and the possibility of downgrades due to institutional deterioration and reduced capital inflows.

What is the outlook for Israel's GDP growth in light of these reforms?

Morgan Stanley has cautioned that if domestic tensions remain unresolved, Israel's GDP growth could be limited to just 1.0% and 1.6% for this year and next, respectively, compared to previous forecasts of around 2.5% and 3%.

Is Israel still an attractive investment opportunity despite the reform backlash?

While investors still see potential in Israel as an investment opportunity, the pursuit of judicial reform by the government may undermine interest in the country's bonds.

What is the potential impact of the upcoming appeal against the judicial reform law?

The Supreme Court hearing an appeal against the reform law in September could potentially lead to an immediate constitutional crisis, further exacerbating uncertainties surrounding the economy.

What is needed to stabilize Israel's economy and the tech sector?

Resolution and stability in Israel's political and judicial spheres are crucial to provide certainty and confidence to stabilize the economy and attract investments in the tech sector.

Please note that the FAQs provided on this page are based on the news article published. While we strive to provide accurate and up-to-date information, it is always recommended to consult relevant authorities or professionals before making any decisions or taking action based on the FAQs or the news article.

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