Israel’s Economy Faces Downgrades and Tech Sector Weakness Amidst Controversial Judicial Reforms

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Israel’s Economy Faces Uncertainty Amidst Controversial Judicial Reforms

Israel’s economy may face downgrades, falling foreign investment, and a weaker tech sector if the turmoil arising from the government’s contentious judicial reforms continues, warn investors and analysts. The government recently passed the first of a series of laws aimed at reducing the powers of Israel’s Supreme Court, favoring Prime Minister Benjamin Netanyahu’s executive branch. This move has sparked widespread protests, with various sectors, including doctors and tech firms, participating in strikes and demonstrations.

The shekel currency has experienced a decline of over 2% against the dollar since the plans were first announced in January, bringing its total decline to more than 9%. The main concern for external investors considering Israel is the uncertainty surrounding the situation. As long as this uncertainty persists, it will overshadow Israel’s economy, leaving many questions unanswered.

Israel’s stock market has also been adversely affected by the tumultuous environment, with MSCI’s Israel index significantly lagging behind global stock indices, such as the MSCI All Country World. Domestic investors have been avoiding the market, leading to a concerning underperformance. However, until the end of June, foreign investment in Israeli equities remained strong due to the country’s appealing economic prospects.

According to data from Copley Fund Research, a considerable percentage of global funds (35.5%) have exposure to Israel, the highest level since 2017. Additionally, the country has witnessed the largest increase in new ownership this year, with a 3.44% rise in the number of funds investing in Israel. The comparably low inflation rate in Israel, in relation to similar countries, has contributed to maintaining investment in the nation. Nevertheless, sustained civil unrest could hinder incoming investments.

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Morgan Stanley has warned that if domestic tensions remain unresolved, the expected GDP growth of around 2.5% this year and 3% next year could decrease to just 1.0% and 1.6%, respectively. Despite Israel’s fundamentally attractive investment story, the pursuit of judicial reforms by the government poses a threat to this favorable trajectory. Roger Mark, a fixed-income analyst at fund manager Ninety One, believes that many investors and rating agencies anticipated more significant dilution of the reforms. The possibility of the government persisting with the reforms could influence investors to avoid the country, leaving bond and foreign exchange investors awaiting developments cautiously.

The government’s supporters argue that the Supreme Court has exercised excessive intervention throughout the years and needs to have its powers curtailed. However, the Supreme Court is set to hear an appeal against the judicial reform law in September, which may result in direct conflict with the government. Analysts express concern about the potential for an immediate constitutional crisis in the short term.

Major concerns regarding the upheaval lie in its impact on investment in Israel’s thriving technology sector. The tech industry, responsible for nearly a fifth of the country’s GDP, over half of its exports, and a quarter of income tax revenues, has been the fastest-growing sector in Israel for over a decade. Innovation in areas such as cybersecurity and artificial intelligence has been adopted worldwide. However, a recent survey from the Israeli Innovation Authority has shown that due to the uncertain business environment, up to 80% of new Israeli startups have registered overseas, compared to only 20% in 2022. Additionally, tech firm fundraising has experienced a significant slump of 65% in the second quarter.

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This reform backlash has the potential to permanently impede economic growth, warns Nicholas Farr, an economist specializing in emerging Europe at Capital Economics. Israel’s credit rating is also under scrutiny, with all three major credit rating agencies, namely S&P Global, Moody’s, and Fitch, expressing concerns about the government’s policy direction. Moody’s has downgraded Israel’s sovereign credit to a dislike stance, while S&P has projected decreased economic growth this year in light of the widespread protests. Fitch, which already rates the country lower at A+, has stated that the judiciary changes may have a negative impact on the credit profile by weakening governance indicators, policy-making, and investor sentiment.

Natalia Gurushina, the chief emerging market economist at fund manager VanEck, anticipates potential credit rating downgrades or adjusted outlooks. The new laws may cause significant institutional deterioration, potentially affecting capital inflows into sectors such as technology. With a risk of capital flight and decreased investor confidence, Israel’s economy is at a delicate crossroads. The government’s pursuit of judicial reforms has far-reaching consequences, and it remains crucial to address the concerns and uncertainties to ensure a stable economic environment for the nation.

(This story has been auto-generated from a syndicated feed, and has been edited for clarity.)

Frequently Asked Questions (FAQs) Related to the Above News

What are the judicial reforms being implemented in Israel?

The Israeli government has passed laws aimed at reducing the powers of the country's Supreme Court, favoring the executive branch led by Prime Minister Benjamin Netanyahu.

What has been the response to these judicial reforms?

The reforms have sparked widespread protests, with various sectors, including doctors and tech firms, participating in strikes and demonstrations.

How has the economy of Israel been affected by these reforms?

The shekel currency has declined over 2% against the dollar, and the stock market has been adversely affected, with foreign and domestic investors showing concerns.

What is the main concern for external investors considering Israel?

The uncertainty surrounding the situation is a major concern for external investors, as it overshadows Israel's economy and leaves many questions unanswered.

How have global funds reacted to the situation in Israel?

According to data, a considerable percentage of global funds have exposure to Israel, with a higher number of funds investing in the country. However, sustained civil unrest could hinder incoming investments.

What is the potential impact on Israel's GDP growth?

If domestic tensions remain unresolved, the expected GDP growth for this year and next year could decrease significantly, according to Morgan Stanley.

What is the concern regarding the upheaval's impact on Israel's tech sector?

The uncertainty has led to a significant slump in tech firm fundraising and a higher number of new Israeli startups registering overseas, potentially impeding economic growth.

How is Israel's credit rating being affected by the reform backlash?

All three major credit rating agencies have expressed concerns, with Moody's downgrading Israel's sovereign credit, S&P projecting decreased economic growth, and Fitch stating that the changes may have a negative impact on the credit profile.

What are the potential consequences of these reforms?

The reforms may lead to institutional deterioration, capital flight, and decreased investor confidence, which could have far-reaching consequences for Israel's economy.

What needs to be done to ensure a stable economic environment for Israel?

It is crucial to address the concerns and uncertainties surrounding the judicial reforms in order to ensure a stable economic environment for the nation.

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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