Moody’s international credit rating agency announced Tuesday that it has not changed Israel’s credit outlook but expressed concerns over the social upheaval resulting from minority opposition to the government’s planned package of judicial reforms.
In advance of the announcement, US investment bank Morgan Stanley released comprehensive report analyzing Israel’s economy and strategy, with a special focus on the fallout from Monday’s Knesset ratification of the first part of the government’s package of judicial reforms, while cutting Israel sovereign credit to “dislike stance.”
Despite the expectations (and even hopes) of some, Moody’s did not lower Israel’s credit rating in its report and left it at stable, noting there is serious risk that the political and social tensions (presumably referring to the destructive behavior of the anarchists) will continue and have negative consequences for Israel’s economy and security.
If the political tensions around the judicial reform continue, growth in 2023 could be slashed to just one percent, Morgan Stanley also warned, also presumably referring to the disruptive behavior of the anarchists.
‘Momentary Reaction’
Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich called the anticipated announcement by Moody’s a “momentary reaction” in a joint response to the announcement.
“When the dust settles it will become clear that Israel’s economy is very strong,” Netanyahu and Smotrich reassured nervous investors.
“The defense industry is bursting with orders, the gas industry is increasing exports to Europe and seven companies are currently competing for tenders for gas exploration in Israel with an investment of billions.
“Intel is planning its largest investment outside the US and will invest $25 billion in Israel. Nvidia is building a supercomputer in Israel, and we are promoting artificial intelligence, cyber and chip manufacturing in Israel.
“The employment market is tight, growth is rising and inflation is being curbed, regulation is being removed and free market competition is increasing,” they noted.
“Israel’s economy is based on solid foundations and will continue to grow under an experienced leadership that leads a responsible economic policy.”
The Prime Minister’s Office also pointed out that the Moody’s report adopted the Israeli government’s growth forecast of 3 percent – higher than that of most developed countries: – USA 1.3%, – France, England and Germany between 0 and 1 percent.
In addition, that the Moody’s report states that the next step in the legal legislation is “the government’s takeover of the committee for the selection of judges”. This is an incorrect statement, the Prime Minister office said it made it clear, including yesterday, that no party – coalition or opposition – will control the committee.
Moody’s
Moody’s report, entitled “Passage of first stage of judicial overhaul points to continued political and social tensions,” said the planned overhaul is likely to carry “negative consequences for Israel’s economy and security situation.
“The bill’s approval comes amid widespread protests by civil society groups that have been ongoing since January and which we expect will continue,” the report said.
“Petitions against the bill have been lodged with the Supreme Court, raising the risk of a constitutional crisis between the executive and judiciary.
“Venture capital investments in Israeli high-tech firms have declined materially, with the sector raising $3.7 billion in the first six months of the year, the lowest figure since 2019. While the slowdown reflects global trends in the sector triggered by tighter financing conditions and a degree of normalization after the pandemic, there are also signs that Israel is decoupling from global trends,” the report said.
Morgan Stanley
“Domestic instability related to the proposed changes in the judicial system affects the economy both in the short and medium term: The heightened uncertainty related to the judicial reform can be characterized as a risk premium shock,” Morgan Stanley said in a statement that was notable for not blaming the government’s planned overhaul.
The agency made a serious effort to avoid directly blaming the ringleaders of the months-long anarchy raging through Israeli cities, fomented by opposition lawmakers and failed, past political leaders in response to a bad case of sour grapes over their defeat at the ballot box.
“In our base case, assuming uncertainty resolved in the coming months, we see 2.5 percent GDP growth (the same as the Bank of Israel’s forecast), accelerating into 2024, and inflation returning within the target band by the second quarter of 2024. We expect the Bank of Israel to end its tightening cycle with a 0.25 percent hike to 5 percent in July, though the risks to our inflation and rates forecast are skewed to the upside.
“In the adverse scenario, with the tensions over judicial reform persisting for longer or even escalating, a higher risk premium and shekel depreciation would translate into higher inflation, averaging 5.1 percent in 2023, and forcing further tightening by the Bank of Israel to 6.25 percent. More broadly, we see lower economic confidence along with tighter monetary policy translating into lower investment and consumption and pushing economic growth to only 1 percent this year.”
