Jan 26, 2023
Israel’s Politics-Proof Markets Under Stress in Netanyahu Revamp
Benjamin Netanyahu’s right-wing coalition has ignited a debate over the character of the Israeli state, with reverberations across a domestic market that had proved itself largely immune to political turmoil in the past.
The new government has set off a firestorm with its proposals to overhaul the judicial system. They include giving parliament power to override high-court decisions and allowing lawmakers the final say in selecting judges, peeling away a buffer between politics and the nation’s top legal authority.
Tens of thousands of protesters have hit the streets, and prominent voices have sounded the alarm. A voting member of the central bank’s monetary committee quit, warning that Israel’s democracy and its $530 billion economy are at risk. A group of more than 250 economists published a petition this week warning of damage to the nation’s credit rating and the ability of companies to raise capital.
“It’s the judicial system that protects you from crazy moves by some politicians,” said Rafi Gozlan, chief economist at IBI Investment House Ltd, a group that serves private, institutional and corporate clients in Israel and overseas. “One of the most important things investors do is check their rights in the judicial system.”
While many analysts say market shifts in Israel are still more correlated to developments in the global tech sector than local politics, there are early signs the turmoil is weighing on sentiment.
Israel’s stock exchange and currency have underperformed global peers since the election on Nov. 1. The TA-35 index is down 8.2%, among the five worst performers in the world over that period, during which many exchanges have enjoyed double-digit returns. While the shekel has gained 4% against the dollar, that’s also one of the worst performances among major world currencies, with the Bloomberg dollar spot index declining 8.5% in the period.
That marks a split from much of the past decade, when Israeli markets and the economy seemed imperturbable even through periods of conflict with Palestinians, civil unrest and five elections in a space of four years. In the decade through Dec. 31, the shekel was the only currency in the world to strengthen against the dollar, gaining more than 6%.
The direction the new government appears to be taking “raises concerns,” said Maxim Rybnikov, director EMEA Sovereign Rating at S&P Global Ratings in response to questions from Bloomberg. The credit-rating company is watching to see whether the judicial changes will be implemented in full, and whether they’re likely to be a one-off that may be reversed by a future government.
“If, on the other hand, this is a first step in a trend, this could present more downside risks,” S&P said. S&P currently rates Israel at AA- with a stable outlook.
Proponents of the judicial revamp, who include Netanyahu’s far-right and nationalist coalition partners, say the court is a biased institution dominated by a left-leaning elite. They cite decisions such as the disqualification of an ultra-Orthodox minister from holding office over tax offenses as evidence of bias.
“The reform will enhance the rule of law, the stability of the law, the impartiality of the law, the predictability of the law and the protection of property rights,” said Avi Bell, a professor of law at Bar Ilan University and senior fellow at the Jerusalem-based Kohelet Policy Forum. “The reform will protect all the parameters that have to do with economics and economic development.”
Many others have gone public with their disagreement.
Eynat Guez, co-founder of Papaya Global, an Israeli-founded payroll platform, said on Twitter on Thursday her company would be withdrawing its funds from Israel due to a bill that she said would harm the economy and democracy.
“I am fighting for my children, but also for the high-tech sector, without which there is no economic justification for Israel’s existence,” Guez said in an interview with Calcalist. “It is my right and even my duty to transfer the money to banks in democratic countries.”
Tal Barnoach, one of the founders of Disruptive VC and Disruptive AI, two related venture-capital funds controlling together more than $200 million, said that their foreign investors were worried and asked that their capital be held in banks outside Israel going forward. He added this didn’t affect their current funds.
For some, the allegations of economic malfeasance aimed at Netanyahu are jarring, given that as finance minister two decades ago he tilted Israel toward free-market policies in a way that earned him the moniker “Mr. Economy.” More recently, he’s been embroiled in his own battles with the courts and needs the support of coalition partners who seek deep-seated and controversial change.
“At the present time, geopolitical and geoeconomic uncertainty prevails throughout the world,” two former Bank of Israel governors, Jacob Frenkel and Karnit Flug, wrote in a joint op-ed published in the Yedioth Ahronoth daily on Jan. 22. “Precisely in such a sensitive period it is very easy to destroy an economic image, and very difficult to restore.”
Amir Yaron, the current governor, met with Netanyahu Tuesday and discussed issues raised in discussions with “senior figures” among economic policymakers abroad and with rating companies in recent weeks, the central bank said.
Netanyahu defended the plans late Wednesday, saying they would cut unnecessary regulation. He urged investors to keep pumping money into an economy set to grow 3% this year.
--With assistance from Alisa Odenheimer and Marissa Newman.
(Adds VC comment in 15th paragraph)
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