Financial fallout of judicial reform overhaul: analysts paint bleak economic picture for Israel

Investment bank Morgan Stanley has lowered Israel’s credit rating in the aftermath of the Knesset’s first vote on judicial reforms. 

The international financial giant downgraded Israel’s sovereign credit rating to a ‘dislike stance’, highlighting its concerns for financial risks following the passing of the “reasonableness law”, which bars the country’s High Court from striking down government decisions and appointments of ministers deemed “unreasonable.”

In an analyst statement, Morgan Stanley said: “We see increased uncertainty about the economic outlook in the coming months and risks becoming skewed to our adverse scenario. Markets are now likely to extrapolate the future policy path and we move Israel sovereign credit to a ‘dislike stance’.”

News agency Reuters notes that the ongoing political crisis has seen shekel fall to a near 3-year low and the Tel Aviv stock market (.TA125) lose nearly 10% since November of last year.

Ahead of a statement by Moody’s, Prime Minister Benjamin Netanyahu together with Finance Minister Bezalel Smotrich, described the economic reactions as “momentary”, added that “when the dust settles it will become clear that Israel’s economy is very strong.”

The statement adds:”Israel’s economy is based on solid foundations and will continue to grow under experienced leadership that leads a responsible economic policy.”

Meanwhile, Moody’s Investor Services made clear this evening that continued political uncertainty in Israel can only have a negative impact on the country’s economy.

While it stopped short of downgrading Israel (it did so in April of this year, moving it from ‘positive’ to ‘stable’) the report states that “the passage of the first stage of the judicial overhaul points to political and social tensions.”

Moody’s adds: “We believe the wide-ranging nature of the government’s proposals could materially weaken the judiciary’s independence and disrupt effective checks and balances between the various branches of government, which are important aspects of strong institutions.”

The company’s CEO is reportedly furious with Prime Minister Netanyahu.

Moody’s also notes that 80% of new Israeli startups have chosen to register their companies overseas this year, up from 20% in 2022.