Consensus on Judicial Reform Needed To Save Foreign Investments in Israel, Experts Say
Fitch credit rating agency gives Israel an A+ rating in new report but warns that controversial judicial overhaul will negatively affect future ranking scores
The American credit rating agency, Fitch, gave Israel an A+ rating with a stable outlook in a report on Wednesday, but it warned that the judicial reform the government is currently legislating could harm Israel’s credit ranking.
Such international institutions as well as foreign investors are waiting to see how the whole situation unfolds in order to understand the level of risk in investing in Israel. Experts say that if the terms of the reform are negotiated and a consensus is reached, then the country’s economy would not be harmed.
While the exact content of the reform is still subject to negotiations in the Knesset, Israel’s parliament, “Fitch believes the reform could have a negative impact on Israel’s credit profile by weakening the governance indicator or if the weakening of institutional checks leads to worse policy outcomes or sustained negative investor sentiment,” according to the report.
Israel’s new government, which took office in January 2023 under the premiership of Binyamin Netanyahu, is currently legislating a package of judicial reforms that would limit the independence of the country’s Supreme Court. The move has sparked nationwide protests that have taken place for more than eight weeks, as well as brought condemnation from senior economists and private sector leaders and warnings of a negative economic impact on the country if the reform goes through as is.
Eyal Winter, Silvezweig Professor of Economics at The Hebrew University of Jerusalem, believes that if a consensus on the terms of the reform is reached between the government and the opposition, it could have the opposite effect and even strengthen Israel’s economy by raising the trust of investors.
Winter tells The Media Line that if the pressure exercised by the consistent and massive demonstrations is successful and leads the government to negotiate and ease the legislation by leaving more power with the Supreme Court then it has so far indicated, “then I think the negative effect will be removed.”
“I’m sure that if a settlement over this issue is reached between the government and the opposition over this new legislation, eventually this negative effect would be released,” he continued, adding that most of the concern is that the current formulation of the legislation is facing huge opposition, both inside and outside the parliament.
He says that a consensus would give more security to investors in the sense that it would be a legislature that they would feel that they can rely on for the long term, and not only for a couple of years. “This is what investors are looking for, they’re looking for rules that are stable, and that don’t change from one day to another,” he said.
Some protesters from the startup industry in Israel claim that they are taking their companies abroad, but this is only meant to exert pressure on the government. There is no reason now, before things have been settled, for people to take out their businesses.
Alex Coman, a senior Israeli economic consultant, explains that if the judicial reform is legislated with the current conditions proposed by the government, the lack of power of the Supreme Court could cause foreign investors to hesitate, which would ultimately lead to the weakening of the shekel. That would negatively impact the Israeli economy.
“When you invest money in a company in a foreign country, you anticipate the possibility of a conflict of interest,” Coman told The Media Line, explaining that foreign investors want assurances that the Supreme Court would rule impartially in case of a conflict between the foreign investor and the government.
“You want to know that it [the Supreme Court] is impartial, that you will get justice, and you also want to know that this justice will actually be activated, that it will not be written on water,” he added.
That is why, he notes, if the Supreme Court is weakened the chances of getting that kind of assurance declines. “This does not necessarily mean that you will stop investing, but you will be more suspicious,” he added.
All this, given the uncertainty, will make foreign investors avoid shifting large amounts of money into the country and limit the buying of Israeli shekels to just what is necessary, according to Coman.
This, he added, would weaken the shekel as there would be less demand.
In terms of the credit profile, Coman explains that it indicates the probability of a country to whom money is being lent to default on its loan. “The higher the profile, the higher the probability that the country defaults on its debt,” he added.
“If Israel’s rating were to decline this would mean that Israel would be less attractive to investors because there’s a higher probability that it will default, and for it to attract money it would have to pay a higher interest rate,” he added.
This is why foreign investors are currently waiting to see how the situation will unfold, according to Winters. “Foreign investors are on the fence waiting to see how things develop,” he said.
Still, he believes some investors are making premature decisions.
“Some protesters from the startup industry in Israel claim that they are taking their companies abroad, but this is only meant to exert pressure on the government. There is no reason now, before things have been settled, for people to take out their businesses,” he said.
Winter adds that, while he opposes the judicial reform as it is currently configured, it is still too early to make such drastic moves.
“I’m very much against this legislation but I don’t think that currently there is any reason to do anything,” he said. He adds that some voices within the coalition are calling for the government to negotiate the terms of the reform with the opposition.
If this happens, Winter believes that there would not be a reason for concern.
“I’m very optimistic that some resolution will be reached between the coalition and opposition and finally, there will be a formulation on which both of them can agree,” he said.
