The recent passage of a new law in Israel, which curbs judicial oversight and increases concerns about the government's agenda, has led to a deepening selloff in the country's markets. Stocks, bonds, and the currency have all tumbled in response, exacerbating fears among investors. Morgan Stanley has even closed their recommendation to buy Israel's foreign bonds, citing heightened risk due to the government's legal overhaul. The shekel, Israel's currency, has experienced a four-day losing streak against the dollar, underperforming compared to other currencies.
The scrapping of the law that allowed judges to void ministerial decisions deemed "unreasonable" by the right-wing coalition led by Prime Minister Benjamin Netanyahu has raised further concerns about the country's economy. This move removes a vital tool of judicial oversight over elected politicians' decisions. The government has expressed its intention to continue with its legal overhaul once the summer recess is over. However, critics argue that such legislation undermines Israel's democracy and could potentially deter foreign investment. Protests against these changes have seen hundreds of thousands of people taking to the streets.
Prime Minister Netanyahu and Finance Minister Bezalel Smotrich released a joint statement to reassure investors, emphasizing the strength of Israel's economy, citing growth and opportunities in defense, gas, and technology industries. However, this has done little to quell the worries of market participants and analysts. Moody's, for instance, warned that Israel's tech sector, a significant driver of economic growth, has already been impacted this year by a retreat in venture capital.
Moody's analysts have also raised concerns about the potential consequences of the ongoing political and social tensions that the passage of this law may exacerbate. They fear negative effects on Israel's economy and security, as the executive and legislative institutions become less predictable and more willing to take significant risks endangering economic and social stability.
Furthermore, Morgan Stanley economists and strategists highlighted the increased uncertainty in Israel's market and the potential for a higher risk premium, leading to a weaker currency and higher borrowing costs. They argued that these recent events make it difficult for investors to form a constructive view on Israeli assets.
The market reaction to these developments is already evident. The shekel has dropped by 1.4% against the dollar, marking its worst losing streak since June. The currency's implied volatility has also surged, indicating increased market turbulence. Equity markets have experienced a decline of about 3%, the sharpest drop since March. Israel's international debt due in 2033 has also slipped this week, reflecting the concerns of investors.
It is predicted that tensions will continue to rise as Netanyahu's government proceeds with the legal overhaul, likely resulting in significant economic costs as protests persist. The uncertainty surrounding Israel's future direction is causing unease among market participants, leaving risk assets without a clear anchor. Only time will tell how these events will unfold and their impact on Israel's economy and stability.