Foreign banks and investment companies are finding it difficult to read the situation in Israel. A forex market source said today, "The foreigners are in shock. They were sure that there would be a compromise." In the wake of yesterday's Knesset enactment of the amendment to abolish the reasonableness standard, US investment bank Citi has published an update on the judicial reform entitled "Reasonableness Test bill has passed without a compromise - now what? - Nobody knows."
Meanwhile the Tel Aviv 35 Index on the Tel Aviv Stock Exchange has lost 4% in two days after an impressive rally before that and the shekel has lost 2.77% against the dollar over the past 24 hours.
In the note, Citi economists write, "Now that the government has empowered itself to ignore Supreme Court decisions on its actions, it gets much more tricky and dangerous."
The note cites several reasons as to why the situation will be problematic in the near future. Firstly, Citi points out, "The law has already been appealed to the Supreme Court. If they decide to debate it and strike it down, we could find ourselves in a constitutional crisis should the government decide to ignore their ruling. However given this has been passed as a "basic law", it's not very likely the court will seek to strike it down."
The note adds, "The Attorney General has been a focal point for harsh criticism from many coalition members, painting her as blocking many of the government's agendas. Local speculation is that the PM could fire her, thereby removing another obstacle and with the reasonableness bill now passed, the court would not be able to intervene. This however would be a dangerous move given the fierce reactions from markets as well as international voices, most probably rating agencies."
Israel's rating could be affected
Citi economists added, "Rating agencies - There has not been any official statements or announcements from them, but local media speculation is growing that they might give a negative outlook given the reforms have pushed forward with no agreements. Up next is Fitch in early August and while from a fiscal perspective, Israel is in a very strong place, they noted in their previous rating that they assumed agreements would be reached on the Judicial Reforms."
Citi said that Prime Minister Benjamin Netanyahu had looked like he was interested in a compromise yesterday, "However his extremist right wing partners refused to budge and forced the hand of the government to pass the law with every coalition member, including the moderate Defense Minister Galant, voting in favor of the bill. The PM has called for serious negotiations in the coming months during the Knesset summer recess, however given recent history the leading opposition members have already rejected the PM's speech, accusing him of endlessly lying as well as being beholden to his extremist partners.
Citi concluded, "Current events in Israel are challenging fundamentals and making investors increasingly nervous with regards to Israeli assets. We urge caution here and to wait for better levels and calmer markets."
Published by Globes, Israel business news - en.globes.co.il - on July 25, 2023.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.