"There is a significant risk that political and social tensions over the issue (the judicial overhaul) will continue, with negative consequences for Israel's economy and security situation," Moody's warns in a special report today.
The international ratings agency added that the legislation, "Could materially weaken the judiciary's independence and disrupt effective checks and balances between the various branches of government."
Regarding the situation of Israel's tech sector, Moody's writes, "While the slowdown reflects global trends in the sector triggered by tighter financing conditions and a degree of normalization after the pandemic, there are also signs that Israel is decoupling from global trends."
Moody's predicts annual GDP growth of 3% in Israel in 2023 and in 2024 but warns that, "Our projection does not incorporate a negative effect from a prolonged period of social and political tensions."
The executive and legislative institutions have become less predictable
Moody's reviews the legal situation created in Israel after the passage of the amendment to the law yesterday abolishing the reasonableness standard. The analysts note the petitions that have already been submitted to the Supreme Court on the subject, the clashes and demonstrations, the fact that many pilots have threatened not to report for duty, and that, "the next piece of legislation will reportedly focus on giving the government control over the judicial selection committee, which decides on the appointment of judges."
The analysts point out that they lowered Israel's rating outlook in April from positive to stable "to reflect our view that Israel's governance has deteriorated, as illustrated by the proposal to overhaul the judiciary."
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. Israel has no written constitution and its institutional set-up relies to an important extent on judicial oversight and review. In addition, the executive and legislative institutions have become less predictable and more willing to create significant risks to economic and social stability.
"Some of our earlier concerns regarding the proposed reforms' impact on Israel's economy are also starting to emerge. Venture capital investments in Israeli high-tech firms have declined materially, with the sector raising $3.7 billion in the first six months of the year, the lowest figure since 2019.
"According to analysis by the Israel Innovation Authority, more than 80% of new Israeli start-ups have chosen to register overseas rather than in Israel since the start of this year, compared with just 20% in 2022, a development that is likely to reflect the significant uncertainty created by the judicial overhaul plan. The Israeli stock exchange and the NASDAQ have also diverged, suggesting that country-specific considerations may be holding back Israeli tech stocks."
Published by Globes, Israel business news - en.globes.co.il - on July 25, 2023.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.