A day after Israeli Prime Minister Benjamin Netanyahu passed a controversial amendment in one of the judiciary laws through parliament, an advertisement covered in black graced the front pages of all major Israeli newspapers with the phrase "A Black Day for Israeli Democracy." The advertisement was funded by a group of high-tech companies protesting Netanyahu's judiciary policies, which analysts claim have unleashed numerous risks for both the Israeli economy and Netanyahu's political future.
Netanyahu's coalition government, composed of nationalist and religious parties, approved the new legislation in the Knesset on Monday, placing restrictions on some powers of the Supreme Court, despite massive street protests and strong opposition from parties. Further amendments may harm the shekel, growth, and the high-tech sector.
The Israeli shekel has been affected with every turn of events in parliament, particularly as efforts to reach a compromise escalated before ultimately collapsing. The shekel, which has lost about 10% of its value against the dollar since Netanyahu's government announced its judiciary plans in January due to concerns among foreign investors, represents just one negative aspect for the economy so far.
The Israeli economy is relatively robust at present, with a projected growth of 3% this year and an unemployment rate of 3.5%. The high-tech sector is a significant driver of growth, accounting for 14% of jobs and nearly one-fifth of GDP. All of this is likely to face difficulties if Netanyahu's government seeks to implement further changes that may be feared to damage the judiciary, which is still perceived abroad as strong and independent.
Indeed, Morgan Stanley announced on Tuesday a downgrade of Israel's credit rating to "junk status." The firm stated, "Recent events indicate ongoing uncertainty and therefore a likelihood of an increased risk premium that will weaken the currency and raise borrowing costs." It added that such economic shocks lead to reduced GDP growth due to decreased investment and consumer growth.
Moody’s warned of negative repercussions on the Israeli economy. The ratings agency said on Tuesday that the passing of the new law in Israel indicates that political tensions will persist and will likely have adverse consequences for both the economic and security situations in Israel.
Before the report was published, Netanyahu issued a statement saying, “This is just a momentary reaction, and when the dust settles, it will become clear that the Israeli economy is very strong.”
Isaac Raz, an economist at the Hebrew University in Jerusalem, stated, "The future of the Israeli economy does not look bright at this moment." Economists and current officials have urged Netanyahu's coalition not to proceed with judicial amendments without arriving at a broad consensus. Raz said, "They are still ignoring the massive warning signs and are walking in a dangerous space."
Even if Netanyahu chooses to cancel plans for further judicial amendments, repairing the damage will be difficult. The high-tech sector, typically distant from political discussion, has been a driving force in the protests against the government's actions. Israel's economy, which is approximately $500 billion in size, derives strength from the tech sector, which represents over half of exports and a quarter of tax revenue.
Several tech companies reported capital flight from Israel, while inflows from abroad have sharply slowed. New startups are increasingly being incorporated abroad. An Israeli Innovation Authority survey found that by May, startups opened outside of Israel accounted for 80% of the companies established this year, and firms also plan to register their future intellectual property abroad.
Avi Hasson, CEO of Nation Central, said, "It will be difficult to reverse trends like registering companies abroad or launching new startups outside of Israel." The tech sector stands to lose significantly if further judicial amendments are made since companies need a reliable legal system to protect their intellectual property.
Nicholas Ward, an emerging markets expert at Capital Economics, remarked, "The biggest concern is that these reforms are just the beginning... amendments to the judicial system could lead to more institutional changes that could put Israel on a path of persistently low growth."
Analysts suggest that despite potential short-term harm, especially if a public sector strike occurs as threatened by the Israeli labor union (Histadrut), long-term growth will suffer more due to reduced investment and so-called brain drain.
In the lead-up to his election victory on November 1, the veteran right-wing leader and free-market advocate focused his campaign on rising living costs, promising financial aid to families struggling with inflation.
The new law restricts some of the Supreme Court's powers. Israel has maintained a current account surplus in the balance of payments due to massive foreign investment in tech companies supporting the shekel. However, the central bank has warned for months that the shekel is under pressure due to the judiciary amendments proposed by the government.
Bank of Israel Governor Amir Yaron stated on July 10 that the "excessive decline" in the shekel’s value contributed as much as 1.5 percentage points to inflation. The increased risk premium in Israel has weakened the shekel, and the central bank has raised interest rates higher than it hoped, resulting in more pain for mortgage holders and other borrowers.
The Knesset's approval of the judicial amendment on Monday also poses a significant political risk for Netanyahu in the long run. Political analyst Amotz Asa-El noted that by pushing for the judicial amendment, Netanyahu has aligned himself with the more radical and extreme right elements of his coalition government rather than the moderates, some of whom are vying for his succession.
This creates potential rifts within his coalition government, which could worsen if Netanyahu leans too far toward either side. Additionally, Netanyahu may have permanently lost moderate supporters of his Likud party. Asa-El, a researcher at the Shalom Hartman Institute, stated, "There are large sectors of the Israeli right that completely oppose what he has done... This is not a matter of right versus left at all... It is a matter of right and wrong."
