Israel is at risk of economic crisis and its leaders need to pay attention - editorial

Investors concerned with Israel's stability may withdraw from the country en masse, which could have a catastrophic impact on Israel’s economic well-being.

MARKET DATA at the Tel Aviv Stock Exchange.  (photo credit: AMIR COHEN/REUTERS)
MARKET DATA at the Tel Aviv Stock Exchange.
(photo credit: AMIR COHEN/REUTERS)

As Israel enters a new era following this week’s passage of the first part of the government’s judicial reform, its economy emerges as a critical area profoundly impacted by recent events. Israeli experts have warned that the vote has triggered a wave of economic instability, leading to negative outlooks from major rating agencies, inflation concerns, and rising mortgage rates.

On Tuesday, the day after the Knesset vote, Morgan Stanley downgraded Israel’s sovereign credit rating, expressing a pessimistic view of the country’s economic prospects. Similarly, Moody’s warned of significant risks arising from the political and social tensions in Israel, potentially resulting in negative consequences for its economy and security.

These warnings are not new; financial experts have previously cautioned against the repercussions of a judicial overhaul and mass protests. Moody’s had raised concerns back in April, highlighting the potential weakening of institutional strength and policy predictability. US investment bank Citi also expressed its reservations.

Former governors of the Bank of Israel, Prof. Karnit Flug and Prof. Jacob Frenkel, have also emphasized the importance of heeding international warnings about the country’s economic outlook. Foreign investors seek a professionally run country with an independent judicial system, and this stability is vital for Israel’s economic success. If investors sense that their investments in Israel are unduly risky, and the economy too volatile or unstable, they may be tempted to withdraw from the country en masse, which could have a catastrophic impact on Israel’s economic well-being.

Advocates of judicial reform argue that these warnings are temporary and that the reforms are necessary to enhance democracy. They believe that the reasonableness bill will strike a better balance between the judiciary and legislative branches, noting that previous governments had also expressed the need for various judicial reforms.

However, the current economic crisis is not solely a consequence of past decisions but is occurring amidst global economic shifts. Concerns about food supply due to the disruption of a grain deal affecting Ukrainian grain, record heat waves in Europe and the US, and China-US tensions are contributing to the uncertainty. Furthermore, the long-term effects of the COVID-19 pandemic continue to fuel inflation.

Economic uncertainty cannot help a country thrive

In this unstable world, the strength of Israel’s economy becomes of utmost importance. Prime Minister Benjamin Netanyahu has stressed the need for a strong and stable country in a region facing constant tests from adversaries. He has long prided himself on his central role in modernizing Israel’s economy, taking it from its early socialist beginnings into the hyper-competitive 21st century.

That legacy is now being tested during this trying time, as Israel’s economic outlook remains uncertain. Rising inflation and mortgage costs could push many Israelis to their limits, particularly those already struggling with high food and housing prices and limited disposable income.

It is vital that Israel’s political leadership address these economic challenges proactively. Israelis should not bear the burden of political turmoil and economic instability. The government must reassure the hi-tech sector and leading credit agencies that Israel remains well-positioned despite recent events.

Other countries that underwent major judicial overhauls experienced economic chaos, but Israel, as a closely tied member of the Western democratic world, cannot afford such a scenario. Unlike some regional countries with alternative allies, Israel’s economy is deeply integrated with the West.

The government must take the economic fallout from the past six months of political chaos seriously and it must consider the potential economic impact of any future developments in its judicial reform. Israel can scarcely afford to be plunged into an economic crisis alongside the deep social and political crises in which it finds itself enmired.

Now is the time for the country’s leaders to pay attention to the warning signs coming from banks, companies, investors, and credit rating agencies and adjust their priorities accordingly.

By doing so, they can signal their commitment to safeguarding Israel’s strong economic position and ensure a stable and prosperous future for all citizens, irrespective of their political views.