If Israel's credit rating is downgraded as a result of the legal reform legislation, the economy is expected to lose between NIS 15 and 30 billion per year, according to a Finance Ministry report published on Monday.
On Monday night senior officials at the Finance Ministry presented Finance Minister Bezalel Smotrich with a severe warning report that predicted harsh economic consequences that may occur following the enactment of the government’s proposed legal reform.
In the senior officials' discussion with Smotrich, Israel's macro data were presented and the possible risks and opportunities of the reform and the protest against it were noted.
The dangers of a lower credit rating
Critics of the reform argue that weakening the system of checks and balances within the legal system will result in Israel receiving a lower credit rating, which will in turn discourage investment in the hi-tech sector from foreign investors, thereby crippling one of Israel’s primary economic workhorses and potentially leading to a national “brain drain” as entrepreneurs seek a new home base for their companies in order to become more attractive to investors.
According to the document, in the event that the credit rating is downgraded as a result of the legal reform legislation, the economy is expected to lose between 15 and 30 billion shekels per year.
The report noted statements from credit rating companies Moody's and Fitch, which have already warned about the possible consequences of the legislative procedure on Israel's credit rating. "The reference of the rating companies is of great significance since their professional assessment provides investors with information about the inherent risks and prospects,” the report read.
“Even without a credit rating downgrade, the expectations of its downgrade are enough to cause negative consequences on the level of investment in the country already in the immediate time frame. Publication of an unusual review that is not fully qualified, as done by Moody's company signals to investors that the state of the economy requires attention and creates negative expectations regarding the viability of investing in the country,” it continued.
“As of this time, it is evident that the proposed changes in the legal system are perceived by the relevant international bodies as those that may weaken the state's institutions. The strength of the institutions is a central consideration in determining the credit rating of Israel and of Israeli companies.
"Therefore, to the extent that the credit rating companies do explain that the legislative measures will weaken the institutions, their approval may lead to a downgrade, for all the economic implications involved as discussed above," the document noted, adding that "the effects of the negative sentiment in the markets may materialize even in a scenario where the legislative measures are promoted separately and gradually.”
Smotrich's response
In response, Smotrich stated: "We all have responsibility for the economy of the State of Israel and our role, along with analysis and assessment of the situation, is also to prepare for every scenario, formulate budget and system solutions and transform challenges into opportunities. The Israeli economy is strong, and the current data as presented in the hearing continues to indicate its strength and great growth potential of the Israeli economy.”
“Stability and social cohesion are important elements for the State of Israel as a society and for the Israeli economy, which is always affected by expectations and needs stability,” he added.
"My position regarding the reform is known and I believe that it has great opportunities for the economy, in the area of legal certainty and renewed synergy between authority and responsibility in a way that will lead to a more flexible risk management model, which will lead to a reduction in bureaucracy and regulation and in any case to great growth,” said the minister. “With God's help, we will continue to steer the economy with broad national responsibility.”
For the past several months, economists, experts and tech executives alike have raised strong concerns regarding the legal reform’s threat to the Israeli economy. Countless statements from rating agencies and tech executives alike, one economic summit featuring speakers from around the world and two open letters to the government which were each co-signed by over 300 Israeli economists have warned of this fallout.
“Unfortunately, our warnings have not been heeded and the Israeli government is advancing the legislative reform while ignoring the warnings stemming from both within and outside of Israel regarding the expected economic damage,” read the second open letter, sent on March 2.
“The experience gained in other countries where politicians ignored the warnings of economists shows that such disregard may cost us all dearly. The Israeli government would do well to consider its steps, lest we all regret that we did not prevent serious harm to the welfare of the residents of Israel and to our common future.”