BICOM

What happened: Two days after the government unilaterally cancelled the reasonability clause, three international financial institutions – Moody’s, Morgan Stanley and Citibank – released statements yesterday.

• Credit rating agency Moody’s issued an unscheduled report that warned about “negative consequences” and “significant risk” for Israel’s economy and the security situation.
• Specifically they warned, “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. While the slowdown reflects global trends… there are also signs that Israel is decoupling from global trends.”
• Morgan Stanley released its report recommending against investing in Israeli bonds. “We see increased uncertainty about the economic outlook in the coming months and risks becoming skewed to our adverse scenario.”
• Citibank recommended investors wait for a calmer or more certain market.
• Citibank also related to attacks by government ministers on Attorney General Gali Baharav-Miara. “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.”

Government’s response: Prime Minister Netanyahu and Finance Minister Smotrich issued a joint statement in response to Moody’s: “This is a momentary response; when the dust clears, it will be clear that the Israeli economy is very strong.”

• “The security industries are bursting with orders. The gas industry is increasing exports to Europe and seven companies are now competing for tenders to explore for gas in Israel at an investment worth billions. Intel is planning its largest investment outside of the US ever and will invest $25 billion in Israel. NVIDIA is building a supercomputer in Israel and we are moving forward in AI, cyber and the manufacture of chips in Israel. Growth is increasing and inflation has been blocked. Regulation is being lifted and free market competition is increasing.”
• They concluded, “The Israeli economy is based on strong fundamentals and will continue to grow under experienced leadership that is enacting a responsible economic policy.”

Context: Moody’s did not plan to release a report but made the decision following the passing of the law.

• Back in April, Moody’s downgraded Israel’s credit rating outlook but kept the actual rating at A1.
• At the time Prime Minister Netanyahu spoke with Moody’s representatives and reassured them that the reforms would only be advanced with a consensus.
• The credit agency had recommended three criteria:
  • Broad agreement.
  • Measured reforms.
  • Slower pace.
• In parallel yesterday, Israeli stock markets continued to fall and the shekel further weakened.
• As well as the economic repercussions, there was also political fallout (see polling below).
• In the security domain there is ongoing concern over the army’s cohesion and readiness. IDF Chief of Staff Halevi released a statement yesterday noting, “Days of dispute and crisis require an emphasis on what we have in common and what unites us: the mission of defending the State of Israel, which is our foremost obligation. The IDF is ready for any challenge, which is imperative to ensuring the existence of the State of Israel.”

Looking ahead: Israelis are now waiting to see if after the summer break the government will continue to advance other aspects of the reform or not.

• Moody’s is not expected to release its full credit rating for Israel until the autumn.
• However other international credit agencies could downgrade Israel’s credit rating earlier. For example Fitch is expected to release its report on Israel in the first half of August.
• Meanwhile, Moody’s still expects the country’s economy to grow at a rate of 3% both this year and in 2024, but cautioned that the projection does not “incorporate a negative effect from a prolonged period of social and political tensions.”