Citi lowers Israeli growth forecast, citing 'recent turmoil' over judicial overhaul

Citibank on Thursday lowered its forecast for Israel’s economy in 2023 and 2024, citing a drop in investments due to fears over the government’s judicial overhaul and other policy decisions.

In a new report, the US bank reduced its 2023 growth projection for Israel from 3.3% to 3.1%, while the 2024 forecast fell from 3.3% to 2.8%.

“The recent turmoil surrounding judicial reform in Israel has raised questions about its impact on the economy,” Citi said. “While there may be short-term effects on growth due to disruptions in economic activity, the more significant impact is likely to be on Israel’s potential growth in the intermediate term.”

Beyond the controversial overhaul, the report singled out the government’s policy priorities.

“It is not only the judicial reform legislation that might have a significant impact on potential growth in Israel, but a range of other governmental decisions as well such as budget allocations, education policy, etc.,” the report said, citing the decision to allocate vast chunks of the budget to ultra-Orthodox communities.

“These decisions will affect many aspects of the country and its economy and, by extension, most asset classes,” the report said. “Unfortunately, it’s not hard to imagine further declines in growth, which may increase the likelihood of a downgrade of Israel’s credit rating,” it warned.

The report comes a week after the bank sent a note to institutional clients telling them the environment in Israel is “much more tricky and dangerous,” after the coalition passed the first law in its planned shakeup of the judicial system, counseling investors to hold off until the dust settles.

“The current events in Israel are challenging… and making investors increasingly nervous with regards to Israeli assets,” Citi VP Michael Wiesen wrote in the note. “We urge caution here and to wait for better levels/calmer market.”

Other financial institutions also sounded bearish notes following approval of the legislation, with US investment bank Morgan Stanley lowering Israel’s sovereign credit to a “dislike stance,” citing “increased uncertainty about the economic outlook in the coming months.”

Moody’s Investors Service warned about “negative consequences” and “significant risk” for Israel’s economy, cautioning that “executive and legislative institutions have become less predictable and more willing to create significant risks to economic and social stability,” while Standard & Poor’s said it saw the continued political turmoil threatening economic growth in Israel.

On Wednesday, the Bank of Israel said that growing and prolonged uncertainty around the implications of the government’s overhaul poses a threat to the country’s financial system and economy.

The reports were issued after the Knesset ratified the so-called reasonableness law despite mass public protests and after efforts to reach a compromise between coalition and opposition parties collapsed. The legislation prevents judicial oversight of government and ministerial decisions on the grounds of reasonableness. The government’s critics say removing the standard opens the door to corruption and improper appointments of unqualified cronies to important positions.

The government has been largely dismissive of the warnings, with Finance Minister Bezalel Smotrich last week blaming the ongoing demonstrations.

Israeli finance officials and business leaders have consistently warned of the damage to the economy, and high-tech workers make up a prominent part of the protest movement.

The law was the first part in a larger package of bills that critics say will fundamentally alter Israel’s democratic system by stripping the judiciary’s ability to act as a check on the governing coalition.

After passing the “reasonableness” law, Prime Minister Benjamin Netanyahu said he would work with the opposition to build consensus and come to a compromise on the rest of the legislative package.

Sharon Wrobel contributed to this report.

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