J.P. Morgan: Judicial reform could hit Israel’s credit rating

J.P. Morgan’s research department has published a survey on the Israeli economy entitled “Israel Strategy: Domestic volatility flares up.”

In the report the US financial services company warns, “The judicial reform has raised concerns regarding institutional strength and the investment climate in the country. Any material deteriorating in the institutional strength can have impact on investment flows, however the scale and timing of such are difficult to judge. There may also be a downside risk to Israel’s sovereign credit rating but we would expect the market impact of that to be limited.”

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JP Morgan added, “Following the judicial reforms in Poland, S&P ratings downgraded its sovereign credit rating in January 2016 to BBB+ from A-.”

Despite this J.P. Morgan expects any impact on direct foreign investment in Israel would be limited.

Barclays also warns of market volatility in Israel due to the government’s legislation plans. “Since the elections in Israel, political uncertainty has prevailed and this has resulted in underperformance in several of the economic indices in Israel. The recent events regarding the controversial judicial reform and the rise in regional tensions have added pressure to all this albeit in a limited way.”

On foreign direct investment (FDI) J.P. Morgan said, “A potential negative impact on investment flows to Israel, for instance to the tech sector, could be also a medium-term risk. Recent reports have suggested that some foreign institutions have already started to move funds out of Israel over concerns over the judicial reform plan. The tech sector has been relatively vocal in voicing its opposition to the proposed reforms. In Poland’s case we note there was some evidence of a lag in net FDI inflow during the period of heightening noise regarding judicial reforms.”

J.P. Morgan recommends purchasing two year Israel government shekel bonds, which implies optimism for the long term. Also noted are the rising interest rate and initial indications that the housing market and business activities have begun to fall.

J.P. Morgan remains neutral on the shekel. “Our base case remains that the shekel will remain very much tied to moves in global financial conditions given the scale of local institutional investor hedging flows with medium-term appreciation pressures driven by the supportive BoP anchor. That said, we prefer to stay neutral on the currency despite a clear build in risk premia.”

Published by Globes, Israel business news – en.globes.co.il – on February 3, 2023.

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