Goldman Sachs issues warning on Israel’s judicial reforms

Goldman Sachs became the latest firm to warn the Israeli government that Prime Minister Benjamin Netanyahu’s coalition’s proposed judicial reforms could cause economic harm, while inconsistent on whether the Israeli shekel would be harmed.

On the one hand, the Goldman Sachs economics research department warned that the proposed reforms could harm the Israeli shekel as they have “sparked concern among some investors, including locals, that the reforms could reduce judicial independence in Israel, and that – for example, by eventually reducing FDI [foreign direct investment] or tech sector growth in Israel.” 

On the other hand, the investment firm stated that: “Throughout the pandemic period, the Israeli shekel has stood out as a currency that is particularly driven by global, rather than domestic, factors.” 

“In particular, even as domestic political developments themselves remained volatile in recent years, going long, USD/NIS has consistently ranked as our top-ranked FX hedge against a global equity drawdown and, for many years now ‘global tech stocks down, USD/NIS up’ has been a steady rule of thumb, indicating that it is global equity developments, rather than domestic political ones, that are key to a forward-looking view on the shekel. Over the past six months, these trends have broadly continued,” the Goldman Sachs report said.

The report drew the following conclusion: “Perhaps most importantly, there are few signs that recent developments would affect the institutional hedging behavior of local investors, which likely underpins the striking correlation between USD/NIS and global tech stocks that have driven the shekel for years.”

JP Morgan’s position, recently published in an Israel Rates Trading report, states that the Israeli shekel is fundamentally “bullish,” indicating that prices, or an item’s value, are expected to rise. 

“We have had some increased noise in recent days on the developing political situation in Israel,” JP Morgan stated. “Our ultimate takeaway is that this is largely noise.”

The noise level in Israel has been notably more significant. 

Last week, Eynat Guez, co-founder and CEO of Papaya Global, an Israeli financial tech company, wrote about her company’s decision to divest from Israel. 

“Following Prime Minister Netanyahu’s statements that he is determined to pass reforms that will harm democracy and the economy, we made a business decision at Papaya Global to withdraw all of the company’s funds from Israel. In the emerging reform, there is no certainty that we can conduct international economic activity from Israel. This is a painful but necessary business step.” 

Since publishing the tweet, Guez has made her Twitter account private (the cached version of her previous comment can be found here).

Yesterday, a memorandum of opinion was published on the Israeli investment site Funder by 325 academics in the field of economics, expressing “deep concern over the government’s moves that are expected to undermine the independence of the judicial system and the public service, and which in our assessment will cause unprecedented damage to the Israeli economy.” 

The opinion of financial experts who actively invest in the Israeli economy does not appear so stark. 

“Although the situation remains tense, we see limited implications for Israel’s economy, with the exception of the new government’s fiscal policy, which we think is likely to increase spending in the 2023 budget amid discussions of economic plans to fight the rising cost of living. This could fuel inflation and lead to ‘more rigid interest path’ from the Bank of Israel,” according to a Jan. 20 report from Barclays Capital Investment Bank.

The Barclays report did comment on the political situation, saying, “The political crisis in Israel has intensified as plans to reform the judiciary that would significantly reduce the Supreme Court’s power have been unveiled.” 

However, the bank only said, “We think this adds a slight risk of a new coalition crisis, while social unrest and disagreements over Cabinet roles will likely keep tensions high in the medium term.”