As Israel’s second economic quarter comes to a close, all eyes are focused on the Central Bureau of Statistics (CBS) and its imminent release of growth data. A recent economic summary from Bank HaPoalim has set the stage, calling attention to a few critical factors that set the stage for the development of Israel’s economy over the rest of the year.
According to HaPoalim, forecasts suggest that economic growth will mirror population expansion, signaling a moderate trajectory. At the same time, though, lingering political tensions surrounding the government’s judicial reform persist, while major credit rating agency Fitch’s pending assessment of Israel’s economy adds an additional layer of intrigue.
All eyes on Fitch
Amidst the ongoing political tumult centered around the government’s judicial overhaul, the spotlight remains on credit rating agency Fitch — one of the only major credit rating agencies that hasn’t weighed in on the government’s recent attempts at judicial overhaul’s effect on the economy.
Last month, Citi, Moody’s, Morgan Stanley, and S&P all warned investors of the increased risk presented by the judicial reform’s effect on the economy’s stability. Morgan Stanley’s statement on the matter characterizes the group of agencies’ concerns: “We see increased uncertainty about the economic outlook in the coming months and risks becoming skewed to our adverse scenario,” the agency said. “Markets are now likely to extrapolate the future policy path and we move Israel sovereign credit to a ‘dislike stance.’”
HaPoalim noted that, while experts widely agree that Israel’s current substandard economic metrics may not affect its long-term credit rating, Fitch’s perspective, in particular, remains a pivotal yet unexpressed factor, given its lack of commentary on the ramifications of the government’s judicial overhaul attempts.
Criticism is mounting and making an economic impact
Indeed, the many recent criticisms of Israel’s economy in light of the judicial reform have had a notable effect on Israel’s primary economic engine: the hi-tech sector.
According to a recent report from Start-up Nation Central, private funding for Israeli hi-tech companies hit a 5-year low in the first half of 2023, dropping by 29% compared to the second half of 2022, reaching a level last seen in 2018. Early-stage funding rounds, especially those under $20 million, also declined after a period of stability in 2022. Investor participation in funding rounds decreased by 53% compared to the same period in 2022, with foreign investors leading for the first time in a decade. The market for initial public offerings (IPOs) and mergers and acquisitions (M&As) in Israel also experienced significant drops. The uncertainty from Israel’s judicial reform efforts contributed to these trends, with fewer emerging startups and decreased fundraising.
“The uncertainty and internal changes in Israel together with global economic changes are prominently expressed in the activity of the Israeli ecosystem and reflect a significant slowing down and an ebb in activity. This sharp drop stands in opposition to the stable trends in funding and venture capital seen in the US,” said Yariv Lotan, Start-Up Nation Central’s VP of Digital Products, Development, Data, and BI.
