HSBC warns Netanyahu’s judicial overhaul will harm Israel's economy

A report by the British bank HSBC published Monday estimates that the judicial reforms currently being pushed in Israel could negatively affect foreign investments in Israel’s economy. The planned reforms by Prime Minister Benjamin Netanyahu's government would limit the power of the Supreme Court to cancel Knesset legislation it finds in violation of Israeli law. It would also offer the government more leverage over the selection of judges and justices. 

The report notes that the Israeli shekel is strong and that foreign investments in the Israeli market and in Israeli companies in the past few years have contributed to its attractiveness. Since 2019, thanks to the strength of the Israeli economy, foreign investment in Israeli bonds has increased. 

On the other hand, close to 12% of Israel’s external debt, equal to $18 billion, is in foreign hands. A judicial overhaul could weaken the Israeli system of checks and balances, which in turn would negatively affect the flow of direct foreign investment in the Israeli economy. The report notes that rule-of-law issues have affected currencies in the past few years in the Middle East and North Africa region. 

The HSBC report follows an internal memo by JPMorgan published last Friday that warned of growing risks to investing in Israel due to the government’s judicial overhaul. The document compared Israel to Poland, which saw its credit rating downgraded in 2016 after adopting a somewhat similar judicial reform. JPMorgan warned that the judicial shakeup could put negative pressure on Israel’s credit rating, which it said is currently “potentially slowing the flow of international investment.’’

A senior diplomatic source spoke to Al-Monitor in reaction to the JPMorgan memo. They said, “You can spin political markets endlessly, but you can't spin financial markets for long.” The source suggested that JPMorgan did not fully understand or was not fully familiar with the details of the planned judicial reform, arguing, “A thousand reports like this won’t change [anything]. People will see for themselves if it’s worth investing or not. The smart money will come in because what we’re doing is balancing an unbalanced situation.”

Netanyahu was in Paris on an official visit when the JPMorgan report was published. During his trip to France, he met with 60 leading businesspeople he claimed are interested in investing in Israel. 

The Israeli press reported that Netanyahu had spoken with senior JPMorgan staff prior to the publication of the memo in an effort to prevent its release. It was also reported that in recent days, Netanyahu spoke with several seniors in other leading international banks and financial institutions, trying to convince them that the judicial reforms he is pushing will not damage Israel’s economy and will not entail downgrading Israel’s credit rating or withdrawing foreign investments. This week, Netanyahu tasked Strategic Affairs Minister Ron Dermer to continue discussing the issue with leading foreign bankers.