A former Israeli central bank governor said a selloff in markets may prompt the government to reconsider plans to continue with a judicial overhaul that’s triggered mass protests in the country.
(Bloomberg) — A former Israeli central bank governor said a selloff in markets may prompt the government to reconsider plans to continue with a judicial overhaul that’s triggered mass protests in the country.
“I hope that now, with the very strong reaction of markets and on the streets, there will be a revision of thinking about the next step,” Karnit Flug said in an interview with Bloomberg Television on Wednesday. “I very much hope that any next step in the legislation will take all these very negative effects into account and won’t move forward without a very broad consensus.”
Israeli financial markets have reeled since Monday, when Prime Minister Benjamin Netanyahu’s coalition approved a law that will curb judicial oversight of the government. The premier’s allies said the move to bar judges from voiding ministerial decisions they consider “unreasonable” is just the first part of their reform plans.
This week, Israeli stocks and bonds and the shekel have all tumbled. The currency weakened 0.2% to 3.7 per dollar as of 8:50 a.m. local time, extending its weekly loss to 2%, the most among a basket of major units tracked by Bloomberg.
Flug sees no risk of “disorderly markets” in Israel but warned that declines in the shekel threaten to speed up inflation and could result in an interest-rate hike “at some point.”
“The concern is not a lack of liquidity or disorderly markets,” said Flug, who’s now at the Israel Democracy Institute, which has regularly criticized the judicial plans. “The concerns are of a longer-term effect. Israel is a small and open economy. If the shekel continues to weaken, that means what we’ve seen on inflation — we’ve seen some deceleration — may change.”
There’s a “serious risk” the controversy could harm Israel’s credit rating, she said. Moody’s investors Service on Tuesday warned that the tech sector, a key engine of economic growth and exports, is already experiencing a retreat in venture capital flows.
Israel is seeing “a materialization of a negative scenario that we’ve been concerned about and warning about for the last few months,” said Flug, who was succeeded at the Bank of Israel by current Governor Amir Yaron.
The government has vowed to continue its overhaul after a summer recess, even as protesters and opponents say further such legislation will undermine Israel’s democracy and could imperil its status as a magnet for high-tech investment. Hundreds of thousands of people have taken to the streets in recent months to protest against the changes. President Joe Biden had urged Netanyahu to delay the parliamentary vote on Monday.
Foreign-direct investment is among the main channels by which the upheaval can filter through to the economy, Flug said.
“We’ve seen a decline in Israeli high-tech investment much beyond what happened in high-tech sectors elsewhere,” she said. “And we haven’t seen the recovery we’ve seen elsewhere.”
Flug was governor until 2018, opting not to seek another five-year term after clashing with Netanyahu and his economic planners.
She said to Bloomberg earlier this month there’s a fear among Israelis that the government will target other institutions after the judiciary, including the Bank of Israel.
–With assistance from Sarah Halls and Harris Braude.
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