JP Morgan report warns: Israel’s judicial reform will negatively impact economy

A new report from global financial-services giant JP Morgan has found increased risk for investment in Israel due to the new government’s planned legal overhaul coupled with recent “increased geopolitical tensions” in the country.

“Israel’s local markets have seen a flare-up in idiosyncratic risk as increased geopolitical tensions were added to investor concerns over plans for judicial reforms,” the report reads.

“The judicial reform has raised concerns regarding institutional strength and the investment climate in the country… Any material deterioration in the institutional strength can have an impact on investment flows; however, the scale and timing of such impact is difficult to judge.”

The report also referenced concerns surrounding the judicial reform’s potential harm to Israel’s credit rating, noting that “there may also be downside risk to Israel’s sovereign credit rating, but we would expect the market impact of that to be limited.”

Last month, a representative of credit rating agency S&P stated that Israel’s reform “is liable to increase the risk of a reduction of Israel’s credit rating,” due to the likelihood it will “weaken key and essential institutions or the system of checks and balances.”

JP Morgan compared Israel’s heightened risk to investors with a similar instance that occurred in Poland, with Warsaw’s recent judicial reforms ultimately impacting its attractiveness to investors.

Others are also drawing parallels with Poland

JP Morgan has suggested that Israel’s reputation among foreign investors may follow suit.

“The judicial reforms can have medium-term investment and growth implications that are hard to quantify. We draw comparisons with Poland’s judicial reforms following [the] election victory in 2015, which appear to have led to some lags in FDI [foreign direct investment] flows, stated the report, reiterating that “credit rating downgrade is also a risk.”

In an interview with The Jerusalem Post, Israel Democracy Institute Vice-President and former Bank of Israel Governor Prof. Karnit Flug also drew a parallel between Israel and other nations that have been negatively impacted by the weakening of their legal institutions.

“Look at what happened to Hungary and Poland, and certainly Turkey: We see that a decline in their credit ratings came about, when the process of weakening the judiciary system occurred,” Flug said.

“If you look at what’s happened to the countries that took the same path, you can also see what happened to their foreign direct investment. After they weakened their institutions, their performance in regard to foreign direct investment was much weaker in comparison to other countries... it’s not surprising. When investors are much less sure about the protection of the rule of law… they’re much more reluctant to invest,” she added.