‘Economic earthquake’: Opposition lashes government after Moody’s downgrade

Opposition lawmakers assailed the governing coalition on Saturday after leading ratings agency Moody’s downgraded Israel’s economic outlook from positive to stable.

Yesh Atid party head Yair Lapid, the leader of the opposition, said the government was causing the country to “fall apart” and should announce immediately that its plans to dramatically overhaul the judiciary will be stopped.

In its decision, Moody’s cited the “deterioration of Israel’s governance” amid the government’s highly contentious effort, which critics warn will erode and even end Israel’s democratic system of governance.

“The announcement… is proof that the regime coup endangers the livelihood of every Israeli citizen. The lies and attempts to blame others will not help in this case,” Lapid tweeted.

“The facts are clear: The government I led handed them a strong and prosperous economy, and under the watch of [Prime Minister Benjamin] Netanyahu and [Finance Minister Bezalel] Smotrich, everything is falling apart,” Lapid said.

“They should announce that they are stopping the legislative madness, and that they will take care of the economy and the livelihoods of the country’s citizens,” the Yesh Atid leader said.

Late last month, Netanyahu announced a pause to the legislation to weaken the Supreme Court, as the coalition and opposition hold talks to try to achieve a consensus on judicial reform, but the premier also stressed that the effort would resume even if no agreements are reached.

Yisrael Beytenu head Avigdor Liberman, a former finance minister, said that the downgrade was an “economic earthquake,” and that Prime Minister Benjamin Netanyahu “is destroying the Israeli economy.”

“Just in April last year, when I was finance minister, Moody’s raised Israel’s outlook to positive, and I responsibly left the current government with a growing economy and a budget surplus of about NIS 10 billion NIS. And here after three months, we are on the verge of economic collapse,” Liberman said.

“The lack of care for the cost of living, the cheap populism, the promotion of personal interests and the priorities of Netanyahu and his government are costing you, the citizens of the country,” Liberman said.

Labor MK Naama Lazimi hit out at the “parade of false narratives” for the downgrade that were being circulated on social media by proponents of the overhaul.

“‘It’s the protesters’ fault’ — a lie, it’s the opposite; ‘You [the opposition] are happy about it — we are shocked, and we are just presenting the reality; ‘This is only one [ratings] company out of three’ — the trend is clear. ‘The economy is still stable’ — institutions are weakening, there is corruption, capital and investments are fleeing, social services are being reduced,” Lazimi wrote, calling on citizens to join the anti-overhaul protests on Saturday evening.

Labor lawmaker Efrat Rayten said that “hubris shut the ears and eyes of the leaders of the coup d’état,” adding that “even Netanyahu’s panicked and desperate phone call to the ratings agency failed to repair the enormous damage caused by this evil government.”

Channel 12 reported that in recent days, Netanyahu and President Isaac Herzog, who is hosting compromise talks on the overhaul, held urgent discussions with senior Moody’s officials in a bid to reassure the agency.

There was no public comment from National Unity leader Benny Gantz, whose party is also involved in the overhaul negotiations at the President’s Residence.

The rating agency report Friday confirmed fears that Israel’s credit outlook could be knocked down, as Moody’s had warned last month.

Weekly mass protests around the country against the government’s plans to weaken the judicial system have continued even after Netanyahu paused the legislation. Coalition members have vowed to press forward with the legislative push after the Knesset’s Passover recess.

On Friday, the agency said the change — which came just a year after Moody’s upgraded Israel’s credit outlook — “reflects a deterioration of Israel’s governance, as illustrated by the recent events around the government’s proposal for overhauling the country’s judiciary.”

“While mass protests have led the government to pause the legislation and seek dialogue with the opposition, the manner in which the government has attempted to implement a wide-ranging reform without seeking broad consensus points to a weakening of institutional strength and policy predictability,” Moody’s strongly worded eight-page report read.

While Israel’s credit outlook took a hit on Friday, the agency kept the country’s actual credit rating at A1, citing “strong economic growth and improving fiscal strength,” it said.

Israel’s economy, Moody’s said, “has proven resilient to many economic and geopolitical shocks over the past decades and has grown at a rapid clip, helped by Israel’s globally competitive high-tech industries. Moody’s baseline projections assume continued robust growth in the medium term.”

“The Israeli economy has grown at a rapid rate over the past several years, averaging 4.1% over the decade to 2022, helped to an important extent by the globally competitive and increasingly diversified high-tech industries,” it said.

Israel’s vaunted tech sector has long been touted as the main engine of Israel’s economic growth, accounting for 49% of total exports and generating around 15% of GDP in 2022.

It has been a key part of the opposition to the government’s judicial plans, with some firms moving significant funds abroad and threatening to relocate if democracy is harmed.

Moody’s warned Friday that Israel’s credit ratings could also come “under downward pressure if the current tensions were to turn into a prolonged political and social crisis with material negative impact on the economy, possibly linked to substantially lower capital inflows into the important high-tech sector and relocation of Israeli firms abroad.”

Moody’s said that while the Israeli government was indeed holding deliberations, it has also “reiterated its intention to change how judges are selected. This means that the risk of further political and social tensions within the country remains.” But should a compromise be reached “without deepening these tensions, the positive economic and fiscal trends that Moody’s had previously identified remain.”

Earlier this month, the OECD cautioned that the country’s pace of economic growth is expected to moderate, warning that “risks are skewed to the downside, related to high global and domestic uncertainty.” The organization sees GDP slowing from the 6.4% growth rate last year to 3% in 2023 and 3.4% in 2024.

On Friday, the release of the March consumer price index (CPI), a measure of inflation that tracks the average cost of household goods, showed an increase of 0.4% from February. CPI has been hovering above 5% in annual terms for the past six months, falling short of the government’s target range of 1% to 3%.

The rise in inflation came despite steps taken by the Bank of Israel to rein it in. The central bank has over the past year steadily hiked its benchmark interest rate from a record low of 0.1% last April to 4.5% earlier this month in a bid to bring down price growth.

Inflation has been slower to ease in part due to a weaker shekel, which is making imported goods more expensive. Since the beginning of this year, the local currency has depreciated about 4% against the US dollar. The US dollar index, which measures the greenback against six major world currencies, has declined about 2% since the start of 2023.

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