Top investor: Economy ‘in terrible danger,’ overhaul crisis must be solved in days
One of Israel’s top tech investors warned in an interview aired on Friday night that the country must solve its internal crisis over the government’s judicial overhaul “within days,” saying the Israeli economy was “in terrible danger.”
Speaking to Channel 12 news, Shlomo Dovrat, who is a co-founder and general partner at Viola Ventures, an Israeli venture capital fund with over $1.3 billion under management, said he was “deeply anxious” about the government’s judicial plans.
“I believe we’re in a dangerous moment, the likes of which I don’t remember seeing in many years,” he said.
Dovrat, who according to Channel 12 has not given an interview in 20 years, broke his silence due to his intense worry.
“Over a period of 40 years we built a glorious economy, a spectacular high-tech industry,” Dovrat said, but the government’s plans were leading to “a danger” for the economy and society “at a level I don’t remember seeing.”
“We are seeing the risk premium for investments in Israel rising dramatically,” he said, noting that money was leaving Israel, and a large part of it would likely not return.
According to Dovrat, foreign investors “won’t invest in a country that doesn’t have certainty, that doesn’t have political stability and doesn’t have an independent justice system that can protect their property rights.”
He said Netanyahu “must take action fast.”
“The markets are voting with their feet. Billions of dollars are exiting Israel every day… In boards of companies we’re invested in, foreign investors say ‘Israel’s risk is too high now, get the money out of Israel.’ That’s what we’re hearing, not from one or two [companies]. It’s widespread,” he said.
Some Israeli tech companies have said they are planning to move their operations out of the country over the overhaul plans.
“Every day that passes and this crisis isn’t resolved we are at huge risk. The clock is ticking. We have to act and fast,” Dovrat said.
“The moment the high-tech industry leaves Israel or the economy weakens in general and foreign investors stop coming here — the cost of living will rise dramatically, interests on mortgages will rise dramatically,” he said.
He called Israel’s high-tech industry “Israel’s economic miracle,” making up 45% of exports and nearly 20% of GDP “and a huge percentage of revenue from taxes.”
“We won’t have the money for hospitals, infrastructure, health,… and of course security,” he warned.
“We don’t have time for politics… [It] can’t end in months of negotiations and a compromise at the last minute. If this process lasts months, there won’t be anything left to fix,” he said, adding that he had “never seen such concern among foreign investors.”
Dovrat also called on President Isaac Herzog to seek a compromise “within days.”
“They must act immediately. Not deliberations, not negotiations, not a pause, no preconditions. No ego games, no power games. An agreement within days. There’s no time. We’re in terrible danger,” he said.
Dovrat’s interview came after a Thursday report said Bank of Israel Governor Amir Yaron warned ministers that an economic crisis could break out at any moment, amid mounting concerns over the government’s pursuit of sweeping changes to the judiciary, which has spooked investors and entrepreneurs in recent weeks and sparked fears of an economic downturn.
Yaron and the Finance Ministry’s chief economist Shira Greenberg were asked for their observations Thursday on the potential harm to the economy at the discussion session by Economy Minister Nir Barkat, who also reportedly relayed warnings he had heard directly from figures in the tech and business industry of serious economic fallout.
“A snowball [effect] may begin,” Greenberg reportedly responded, adding that there was “significant danger” to the economy. Earlier, Greenberg warned in a report accompanying the multi-year budget draft 2024-2027 sent to Prime Minister Benjamin Netanyahu’s hardline coalition government on Thursday that the judicial overhaul was “perceived by the market as damaging the strength and independence of state institutions and increases uncertainty in the investment environment.”
“This may harm economic activity and in particular private investments,” she wrote.
Netanyahu has repeatedly waved off such warnings, including on Thursday when he said those making them were driven by political motivations and hysteria and insisted they would be proven wrong.
In her report, Greenberg cited studies that found a positive relationship between the strength and independence of state institutions and economic growth, scope of private investments, and in particular the scope of foreign direct investments.
“Also, the credit rating agencies are likely to react to these developments,” Greenberg cautioned.
According to a separate report Thursday by Israeli data and credit firm BDI, one in five large companies based in Israel has seriously considered moving money out of the country or has already done so. The study, cited by Channel 12, surveyed more than 900 companies across sectors such as tech and real estate, with almost 60% reporting that their revenues took a hit from recent market jitters and a weaker shekel that makes imported goods more expensive and hikes consumer prices.
As the government passed initial votes on legislation this week marking the first significant steps in its divisive effort to shake up the judiciary, the shekel depreciated to the weakest level in three years against the US dollar and Tel Aviv shares declined.
The vote came despite fierce opposition and massive protests against the government’s plans, which would grant it total control over the appointment of judges, including to the High Court, all but eliminate the High Court’s ability to review and strike down legislation and allow politicians to appoint — and fire — their own legal advisers.
Over the past month, the shekel has lost over 7% of its value amid the mass protests and the dampened market mood.
In his comments at the discussion session on the state budget, Barkat — a former tech entrepreneur and venture capitalist who is a member of the ruling Likud party — relayed warnings of serious economic fallout by leading Israeli business figures whom he said told him that the government “can shred the budget” as it “won’t have the money to implement it anyway.”
“The Israeli economy is going to crash,” he said he was told.
Barkat said he was in favor of the judicial overhaul but urged for negotiations and dialogue. “Even if we don’t get everything we are after, it won’t be so terrible,” he reportedly said.
At the session, Finance Minister Bezalel Smotrich, whose far-right Religious Zionism party is one of the driving forces behind the shakeup of the judiciary, said the hard-right government has taken into account that things “may develop in negative directions” with a drop in government revenues. “Therefore we need to be responsible with the budget,” Smotrich was quoted as saying.
The budget discussion session came days after the central bank hiked its key lending rate to the highest level since 2008, as it seeks to battle inflation and a weakening shekel.
Yaron reportedly called an emergency meeting late Wednesday to discuss stabilizing the country’s financial picture after this week’s market rollercoaster.
On Wednesday, former Bank of Israel chief Jacob Frenkel joined a growing list of economists inside and outside Israel to sound the alarm over the judicial overhaul.
Frenkel, who served as bank governor from 1991 to 2000, urged the government in an interview with Channel 12 on Wednesday to rethink its plans, warning that “irresponsible decisions could ruin it all.”
“We have a situation of total uncertainty: economic uncertainty, political uncertainty and a lack of certainty in institutions, which affects all aspects of the economy,” he said.
Charting the Global Economy: Fed, BOE, SNB Push Ahead With Hikes
(Bloomberg) — The Federal Reserve, Bank of England and Swiss National Bank all proceeded with expected interest-rate increases this week, reinforcing their commitments to curb inflation despite turmoil in the banking sector.
Policymakers in the US and UK hiked by a quarter point while those in Switzerland opted for a half point. All three signaled more increases could be in store.
The UK was especially under pressure to tighten policy after a report earlier in the week showed consumer prices advanced 10.4% in February, surpassing all estimates in a Bloomberg survey and bucking economists’ expectation of a slowdown.
Here are some of the charts that appeared on Bloomberg this week on the latest developments in the global economy:
Iceland’s central bank extended western Europe’s longest policy-tightening campaign with a full percentage-point increase, while the Philippine central bank shifted to a smaller hike. Norway, Taiwan and Nigeria also kept hiking. Officials in Turkey left rates unchanged, as did those in Brazil despite pressure from the government for looser policy.
The rush of layoffs that began late last year isn’t letting up, marking the worst start to a year since 2009, with nearly 52,000 jobs lost in one week in January alone. Since Oct. 1, executives across sectors have sacked almost half a million employees around the world, according to a comprehensive review of layoffs by Bloomberg News.
History remembers Paul Volcker as the slayer of inflation, and Ben Bernanke as the crisis firefighter. Jerome Powell is in danger of having to play both roles at once — or, what may be worse, to choose between them.
Powell and his colleagues are expecting a sharp dropoff in economic activity through the rest of 2023 — at least, that’s the implication from new economic projections they published this week.
Rent increases for US single-family homes eased for a ninth straight month in January, pushing the annual rate to the lowest since the spring of 2021, according to CoreLogic. All 20 major metro areas tracked by CoreLogic posted single-digit annual rent increases, for the first time since late 2020.
UK inflation accelerated unexpectedly in February for the first time in four months, keeping the BOE on course to raise interest rates. Food and non-alcoholic drink prices soared 18%, the fastest pace in 45 years, while core and services inflation also picked up.
Euro-zone economic growth continued to pick up in March, driven exclusively by the service sector as concerns over energy supplies recede. The overall rate of expansion rose to the highest level in 10 months, according to business surveys by S&P Global.
China’s population is emerging from a massive virus wave unleashed by the rapid reversal of Covid Zero in mid-December. People are planning trips, dining out and returning to shopping malls. Still, residents of the world’s second-biggest economy aren’t splashing out like they used to.
South Korea’s early trade data showed a deepening slump in exports as global demand for semiconductors remains weak and China’s reopening is yet to generate any boost.
Singapore’s core inflation, a key barometer for the central bank, kept its 14-year-high pace in February as officials weigh fresh threats to the global economy amid the Federal Reserve’s resolve to stay the course on tightening.
Sri Lanka clinched a $3 billion bailout loan from the International Monetary Fund after six months of negotiations. Now comes the harder part: getting a debt restructuring agreement and seeing through monetary policy and tax reforms.
—With assistance from Mathieu Benhamou, Ruchi Bhatia, Matthew Boesler, Libby Cherry, Jo Constantz, Jennah Haque, Jinshan Hong, Michelle Jamrisko, Sam Kim, Phil Kuntz, Karen Leigh, Rich Miller, Tom Rees, Zoe Schneeweiss, Naomi Tajitsu, Alex Tanzi, Kevin Varley, Alexander Weber and Karl Lester M. Yap.
Euro-Area Economy Strengthens More on Service-Sector Surge – Financial Post
(Bloomberg) — Euro-zone economic growth continued to pick up in March, driven exclusively by the service sector as concerns over energy supplies recede.
The overall rate of expansion rose to the highest level in 10 months, according to business surveys by S&P Global. Manufacturing output broadly stagnated, however, only supported by a backlog of orders as demand continued to fall.
“Growth has been buoyed since the lows of late last year as recession fears and energy market worries fade, inflation pressures ease and the unprecedented supply chain delays seen during the pandemic are replaced with record improvements to supplier delivery times,” said Chris Williamson, an economist at S&P Global.
Sentiment in Europe has been improving as it became clear that the region would avoid worst-case scenarios for access to natural gas predicted after Russia cut off supplies to the bloc. Recent turmoil in the banking sector has cast some doubt on how the global economy will develop, though European officials have sounded confident that the sector can withstand any fallout.
While activity improved in both Germany and France, the strongest performance came in the rest of the 20-nation euro area.
What Bloomberg Economic Says…
“The euro-area composite PMI survey for March suggests the economy is beginning to emerge from a period of stagnation and holding up well under the weight of higher interest rates. While monetary policy works with long and variable lags and choppy waters may still lie ahead, the resilience of the economy should allow the hawks at the European Central Bank to succeed in pushing for more interest rate increases”
—David Powell, economist. For full analysis, click here
Inflation is still running far above the European Central Bank’s 2% target, however, with underlying data becoming the key focus for policymakers. While price gains continued to moderate in March, they remain elevated by historical standards, according to S&P Global.
“Such stubborn inflationary pressures, fueled primarily by the service sector and rising wage costs, will be a concern to policymakers and suggests that more work may be needed in terms of bringing inflation down to target,” Williamson said.
The jobs market also remained resilient. Employment growth reached a nine-month high, with acceleration seen especially in services in line with rising demand.
Firms’ confidence in the business outlook dipped, though it remained well above levels seen in late 2022. That could be linked to concerns over uncertainty caused by banking-sector stress and the impact of further increases in interest rates, S&P Global said.
The composite PMI reading for the UK edged lower to 52.2 in March from 53.1 the previous month, suggesting the economy has avoided a recession for now. British companies are the most confident they’ve been since the start of Russia’s invasion of Ukraine.
Data earlier revealed activity in Japan’s services sector edged up to the strongest in almost a decade as the return of Chinese tourists boosted demand. The US number due later on Friday is expected to be below 50.
—With assistance from Mark Evans, Joel Rinneby, Tom Rees and Zoe Schneeweiss.
(Updates with UK PMI data in 10th paragraph.)
Economy headed into a ‘Bermuda Triangle’ financial crisis: Nouriel Roubini
- The economy is headed into a “Bermuda Triangle” of risk, economist Nouriel Roubini warned.
- Roubini pointed to three stressors facing the US economy.
- He sounded the alarm for a stagflationary debt crisis and a severe recession to hit the US.
In a recent interview on the McKinsey Global Institute’s “Forward Thinking” podcast, the top economist warned that the economy was risking another financial crisis as central bankers continue to tighten monetary policy.
Federal Reserve officials raised interest rates another 25 basis-points this week, and have hiked rates 475 basis-points over the last year to control inflation. That marks one of the most aggressive Fed tightening cycles in history, and could place the economy under three different kinds of stress, Roubini warned.
First, high interest rates could easily overtighten the economy into a recession, experts say, which reduces income for households and corporations.
Second, high interest rates means firms are battling higher costs of borrowing and waning liquidity, which weighs on asset prices. Last year, US stocks plunged 20% amid the Fed’s rate hikes, with warnings from other market commentators of an even steeper crash in equities this year.
Finally, high interest rates are pressuring the mountain of debt, both private and public, that was amassed during the years of low rates, Roubini said. He pointed to bankrupt “zombies”, which include households, corporations, and governments.
“It’s got like, a Bermuda Triangle. You have a hit to your income, to your asset values, and then to the burden of financing your liabilities. And then you end up in a situation of distress if you’re a highly leveraged household or business firm. And when many of them are having these problems, then you have a systemic household debt crisis like ,” he warned.
Roubini, one of the experts who called the 2008 subprime mortgage crisis, has repeatedly sounded the alarm for another crisis to strike the US economy. The scenario he envisions combines the worst aspects of 70s-style stagflation with something like the 2008 crisis, with a severe recession, stubborn inflation, and mounting debt levels bludgeoning economic growth.
He and other top economists have criticized the Fed’s aggressive rate hiking regime over the last year, and some experts have called central bankers to stop raising interest rates entirely out of fear of “breaking” something in the financial system.
Signs of stress are mounting, the most recent being the failure of Silicon Valley Bank. But pausing interest rates could panic investors and lead to a resurgence of inflation, meaning central bankers are powerless no matter what they do with rates, Roubini has said previously.
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