In a report submitted Monday to the Knesset, Finance Minister Bezalel Smotrich said Israel’s economy and finances were comparatively strong globally, but acknowledged that inflationary pressures have not eased as much as he previously predicted.
“Israel’s economic data is strong and thank God, the Israeli economy is strong and stable within the global sea of instability, given the international economic crisis,” Smotrich wrote in the report.
The finance minister noted that “growth is high and the job market is sound,” and while the inflation rate is lower than other countries, he admitted that “it is not as good as we expected when we submitted the state budget,” and could remain high going forward.
According to Smotrich’s report, the ministry predicted that inflation would average 3.9 percent in 2023 when the budget was put before the Knesset, 4.2% in when it was passed in May, and is now expected to be 4.3% by the end of the year.
Furthermore, the Israeli shekel has weakened against the US dollar over the course of the year, trading at NIS 3.81 per dollar on Monday, compared to NIS 3.45 per dollar when the budget was submitted and NIS 3.60 per dollar when it was passed.
“In addition, global inflation has an impact on the Israeli market through imports. This effect may intensify, due to the weakening shekel,” he said.
Protesters rally against the coalition’s judicial overhaul legislation in Tel Aviv, September 2, 2023. (Gitai Palti)
Meanwhile, the Bank of Israel decided on Monday to leave the benchmark interest rate steady at 4.75% for the second month in a row as inflation shows signs of easing. However, the central bank warned of a “real possibility” of higher borrowing costs in the coming months as the shekel continues to weaken.
The aggressive interest rate increases have been rapidly fueling the costs of mortgage and loan holders, who are struggling to meet monthly payments.
Annual inflation slowed to 3.3% in July from 4.2% in June, its lowest rate in more than a year. However, consumer prices are still above the government’s target range of between 1%-3%. Meanwhile, political uncertainty around the Israeli government’s proposed judicial overhaul has seen the shekel depreciate by more than 8% against the US dollar since the start of the year.
“Since the beginning of the year, the shekel has remained one of the weakest currencies in the world, while the volatility of the shekel exchange rate has remained high,” the central bank remarked.
Smotrich on Monday also attacked the protests against the government’s efforts to overhaul the judicial system, saying the resilience of the local economy “is doubly clear in light of the campaign waged in recent months by irresponsible figures, who are trying to intentionally harm the economy as part of their political fight against the right-wing government and the important changes it wishes to pass in the Israeli judicial system.”
“Huge forces with gargantuan budgets and unprecedented media backing are slandering Israel throughout the economic world with bold lies and false scaremongering, doing everything they can to create panic and negative economic sentiment,” Smotrich claimed. “So far it seems their influence on the economy is minuscule.”
Yisrael Beytenu party chair Avigdor Liberman, who was finance minister in the previous government, called on Smotrich to step down over his acknowledgement that economic figures were worse than predicted.
“This is a result when you ignore and belittle officials in the [finance] profession. It is time for you to return the keys. Israeli citizens deserve responsible and professional behavior,” he tweeted.
Last month, the Bank of Israel said that the uncertainty around the advancement of the proposed judicial shakeup was already having an impact on the economy reflected in the increase in the country’s risk premium, depreciation of the shekel, the decline in equity prices, and increased volatility in the foreign exchange market.
For now, the Bank of Israel sees the economy growing at a rate of 3% in each of the years 2023 and 2024. As the main risk to the forecast, the central bank cited a scenario in which the advancement of the legal and institutional changes leads to an increase in Israel’s risk premium, continued devaluation of the shekel, damage to exports, and a decline in local investments and demand for private consumption. Should this risk materialize, the central bank estimates that the damage to Israel’s GDP in each of the coming three years will be between 0.8% and 2.8%.
Fitch Ratings’ sign, in New York, October 9, 2011. (Henny Ray Abrams/AP/File)
Global credit agencies have also warned of the potential damage of the overhaul.
Last month, Fitch Ratings affirmed Israel’s A+ credit rating with a stable outlook, as it did in March, but warned of fallout if the government further advances parts of its overhaul of the judiciary.
The rating came three weeks after rival agency Moody’s Investors Service warned about “negative consequences” and “significant risk” for Israel’s economy and security situation following the passage of the first bill of the government’s contested judicial overhaul.
In April, Moody’s lowered Israel’s credit outlook from “positive” to “stable,” citing a “deterioration of Israel’s governance” and upheaval over the government’s bid to dramatically overhaul the judiciary.
Other credit rating agencies, including Standard & Poor’s, have been warning in recent months about a deterioration in Israel’s governance, and the potential weakening of the judiciary and institutional strength. They have raised concerns over heightened domestic social and political tensions.
The main concern in the business and tech community is that the proposed judicial overhaul will erode democracy and weaken checks and balances, which will make venture capitalists and other money-makers leery of investing their money in the country, triggering an outflow of funds.
Sharon Wrobel contributed to this report.
