Morgan Stanley downgraded Israel’s sovereign credit to a “dislike stance” on Tuesday, after the country’s parliament passed the first of a series of reforms sought by Prime Minister Benjamin Netanyahu to limit the Supreme Court’s power.
“We see increased uncertainty about the economic outlook in the coming months, and risks becoming skewed to our adverse scenario,” Morgan Stanley analysts wrote in a research note.
“Markets are now likely to extrapolate the future policy path, and we move Israel sovereign credit to a ‘dislike stance’.”
They went on to say that recent developments indicated “continued uncertainty” in Israel, with the shekel currency weakening and borrowing prices rising as investors attach a bigger risk premium.
The crisis has created a deep schism in Israeli society and triggered months of large protests, causing the shekel to tumble to a near 3-year low and the stock market (.TA125) to drop about 10% since November.
“In our worst-case scenario, we expect growth to slow to 1.6% (year on year) in 2024, with inflation remaining significantly above the Bank of Israel’s tolerance band.”
“For the time being, we maintain our call for another 25 basis point hike to 5% at the BoI’s September meeting, but risks to the rates outlook have shifted to the upside.”
Marc Jones and Steve Sheer in Jerusalem contributed reporting, and Ari Rabinovitch contributed editing.
