Morgan Stanley, the third-largest U.S. bank, warned Tuesday of the economic consequences of political instability related to judicial reform. Under the title A Test of Resilience, a detailed 39-page economic review was distributed today to the Bank's customers, devoted entirely to Israel.
"Domestic instability related to proposed changes in the legal system affects the economy in both the short and medium term," the US bank's economists wrote in a survey obtained by Israel Hayom.
Regarding the impact of the uncertainty surrounding the legal reform on the high-tech industry, it said: "The high-tech superpower of the Middle East is shaken by the political situation. Israel has become a fast-growing economy with strong foundations and has become the high-tech superpower of the Middle East. GDP growth is consistently high, inflation is low, there is a decline in the debt-to-GDP ratio, and a positive balance of net international investments."
Will the legal revolution harm the Israeli economy? Not sure, the stock exchange (illustrative), photo: AP
All of these have made Israel financially strong, the bank says. "However, domestic instability linked to changes in the justice system initiated by the government this year are weighing on the outlook," the bank's economists wrote. "The high uncertainty associated with legal reform can be characterized as a shock risk premium," they write.
Three different scenarios
Morgan Stanley economists then describe three different scenarios – the baseline scenario in which the disagreements over the legal reform are resolved in the coming months, the optimistic scenario, and the negative scenario in which uncertainty will remain for a long time.
"In our baseline scenario, assuming that the uncertainty is resolved in the coming months, we will see GDP growth of 2.5 percent per year, accelerated into 2024, and inflation returning to the Bank of Israel's target range by the second quarter of 2024. We expect the Bank of Israel to end its round of interest rate increases in July with an additional interest rate increase of 0.25 percentage points to 5 percent."
A branch of Morgan Stanley in New York, photo: Aye. Nose. P
It should be noted that Morgan Stanley's forecast differs from most forecasts in the interest rate market, which indicate that the Bank of Israel will leave the interest rate unchanged in July.
The pessimistic scenario of the US Bank, which is not the baseline scenario, describes an extreme situation in which the Bank of Israel interest rate will reach 6.25 percent. "In the negative scenario, when the tension surrounding the legal reform continues for a longer period of time or an escalation occurs, Israel's higher risk premium and the depreciation of the shekel will translate into higher inflation, averaging 5.1 percent in 2023, which will later lead to an increase in the Bank of Israel interest rate to 6.25 percent. Economic security will be lower, and together with the high interest rate, it will decrease the level of investment in the economy, lead to lower consumption and lower the level of growth to only 1% this year."
"Finally, we also take into account a scenario that assumes a rapid and complete reversal of the risk premium, reducing pressures on the shekel to 2022 levels," the economists say of the optimistic scenario.
Middle East Index Leader
Beyond that, the Bank's economists mention some interesting data regarding the Israeli economy. Thus, for example, Israel is ranked 20th in the World Forum's Global Competitiveness Report and 35th in the world in the Ease of Doing Business Index.
It was also noted that Israel's corruption perception index is 63 (on a scale from 0 – very corrupt to 100 – no corruption), and Israel is ranked 31st among the least corrupt countries in the world and leads in this index in the Middle East.
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