Bank of Israel Warns of Medium-Term Economic Risk Due to the Legal Reform Legislation

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by Ifi Reporter Category:Banking Aug 2, 2023

In its semi-annual financial stability report, the Bank of Israel has issued a warning regarding potential adverse effects on Israel's economy in the medium term. The report highlights two main factors impacting the country's financial system: the continuous tightening of monetary policy through interest rate hikes, and a slowdown in global economic growth alongside difficulties in the global banking system.

Rising Macroeconomic Risk Level

The Bank of Israel has raised concerns about the increasing level of macroeconomic risk in the country. The combination of uncertainty surrounding the consequences of legal reform legislation, the possibility of continued interest rate increases, and a global growth slowdown has led to the risk level escalating from medium-low to medium-high.

Stability of the Financial System

Despite the rising risks, the Bank of Israel economists noted that the local financial system remains stable. They credited the strength and stability of the banking system and insurance companies, as well as the proper functioning of financial infrastructures such as payment and clearing systems.

Security Cushions and Resistance to Shocks

The report highlighted the positive impact of security cushions accumulated by households and corporations, partly due to budgetary incentives and monetary easing during the Covid-19 pandemic. These cushions have increased their resistance to potential shocks in the economy.

Effects of Monetary Tightening and Moderation of Growth

The monetary tightening necessitated by ongoing inflation and moderation of economic growth has led to increased risk indices and pricing in the real estate and financial markets. The burden of debt on households and businesses has also increased, with the construction and real estate industry showing elevated risk.

Impact of Legislative Changes on Business Sentiment

The uncertainty surrounding legislative changes in the legal system has had a significant effect on the business sector and financial markets. The accelerated development of negative sentiment in these markets was observed in response to the progress in the legislation.

Medium-Term Risks

The report highlights potential medium-term risks, including deteriorating business sentiment and culture, damage to investor confidence and the economy's attractiveness, decreased foreign investment, increased regulation, higher debt costs, decreased capital availability and inefficiency in its allocation, and possible damage to financial system stability.

Warnings from Credit Rating Companies

Major credit rating companies have also expressed concerns over the legislation's impact on the functioning and independence of institutions, increased uncertainty, and reduced transparency. Moody's rating forecast was downgraded from "positive" to "stable."

The Bank of Israel emphasizes that these risks are not inevitable outcomes but warns that they could manifest if uncertainties intensify both domestically and globally.

As the situation evolves, investors and policymakers will closely monitor these risks to mitigate potential adverse impacts on Israel's economy and financial system.

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