The policies and reforms proposed by Israel’s new government have already stirred up controversy inside the country. Gradually, they are also eliciting a response from abroad, and they could have extensive financial implications for Israel.
In the immediate aftermath of the election, when it was already clear Israel was heading to a far-right government, voices of concern rose from within Israel’s business community.
Letters from leading hi-tech entrepreneurs addressed to Prime Minister Binyamin Netanyahu raised those worries.
The entrepreneurs claim that foreign investments in Israel, especially in the hi-tech sector, are not only a vote of confidence in the booming start-up sector in the country, but also testament to assurance of the strength of its democracy.
The current government has vowed a series of widespread reforms in the justice system, reforms that opponents say will weaken its democracy. In addition, some senior members of the government have a past that includes racist and anti-LGBTQ remarks and actions.
“Do not help in damaging Israel’s standing in the world,” read one of the letters signed by 100 entrepreneurs. “We demand you stop this snowball effect, stabilize the ship and maintain the status quo between all parts of society.”
The year 2022 saw a major decline in investments in Israeli hi-tech. According to Start-Up Nation Central, an organization that monitors the tech sector in Israel, this can largely be attributed to the global slowdown.
But as 2023 begins, Israel’s political turmoil could further promote that trend.
“Investments will not be all pulled out in one day, but gradually,” said Professor Esteban Klor of the Economics Department at the Hebrew University of Jerusalem and a senior researcher at the Institute for National Security Studies at Tel Aviv University. “If the message coming out of Israel is that it is not a friendly place for the business sector, people will take their money elsewhere.”
This could lead to a slowdown in growth, a drop in quality of life and higher unemployment for Israelis.
Tens of thousands of Israelis took to the streets over the weekend to protest the government’s plans. Continued demonstrations could further rattle the confidence of potential investors.
“Investments like stability,” said Noga Levtzion Nadan, managing partner in Value^2 – The Responsible Investment House and founder and CEO of Greeneye ESG Research Company. “The greatest fear is that even the feeling of instability, or lack of continuance, will raise more concern. It does not mean there will be no investments at all, but there might be a reduction or more risk elements added to investments.”
Israel’s economy relies heavily on its hi-tech sector in foreign investment. According to the Central Bureau of Statistics, approximately half of foreign capital entering Israel is funneled to tech firms.
“Statements by politicians and intentions of changing the rules of the game, even if these are just statements, at this point have a significant meaning,” said Levtzion Nadan, who is an expert on ESG (environmental, social and governance factors) investments. “There is real concern about the voices being heard from the government, even from its junior members.”
Increasingly dominant in global business deals are ESG investments that take into account environmental, social and governance factors. These are investments that consider their impact and how socially responsible they are. The increasing adoption of ESG values by investment firms, especially in Europe, could put Israel in a difficult position.
“ESG investments look at how a country is run,” Levtzion Nadan said. In her experience, Israeli firms have had increased difficulty raising money from European firms in recent years. “These developments are just going to make things harder,” she added.
The international environment in which many countries have imposed sanctions on Russia due to its war on Ukraine could also make it easier for businesses and countries to adopt measures against Israel. While not necessarily sanctions, a drop in investments will definitely hurt.
“Big firms and countries could be under pressure by investors not to support countries in which there are policies they do not approve of,” said Klor. “While the government will be judged by its actions and not its words, the words we are hearing are not coming out of nowhere.”
Changes to the legal system could hamper business deals due to basic contract clauses. Companies could be concerned about how much legal coverage they have or need in the case of business disputes arising from the changes. The protection of proprietary and intellectual rights is critical to the confidence investors have. A weakened judicial system could leave investors with more doubts about the assurances their contracts provide.
“Israel is looking like it is heading to regime change,” said Levtzion Nadan, who acknowledges that investments are made in non-democratic countries all the time. “Investments in Israel are based on it being a democracy with democratic values. Investors need to feel comfortable.”
Just recently, a senior official from the international credit rating company S&P warned that reforms that weaken state institutions pose a risk to Israel’s currently high rating. This also contributes to the feeling that Israel is treading turbulent waters.
“Throughout history it has been proved that economies of democracies grow faster and longer than dictatorships,” said Klor. “To move in the wrong direction also harms business in the end.”
“The upcoming legislation to dismantle the judicial system in Israel will have severe and irreversible implications on the country’s position as a business hub,” wrote Barak Eilam, CEO of NICE, on his Facebook page.
Israeli entrepreneurs are used to volatility. Every time there is a military escalation, they are contacted by investors looking for reassurances and explanations.
“In those cases, we know how to explain things,” said Levtzion Nadan. “Regime change is a different ballgame.”
Members of the current government also have spoken openly about the annexation of land in the West Bank. These territories are in dispute: the Palestinians see them as part of their future state and the current Israeli government has vowed to further solidify Israel’s presence in them.
“Right now, there are very few investment funds who categorically do not invest in Israel because of its presence in the West Bank,” said Levtzion Nadan. “If this will become blunter, Israel will be seen as problematic.”
The international community does not recognize Israel’s hold on the West Bank and Jewish settlements there are considered illegal according to international law.
In addition, the intricate coalition agreements involve a rotation between finance ministers halfway through the government’s term, after Netanyahu was forced to cave in to the demands of his coalition partners.
“If the economic policy will not be consistent, this does not contribute to calming things down,” said Klor.
The government is expected to pass a budget in March, though its direction is unclear. If there is a decision to increase expenditures on subsidies in response to coalition demands or as a measure to combat price hikes, this could be a further deterrent for investors. With inflation raging around the globe, coupled with its own political commotion, Israel’s starting point is not advantageous.
“Israel is in a dangerous position,” said Klor. “We are expecting a difficult financial year in the world and we haven’t heard yet from this government on how it is preparing for all of this.”
The story is written by Keren Setton and reprinted with permission from The Media Line