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Morgan Stanley Predicts Strong Outlook for Israel in 2023

Morgan Stanley seed 2.5% growth.

Shekel NIS

Morgan Stanley, the powerhouse American investment bank, sees a strong 2023 for Israel, in a rebound after a weak 2022 caused mainly by the worldwide financial crisis and global inflation. The firm sees as much as %2.5 percent economic growth for the country, but there is a catch. Morgan Stanley tied this forecast to whatever the government of Prime Minister Benjamin Netanyahu chooses to do with his controversial judicial reform plans.

On that issue. In its report, Morgan Stanley stated, “Domestic instability related to the proposed changes in the judicial system affects the economy both in the short and medium term: The heightened uncertainty related to the judicial reform can be characterized as a risk premium shock.”

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The world has been saying basically the same thing ever since Netanyahu’s Justice Minister revealed the reform plan at the start of the year. The plan, which would effectively end judicial review of government acts and new laws in Israel, has been condemned by both Israel’s political opposition and many world leaders as an attack on Israel’s democratic nature.

In its report, Morgan Stanley echoed sentiments expressed by leading world credit ratings agencies like Moody’s and Standard and Poor’s.

Moody’s stated in a report released in March, “If implemented in full, the proposed changes could materially weaken the strength of the judiciary [in Israel] and as such be credit negative. The planned changes could also pose longer-term risks for Israel’s economic prospects, particularly capital inflows into the important high-tech sector.” And in April the firm downgraded Israel’s credit rating.

In May Standard and Poor’s reaffirmed Israel’s credit rating. But that came with a similar caveat about the judicial reform plan.

Morgan Stanley said it sees 2.5% GDP growth (the same as the Bank of Israel’s forecast), accelerating into 2024, and inflation returning within the target band by the second quarter of 2024. The firm also expects the Bank of Israel to end its tightening cycle with a 0.25% hike to 5% in July, though the risks to inflation and rates forecast are skewed to the upside.

“In the adverse scenario, with the tensions over judicial reform persisting for longer or even escalating, a higher risk premium and shekel depreciation would translate into higher inflation,” added Morgan Stanley, “averaging 5.1% in 2023, and forcing further tightening by the Bank of Israel to 6.25%. More broadly, we see lower economic confidence along with tighter monetary policy translating into lower investment and consumption and pushing economic growth to only 1% this year.”

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