JP Morgan, the largest US investment bank warned on Thursday in a new review of the Israeli economy that the country's strong economic standing could be adversely affected if the proposed judicial reforms become a reality, noting that the internal divisions that this process has sparked could ultimately affect the overall character of Israel's democratic systems.
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In its report, called "Israel Strategy: Domestic volatility flares up", it said that "the volatility across Israeli local assets has notably increased recently, as renewed geopolitical tensions were added to investor concerns over the government's potential judicial reforms," adding that "generally, these reforms have been interpreted as tweaking checks and balances in the system, as well as increasing divisions."
It cautioned, however, that "the scale of economic/market impact is difficult to judge at this stage, but it can be a medium-term negative," also warning that "one potential implication could be downside risk to Israel's credit rating."
The report noted that the internal strife over the reforms could impact the country's sovereign credit ratings, but said this was likely to have a "limited impact" on the market.
"Israel's local markets have seen a flare-up in idiosyncratic risk as increased geopolitical tensions were added to investor concerns over plans for judicial reforms," the report read. "The judicial reform has raised concerns regarding institutional strength and the investment climate in the country… Any material deterioration in the institutional strength can have an impact on investment flows, however, the scale and timing of such is difficult to judge."
The statement comes just weeks after one of the world's leading credit-rating agencies said that despite the economic indicators and fundamentals being strong, the ongoing political clash in Israel over the reforms "is liable to increase the risk of a reduction of Israel's credit rating," citing the impact on the democratic system.
