LONDON, July 25 (Reuters) – Morgan Stanley cut Israel’s sovereign credit to a “reluctance stance” on Tuesday after the country’s parliament passed the first in a series of laws sought by Prime Minister Benjamin Netanyahu to limit the power of the Supreme Court
“We see increased uncertainty about the economic outlook in the coming months and risk being skewed to our unfavorable scenario,” Morgan Stanley analysts said in a research note.
“Markets are now likely to extrapolate the future policy path and we move Israel’s sovereign credit to a ‘dislike’ stance.”
They added that recent developments pointed to “continued uncertainty” in Israel and that the shekel currency is weakening and borrowing costs will rise as investors attach a higher risk premium.
The crisis has caused a deep rift in Israeli society and sparked months of mass protests that have seen the shekel fall to a near 3-year low and the stock market (.TA125) lose nearly 10% since November.
“In our downside scenario, we think growth could weaken significantly to 1.6% (year-on-year) in 2024, with inflation remaining significantly above the Bank of Israel’s tolerance band.”
“At present, we maintain our call for a further 25 basis point hike to 5% at the BoI’s September meeting, but risks to the interest rate outlook are now shifting to the upside again.”
Reporting by Marc Jones and Steve Sheer in Jerusalem, additional reporting by Ari Rabinovitch; Editing by Amanda Cooper
Our standards: Thomson Reuters Trust Principles.