Analysis-Amid Israel turmoil, markets want continuity at central bank helm
8:32 am Thursday, September 21st, 2023
By Steven Scheer
JERUSALEM (Reuters) – Financial markets are hoping Prime Minister Benjamin Netanyahu keeps Bank of Israel Governor Amir Yaron for a second term to safeguard the bank’s independence and provide reassuring stability to an economy rattled by political turmoil this year.
Yaron has not shied away from criticism of the divisive judicial overhaul plan pushed by Netanyahu’s national-religious coalition that has weighed on Israeli shares and sent the shekel to a three-year low against the dollar.
Unease over the reforms, which have sparked one of the biggest waves of protest in Israel’s history, have had significant economic costs, he said.
Yaron’s five-year term ends at the end of 2023 and he has been tight-lipped on his plans, only saying he would announce a decision on whether to put himself forward for a second term after the Jewish holiday season ends on Oct. 7.
In 2018, when Netanyahu appointed Yaron, an Israeli professor at the Wharton School of the University of Pennsylvania who had lived in the United States for two decades, there was little fanfare and market reaction was muted.
“In the current circumstances, the stakes are much higher because there is already fear about curtailing the independence of the central bank,” Karnit Flug, who preceded Yaron as governor from 2013-2018, told Reuters.
“Therefore, markets and credit rating agencies are reading more into the question of ‘yes’ or ‘no’ to a second term. They look at what it means for the independence of the institution.”
Rating agencies Moody’s, S&P and Fitch have warned of damage to Israel’s institutional independence from the judicial reforms, which the government says is to stop overreach by unelected judges but which many see as a threat to Israel’s democratic values.
YES-MAN OR BACKBONE?
It is possible Yaron would not accept a second term even if asked, in which case the markets’ focus would switch to whether Netanyahu appoints a yes-man replacement or someone with backbone.
“Who will be governor is a major concern for investors abroad,” said Leader Capital Markets Chief Economist Jonathan Katz.
“The best scenario is another five years for Yaron,” he said, noting that Yaron represents an independent governor who doesn’t cave to political pressure and speaks his mind.
“Second best is another internationally recognised figure who is viewed as a monetary expert,” Katz said.
The option markets fear most, analysts say, would be if Netanyahu makes clear he did not want Yaron to serve a second term, and gives the post to a political ally.
“He does not have to say ‘I’m not giving a second term’ but he can say it in a way that everybody understands that he did not intend to reappoint (Yaron) and if he does that then this would be terrible,” said Nadine Baudot-Trajtenberg, an economist who served as Flug’s deputy governor.
Yaron has characterized his term as ‘challenging’. He has had to deal with the economic fallout of five election cycles, the Covid pandemic, the Ukraine-Russia conflict and a spike in inflation.
Jacob Frenkel, Bank of Israel chief in 1991-2000, hopes Netanyahu will succeed in convincing Yaron to stay on, noting his contribution to the stability of Israel’s economy and stellar international reputation.
“Israel cannot afford losing this important anchor of stability,” Frenkel said.
It is not clear if Netanyahu wishes to grant Yaron a second term, especially given Yaron’s criticism of the government’s plan to rein in the judiciary – an issue that has been investors’ top concern in 2023.
With the weaker shekel helping to push up inflation and interest rates, Yaron has caught flak from some senior members of Netanyahu’s coalition – including threats of legislation – over a jump in rates that has hurt mortgage and other loan holders.
It is possible Yaron no longer wants to put up with such political interference. When asked this month by Reuters what he wishes to see in a successor, Yaron said: “Whoever is the governor has to continue to be independent and to express the professional opinion in matters concerning the Israeli economy.”
Flug, who opted against a second term and now is vice president of research at the Israel Democracy Institute, said “a lot of what I am thinking now is really something that I had concerns about five years ago, towards the end of my term as a governor.”
A few years earlier in 2010, Stanley Fischer accepted a second term and helped Israel weather the global financial crisis. He stepped down mid-term and in 2014 became vice chairman of the U.S. Federal Reserve.
Bringing in someone of the status of Fischer was a huge coup for the then finance minister Netanyahu and since then he has preferred internationally known figures who are Jewish or Israeli to lead the central bank.
Israeli media have reported that Netanyahu is considering Efraim Benmelech – a professor of finance at Kellogg School of Management at Northwestern University. Benmelech told Reuters “there is nothing to report at this point” and has not received a formal offer. Netanyahu’s office declined to comment.
If Yaron leaves and no successor is in place by year end, a similar situation to 2018, then deputy governor Andrew Abir would be acting governor.
(Reporting by Steven Scheer; Additional reporting by Maayan Lubell; Editing by Christina Fincher)