Thriving in spite of rising conservative pressures, Israeli cinema is back at Locarno festival with Israeli and Palestinian projects, a year after facing widespread threats of a cultural boycott, proving that it still boasts a liberal industry.

At Locarno, Israel is being showcased at the Match Me forum, along with Brazilian and Chilean producers. It’s not surprising that one of the three producers chosen by Locarno to represent Israel is a Palestinian one: Baher Agbariya, the producer of Maha Haj’s “Personal Affairs” which opened at Cannes’ Un Certain Regard. Whereas its TV landscape is vastly dominated by Israelis, its film industry owes its international profile and recognition in festivals to both Israeli and Palestinian filmmakers.

But amid the current turmoil shaking up the Arab world and tensions with Israel’s right-wing government, the relationship of Palestinian producers and directors with Israel is being put to test.

“(Politically-speaking), we’ve been in a deadlock for a long time with Palestinians, and that’s reflected in our relationship with filmmakers: There are ups and down,” said Katriel Schory, the executive director of the Israel Film Fund, adding that Jerusalem film fest had even collaborated with Ramallah festival back in 2010 — an initiative that is not concevable today.

Indeed, the Israeli film industry is currently at a crossroads, creating a volatile climate. The minister of culture and sports, Miri Regev, an outspoken right-wing conservative, has threatened to cut funding for films that are being critical of the state of Israel. Meanwhile, the national budget allocated to culture, including film, is being renegotiated next year for 2018-2022 which raises the stakes of current debates. The film sector is currently financed with an 18 million Euro envelope.

“So far there has only been talks, no actions,” said Schory at Jerusalem film festival in July. The exec, who’s been heading the Israel Film Fund for 17 years, pointed the budget for culture could get cut by 10% to 15% at most.

But the biggest blow carried by Regev was her decision to impose Palestinian movies that are supported by Israel to be credited as Israeli rather than Israeli-Palestinan pics. That policy was enacted following the scandal caused by Suha Arraf, a Palestinian director who refused to list her film “Villa Touma” – which was selected at Venice — as Israeli even though it had been partly financed by Israel.

Agbariya said the new rule was “unfair” to Palestinian directors, not only ethically-speaking but also because it makes it more difficult to have their movies travel in the Arab world. Apart from a few exceptions, like “Personal Affairs” (a Nazareth-set dramedy centering on a dysfunctional extended family) which was selected at Beirut Film Festival, movies that are partly financed by Israel are blacklisted in most of the Arab markets.

Yet, the support of the Israeli funds is a driving force behind the new generation of Palestinian filmmakers, Agbariya admitted. “For the new generation, their only choice is to be supported by Israeli funds: The Arab world gives no money to young, unknown directors; they give money to big names, and they prefer not to help directors who have the Israeli citizenship,” added Agbariya, who runs Majdan Films.

But the question is: Will Israel continue supporting Palestinian directors the same way in spite of political pressures?

While the Israel Film Fund and the Rabinovich Foundation are NGO’s, they are financed by the government and Regev seeks to exert greater control over their editorial policies.

Even without an effective change in policy, Agbariya says he fears film funds increasingly have Regev’s threats in mind when selecting projects.

“Negev is succeeding: When funds read the scripts they think about her and they are being more and more cautious about financing radical films,” said Agbariya, who nevertheless noted that Schory was one of the last standing gatekeepers of the industry who fights for the freedom of every filmmakers.

But even Schory acknowledges the looming threat. “we may see more and more self-censorship. And what’s dangerous is that it’s very difficult to detect,” said Schory.

Meanwhile, it may not be a coincidence that Israeli funds are also encouraging filmmakers to tackle lighter stories and crowd-pleasing comedies that can click with local audiences, and not solely work at film festivals around the world. Israeli moviegoers are rarely fond of movies dealing with the conflict.

In spite of the turmoil, Locarno, like Cannes, Toronto, Berlin, Karlovy Vary and many other international festivals, are still celebrating Israeli films.

“I think people are understanding that what happens in the Israeli film world is different from what’s going on elsewhere,” said Markus Duffner, project manager for Locarno’s First Look and Match Me showcases, about the absence of controversy over Israel’ presence at the festival, compared with last year’s boycott calls.

“As long as Israel will continue financing films that are satirical, entertaining, critical and engaging – regardless of their genre — we will be rooting for them at Locarno,” added Duffner.

At Locarno, Agbariya is pitching Haj’s follow up to “Personal Affairs” and Tawfik Abu Wael’s “Wise Hassan,” a drama about a man with big dreams who is tasked to kill a collaborator who lives in Tel Aviv and finds out his target is a transgender female who makes a living as a prostitute.

The other two producers – shortlisted by Israel Film Fund and Locarno’s Match Me initiative — are Adar Shafran from Firma Films who is pitching Roi Werner’s romantic comedy “Ger-Mania” and Keren Michael at Dori Media Paran who is presenting Eran Kolirin’s dramedy “Let it be Morning,” Amikam Kovner and Assaf Snir’s suspense drama “Echoes,” among other projects.