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A leading US credit rating agency downgraded the outlook for Israel’s credit rating on Friday. The move reflects continued concerns about Israel’s trajectory amid the controversy over the government’s judicial reform plans.
Moody’s investor service updated Israel’s credit outlook from "positive" to "stable." The agency did not lower Israel’s credit rating, which currently stands at A1.
The New York-based agency said the decision was driven by a “deterioration of Israel’s governance” related to the judicial reform.
“The change of outlook to stable from positive reflects a deterioration of Israel's governance, as illustrated by the recent events around the government's proposal for overhauling the country's judiciary,” noted Moody’s in a statement. “While mass protests have led the government to pause the legislation and seek dialogue with the opposition, the manner in which the government has attempted to implement a wide-ranging reform without seeking broad consensus points to a weakening of institutional strength and policy predictability.” Moody’s added that the “positive economic and fiscal trends” it identified in previous assessments will remain if a solution on the reform is reached.
Israel’s shekel has weakened in recent days, trading on Wednesday at 3.68 to the dollar and 4.02 to the euro. It was the first time in two years that it passed four shekels to the euro.
Moody’s move comes despite Prime Minister Benjamin Netanyahu and President Isaac Herzog's Thursday meeting at the agency. Herzog said that the Finance Ministry had asked him to contact Moody’s out of concern that Israel's credit rating would be lowered as a result of the public protests against the government's judicial overhaul plan.
On March 7, three weeks before Netanyahu suspended the judicial overhaul legislation process, Moody’s warned Israel, “If implemented in full, the proposed changes could materially weaken the strength of the judiciary 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.” The agency’s March 7 report read that the government’s judicial overhaul “could materially alter judicial independence and effective checks and balances between the various branches of government,” calling them “important aspects of strong institutions.”
A report published on March 6 by the British bank HSBC estimated that the judicial reform could negatively affect foreign investments in Israel’s economy. The report noted that the strength of Israel’s economy is highly dependent on foreign investments as close to 12% of Israel’s external debt, some $18 billion, is in foreign hands.
