Moody’s issues warning about Israel’s judicial reform

A leading credit rating agency said Tuesday that Israel’s controversial judicial reform bill could hurt the country’s economy, debt rating and attractiveness for investment. 

Moody’s released a report on the Israeli government’s efforts to reform the country’s judiciary. Prime Minister Benjamin Netanyahu’s Cabinet is seeking to reduce the Supreme Court’s power to overturn legislation and apply stronger political control over judicial appointments. Much of the Israeli public is against the proposal, believing it will hurt Israeli democracy. The Israeli right has long held the court in contempt for blocking its plans, and Netanyahu believes the reform will help reflect the popular will. 

The legislation is still being debated in the Knesset. 

The reform could hurt Israel’s credit rating and ability to attract investment, according to Moody’s. 

“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,” said Moody’s in the report, which they sent to Al-Monitor. 

Moody’s said that it views Israel’s institutions as a “supportive factor” for its credit profile. However, the Cabinet’s efforts to introduce a judicial override clause “could materially alter judicial independence and effective checks and balances between the various branches of government,” they added, calling these checks and balances “important aspects of strong institutions.” 

Moody’s said it does not expect any economic fallout in the short term, but the company referenced Israeli media reports that some high-tech firms are considering leaving the country in opposition to the reform. 

“While those announcements are probably rather symbolic at this stage, there is a risk that new Israeli companies will choose to locate elsewhere rather than in Israel,” said Moody’s. 

Why it matters: Moody’s is just the latest international financial institution to warn about the judicial reform. Last week, Moody’s competitor Fitch warned about the potential impact of judicial reforms on the Israeli economy. Wall Street bank JPMorgan and British bank HSBC issued similar warnings last month. 

However, Fitch affirmed Israel’s “A+ stable” credit rating in its assessment, pointing to the country’s strong GDP figures in 2022 and declining debt. 

The Moody’s report constitutes somewhat of a change for the company. In November of last year, Moody’s published a report saying a new Israeli government would be “unlikely to derail Israel's economic resilience and fiscal improvements.” Netanyahu returned to power in late December. 

Moody’s last assessed Israel’s credit rating in April of last year, giving the country an “A1” rating. This indicates a strong ability to meet its financial obligations. 

“We continue to believe that there is broad political consensus on the direction of economic and fiscal policies despite the fragmented political landscape. However, stronger fiscal and debt metrics may not be sufficient to offset weakening institutions if the content of the judicial reforms and the way they are passed point to such weakening,” said Moody’s in the Tuesday report. 

Moody’s also warned about the renewed violence between Israelis and Palestinians in the West Bank, saying the “positive impact” from the Abraham Accords could end up “more limited than expected” due the situation. Moody’s specifically noted the possibility that the United Arab Emirates and Bahrain may “become less inclined to advance relations” with Israel in response to the violence, and that Saudi Arabia may grow more reluctant to establish formal relations. 

At the same time, Moody’s said the Israeli economy has shown “strong resilience to external and internal security threats” in the past. 

Know more: Israel’s powerful high-tech sector experienced financial difficulties last year along with its counterparts elsewhere. Israeli journalist David Rosenberg wrote for Al-Monitor PRO last month that the Israeli tech sector’s rebound is contingent upon what happens with the judicial reform.