Credit rating agency Standard & Poor’s (S&P) has warned that the new Israeli government’s plans for radical judicial reform as well as its hardline policies in the West Bank could negatively affect the country’s rating.
The agency’s Director of Global Ratings Maxim Rybnikov told Reuters: “If the announced judicial system changes set a trend for weakening Israel’s institutional arrangements and existing checks and balances this could in the future present downside risks to the ratings.”
However, he added, “we are not there yet.”
Rybnikov also said that “the primary concern for us would be the… security situation which could be undermined in a scenario of more hardline policies.”
“Hardline rhetoric that undermines the fragile situation in the West Bank could generate risks,” he noted.
“If we see more protests, this is not going to be good news also for the economy.”
The hard-right government led by restored Prime Minister Benjamin Netanyahu has vowed to enact a sweeping judicial overhaul that would severely limit court oversight of the government and give the coalition broad control over judicial appointments.
On Thursday, Supreme Court President Esther Hayut denounced the plan as one that would deal a “fatal blow” to the country’s democratic identity, give the Knesset a “blank check” to pass any legislation it pleases — even in violation of basic civil rights — and deny the courts the tools needed to serve as a check on executive power.
Earlier this week, Rybnikov told the Calcalist newspaper that “If, contrary to the previous situation, the institutional system in Israel enters a consistent path of weakening, including damage to the system of checks and balances, and political power is concentrated too much in the hands of one person or one group, the public debate will also be damaged and it will lead to fiscal policy being less responsible — not just for one year, but become a feature of policymaking. All of these things could become a real rating risk.”
S&P warns Israel: "Weakening state institutions is a ratings risk."
Maxim Rybnikov, the chief analyst responsible for Israel's rating at S&P, predicts that the slowdown in the world's main economies will also affect Israel, resulting in growth of only 2%.https://t.co/jCluRDjSjC
— CTech (@Calcalistech) January 9, 2023
For this reason, he said, “We’re closely following developments around the Supreme Court and the potential implications of these changes. This is not good news for that institutional system that certain laws are changed in such a way to suit specific people in certain positions.”
In the West Bank, the new government has adopted a position in favor of annexing the territory or parts of it — though this is seen as a largely declarative policy for now — while appointing the far-right’s Itamar Ben Gvir and Bezalel Smotrich to key positions in charge of enforcement mechanisms in the territory.
In November, S&P had announced it was keeping Israel’s favorable rating unchanged at AA- with a “stable” outlook.
The agency assessed that Israel’s economy grew by a strong six percent in 2022, but that global economic trends would hamper growth in 2023, and Israel’s GDP will grow by an estimated 2% this year.
Israel, along with much of the rest of the world, continues to grapple with inflation. The bank has hiked benchmark interest rates as inflation in Israel has spiked.
In its analysis, S&P praised Israel’s “wealthy and resilient economy” as a rationale for its favorable credit rating, but said such assessments “remain constrained by significant domestic and regional political and security risks.”
Israel’s economy has proved resilient in the face of uncertainty and instability in recent years. The economy, driven by high value-added IT-related service exports, registered only a mild contraction of 1.9% in real terms in 2020 at the onset of the COVID-19 pandemic, and then grew by a strong 8.6% in 2021, S&P said.
While economic growth will stagnate in 2023, S&P expects a rebound in 2024 and 2025.
Domestically, S&P said it expects household budgets to “suffer from higher inflation, the tightening of Israel’s monetary policy, and the effect of rapid house price growth on housing affordability.”
Housing prices are up 19% from 2021 and the Consumer Price Index — a measure of inflation that tracks the average cost of household goods like food, clothing, and transportation — has been steadily increasing.
“We expect the government may be under pressure to adopt additional spending measures that would soften the effect on living standards in the coming months,” the agency said.
Ricky Ben-David contributed to this report.