Moody’s: Overhaul raises ‘significant risk’ of economic and security harm, constitutional crisis

Credit rating agency Moody’s Investors Service warns about “significant risk” of heightened political and social tensions in Israel following the passage of the first law of the government’s contested judicial overhaul, which are likely to carry “negative consequences for Israel’s economy and security situation.”

“Attempts to reach a compromise with the opposition have failed… the bill’s approval comes amid widespread protests by civil society groups that have been ongoing since January and which we expect will continue,” Moody’s notes in a new report.

“Petitions against the bill have been lodged with the Supreme Court, raising the risk of a constitutional crisis between the executive and judiciary,” it adds.

Moody’s also warns that some of its earlier concerns regarding the proposed reforms’ impact on Israel’s economy are starting to materialize.

For now, the credit rating agency keeps Israel’s credit outlook at “stable” after cutting it from “positive” in April, citing a “deterioration of Israel’s governance” and upheaval over the government’s bid to dramatically overhaul the judiciary.

Global credit rating agencies, including Moody’s and Standard & Poor’s have until now held off rating downgrades as the Israeli government led by Prime Minister Netanyahu has expressed that it would make every effort to reach a broad agreement or some form of consensus with the opposition and will not advance unilateral legislation on the judicial overhaul.

Israeli shares continued to take a dive today and the shekel weakened for a second day amid market concern that international rating agencies are likely to change the country’s credit outlook.

“Venture capital investments in Israeli high-tech firms have declined materially, with the sector raising $3.7 billion in the first six months of the year, the lowest figure since 2019,” Moody’s cautions. “While the slowdown reflects global trends in the sector triggered by tighter financing conditions and a degree of normalization after the pandemic, there are also signs that Israel is decoupling from global trends.”