Moody's cuts Israel's outlook on 'governance deterioration'

Rating agency highlights failure to seek consensus for proposed judicial reforms

People hold Israeli flags as they block a road during a demonstration against Israel's nationalist coalition government's judicial overhaul. Reuters

Moody’s Investors Service has revised Israel’s outlook to stable from positive amid mass protests in the country over judicial reforms but kept the overall A1 rating in place on strong economic growth and improving fiscal strength.

The A1 rating highlights the strong capacity of Israel to meet its financial commitments.

“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,” the ratings agency said on Saturday.

“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.”

Last month, Israel came to a standstill as more than 80,000 people took to the streets to protest against Prime Minister Benjamin Netanyahu's proposed changes to the judicial system that would give his government, or future governments in power, full control over judicial appointments and weaken the country's supreme court.

Mr Netanyahu suspended the judicial overhaul legislation process and it is expected to be considered in the future again by his government.

"While the deliberations about the exact form of the judicial reform continue, the government has reiterated its intention to change how judges are selected. This means that the risk of further political and social tensions within the country remains," Moody's said.

On the upside, "if a solution is reached without deepening these tensions, the positive economic and fiscal trends that Moody's had previously identified remain. All in all, the recent events offset the positive developments that had led Moody's to assign a positive outlook in April 2022, which related to strong economic and fiscal performance and the implementation of structural reforms by the previous government."

The affirmation of the A1 ratings reflects Israel's strong economic growth and improving fiscal strength, which is expected to continue, according to the ratings agency.

"The economy has proven resilient to many economic and geopolitical shocks over the past decades and has grown at a rapid clip, helped by Israel's globally competitive high-tech industries," Moody's said.

The government's fiscal metrics have also improved rapidly after the pandemic-induced temporary shock, with the public debt-to-GDP ratio declining by ten percentage points of GDP within two years to 60.7 per cent of GDP in 2022. Moody's expects a further decline towards 55 per cent by the end of next year.

Israel's economy is forecast to grow 2.9 per cent in 2023 after expanding by 6.4 per cent last year, according to the International Monetary Fund. The economy is projected to grow 3.1 per cent next year.