Israeli Leaders Rebuff Moody’s Warning of Economic Slump Due to Judicial Overhaul

An aerial view shows protesters as they take part in a demonstration against Israeli prime minister Benjamin Netanyahu and his nationalist coalition government's judicial overhaul, in Tel Aviv, Israel, on July 8, 2023. (Oren Alon/Reuters)

The Israeli government issued a response to Moody’s Special Report on Israel, following the passage of the governing coalition’s bill on the nation’s judicial overhaul.

Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich issued a joint press statement immediately in response to Moody’s July 25 report.

The government bill will give legislators the right to select and confirm judges and limit the right of Israel’s Supreme Court to strike down any passed legislation.

On April 15, Moody’s Investors Service, the credit ratings agency, downgraded Israel’s credit outlook from “positive” to “stable,” citing concerns about the legislation’s impact on the independence of the judiciary.

Moody’s affirmed Israel’s sovereign credit rating at “A1” while downgrading its outlook, after implying that the country’s institutions were less predictable given the recent events.

“The wide-ranging nature of the originally proposed changes and the speed with which the government attempted to push them through ... without an attempt to achieve broad consensus point to a weakening of institutions,” the agency said at the time.

“Israel’s economy is stable and solid and with God’s help will remain so,” said Netanyahu and Smotrich, back in April.

Both downplayed Moody’s earlier warning, calling the assessment “natural for those unfamiliar with the strength of Israeli society.”

Netanyahu Coalition Facing Pressure From Credit Agencies

Still, Mr. Netanyahu is facing severe pressure at home and abroad over the judicial overhaul.

Global credit rating agencies, such as Moody’s and Standard & Poor’s, have until recently held off rating downgrades, as Mr. Netanyahu’s cabinet has promised that it would make every effort to reach a broad agreement or a consensus with the left-wing opposition and would not advance any new unilateral legislation on the judicial overhaul for now.

Moody’s warned about “significant risk” of heightened political and social tensions in Israel following the passage of the contested judicial overhaul, which has divided the country between supporters of Netanyahu’s government and supporters of the left opposition.

Tens of thousands supporting the opposition protested in Tel Aviv and other cities on July 24 after passage of the reform bill by waving flags, blocking roads, and setting fires.

The Israeli Medical Association, which represents 97 percent of the country’s doctors, announced today that it would call a strike today in protest, while thousands of Israeli military reservists threatened to not serve or volunteer.

Masses of protesters gathered outside the Knesset, the Israeli parliament, while opposition lawmakers inside called the changes an attack on the rule of law, the rights of citizens, and to democracy itself, reported The New York Times.

The protestors claim that the law will weaken the courts and endanger civil liberties.

Mr. Netanyahu’s coalition members argued that an unaccountable judiciary was the real threat to democracy and that they planned on further moves to curb its power.

The left-leaning Supreme Court was formerly able to overturn bills passed by elected officials because the country’s unique constitution allowed the justices, who select their own membership and not by the legislators, rule that any laws they tend to oppose as not being “reasonable.”

Tel Aviv Refutes Moody’s Credit Rating Assessment

The credit rating agency said that the unrest is likely to carry “negative consequences for Israel’s economy and security situation.”

Israel’s central bank and senior finance ministry officials have warned earlier this year that the new law might impact investor sentiment and hurt the economy.

“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,” noted Moody’s.

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

Moody’s further warned that some of its earlier concerns this year regarding the proposed reforms’ impact on the nation’s economy are starting to be felt, which Mr. Netanyahu’s government refuted.

“This is a momentary response; when the dust clears, it will be clear that the Israeli economy is very strong,” said Mr. Netanyahu and Mr. Smotrich in the press statement.

“The security industries are bursting with orders. The gas industry is increasing exports to Europe, and seven companies are now competing for tenders to explore for gas in Israel at an investment worth billions.”

“Intel is planning its largest investment outside of the U.S. ever, and will invest $25 billion in Israel,” they added.

“NVIDIA is building a supercomputer in Israel, and we are moving forward in AI [artificial intelligence], cyber, and the manufacture of chips in Israel. Growth is increasing, and inflation has been blocked. Regulation is being lifted, and free market competition is increasing.”

“The Israeli economy is based on strong fundamentals and will continue to grow under experienced leadership that is enacting a responsible economic policy,” concluded the prime minister and finance minister.

Israeli Economic Growth Threatened by Unrest Over Judicial Reform

Moody’s announced it would keep Israel’s credit rating at a “stable” rating for the moment, citing a “deterioration of Israel’s governance” and the ongoing upheaval in the streets.

Shares of Israeli firms continued to plummet today as the shekel fell for a second day in a row amid concerns that international rating agencies were likely to hit 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 warned.

“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.”

Meanwhile, Israel’s economy grew a faster than expected, at 6.4 percent, in 2022, but growth is expected to fall below 3 percent this year amid aggressive central bank interest rate hikes aimed at curbing high inflation.

“The Israeli economy has grown at a rapid rate over the past several years, averaging 4.1 percent over the decade to 2022, helped to an important extent by the globally competitive and increasingly diversified high-tech industries,” said Moody’s.

Israel’s booming tech sector has been its main engine of economic growth for the past decade, accounting for 49 percent of total exports and generating around 15 percent of GDP in 2022.

A further downgrade to Israel’s credit rating may endanger future investment in that critical sector.

Reuters contributed to this report.