Moody’s, an international credit rating agency, has maintained Israel’s credit rating at A1 but has downgraded its credit outlook from positive to stable. This is the first time since the Covid pandemic that Israel’s credit outlook has been lowered, and it comes exactly one year after Moody’s praised Israel’s economy and raised the credit outlook from stable to positive.

Moody’s attributed the alteration in outlook to Israeli government’s push for judicial reform. According to the international credit agency, the change in outlook from positive to stable reflects a deterioration in Israel’s governance, as evidenced by recent events surrounding the proposed overhaul of the country’s judiciary. As a result of massive protests, the government has halted legislation and is in dialogue with the opposition. However, the manner in which the government attempted to implement significant reforms without seeking broad consensus demonstrates a decline in institutional strength and policy predictability.

The head of the Bank of Israel and the chief economist of Israel’s Finance Ministry, Shira Greenberg, who raised concerns last month that “credit agencies are likely to react” to changes in Israel’s judiciary, are among the many prominent economists and business leaders in Israel who have warned that these steps will severely damage the economy.

Moody’s remains concerned that the government is determined alter the selection process for judges, which increases the risk of additional political and social tensions within the country. Moody’s had previously identified positive economic and fiscal trends, which will continue if a solution is found to the current political impasse.

Recent events have negated the positive developments that prompted Moody’s to assign a positive outlook in April 2022, based on robust economic and fiscal performance and the implementation of structural reforms by the previous government.

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