In its recent quarterly report on Israel, S&P Global, the New York-based credit rating agency, has affirmed the country’s credit rating at AA- with a “stable” outlook. This rating reflects Israel’s strong economic fundamentals, including a diverse and prosperous economy, flexible monetary settings, and a robust high-tech sector.

However, S&P also pointed out some potential risks to Israel’s economy, particularly “persistent domestic and regional political and security risks.” These risks include the ongoing conflict with terror groups based in Gaza and the proposed judicial reform by the current government.

S&P believes that the judicial reform, if implemented, could be detrimental to the economy and exacerbate the polarization of domestic politics. The credit rating agency stated that the prolonged uncertainty over Israel’s judicial reform poses a “significant downside risk” to the country’s economic growth.

Despite these potential risks, S&P is optimistic about Israel’s economic growth in the long run. If the government reaches an agreement with opposition parties that represents a broader consensus, S&P sees Israel’s economic growth recovering to an annual average of 3.5% from 2024, supported by strong performance in the high-tech sector.

However, in the short term, S&P anticipates that Israel’s economic growth will decelerate to 1.5% in 2023 from 6.5% in 2022. This slowdown is due to tighter monetary policy, global inflation, and weaker economic performance among Israel’s key trading partners in Europe and the United States.

S&P’s report underscores the importance of political stability and the rule of law in promoting economic growth. The proposed judicial reform has sparked protests in Israel, with many people concerned about its potential impact on the country’s democratic institutions. S&P’s warning about the potential downside risk to Israel’s economy from prolonged uncertainty over the judicial reform should serve as a wake-up call to the government and other stakeholders to find a solution that balances economic growth and democratic principles.

Main image: S&P Global considered to be one of the world’s largest credit rating agencies. Brendan McDermid/Reuters