Moody's Investor Service warned Tuesday that the new Israeli government's judicial reform could weaken institutions and negatively impact the country's sovereign credit profile.
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The company said in a statement that it did not downgrade Israel's A1 positive credit rating and did not walk back the positive outlook it assigned in April 2022 which was driven by solid government finances.
It warned, however, that "there could arguably be downward pressure on those scores" if the government fully passed the legislation.
Moody's credited the "credit-positive structural reforms" the previous Israeli government implemented for achieving its A1 rating and said it had expected the new leadership to maintain those policies.
"We continue to believe that there is broad political consensus on the direction of economic and fiscal policies despite the fragmented political landscape," the statement said. "However, stronger fiscal and debt metrics may not be sufficient to offset weakening institutions if the content of the judicial reforms and the way they are passed point to such weakening."
"The planned changes could also pose longer-term risks for Israel's economic prospects, particularly capital inflows into the important high-tech sector," it said.
The judicial reform has been a source of contention ever since it was first introduced by Justice Minister Yair Levin in January 2022.
Critics say Prime Minister Benjamin Netanyahu is seeking to undermine the courts due to his own criminal trials, but proponents say the legislation is meant to curb the power of what they deem an activist predominantly left-wing judiciary that interferes in politics.
The plan has led to weekly mass protests across Israel for over two months and warnings from leaders in the private sector.
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