Moody’s cuts Israel’s outlook from ‘positive’ to ‘stable’

Credit ratings giant Moody’s has downgraded the outlook on Israel from “positive” to “stable.”

It’s another setback for Israel’s economy since massive protests broke out across the country last month, due to proposed changes in the judicial system that are widely unpopular among citizens.

For now, Moody’s left the overall A1 rating in place for Israel, allowing it to stay in the upper end of the investment-grade category. 

But as a rating slips, a country faces the danger of having to pay higher rates to potential borrowers. Ratings drops also prevent some funds from investing in a nation’s sovereign bonds. What’s more, outside investment from the U.S. and Europe is crucial to the health of Israel’s economy. 

In a note issued late Friday afternoon, Moody’s wrote: “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 Tel Aviv Stock Exchange is down 14% in the past month, and year to date the index has lost a quarter of its value as investors concerned about the possible changes to the legal system dumped Israeli equities.

The government suspended imminent plans to make changes to the legal system in late March amid widespread protests and unprecedented steps by members of Israeli army reservists who refused to report for duty. The changes, which are still expected to move forward in some form, would give sitting governments full control over judicial appointments and greatly weaken the country’s supreme court.

In recent polls more than 65% of respondents have said they’re against the changes.

Many prominent economists and business leaders in Israel have warned these steps will greatly harm the economy, including the head of the Bank of Israel and the chief economist of Israel’s Finance Ministry, Shira Greenberg, who predicted last month that “credit agencies are likely to react” to changes in Israel’s judiciary. 

The fear pervasive among investors is that the new laws would make investment in Israel more uncertain.

In affirming the country’s overall A1 rating, Moody’s said it “reflects Israel’s strong economic growth” which the agency expects to continue. The note adds the Israeli “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.”

Due to the Sabbath in Israel, officials were not available to comment Friday night on Moody’s outlook change.