Moody’s Warns Israel’s Judicial Reform Could Risk Credit Rating Downgrade
Moody’s Investors Service issued a report on Israel’s economy highlighting its resilience amid geopolitical risks but warned that weakening the independence of the judiciary could lead to a credit rating downgrade. The warning came shortly before the Knesset passed legislation diminishing the authority of the government’s legal advisor, a law expected to take effect in January 2025.
Moody’s maintained Israel’s credit rating at Baa1 with a stable outlook, emphasizing the country’s strong economic fundamentals and institutional quality, though noting a decline in institutional strength in recent years. The rating agency’s methodology assesses economic strength, institutional quality, and fiscal resilience, with Israel scoring relatively high on economic strength (A1) and institutions (A3), but lower on fiscal resilience (Baa3) due to government deficits and rising debt.
The new law reduces the legal advisor’s role by allowing the government to disregard their legal opinions and represent only its own stance, except in criminal matters. The legislation does not address appointment or removal procedures for the legal advisor but requires a government review of these processes by January 2027. Critics argue this undermines judicial independence.
Economists familiar with Moody’s methodology suggest the law alone may not trigger an immediate downgrade, especially with upcoming elections offering a chance to reverse the changes. However, former Bank of Israel deputy governor Professor Nadine Bodo-Trachtengerg warned that recent government moves justify a likely downgrade unless corrective action occurs.
Moody’s has not downgraded Israel since 2008 but shifted its outlook from positive to stable in March 2023 following judicial reform proposals. The agency closely monitors the impact of legal changes on business climate and contract enforcement. While Israel’s rating remains above countries with weaker institutions, further erosion of judicial independence and political instability could increase downgrade risks after the November elections.
