Fitch reaffirms Israel's A+ credit rating, warns against judicial reform

Finance rating company Fitch reaffirmed Israel’s A+ credit rating, stating the rating balances a “diversified, resilient and high value-added economy and strong external finances” against a “high government debt-to-GDP ratio, elevated security risks and a record of unstable governments.”

However, Fitch also warned on Wednesday that the judicial reform proposed by the government “could have a negative impact on Israel’s credit profile.”

The finance company further warned that recent calls by members of the coalition to weaken the Bank of Israel’s independence “would reduce the credibility of Israel’s policy-making, currently a rating strength.”

Fitch is the latest in a series of global finance organizations to warn against the ill effects of the government’s judicial reform on the country’s economy.

A report JPMorgan published in February similarly highlighted the increased risk to investors posed by the reform, especially when coupled with “increased geopolitical tensions.”

“The judicial reform has raised concerns regarding institutional strength and the investment climate in the country... Any material deterioration in the institutional strength can have an impact on investment flows, however, the scale and timing of such is difficult to judge,” read the report, noting that, while the market impact may be limited, the judicial reform poses “downside risk to Israel’s sovereign credit rating.”

In mid-January an S&P representative stated that Israel’s reform “is liable to increase the risk of a reduction of Israel’s credit rating,” due to its likelihood to “weaken key and essential institutions or the system of checks and balances.”

The risk posed by the judicial reform

Rating agencies are far from the only ones warning against the economic risk posed by the judicial reform. In January, an open letter signed by over 360 economists was sent to the prime minister, warning against enacting the reform for fear of tanking the economy.

“The Israeli economy is highly regarded by the institutions and international economic rating bodies. This evaluation was achieved thanks to a long and continuous effort of governments on both sides of the political barrier, and is due, among other things, to the independence of the judiciary and the public service,” the letter read.

“The damage to the independence of the judiciary will greatly increase the likelihood of damage to the credit rating of the Israeli government, and to the capital raising of Israeli companies,” it continued, referring to Poland’s credit rating decline in the mid 2010s as a precautionary tale.

“The surprising downgrade of the credit rating of Poland’s government bonds in January 2016 by the rating agency S&P was justified by the violation of the independence of the constitutional court and public broadcasting,” the letter explained. “We strongly warn against the current initiatives of the coalition, which mean a fundamental change of the system of the regime in Israel and a danger to the future of the Israeli economy.”