S&P warns: Judicial reform controversy will continue to harm Israeli economy

The country’s "controversy over judicial reforms will continue to harm the Israeli economy,” according to a report published by S&P's 500 stock market index Thursday.

“The controversial reform has led to sizable public protests, and, in our view, if government and opposition do not achieve an agreement on the topic, this could further exacerbate domestic political confrontation and weigh on medium-term economic growth. In the short term, we expect that persisting political uncertainty will combine with weaker economic performance in Israel's key trading partners in Europe and the U.S. as well as tighter monetary policy, causing Israeli economic growth to slow to 1.5% in 2023 from 6.5% in 2022,” read the report.

S&P explained that it expects “domestic political polarization and volatility in Israel will remain high in the coming months,” and that “For now the prospects for adoption of other parts of the judicial reform remain unclear.”

The agency also noted a few factors that positively impact Israel’s credit rating. Per the report: “Israel's credit strengths include its wealthy and diversified economy, its net external asset position, and the benefits that accrue from flexible monetary settings and a relatively deep pool of domestic savings.”

Overall, however, it seems likely that the S&P’s next credit evaluation in November may not be a very positive one.

S&P’s warning came three days after the Knesset passed the first bill in its controversial judicial reform plan — a move that was widely protested throughout the country by citizens, start-ups, and Israel’s 150 leading businesses.

S&P is last of the “big three” global credit agencies to weigh in

S&P is the last of the “big three” global credit agencies to weigh in on the bill’s passing. On Tuesday, Morgan Stanley downgraded Israel's credit rating to a “dislike stance,” and warned of “increased uncertainty about the economic outlook in the coming months and risks becoming skewed to our adverse scenario.”

On the same day, Moody's Investors Service warned of a "significant risk" of increased political and social tensions in a special report on the country's economy. Within its report, Moody’s highlighted the coalition’s inability to find a middle ground with the opposition.

“Attempts to reach a compromise with the opposition have failed… the bill’s approval comes amid widespread protests by civil society groups that have been ongoing since January and which we expect will continue,” Moody’s stated. “Petitions against the bill have been lodged with the Supreme Court, raising the risk of a constitutional crisis between the executive and judiciary.”

For months, hundreds of economists, experts, and executives in Israel and around the world have warned that the current government's plan for judicial reform would lead to a sharp decline in foreign investment due to a lack of economic stability caused by a weakened legal system, thereby neutering the country’s hi-tech sector and effectively crippling one of Israel’s primary economic engines.

These warnings have already begun to come to fruition. A report published on Sunday by Start-Up Nation Central found that 68% of startups have taken steps to protect themselves from the economic impact of the upcoming judicial reform, such as withdrawing cash reserves, relocating their headquarters outside of Israel, moving employees abroad, and conducting layoffs.