Moody’s outlook downgrade fuels split reaction in Israel

By Steven Scheer

JERUSALEM (Reuters) -Israel’s finance minister on Sunday said Moody’s decision to cut the outlook for Israel’s sovereign credit rating was “not a big drama” and reiterated his stance that the government’s plan to overhaul the judiciary would help the economy.

But the head of Israel’s securities agency, who weighed in on the issue as she ended a five-year term on Sunday, said the downgrade was a warning that needed to be taken seriously and should push the government to rethink its plans.

Moody’s Investors Service on Friday lowered Israel’s outlook to stable from positive while affirming its sovereign credit rating of “A1”.

Much of its report focused on a government plan to overhaul Israel’s court systems, and in doing so give politicians greater sway over selecting judges and limit the power of the Supreme Court to strike down legislation.

The legislative push has sparked weeks of intensifying mass protests and Moody’s said it reflected weaker institutions.

Prime Minister Benjamin Netanyahu, under pressure at home and abroad, has agreed to delay the overhaul to try to negotiate a middle ground, but demonstrations have continued.

Representatives from Netanyahu’s coalition and opposition parties will begin talks on Monday in the hopes of reaching a consensus, said the office of Israeli President Isaac Herzog, whose post is largely ceremonial. Herzog’s efforts to reach a compromise so far have come up short.

Finance Minister Bezalel Smotrich told a session of parliament’s finance committee during a debate on the 2023-24 state budget that Israel’s credit outlook was previously lowered in 2020 and raised again in 2022.

“I take the opinion seriously but it’s not big drama,” he said, noting Moody’s also pointed to a strong economy despite the political turmoil.

Smotrich said he did not “think economists are great experts on the judicial issue,” and that any damage to the economy would come from the “campaigns of lies” against the reforms.

Anat Guetta, the chair of the Israel Securities Authority, had a different take and joined a growing number of top economists, including from the central bank and Finance Ministry, who have warned of an economic backlash to the government’s moves.

“Moody’s announcement is not only a warning sign, but also an opportunity to recalculate our path, and to take seriously the concerns of investors who in the last decade fuelled the growth of the capital market …” Guetta said on the final day of her term.

She called on the government to take steps to restore faith in the country’s economy.

Israel’s Business Forum, which represents 40 of Israel’s largest companies, called on the government to halt the legislation until a broad consensus was found.

This would “stop the deterioration of the Israeli economy,” it said. “The harm to the public will intensify and cause irreversible damage as long as such an announcement is not issued.”

It added that stopping the plan would calm financial markets and help the economy grow.

Data published on Sunday showed that the economy grew an annualised 5.3% in the fourth quarter from the prior three months, versus a prior estimate of 5.6%. Israel’s economy grew 6.5% in 2022 but the Bank of Israel foresees 2.5% growth this year.

On the heels of Moody’s action, Israeli government bond prices were down as much as 1.1%, while Tel Aviv share indexes were down 0.2%. The shekel doesn’t trade on Sundays but it weakened 0.7% versus the dollar in New York on Friday.

(Reporting by Steven Scheer; Additional reporting by Ari Rabinovitch; Editing by Sharon Singleton)