Fitch affirms Israel's A+ credit rating but warns about judicial reform fallout

The credit rating agency Fitch confirmed Israel's A+ grade with a stable economic outlook in its latest report, reaffirming a similar rating from March.

"Israel's 'A+' rating balances a diversified, resilient and high value-added economy and strong external finances against a relatively high government debt/GDP ratio, ongoing security risks and a record of unstable governments that has hindered policymaking," Fitch explained.

"The government's initial judicial overhaul package has been watered down but remains highly controversial and faces strong civil society and political opposition, Fitch warned in its assessment about the potential economic impact of the Israeli government's judicial reforms,

The credit agency explained that the reforms could impact Israel's credit ranking "if the weakening of institutional checks leads to worse policy outcomes or sustained negative investor sentiment or weakens governance indicators."

The report, however, appeared to support the coalition's statements that the reforms would not lead to a massive emigration wave out of Israel, explaining that "current measures are unlikely going to trigger a material exodus of talent and capital in the high-tech sector."

Israeli Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich praised the decision, which affirmed their stance that the judicial reforms would not harm the Israeli economy, despite repeated warnings from opposition members and economists.

"[The decision proves] what we have been saying throughout - Israel's economy is strong, stable and solid. Israel is good for business. Those who invest in Israel benefit. The responsible and conservative policy pursued by Prime Minister Netanyahu and Finance Minister Smotrich... proves that Israel's economy is diverse, has high added value and strong external financial indicators," their joint statement read.

“When examining the true data on the Israeli economy, the resulting picture is the opposite of what some are trying to create via false panic campaigns in the news networks."

Netanyahu added a warning to Israel's enemies to not interpret internal strife as a sign of weakness.

"Not only do we have a strong economy but also a strong army. Let not our enemy mistake Israel's resilience," Netanyahu said.

Other credit rating agencies have repeatedly criticized the judicial reforms, with Moody's downgrading the Israeli economic outlook in April from positive to stable due to the “deterioration of Israel’s governance.”

In July, Moody’s warned that the newly-passed Reasonableness Standard Law created high levels of market uncertainty, making Israel increasingly unattractive to investors.

S&P Global, the leading American financial agency, also warned in July that the Israeli “controversy over judicial reforms will continue to harm the Israel economy.”