The controversy over Israel's plans to limit some of the Supreme Court's powers is increasing domestic political uncertainty and will lead to lower economic growth this year, S&P Global Ratings said in a country report on Thursday.
S&P did not take any ratings action on Israel. In May it affirmed its 'AA-/A-1+' credit rating and stable outlook. Its next ratings review is scheduled for Nov. 10
The plans being pursued by Prime Minister Benjamin Netanyahu and his right-wing government have prompted months of unprecedented protests, opened up a deep divide in Israeli society, and strained the loyalties of some army reservists.
It has also spooked foreign investors and led to a more than 8% depreciation of the shekel the past six months.
"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," S&P said.
In the short-term, it projects Israel's economic growth to slow to 1.5% this year from 6.5% in 2022, citing the persisting political uncertainty that will combine with weaker economic performance in Israel's key trading partners in Europe and the United States as well as tighter monetary policy.
S&P's report followed a similar warning issued by Moody's rating agency on Tuesday.
"We consider that domestic political polarization and volatility in Israel will remain high in the coming months," it said, noting that for now, "the prospects for adoption of other parts of the judicial reform remain unclear."
Political watchdog groups have appealed to the Supreme Court to overturn a new law passed by parliament in the first of the changes to trim Supreme Court powers, paving the way to a showdown among branches of government when it hears the arguments in September.
Israel Finance Minister Bezalel Smotrich, a proponent of the judicial changes, put the blame on anti-reform protesters and not the government for concern by rating agencies.
"S&P, like Moody's, does not recommend a downgrade of the credit rating and does not warn of damage to the economy due to the legal reform but because of the protest that creates instability," Smotrich said in a statement.
S&P said that its Israel ratings have in the past been consistently constrained by domestic and regional political and security risks. Israel, it added, has a history of frequent elections and changes in government composition which makes future policy direction harder to predict.
Still, it said, "we do not expect local political or regional tensions to escalate into more significant domestic confrontation or a sustained armed conflict in Gaza or the West Bank."
S&P said Israel's credit strengths include its wealthy and diversified economy and its net external asset position.
