Leading rating agency Moody’s downgraded Israel’s economic outlook from positive to stable on Friday, citing the “deterioration of Israel’s governance” amid months of upheaval over the government’s highly contentious bid to dramatically overhaul the judiciary. A report on Friday confirmed fears that Israel’s credit outlook could be knocked down.

Mass Protests and Legislative Pause

Weekly mass protests around the country against the government’s persistent efforts to weaken the judicial system have continued even after Prime Minister Benjamin Netanyahu paused the legislation late last month to allow dialogue on reaching a compromise between the sides. Coalition members have nevertheless vowed to press forward with the legislative push after the Knesset’s Passover recess.

Moody’s Report: Deterioration of Governance

On Friday, Moody’s explained the change in Israel’s outlook “reflects a deterioration of Israel’s governance, as illustrated by the recent events around the government’s proposal for overhauling the country’s judiciary.” The report also highlighted the weakening of institutional strength and policy predictability.

Economic Resilience Amid Credit Outlook Downgrade

While Israel’s credit outlook took a hit on Friday, Moody’s kept the country’s actual credit rating at A1, citing “strong economic growth and improving fiscal strength.” Israel’s economy has proven resilient to many economic and geopolitical shocks over the past decades, growing at a rapid clip, helped by Israel’s globally competitive high-tech industries.

Downward Pressure on Credit Ratings

Moody’s warned that Israel’s credit ratings could also come “under downward pressure if the current tensions were to turn into a prolonged political and social crisis with material negative impact on the economy, possibly linked to substantially lower capital inflows into the important high-tech sector and relocation of Israeli firms abroad.”