(Bloomberg) --

Moody’s Investors Service became the last of the largest three credit assessors to warn of risks to Israel’s debt rating and economic prospects from Prime Minister Benjamin Netanyahu’s planned changes to the country’s legal system.

The rating company said the revamp, if implemented, “could materially weaken the strength of the judiciary and as such be credit negative.” Israel has an A1 rating from Moody’s, its fifth-highest grade, with a positive outlook.

“Stronger fiscal and debt metrics may not be sufficient to offset weakening institutions if the content of the judicial reforms and the way they are passed point to such weakening,” Moody’s said.

Credit companies are taking an increasingly dim view of the legislative push by Israel’s far-right cabinet that took office late last year. Fitch Ratings this month issued a warning similar to Moody’s, and S&P Global Ratings has said the direction the new government appears to be taking “raises concerns.”

Israel, which Moody’s rates on par with Japan and Saudi Arabia, has never been downgraded by any of the three biggest credit companies, according to data compiled by Bloomberg.

The government’s plans to restrict the authority of the Supreme Court and other parts of the legal system have snowballed into a domestic controversy that’s causing a deep social rift. Tens of thousands of Israelis have been protesting the proposals that critics say could hurt the economy and undermine the democracy. 

Still, the changes may not be approved into law in their current form, with Israel’s president saying this week that politicians are close to a compromise.

The tensions are also playing out in the market. 

The shekel was one of the world’s worst performers against the dollar over the past month before recouping some losses in recent days. The currency’s one-month implied volatility remains near the highest since March 2020.

Capital inflows to Israel’s technology sector, a critical part of the economy, could prove especially vulnerable to the planned changes, according to Moody’s. Employees of high-tech companies account for 10% of workers but contribute an estimated quarter of all income tax, it said.

“We do not expect that the reforms will have a material economic impact in the short term,” Moody’s said. “However, currency volatility, which has increased since the reforms were unveiled, could slow the expected easing in inflationary pressures. Greater economic uncertainty could also delay investment decisions.”

--With assistance from Abeer Abu Omar and Netty Ismail.

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