Israeli judicial reforms a 'downside risk' for credit rating, says S&P

JERUSALEM, Jan 12 (Reuters) - Judicial reform plans by Israel's new hard-right government could pressure the country's sovereign credit rating even as the budget remains under control, according to an S&P analyst, as could a violent escalation with Palestinians.

In an interview with Reuters, Global Ratings director Maxim Rybnikov said the agency was closely following moves Prime Minister Benjamin Netanyahu's cabinet might make in the occupied West Bank, as well as the pledged judiciary overhaul that would cut back Supreme Court powers.

"If the announced judicial system changes set a trend for a weakening Israel's institutional arrangements and existing checks and balances this could in the future present downside risks to the ratings. But we are not there yet," said Rybnikov.

S&P rates Israel as 'AA-' with a stable outlook.

Rybnikov, the main credit analyst for Israel, said risks to the country's ratings are currently balanced but that could change. He added that if necessary, ratings action could come sooner than a planned review in May.

"The primary concern for us would be the ... security situation which could be undermined in a scenario of more hardline policies."

The past year has seen some of the worst violence in the West Bank in years. Netanyahu's coalition government, sworn in last month, has promised to bolster Israel's settlements on the land that Palestinians seek for a state.

On Thursday, the pro-settlements Finance Minister Bezalel Smotrich met with defence officials to begin transferring some West Bank administration powers over to him, according to a Finance Ministry statement.

"Hardline rhetoric that undermines the fragile situation in the West Bank could generate risks as well," Rybnikov said. "If we see more protests, this is not going to be good news also for the economy."

RECORD

Asked whether he was willing to risk Israel's credit rating for the sake of weakening the legal system, Netanyahu told reporters on Wednesday the reforms would strengthen democracy and the country's economic policies until now speak for themselves.

Backed by Netanyahu, who is on trial for corruption charges he denies, Justice Minister Yariv Levin's reform plan includes limiting High Court rulings against government moves or Knesset laws, while increasing politicians' say in selecting the bench.

Proponents say it will restore balance between the legislative, executive and judiciary, while critics fear for democracy and corruption.

Still, the economy remains solid, with Rybnikov citing the budget, which in 2022 recorded its first surplus in 35 years, high foreign exchange reserves and falling public debt burden.

"We are not very concerned on the fiscal front despite announcements of higher spending by the coalition partners," he said. "In the short term, Israel has some fiscal room for temporary relaxation of fiscal policy."

Rybnikov projects Israel's budget deficit at 2% of gross domestic product this year after a 0.6% surplus in 2022. He also predicts economic growth of 2% this year, lower than the central bank's 2.8% estimate, after growth of some 6% in 2022.

The government is formulating a 2023 budget which parliament must pass by late May. Smotrich has pledged fiscal responsibility despite announcing measures to ease living costs.

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