Moody's Investor Service warned on Tuesday that the Israeli government's planned judicial reforms could weaken institutions and could negatively impact Israel's sovereign credit profile.
In its statement, Moody's did not downgrade Israel's A1 positive credit rating and did not walk back the positive outlook it assigned in April 2022 which was driven by solid government finances.
But Moody's warned, "there could arguably be downward pressure on those scores" if the government fully passed the judicial overhaul.
Moody's credited the "credit-positive structural reforms" the previous Israeli government implemented for achieving its A1 rating and said it had expected the current government to maintain those policies.
"We continue to believe that there is broad political consensus on the direction of economic and fiscal policies despite the fragmented political landscape," the statement said. "However, 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."
The statement added that Israel could be weakened as an attractive destination for foreign investment if the reforms passed as they are currently presented.
Critics of the planned law changes say, Prime Minister Benjamin Netanyahu - on trial on graft charges that he denies - is pursuing steps that will hurt Israel's democratic checks and balances, enabling corruption and bringing diplomatic isolation.
Proponents say the changes are needed to curb what they deem an activist judiciary that interferes in politics.
The plan has led to weekly mass protests across Israel and warnings from leaders in the private sector.