Moody's Investors Service cautioned that "negative consequences" and a "significant risk" loom over Israel's economy, after the passage of a law that curtails the powers of the Supreme Court.
The measure, which was passed by a final 64-0 vote on Monday, removes the "reasonableness" provision that allows the unelected Supreme Court to overrule the government's decisions. The development has triggered mass protests, bringing tens of thousands of demonstrators into the streets earlier this week.
"We believe the wide-ranging nature of the government's proposals could materially weaken the judiciary's independence and disrupt effective checks and balances between the various branches of government," Moody said in its Tuesday report released Tuesday.
The agency added that Israel's executive and legislative institutions have become "less predictable and more willing to create significant risks to economic and social stability."
The report also cited that more than 80% of new Israeli startups chose to register overseas since the start of this year, compared against 20% last year.
"This is particularly concerning given that the country's high-tech sector has become the key engine of economic growth," Moody's analysts wrote, adding that the sector accounts for half of the country's total exports and generate around 15% of the country's GDP in 2022.
A report by Israeli private equity investment group Viola, had stated that Israel ceded its ranking as the world's fifth best-funded tech ecosystem to instead take 10th place.
In a joint statement, Israel's Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich said that Moody's report "is a momentary reaction, when the dust settles it will become clear that Israel's economy is very strong."
They added, "Israel's economy is based on solid foundations and will continue to grow under experienced leadership that leads a responsible economic policy," elaborating that the defense industries are "bursting with orders," and that the gas industry is increasing exports to Europe.