S&P, the global financial services company, reaffirmed Israel’s A/A-1 credit rating on Friday while keeping its outlook negative because of Israel’s ongoing conflicts in Gaza and with Iran and its proxies.
The credit ratings agency, which downgraded Israel’s credit rating twice last year, said in its most recent report that another downgrade is possible in the next 24 months if Israel’s military conflicts “hamper the country’s economic growth, fiscal position, and balance of payments more than we currently anticipate.
“This could be the case, for example, if the ongoing conflict persists, raising the risks of retaliatory attacks against Israel, or if the prospect of a direct war between Israel and Iran increases.”
While S&P said the outlook for Israel could change if the risk of military escalation diminishes, such an outcome is unlikely because “a lasting resolution of geopolitical tensions appears remote” following Israel’s intensified military campaign in Gaza, military operations in Lebanon and Syria, and the ongoing exchange of strikes with the Iran-back Houthis in Yemen.
“This suggests the security environment for Israel will likely remain challenging, in our view,” the report said, also citing the unpredictability of US policy in the Middle East under US President Donald Trump as a factor contributing to regional uncertainty.
S&P projected that Israel’s GDP will grow by 3.3% in 2025, up from 0.9% last year. However, medium-term growth is expected to remain below pre-war levels. The agency pointed to labor shortages due to the mobilization of military reservists and the loss of Palestinian construction workers, who have been barred from entering Israel since October 7, 2023, as key constraints. Efforts to replace the latter with foreign labor have proven insufficient, S&P said.
Construction in Ramat Gan, December 10, 2024 (Yossi Aloni FLASH90)
Israel’s fiscal outlook remains strained, with S&P forecasting a general government deficit of 6% of GDP in 2025 and 5% in 2026. Defense spending is expected to stay elevated in the long term, adding roughly 0.5% of GDP annually. As a result, net government debt is projected to climb from 58% of GDP in 2023 to nearly 70% by 2028. However, S&P noted that the structure of Israel’s debt remains favorable, as most of it is long-term, denominated in local currency and held by domestic investors.
Nevertheless, S&P said Israel’s external and monetary indicators remain a source of strength, with the company expecting Israel to maintain a current account surplus averaging around 3% of GDP through 2028. Furthermore, S&P said that, despite the war, the shekel has stabilized following an initial drop and that there has been no sign of instability in bank deposits.
Israel’s economy has been burdened since war broke out on October 7, 2023, when Hamas-led terrorists invaded Israel, killing some 1,200 people and kidnapping 251.
In March, Moody’s Investor Service, which has also twice downgraded Israel’s credit rating, warned of “very high political risks that have weakened economic and fiscal strength.”
Prime Minister Benjamin Netanyahu’s hardline government, including far-right Finance Minister Bezalel Smotrich, has in the past accused the rating agency of downgrading Israel’s status due to “pessimistic and unfounded” reasoning.
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