Fitch Ratings on Friday affirmed Israel’s sovereign credit rating at ‘A’ with a negative outlook, maintaining its previous assessment despite ongoing conflict and fiscal pressures. The agency said the rating reflects a balance between Israel’s “diversified and resilient economy” and high-value-added sectors, against a backdrop of rising public debt, persistent security risks and political instability that has complicated policymaking.
Fitch said recent developments, including a perceived reduction in the threat from Iran following Israeli military operations, as well as the continuation of a ceasefire in Gaza, were among the factors shaping its evaluation.
At the same time, the expansion of military operations against Hezbollah in Lebanon and increased defense spending continue to weigh on Israel’s fiscal outlook.
While military expenditures are expected to decline after the conclusion of operations in Iran and Lebanon, Fitch said they are likely to remain above pre-war levels.
Deficit and debt expected to rise further
Fitch forecasts Israel’s budget deficit will widen to 5.7% of gross domestic product in 2026, up from 4.7% in 2025 and above the government’s updated target of 5.1%.
Public debt is projected to rise moderately in the medium term, reaching 71.4% of GDP in 2026, reflecting continued fiscal strain linked to defense spending and economic disruptions.
Economic resilience supports growth outlook
Despite the pressures, Fitch highlighted the resilience of the Israeli economy following the shocks of the war, projecting real GDP growth of 3.5% in 2027, up from 2.9% in 2025.
The agency cited Israel’s strong external financial position and dynamic technology sector as key factors supporting recovery prospects.
Political uncertainty remains a key risk
Fitch also pointed to domestic political uncertainty, noting that ultra-Orthodox parties are expected to support the 2026 state budget despite tensions over military conscription exemptions.
This could allow the government to pass the budget before the March 31 deadline, reducing immediate political risks. However, the agency warned that Israel’s history of unstable coalitions means early elections — currently scheduled for October 2026 — remain a possibility.
End of conflict could mark economic turning point
Fitch said the eventual end of the war could represent a “significant turning point” for Israel’s economy, depending on the durability of agreements with Hamas, Iran’s future actions, and Israel’s ability to strengthen regional ties.
However, the agency cautioned that uncertainty remains high, particularly regarding the long-term geopolitical and economic consequences of the ongoing conflict.
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