Moody's Affirms Israel's Credit Rating at Baa1 - Warns of Geopolitical and Fiscal Risks

Moody's Ratings has affirmed Israel's sovereign credit rating at Baa1 and maintained its stable outlook, according to a country assessment released early Wednesday.

The report does not constitute a formal rating action but provides the agency's rationale for maintaining its current assessment. The stable outlook follows Moody's decision in January 2026 to revise Israel's outlook from negative to stable.

Resilient Economy Faces Persistent Challenges

Moody's said Israel continues to demonstrate considerable economic resilience despite prolonged geopolitical tensions and repeated external shocks.

However, the agency emphasized that geopolitical risks remain elevated and continue to weigh on the country's credit profile.

Moody's forecasts Israel's economy will expand by 3.7% in 2026, below the 4.0% growth projected by the Bank of Israel. For 2027, the agency expects economic growth of 5.0%, compared with forecasts of 5.5% by both the central bank and the Ministry of Finance.

Fiscal Pressures Continue to Weigh on Credit Profile

The agency projects Israel's fiscal deficit will reach 5.3% of GDP in 2026, reflecting continued pressure from elevated defense spending.

Moody's also expects the country's debt-to-GDP ratio to increase to 70% in 2026, up from 68.5% at the end of 2025.

According to the agency, persistent fiscal deficits driven primarily by security expenditures remain one of the principal constraints on any future credit rating upgrade.

Institutional Strength Under Pressure

Beyond fiscal and geopolitical concerns, Moody's warned that Israel's institutional framework has weakened in recent years amid increasing political polarization and tensions between key state institutions.

The agency said continued concerns over the independence and strength of Israel's judicial system represent a significant factor in its assessment of sovereign risk.

Judicial Reforms Could Trigger Future Downgrade

Moody's noted that a future downgrade could result not only from an escalation in regional security risks but also from domestic developments affecting Israel's economic outlook or institutional governance.

According to the agency, downward pressure on the rating could emerge from "a weakening of Israel's economic and fiscal outlook for reasons unrelated to geopolitical risks, or a weakening of Israel's institutions—particularly if the judiciary proves to be weaker than currently assessed following institutional reforms."

The assessment underscores that while Israel's economy continues to demonstrate resilience, the country's long-term credit profile will depend on its ability to contain fiscal pressures, preserve institutional stability, and navigate an increasingly complex geopolitical environment.