S&P Global Ratings on Friday reaffirmed Israel’s sovereign credit rating at A and maintained a stable outlook, marking the agency’s first rating decision since the second phase of the direct conflict with Iran began on February 28.
The decision was based on the continuation of ceasefire arrangements with both Iran and Hamas, alongside the assumption that future military operations will remain “episodic and limited” in scale.
Despite maintaining the rating, the agency stressed that geopolitical risks facing Israel remain elevated.
S&P highlighted a nearly 10% annualized contraction in real GDP during the first quarter of 2026, describing it as a direct consequence of the war. Nevertheless, the agency forecasts economic growth of approximately 3.1% for 2026 and a sharp recovery to 5.9% in 2027.
Compared with the Bank of Israel's forecasts, S&P is more pessimistic about this year but slightly more optimistic about next year’s rebound.
The recovery scenario is based on expectations that reserve soldiers will gradually return to the workforce, supply shortages will ease, and consumer and business confidence will improve during the second half of the year.
However, the agency warned that Israel’s GDP is still expected to remain below its pre-2023 growth trajectory.
FISCAL PRESSURES IDENTIFIED AS MAIN RISK
According to S&P, the primary threat to Israel’s credit profile is fiscal deterioration.
The agency assigned fiscal performance its highest risk score — 4 out of 5 — and projected a government deficit of 6.0% of GDP in 2026, declining modestly to 4.7% in 2027.
This would mark a fourth consecutive year of unusually high deficits, driven primarily by elevated defense spending. S&P estimates that security expenditures will remain above 7% of GDP in 2026 and stay structurally higher than pre-2023 levels for years to come.
DEFENSE COSTS AND DECLINING REVENUE
The report noted that the deficit projections already include a one-time increase in tax revenues equivalent to roughly 0.5% of GDP stemming from the acquisition of an Israeli technology company by a foreign investor, referring to the reported Google-Wiz transaction.
At the same time, S&P expects government revenues as a share of GDP to continue declining, reaching approximately 37% of GDP — among the lowest levels in developed economies.
Given Israel’s relatively low civilian spending, the agency warned that any future fiscal adjustment would likely need to rely heavily on increasing revenues rather than cutting expenditures.
PUBLIC DEBT EXPECTED TO RISE
S&P projects Israel’s net public debt to climb to 68% of GDP by 2029, significantly above pre-war expectations that debt would fall below 55% by 2026.
Still, the agency described Israel’s debt structure as relatively resilient, noting that more than 80% of debt is denominated in local currency, short-term debt accounts for only 8%, and the average maturity of government debt is approximately eight years.
MONETARY POLICY RECEIVES PRAISE
The agency also praised Israel’s monetary policy framework.
Annual inflation fell to 1.8% in March, according to the report, and is expected to stabilize near the government’s 2% target amid tighter fiscal policy, easing supply pressures, and a stronger shekel helping moderate imported inflation.
S&P also addressed the political environment ahead of Israel’s upcoming elections.
While the agency noted that Prime Minister Benjamin Netanyahu has strengthened his political standing since the October crisis, current polling still does not clearly indicate that he can form a governing coalition.
The agency’s baseline assumption is one of policy continuity on both security and economic matters. However, it emphasized that the 2027 state budget — which will be shaped by the next coalition — remains a major source of uncertainty.
DOWNGRADE RISKS REMAIN
S&P warned that Israel’s rating could face downward pressure if economic performance, fiscal indicators, or external balances deteriorate significantly beyond current forecasts, particularly in the event of renewed military escalation.
Conversely, an upgrade scenario would require substantially stronger growth, firmer fiscal consolidation, and a sustained reduction in regional geopolitical risks.
For now, the agency’s message remains cautious: Israel retains strong institutional and economic foundations, but prolonged conflict and mounting fiscal pressures continue to weigh heavily on its long-term outlook.
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