
Amid ongoing concerns over the expansion of Israel’s military conflicts, global credit rating agency S&P Global Ratings announced Friday that it is maintaining Israel’s sovereign credit rating at 'A', while keeping its negative outlook in place.
This decision follows a similar stance taken by Moody’s and Fitch, which also refrained from further downgrades in recent months but continue to signal elevated risk. The negative outlook from all three agencies reflects a significant likelihood of another downgrade within the next two years.
S&P Flags Military Escalation
In its latest review, S&P warned that Israel's renewed military operations in Gaza, alongside continued activity in Lebanon and Syria, keeps security risks high. The agency projects that Israel’s economy will grow 3.3% in 2025, rising to 3.9% in 2026, after a modest 0.9% in 2024.
However, S&P raised a red flag over Israel's rising public debt, forecasting an increase from 67.8% of GDP in 2024 to 71.6% by 2027. This trend contradicts the Bank of Israel’s more optimistic projection, which sees debt peaking at 69% in 2025 before declining. On a positive note, S&P emphasized that most of Israel’s debt is local, limiting exposure to foreign currency risks.
Negative Outlook Tied to Security
S&P warned that Israel's rating could be downgraded within the next 24 months if military conflict significantly harms growth, fiscal stability, or the balance of payments. A worsening of hostilities with Iran or Hezbollah, or prolonged conflict with Hamas, could tip the balance.
“A resolution of the conflict between Israel and Hamas seems distant,” the agency wrote, adding that the direction of the war will depend heavily on U.S. policy, which remains uncertain. The agency also noted that new U.S. tariffs may affect Israel's economy indirectly, despite limited direct exposure due to the dominance of services in Israeli exports.
Structural Economic Strains
Even if the geopolitical situation stabilizes, S&P projects that Israel’s GDP will underperform its pre-war trend. Contributing factors include the broad mobilization of reservists, the loss of Palestinian labor in construction, and the elevated risk premium attached to Israeli markets. Investor confidence remains lower than before the war.
All three major credit rating agencies downgraded Israel’s rating for the first time in decades during the war. S&P’s rating was cut from AA- to A+ in April 2024, and again to A in October 2024, amid escalating tensions with Iran and Hezbollah. Moody’s cut Israel's rating two notches to Baa1 (BBB+), and Fitch lowered it to A in August 2024.
What Credit Ratings Mean for Governments
Sovereign credit ratings assess a country’s capacity and willingness to meet its debt obligations. They influence government borrowing costs, investor sentiment, and access to international capital markets. Ratings are based on economic fundamentals, fiscal discipline, geopolitical risks, and the strength of institutions.
While most government funding comes from domestic tax collection, borrowing is used to finance deficits. A downgrade typically raises borrowing costs and can reduce a government’s financial flexibility during crises.
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