S&P, the international ratings agency, issued a significant announcement for the Israeli economy last night (Friday night), in which it affirmed the country’s credit rating at A and left the rating outlook at “stable.” This is the first rating decision made since the round of direct fighting with Iran at the end of February. The decision is based on the assumption that the ceasefires with Iran and Hamas will be maintained, and that future military activity will remain limited and focused in scope.
However, the agency’s economists are far from complacent. The report emphasizes that geopolitical risk remains high, which is reflected in difficult macro data: in the first quarter of 2026, real gross domestic product contracted at an annual rate of almost 10% due to the war. Despite this, S&P expects growth of 3.1% throughout the year and an impressive recovery of 5.9% next year. These data present a more pessimistic approach than the Bank of Israel for the current year, but more optimistic for 2027.
The bulk of the positive forecast is based on a recovery scenario in the second half of the year. According to the agency’s economists, the release of reservists back into the labor market, along with an easing of supply shortages and an increase in consumer and business confidence, will lead to growth. However, they warn that even after the recovery, national GDP is expected to remain below the trend line where the economy was on the eve of October 7th, 2023.
On the worrying side of the report is the fiscal situation, which received the lowest score (4 out of 5). The deficit is expected to stand at 6.0% of GDP in 2026 and fall to 4.7% in 2027. This is a four-year streak of extremely high deficits, resulting from defense spending stabilizing at over 7% of GDP. The agency notes that the deficit would have been even higher if not for one-time tax revenue following the giant Google-Wise deal.
Regarding state revenues, S&P warns that the ratio of revenues to GDP in Israel is one of the lowest among developed economies (about 37%). In light of the fact that civilian spending in Israel is already limited, the agency estimates that any future attempt to balance the budget will have to be based primarily on raising taxes and not on cutting services. At the same time, there is concern that a gradual erosion of American security assistance will add additional fiscal pressures.
Despite the budget challenges, the agency praises the Bank of Israel’s monetary policy and notes positively the decline in inflation to 1.8%. In addition, the Israeli debt structure is considered solid, with most of it held in local currency and over long terms. However, net public debt is expected to climb to 68% of GDP by the end of the decade, far from early forecasts that predicted a decline below 55%.