Israel's S&P rating holds steady at 'A/A-1', negative outlook persists

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Investing.com -- On May 9, 2025, S&P Global Ratings affirmed its 'A/A-1' long- and short-term foreign and local currency sovereign credit ratings on Israel, maintaining a negative outlook. The rating is influenced by Israel's strong macroeconomic fundamentals, including a diversified and adaptable economy. However, ongoing military conflicts in Gaza, Lebanon, and Syria continue to pose high security risks for the nation.

The negative outlook reflects the potential for the conflict between Israel, Hamas, and other Iranian proxies to significantly weaken Israel's economy, public finances, and balance-of-payments position, especially if the conflict escalates. The ratings could be lowered within the next 24 months if the military conflicts further hamper the country's economic growth, fiscal position, and balance of payments.

On the other hand, the outlook could be revised to stable if there is a reduced likelihood of military escalation and broader security risks lessen. Israel's credit strengths include its wealthy and diversified economy, its sizable net external asset position, and the benefits that accrue from flexible monetary settings and a relatively deep pool of domestic savings.

The resolution of the Israel-Hamas conflict appears to be distant, potentially impacting Israel's long-term growth and public finances. The path of the conflict is largely influenced by the stance of the U.S administration, which is currently unpredictable.

U.S. trade tariffs will affect Israel's economy both directly and indirectly. Despite this, GDP growth is projected to recover to 3.3% in 2025, up from a mere 0.9% growth the previous year. The geopolitical and security risks Israel faces remain very high. The scale of resumed military activities in Gaza has intensified, and along with Israel's active military involvement in bordering Lebanon and Syria, the security environment for Israel is expected to remain challenging.

The next regular parliamentary elections in Israel are scheduled for October 2026. Despite the political uncertainties, Israel's GDP growth is anticipated to recover to 3.3% this year, supported by stronger investment and consumption, partly backed by loose fiscal policies.

The general government deficit is forecasted to remain wide at 5% of GDP, on average, in the medium term. Net general government debt is expected to reach 69% of GDP by 2028. However, the structure of this debt is viewed favorably; it is primarily issued at long tenors, and mainly held domestically and denominated in local currency.

Israel's external profile remains strong, with the country running a current account surplus for decades. The country's gross international reserves have exceeded pre-war levels, reaching $219 billion (40% of GDP) at the end of March 2025. This substantial buffer allows Israel policy room to maneuver.

The Israeli banking system remains resilient, well-capitalized, and profitable. Over the past 12 months, banks' asset-quality deterioration has been contained, with nonperforming loans accounting for a low 1% of total loans.

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