S&P’s Stable Outlook for Israel: Navigating Geopolitical Storms with Economic Resilience

In a move that underscores Israel’s economic resilience amid persistent geopolitical turbulence, S&P Global Ratings reaffirmed the country’s long- and short-term sovereign credit ratings at ‘A/A-1’ on May 9, 2025. While the agency maintained a stable outlook, this decision contrasts sharply with the negative outlooks held by peers like Fitch and Moody’s. The affirmation reflects S&P’s confidence in Israel’s robust fiscal management, diversified economy, and external buffers—but investors must weigh these strengths against ongoing risks tied to military conflicts and political instability.

The Case for Stability: Key Drivers of S&P’s Affirmation

S&P’s decision hinges on several pillars of Israel’s economic strength:

1. Strong Macroeconomic Fundamentals:
2. GDP Growth: S&P projects 3.3% GDP growth in 2025, driven by rising investment and consumer spending. This reflects a resilient private sector, particularly in tech and innovation-driven industries.
3. Fiscal Management: The general government deficit is expected to narrow to 4.2% of GDP in 2025, down from 6.9% in 2024, signaling fiscal discipline.

4. Debt Sustainability: Net government debt is projected to climb to 69% of GDP by 2028, but S&P emphasizes its long tenor and domestic issuance in shekels, reducing refinancing risks.

5. External Resilience:

6. Foreign Reserves: Israel’s $219 billion in international reserves (40% of GDP) provide a critical buffer against external shocks. This exceeds pre-war levels, bolstering confidence in its ability to weather crises.

7. Current Account Surplus: A decades-long surplus reflects strong export competitiveness, particularly in tech and defense sectors.

8. Banking System Strength:

9. Israel’s banks remain well-capitalized, with nonperforming loans at just 1% of total loans—a testament to financial sector health even amid prolonged military operations.

The Elephant in the Room: Geopolitical Risks

While S&P’s affirmation highlights resilience, the agency acknowledges significant risks:
- Military Conflicts: Ongoing operations in Gaza, Lebanon, and Syria pose direct threats to economic stability. S&P warns that prolonged escalation could derail growth, widen deficits, and strain external balances.
- Political Uncertainty: Domestic tensions over judicial reforms, conscription policies, and public distrust in Prime Minister Netanyahu’s government add to institutional risks.
- U.S. Policy Dependence: Trade tariffs and shifts in U.S. foreign policy could disrupt Israel’s economy, though service-sector exports (e.g., IT) remain largely tariff-exempt.

Contrasting Outlooks: Why S&P Differs from Peers

Fitch and Moody’s maintain negative outlooks, citing heightened political risks and elevated public debt. Their concerns include:
- Fitch’s March 2025 Report: Warned of “institutional weakening” due to judicial reforms and potential political turmoil ahead of the 2026 elections.
- Moody’s Warnings: Highlighted “very high political risks” as a drag on fiscal and economic strength.

S&P, however, emphasizes that risks remain manageable for now, assuming conflicts do not escalate further. The stable outlook reflects a bet on Israel’s ability to navigate crises through its strong external position and flexible fiscal policies.

Investment Implications: Proceed with Caution

For investors, S&P’s affirmation suggests Israel remains a stable credit despite turmoil. Key opportunities and risks include:
- Government Bonds: Israel’s shekel-denominated debt offers yields competitive with peers, backed by low default risk.
- Equities: Tech and defense sectors (e.g., Elbit Systems, Check Point) could benefit from sustained innovation and geopolitical demand.

However, investors must monitor:
- Conflict Trajectory: Escalation with Iran or Lebanon could trigger a ratings downgrade.
- Fiscal Discipline: If deficits remain above 5% of GDP, pressure on credit metrics may rise.

Conclusion: A Delicate Balance

S&P’s affirmation of Israel’s ‘A/A-1’ ratings with a stable outlook signals confidence in the country’s economic fundamentals, even as geopolitical risks loom. The $219 billion in reserves, 3.3% GDP growth, and resilient banking system provide a solid foundation. Yet, the negative outlooks from Fitch and Moody’s serve as a reminder that political and military risks remain unresolved.

For now, Israel’s credit profile offers a balanced proposition: it’s a stable investment in an unstable region. Investors should maintain a long-term perspective, prioritizing sectors tied to innovation and resilience. However, the stable outlook hinges on conflict containment—a variable as unpredictable as it is critical. As S&P notes, the next 24 months could see either stabilization or renewed volatility, making this a story worth watching closely.