Overview

The U.S.-brokered ceasefire agreement between Israel and Hamas could provide space for military de-escalation and reduce the probability of larger-scale tensions in Gaza and the wider region.

This could soften pressure on Israel’s economy, labor market, and public finances.

We revised our outlook to stable from negative and affirmed our 'A/A-1' sovereign ratings on Israel.

Rating Action

On Nov. 7, 2025, S&P Global Ratings revised its outlook on Israel to stable from negative. At the same time, we affirmed our 'A/A-1' long- and short-term foreign and local currency sovereign credit ratings.

Outlook

The stable outlook reflects our view that military de-escalation, underpinned by the ceasefire agreement between Israel and Hamas, has lowered immediate security risk for Israel. The outlook reflects our assumption that the scale of direct military confrontation will remain contained, even if tensions between Hamas and Israel persist and the broader regional security environment remains fragile.

Downside scenario

We could take a negative rating action if Israel’s economic, balance-of-payments, or fiscal performance weakened markedly beyond our forecast, possibly as a result of military escalation.

Upside scenario

We could raise the ratings if Israel’s growth and fiscal outcomes proved much stronger than we currently project. Rating upside could also stem from a significant and lasting reduction in regional geopolitical and security risks.

Rationale

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 ratings are constrained by still elevated geopolitical risks, as well as elevated security-related pressures on the country's public finances.

Institutional and economic profile: The security environment remains fragile, but immediate risks have eased

We expect the Israel-Hamas ceasefire agreement will offer room for a halt to military confrontation. Occasional skirmishes and temporary breaches of the truce are still possible.

The path to a lasting peace agreement will remain long, however.

Military de-escalation will ease supply side constrains and push Israel’s real GDP growth to 5% in 2026.

Despite episodes of resumed strikes between Israel and Hamas, both sides have so far upheld to a ceasefire.

The agreement, mediated by the U.S., Qatar, Turkiye, and Egypt, includes three stages. The first phase, effective since Oct. 10, saw the suspension of military operations, an exchange of living hostages and prisoners, the withdrawal of Israeli troops from major cities of Gaza, and the resumption of humanitarian aid.

The diverging views of Israel, U.S., EU, Turkiye, and the Gulf states on the post-war settings in Gaza will complicate progress toward a lasting peace agreement.

The second phase of the ceasefire agreement focuses on security arrangements around Gaza, including the disarmament of Hamas and the formation of a temporary international stabilization force. Stage 3 centers around post-war reconstruction and governance of Gaza. Progress during these stages could be challenging since it depends on the outcome of additional negotiations between Israel, Hamas, and international mediators, including on the composition of an international stabilization force and details of transitional governance in Gaza. Previous efforts to reach a solution to the Israeli-Palestinian conflict have had limited success.

We believe the geopolitical risks Israel faces will remain high, not least because of the fragile regional security environment.

Despite Israel’s largely successful effort to degrade the military capabilities of its key adversaries--namely Iran and Iran-backed proxies including Hezbollah--Israel military involvement in bordering Lebanon and Syria has persisted. Moreover, the extent to which Iran might be willing to rebuild its nuclear capabilities remains uncertain. Under some scenarios, Israel and Iran could engage in another round of direct military confrontation. The two countries had a short direct military conflict in June 2025, when Israel and later the U.S. carried out strikes against Iran’s nuclear sites and Iran retaliated with missile strikes on Israel.

The suspension of military activity will support the ongoing recovery of the Israeli economy.

Recovery has started after a 4% year on year output contraction in the second quarter of 2025 caused by the conflict with Iran. We project Israel’s GDP growth will rebound strongly in the second half of 2025 and reach 5% next year as consumer and business confidence strengthens and the mobilization of reserve soldiers declines, easing labor supply constraints. Our projections factor in only a modest effect from the higher tariffs imposed on Israeli goods by its key trading partner, the U.S., which account for 27% of the country’s total merchandise exports. Given that two-thirds of Israel’s exports to the U.S. are services--primarily in the information and communication technology sector, which are not subject to import tariffs--the direct effect on the Israeli economy has been moderate.

Although security risks have eased somewhat, Israel’s GDP will likely remain below the pre-war trend.

This is due to the lasting effects of the war. Labor supply constraints will likely persist as more mobilized workers will likely remain in the military compared with before the war, and Palestinian workers formerly employed in the construction industry (which constitutes 5% of GDP) are only partly replaced by foreign labor.

If broader regional tensions escalate, the implications for Israel's small economy could be sizable.

While it is difficult to quantify, the effects of escalating conflict could include international sanctions, shocks to foreign and domestic investor confidence, capital flight, and financial market and exchange-rate volatility. These would likely come on top of direct physical damage to infrastructure and associated fiscal pressures.

That said, the resilience of Israel’s economy to security-related shocks has been remarkable.

The structure of the Israeli economy, which centers on high-tech services exports, with a high percentage of employees able to work from home, has cushioned the impact of security disruptions. Heightened security risks have so far had limited impact on residents’ behavior, with no evidence of bank deposit instability or conversion to foreign currencies.

Flexibility and performance profile: Softer security risk will take time to be reflected in lower fiscal deficits

We forecast that the general government deficit will moderate only slightly as the defense bill will remain elevated in the medium term.

Net general government debt will remain high, reaching 67% of GDP by 2028, but we view its structure as favorable.

Israel’s balance-of-payments position remains strong, and effective monetary policy allows the authorities to cushion shocks.

Defense and security-related spending will decline from its peak of 8% of GDP in 2024, but we assume it will remain higher than before the war.

The Nagel Commission, a special government commission charged with making a recommendation on Israel's security strategy and budget, estimates additional defense-related spending needs of some 0.5% of GDP annually in the long term. There are also spending needs associated with the restocking military equipment, enhancement of military logistical capacity, and stronger surveillance along Israeli borders. Additionally, public finances will face sizable reconstruction costs in affected areas in the north and south of the country, which the authorities estimate at 2.5% of GDP (though part of these costs could be covered by domestic and international nongovernmental organizations).

There is uncertainty over the fiscal settings in 2026, given upcoming parliamentary elections.

Budgetary discussions for 2026 have been delayed by the security developments and also by disagreements between the coalition members on post-war fiscal policies. According to local rules, the failure to legislate the budget by the end of March will trigger an early parliamentary election. That said, the lack of approved budget next year might suppress fiscal deficits. This is because the government will face legal constraints on additional spending or modifying taxes.

We forecast a general government deficit of slightly below 6% of GDP in 2025 and 4.8% of GDP in 2026.

These projections are slightly stronger than our previous expectations due to the reduction of military spending, stronger economic recovery, and lower borrowing costs. Israel’s fiscal outlook remains weaker than before the war, however. Our fiscal forecast reflects a relatively strong revenue performance reported in the first nine months of 2025 and one-off tax receipts in 2026 from the announced acquisitions of the local high-tech startup by a foreign investor. We also assume that past revenue enhancing measures, including selected tax hikes, will not be reversed.

Elevated fiscal deficits will keep net general government debt high at 67% of GDP through 2028.

This contrasts with our pre-war projection of net debt declining to below 55% of GDP in 2026 and beyond. However, we note Israel's debt structure remains favorable. Over 80% of government debt is held domestically and denominated in local currency. Short-term debt constitutes just 8% of total debt and the average time to maturity is nine years.

In our view, government funding risks are contained, given the depth of Israel's capital and financial markets.

Israel has also demonstrated continued access to international capital markets, including during episodes of geopolitical escalation and elevated security risks. In the event of funding disruptions, the Israeli government also has recourse to the remaining portion of a long-standing U.S. debt guarantee program.

We expect Israel's external profile will remain exceptionally strong.

The country has been running a current account surplus for decades, primarily supported by the fast expansion of high-value-added information and communication-technology services exports. The total external services surplus has averaged 7% of GDP in the past few years. As a result, Israel has shifted into a substantial net external asset position of about 40% of GDP--one of the highest among noncommodity-exporting sovereigns--and reduced its gross external financing needs. We project the exports of high-value-added technology services will continue uninterrupted, and Israel's current account surpluses will average 3% of GDP through 2028.

Gross international reserves have exceeded pre-war levels, reaching $232 billion (40% of GDP) in September 2025.

This is a significant buffer, in our view, given that it covers 1.8x the gross external debt of the whole economy (including the public sector, banks, and the nonbank corporate sector) and affords Israel policy room to maneuver.

We consider Israel's monetary policy flexibility a credit strength.

The Bank of Israel (BOI) has a record of operational independence and uses a range of market-based monetary instruments. Monetary policy also benefits from Israel's deep local-currency financial and capital markets. Headline consumer price pressures have been elevated on war-related supply constraints and loose fiscal policies. That said, in August, inflation moved to the BOI's target range of 1.0%-3.0% for the first time since mid-2024 on lower food inflation. Stronger labor supply, tighter fiscal policy, and exchange rate stability should keep inflation within target in the coming months, providing room for monetary easing.

The 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. Still, possible security-related shocks could have knock-on effects for the financial system.