Fitch Ratings has reaffirmed Israel’s long-term foreign-currency issuer default rating at ‘A’ while maintaining a negative outlook, citing concerns over the nation’s high public debt-to-GDP ratio and ongoing geopolitical tensions, particularly in Gaza.
The persistent conflict in Gaza has exerted significant pressure on Israel’s economy. The nation’s public debt has escalated, with projections indicating a rise to 67.5% of GDP in 2024, up from 59% in 2022. This increase is largely attributed to the substantial costs associated with military operations and related expenditures.
In August 2024, Fitch downgraded Israel’s credit rating from ‘A+’ to ‘A’, reflecting heightened geopolitical risks and economic challenges. Similarly, Moody’s downgraded Israel’s credit rating in September 2024, citing increased geopolitical risks and the potential for further downgrades if conflicts escalate.
The ongoing conflict has also led to a widening public deficit, reaching 8.1% in July 2024. The Bank of Israel forecasts a further increase in debt levels, underscoring the economic strain posed by the prolonged conflict. Fitch projects Israel’s central government cash budget deficit to decline to 5.7% of GDP in 2025, down from 6.8% in 2024, driven by a combination of higher revenue and lower military spending.
Reductions in expenditure, particularly on public sector wages, will partially offset spending pressures related to budgetary allocations supporting coalition parties’ agendas and military funding. Fitch’s projected 5.7% fiscal deficit is higher than the 4.9% target set in the 2025 budget, reflecting the ongoing war in Gaza, which is not fully accounted for in the adopted budget.
The central government deficit is projected to decline further to 4.4% of GDP in 2026, assuming lower exceptional military spending. General government spending is expected to reach 43.3% of GDP in 2026, approximately three percentage points above the 2015–2019 average, underscoring the long-term impact of the war on both civil and military expenditures. This would contribute to a still-elevated accrual general government deficit of 8.3% of GDP in 2025 and 7% in 2026, following 9.4% in 2024.
Fitch projects general government debt-to-GDP to rise to 73% by 2026, from 68% in 2024, above the forecast ‘A’ median of 55%, driven by high deficits. Higher than forecast military spending is the main risk to our debt projections. Funding conditions remain solid. Israel issued USD5 billion in Eurobonds in February 2025 and demand for domestic debt remains robust. The structure of Israel’s debt is a strength, with an average term to maturity of more than nine years at end-2023 against 7.7 years for the ‘A’ median.
Israel’s external balance sheet remains stronger than that of its peers, with a net external creditor position of approximately 61% of GDP at the end of 2024, compared to 5% for the ‘A’ median. Foreign exchange reserves also remain high, covering around 15 months of current external payments, significantly exceeding the ‘A’ median of two months.
Fitch forecasts current account surpluses exceeding 2% of GDP in 2026, though this is lower than the pre-2023 average of around 4% (2018–2022), reflecting assumptions of increased military imports and reduced tourism revenues.
Fitch reports that the weakening of Iranian proxy forces across the Middle East has strengthened Israel’s strategic position and lowered risks to its credit profile, though sporadic escalations and ongoing tensions with Iran are likely to persist. The ceasefire between Hezbollah and Israel is expected to hold, while the collapse of the Assad regime in Syria has further reduced short- to medium-term security threats to Israel.
Israel’s military operations in Iran in 2024 secured certain strategic gains and demonstrated an understanding of Iran’s deterrence capabilities. However, the conflict in Gaza reignited in mid-March 2025, ending the ceasefire established on January 15.
Fitch anticipates that the renewed hostilities could involve intense air and ground operations lasting several months, though with fewer reserve forces mobilized compared to 2023, potentially lessening the impact on the labor force, economy, and public finances. Despite this, Israel is expected to maintain a significant presence in Gaza over the medium term.
Fitch forecasts real GDP growth to recover to 3.0% in 2025 and 3.6% in 2026, up from just 0.9% in 2024, when economic activity was significantly impacted by military mobilization and the lingering effects of a sharp contraction in the fourth quarter of 2023.
The expected rebound is driven by a lower level of mobilization in 2025 and 2026, along with improved economic sentiment as large-scale military operations wind down. The high-tech sector has demonstrated resilience throughout 2024 and is anticipated to remain a key driver of economic growth in the coming years.
The construction sector has been notably impacted, experiencing a workforce reduction due to the suspension of work permits for Palestinian laborers and the departure of migrant workers. This labor shortage has led to the halting of numerous construction projects, contributing to a slowdown in economic activity.
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