Fitch Affirms Israel’s ‘A’ Rating with Negative Outlook

In a closely watched sovereign credit assessment, Fitch Ratings has affirmed Israel’s long-term foreign-currency issuer default rating (IDR) at ‘A’, while maintaining a negative outlook, signaling mounting concerns over fiscal stability and geopolitical risks.

The agency’s decision reflects a delicate balance between Israel’s resilient, high-value economy and intensifying pressures from rising public debt and prolonged regional conflict.

According to Fitch, the negative outlook is primarily driven by expectations of continued increases in government debt, which already exceeds the median for countries in the ‘A’ rating category. The agency warned that ongoing military operations and broader geopolitical tensions could further strain Israel’s economic trajectory.

Government spending, particularly defense expenditure, remains a key concern. Military spending is projected to stay elevated through 2026, reaching 7.5% of GDP, a sharp rise from 4.1% in 2022, underscoring the long-term fiscal impact of sustained conflict.

Fitch highlighted the risk of further escalation in Israel’s conflict with Hezbollah as a central threat to economic stability. The agency noted the possibility of expanded military operations in southern Lebanon, which could require large-scale mobilization of reserve forces and significantly increase fiscal burdens.

Such developments, Fitch cautioned, could derail fiscal consolidation efforts and weaken growth prospects over the medium term.

The agency forecasts that Israel’s central government cash deficit will widen to 5.7% of GDP in 2026, up from 4.7% in 2025, largely due to higher-than-expected military spending.

Although a modest improvement is anticipated in 2027, with the deficit narrowing to 4.5%, overall public expenditure is expected to remain elevated at 45% of GDP, well above pre-war levels of around 41%.

Public debt is projected to climb to 71.4% of GDP in 2026, with further increases expected in the absence of meaningful fiscal adjustments following upcoming elections. By 2027, debt could reach 72.5%, significantly exceeding the ‘A’ category median of 56%.

Fitch warned that without credible fiscal consolidation measures, debt levels may continue to rise gradually in the years ahead.

Despite these challenges, Israel’s rating is supported by several structural strengths. Fitch pointed to the country’s diversified and technologically advanced economy, along with strong external finances.

Israel maintains a robust net external creditor position, estimated at 62% of GDP by the end of 2025, and holds substantial foreign exchange reserves covering approximately 14 months of external payments.

Additionally, the country scores relatively well on governance indicators, including institutional quality and control of corruption.

Fitch also flagged domestic political divisions as a complicating factor that could hinder timely fiscal reforms. A history of unstable governments, the agency noted, has often slowed policy decision-making and weakened fiscal discipline.