NEW YORK (VINnews) — S&P Global Ratings affirmed its ‘A/A-1’ long- and short-term foreign and local currency sovereign credit ratings on Israel, stating that its economic outlook is “stable.”

The company, the largest assessment company worldwide, explained that “The stable outlook reflects our view that military de-escalation, underpinned by the ceasefire agreements, will lower immediate security risk for Israel. The outlook reflects our assumption that possible military hostilities will remain episodic and contained, even if tensions between Israel and Iran and its proxies persist and the broader regional security environment remains fragile.”

S and P warned that “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.

It also reiterated that “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.”

• In explaining the rationale for its decision, S and P stressed that:
  Israel’s credit strengths include its wealthy, innovative, 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 very high geopolitical risks, as well as elevated security-related pressures on the country’s public finances.
• We expect the U.S.-Iran and Israel-Hamas ceasefire agreements to broadly hold. Occasional skirmishes and temporary breaches of the truce are still possible.The path to a lasting peace agreement in these conflicts will remain long, however.
• Military de-escalation will ease supply side constraints and push Israel’s real GDP growth to close to 6% in 2027.
• The U.S.-Iran ceasefire has held until now. The initial two-week truce was unilaterally extended by the U.S. administration, following the request of Pakistani mediators to provide the Iranian leadership more time to submit a peace proposal. Direct missile and drone exchanges between Israel and Iran have ceased since the truce took effect. We understand damage to Israel’s critical infrastructure from Iran’s missile strikes in February-March 2026 has been limited.

Regarding the possibility of continued warfare, the company wrote that “Despite military de-escalation, we believe the geopolitical risks Israel faces will remain high, not least because of the fragile regional security environment including in neighboring Lebanon. Notwithstanding Israel’s largely successful effort to degrade the military capabilities of its key adversaries–namely Iran and Iran-backed proxies including Hezbollah–tensions remain elevated. Israeli military involvement in Lebanon has widened and the existing ceasefire between Lebanon and Israel appears fragile. Moreover, the extent to which the U.S. and Iran might be willing to extend a ceasefire remains uncertain. There is a risk the U.S., Israel, and Iran could engage in another round of direct military confrontation.

The diverging views of Israel, the U.S., the EU, Türkiye, and the Gulf states on the post-war settings in Gaza will complicate progress toward a lasting peace agreement. The second phase of the Israel-Hamas ceasefire agreement, focused on security arrangements around Gaza, including the disarmament of Hamas and the formation of a temporary international stabilization force, has largely stalled. Progress has been slow 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.

The suspension of military activity will boost the Israeli economy from the second half of 2026. Absent military re-escalation, we project the recovery will likely start in the second quarter after our estimate of an almost 10% output contraction in annual terms in the first quarter of 2026 caused by the conflict with Iran. We project Israel’s GDP growth will rebound strongly in the second half of 2026 and reach 5.9% in 2027 as consumer and business confidence strengthens and the mobilization of reserve soldiers declines, easing labor supply constraints.

The fallout from the global energy price shock emanating from the Middle Eastern conflict is limited, given Israel’s sizable domestic gas production. Domestic natural gas accounts for 70% of electricity production (renewables and coal add another 15% each). Even though Israel imports both crude oil (from Azerbaijan and Kazakhstan) and refined petroleum products, the inflationary impact of higher global energy prices has been to some extent mitigated by the exchange rate appreciation on the back of Israel’s persistent current account surplus.

Although we project the security risks to ease somewhat, Israel’s GDP will likely remain below the pre-war trend. This is due to the lasting effects of the military conflicts. Labor supply constraints will likely persist as more mobilized workers will likely remain in the military compared with before 2023, 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 re-escalate, the implications for Israel’s 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.