Moody’s leaves Israel’s credit outlook stable, praises economic resilience despite war costs

Moody’s left Israel’s sovereign credit rating unchanged at Baa1 with a stable outlook, signaling confidence in the economy’s ability to withstand prolonged regional conflict while warning that security risks and elevated military spending continue to limit prospects for an upgrade.

The international ratings agency said its latest report was a routine review rather than a formal rating decision. The agency last acted on Israel’s rating in January, when it improved the outlook from negative to stable while keeping the Baa1 rating intact.

“The Israeli economy has demonstrated resilience in the face of geopolitical shocks,” the agency said, adding that the current security situation nevertheless “continues to weigh on the country’s economic and fiscal outlook.”

Moody’s believes the economy is poised for a stronger recovery if ceasefires with Iran, Hezbollah and Hamas remain in place. While describing those arrangements as fragile, the agency said sustained calm would allow activity to rebound after a weak opening to 2026.

Under that scenario, Israel’s economy is expected to expand by 3.7% this year and by 5% in 2027, following growth of 2.9% in 2025. Those projections are somewhat more conservative than those published by the Bank of Israel and the Finance Ministry.

Price pressures have also moderated. Annual inflation fell to 1.9% in May, helped by the appreciation of the shekel and Israel’s relatively limited exposure to rising global energy costs. Moody’s expects inflation to average about 2% over the next two years, consistent with the central bank’s target.

The agency cautioned, however, that Israel’s fiscal position remains strained by permanently higher defense expenditures. It estimates spending on defense and national security will remain around 6% of gross domestic product each year, significantly above pre-war levels.

As a result, Moody’s forecasts the central government deficit will widen to 5.3% of GDP in 2026 before narrowing to 4.4% in 2027. Government debt is expected to level off at roughly 70% of GDP, compared with 68.5% at the end of last year.

The report also highlighted the factors that could eventually change Israel’s rating. A lasting improvement in regional stability, coupled with faster deficit reduction, could support a higher rating over time.

At the same time, Moody’s warned that renewed military escalation, a weakening of economic performance unrelated to security spending, or erosion of Israel’s institutional strength could trigger negative rating pressure.

The agency specifically pointed to concerns surrounding the judiciary, saying a downgrade could result from “a weakening of Israel’s institutions (especially if the judicial system turns out to be weaker than expected following institutional reforms).”

The unchanged rating leaves Israel four notches above non-investment grade, allowing the government to continue borrowing at investment-grade status as it confronts the economic costs of an extended regional conflict.