Credit Agencies Assess Israel's Economy Post-Election, Maintain Stable Outlook

Three major credit rating agencies, Moody's, Fitch, and S&P, have concluded their reviews of Israel's economy following the recent elections without altering the country's credit rating. Moody's and Fitch released special analyses in late October, while S&P opted against any rating action, maintaining Israel's 'A' rating with a stable outlook and publishing a full analysis. Although this suggests agreement, closer examination of their reports reveals differing perspectives on the risks facing Israel's economy.

All three agencies concur that the election results themselves do not warrant a rating change. They anticipate a prolonged government formation process, possibly leading to repeat elections. A shared concern is the projected rise in the debt-to-GDP ratio, currently around 68% (up from 60% pre-war), unless a government implements a serious fiscal plan. This trend is narrowing Israel's financial buffers, potentially hindering its ability to manage unexpected crises.

Moody's and S&P highlight that defense spending will remain a top priority for any incoming government, with S&P noting that both political blocs support high defense expenditures, approximately 7% of GDP, significantly more than before October 2023. S&P and Fitch predict Israel will enter 2027 without an approved budget. Both Moody's and S&P have improved deficit forecasts due to higher-than-expected revenues, partly attributed to tax payments from Nvidia, though Moody's points out this distorts the true picture of local economic activity.

The agencies identify a growing reliance on a few key growth engines. Moody's, which holds the lowest rating for Israel (Baa1 with a stable outlook), identifies institutional resilience as the primary risk. Concerns include the status of the Attorney General, judicial appointments, and the scope of judicial review. Moody's suggests that a government led by an opposition figure might foster more diplomatic openness and policy changes in Gaza, the West Bank, Lebanon, and regarding Iran, which would be positive for the rating.

S&P, conversely, focuses on geopolitical risks, particularly the conflict with Iran and its proxies, which leads them to downgrade Israel's baseline rating of AA- (pre-war level) by two notches to A. An upgrade would require a significant reduction in security risks or substantially better fiscal outcomes. S&P notes that the opposition is expected to prioritize strengthening state institutions and increasing labor market participation.

Fitch's primary concern is governmental stability, warning of a period of unstable coalitions and transitional governments similar to 2019-2022, which saw five elections. Fitch's likely scenario involves the Knesset dissolving in early January, potentially leaving Israel without an approved budget through 2027 or beyond. They foresee a moderate increase in debt, contributing to their negative outlook.

In essence, the rating agencies are not confused but are measuring different variables that collectively map Israel's risks. The true test for Israel's credit rating will come with the formation of the next government, not with the recent review.