Moody's Maintains Israel's Credit Rating at Baa1 with Stable Outlook

Moody's reaffirmed Israel's credit rating at Baa1 with a stable outlook overnight between Tuesday and Wednesday. The rating agency clarified that this publication is not a new rating action but an updated summary of the existing rating considerations. Moody's highlighted Israel's economic resilience amid geopolitical shocks, though it noted that the fragile security environment continues to cast uncertainty over the economic and fiscal outlook.

The agency pointed out that ceasefire agreements with Iran, Hezbollah, and Hamas could allow Israel's economy to gradually recover from the slowdown experienced in the first quarter of the year. However, these agreements remain fragile. If sustained, Moody's projects economic growth of approximately 3.7% in 2026 and about 5% in 2027, following a 2.9% growth rate last year.

Regarding inflation, Moody's noted that the annual inflation rate eased to 1.9% in May, helped by the strengthening shekel and Israel's relatively limited exposure to high global energy prices. The agency forecasts average annual inflation of around 2% for 2026 and 2027, a significant decline from the 3% average expected in 2025, aligning with the Bank of Israel's target.

Moody's warned that fiscal balance remains under pressure due to structurally high defense and national security expenditures, estimated at about 6% of GDP annually. It projects a central government deficit of approximately 5.3% of GDP in 2026 and 4.4% in 2027, after 4.7% last year, with an overall government deficit around 5.9% in 2026. The debt-to-GDP ratio is expected to stabilize near 70% over the next two years, slightly above the 68.5% recorded in 2025.

The agency indicated that upward rating pressure could arise from clearer consolidation of ceasefire agreements and accelerated deficit reduction efforts. Conversely, renewed geopolitical deterioration, economic or fiscal weakening unrelated to security, or weakening of state institutions, particularly the judiciary, could exert negative pressure on the rating.