Israel’s AAA-Level Economy Held Back by BBB-Level Government Policies, Says S&P Report

The recent semi-annual report by rating agency S&P highlights a significant disparity in Israel’s credit rating, revealing why the country has not yet achieved an upgrade despite its strong economic performance. Among 142 countries rated, only ten receive the highest score of 1 in both economic strength and external sector independence, a mark of a "super-economy." Israel is unique in this elite group for scoring a top 1 in economic and external sector metrics but only a 4 in institutional quality, fiscal performance, and debt burden, which prevents it from reaching the highest overall rating.

Israel’s economy is forecasted to grow by about 6% in 2027, ranking fourth among 53 countries rated A and above, trailing only oil-rich Qatar, Abu Dhabi, and the UAE. This growth would raise Israel’s GDP per capita from $60,400 to $69,300, placing it alongside advanced economies like Singapore and Switzerland. Inflation is expected to decline to 2.2% by the end of the decade, aligning with price stability targets.

However, government fiscal management is a weak link. The budget deficit is projected at 6% of GDP in 2026, worse than France, Belgium, and the UK, and nearly matching the US. The deficit is expected to remain above 4% through 2029, reflecting a lack of a fiscal consolidation plan after the government spent 400 billion shekels. Net debt is forecast to barely improve in 2027 and then rise again, surpassing 2020 levels.

S&P’s analysis shows that Israel’s credit rating is limited not by economic fundamentals or external independence but by government policy and fiscal discipline. The country’s overall A rating reflects an average of its AAA-level economy and BBB-level government performance. Future rating upgrades depend on improved fiscal governance rather than economic growth or conflict resolution.