In Tel Aviv’s crowded cafes and Jerusalem’s government halls, there’s a quiet tension beneath the daily hum. Israel’s economy, battered by war and uncertainty, got a mixed report card last week when S&P Global Ratings reaffirmed the nation’s credit rating at “A/A-1” but kept a negative outlook, pointing to the Gaza conflict’s heavy shadow. For shop owners, workers, and families, it’s a reminder that stability is fragile when bombs fall and borders bristle.
S&P’s decision, announced on May 9, 2025, means Israel’s ability to borrow money internationally remains solid, but the agency warned that the ongoing war could tip the scales. The “negative outlook” signals a risk of downgrade within two years if fighting worsens or spreads, potentially hiking borrowing costs. S&P highlighted rising public debt, now at 69% of GDP, and military spending, which hit 100 billion shekels ($28 billion) in 2024, as key concerns. Despite recent fiscal gains—Israel’s deficit narrowed to 5.1% of GDP in April—the agency sees long-term growth at risk without peace.
Finance Minister Bezalel Smotrich struck a defiant note. “Our economy is proving its strength even in tough times,” he said at a Jerusalem press conference, his words aimed at calming markets. But for people like Miriam Katz, a Haifa grocer quoted by Haaretz, the news feels distant. “Taxes are up, customers are spending less, and now this? I just want to pay my bills,” she said, her voice heavy with worry. The January 2025 VAT hike from 17% to 18% has squeezed households, while war costs linger like an uninvited guest.
Israel’s economic tightrope is tied to its volatile reality. The Gaza war, sparked by Hamas’s October 2023 attack, has drained resources and disrupted trade. The blockade and strikes have crippled Gaza, but Israel’s economy feels the ripple effects—tourism is down, tech startups face investor hesitancy, and U.S. tariffs looming in July threaten a $7.4 billion trade deficit. S&P noted that a prolonged conflict could weaken fiscal performance and investor confidence, a fear echoed by the Bank of Israel, which urges sticking to the 2025 budget’s 4.7% deficit target.
Reactions reflect a nation divided by hope and frustration. In Tel Aviv, some see the steady rating as a win. “It’s a sign we’re holding up,” said tech worker David Cohen to The Times of Israel. On social media, posts praised fiscal discipline, but others vented, with one user writing, “Negative outlook? That’s our life here—war and worry.” Globally, investors took note—Israel’s $5 billion bond sale in February showed market trust, but S&P’s warning cooled optimism, with analysts citing risks of regional escalation.
The stakes are deeply personal. A downgrade could raise loan rates, hitting small businesses and homebuyers hard. Already, families feel the pinch—higher VAT and fuel costs eat into budgets, while war spending overshadows schools and hospitals. Yet, there’s resilience too. Israel’s tech sector, a global powerhouse, still draws investment, and recent Syrian talks in Qatar hint at diplomatic shifts that could ease tensions. But S&P’s report is blunt: without de-escalation, growth.
