AAA Economy, BBB Government: Why Israel Has Not Received a Rating Upgrade
An S&P report highlights that Israel functions as a 'super-economy' with AAA-level metrics, yet its rating remains at A due to government fiscal policy. Structural deficits and rising debt levels overshadow the business sector's strong performance.
The most significant contribution of the semi-annual report by the rating agency S&P, published at the end of the week, is not the forecasts, but the comparative analysis. Israel was measured against 141 other countries, providing a clear perspective on its relative position. Out of 142 rated countries, only ten receive the highest grade (1) for both the economy and the external sector. This defines a 'super-economy,' a prestigious club that includes Norway, Singapore, Sweden, Switzerland, Germany, Austria, Hong Kong, Korea, and Taiwan. All nine are rated AA or higher. The tenth is Israel, yet it is rated only A.
This gap is explained by three other grades: Israel receives a 4 for the quality of institutions, a 4 for budget execution, and a 4 for debt burden (6 being the worst grade). This is a unique combination: a country with a 1 in the economy and external sector, but a 4 in institutional and budget policy. As of mid-2026, it has no equivalent in the world.
An Economy Split Between Two Worlds
The first world is the business sector. S&P forecasts growth of about 6% for Israel in 2027—the fourth highest among the 53 countries rated A and above. Among developed economies that do not rely on hydrocarbons, this is the highest growth forecast. GDP per capita is projected to jump from $60.4 thousand to $69.3 thousand. Inflation is expected to drop to 2.2% and stabilize at 2% by the end of the decade.
The second world is the government. The deficit in 2026 stands at 6% of GDP—the sixth worst among those 53 countries. This is higher than in France (5.05%), Belgium (5.2%), and the UK (4.7%). The issue is that the trend continues: according to forecasts, the deficit will not drop below 4% of GDP through 2029. The current government failed to present a fiscal consolidation plan after spending 400 billion shekels, leaving the burden for the next government.
The Debt Trap
The second critical factor is debt. The forecast is troubling: even in the strongest year of 6% growth (2027), net debt drops by only 0.07 percentage points: from 66.81% to 66.74% of GDP. It then begins to rise again—to 67.5% in 2028 and 68% in 2029, exceeding the level recorded in 2020. This is the definition of a structural deficit: even the best-case growth scenario is insufficient to reduce the debt burden.
The bottom line is simple: Israel's rating will not be changed by growth, as it is already priced at the maximum, nor by the end of hostilities, as that is already factored into the forecast. It will be changed by government policy, including fiscal policy. Israel is rated A with an economy that functions like AAA and a government that functions like BBB.
