S&P, Fitch Diverge on Israel’s Economic Outlook Amid Rising Regional Tensions

By IndraStra Business News Desk

Cover Image Attribute: Israeli security forces established a perimeter around homes destroyed by Iranian missile strikes in Tel Aviv on June 14, 2025 / Source: Faiz Abu Rmeleh, Middle East Eye (MEE)

As clashes between Israel and Iran escalate, global credit rating agency Standard & Poor’s (S&P) has issued a sobering warning about the potential economic consequences of a prolonged conflict. On Monday, June 16, 2025, S&P cautioned that Israel’s credit rating, already under strain, faces the risk of further downgrades if the ongoing military campaign against Iran’s nuclear program intensifies or extends beyond initial expectations. The agency highlighted that the conflict, now in its fifth day, is testing earlier assumptions due to the increasing likelihood of escalation. Israel’s stated objective of neutralizing Iran’s nuclear capabilities, a mission it estimates could take at least two weeks and possibly longer, suggests a more protracted engagement than the retaliatory strikes seen in 2024. This development has raised concerns about the economic toll on Israel, with ripple effects that could impact government, business, and household borrowing costs.
The conflict began early Friday when Israel launched a series of strikes targeting Iran’s nuclear and ballistic missile programs, citing an imminent existential threat. Iran responded with missile barrages aimed at Israeli territory, with one such attack illuminating the night sky over Tel Aviv on Sunday, June 15, 2025. Images of explosions in the city reveals the intensity of the exchanges. However, both sides appear to be calibrating their actions to avoid drawing in third parties, such as the United States or Gulf nations. S&P analysts noted that, so far, the conflict has remained confined to Israel and Iran. Still, they warned that any broadening of Iran’s retaliation could provoke a response from the U.S. or regional allies, significantly heightening risks. A longer or more intense conflict, the agency added, increases the chances of military miscalculations, which could further destabilize the region and exacerbate economic pressures on Israel.
S&P’s concerns are rooted in the potential for a sustained conflict to erode Israel’s economic stability. The agency reaffirmed Israel’s A/A-1 credit rating in May 2025, after downgrading it twice in the previous year, but maintained a negative outlook, signaling the possibility of additional downgrades. A lower credit rating would raise borrowing costs for the Israeli government, businesses, and households, straining public finances and potentially slowing economic growth. The negative outlook reflects the risk that an escalation in hostilities could weaken Israel’s fiscal position and balance-of-payments metrics, both critical indicators of economic health. S&P pointed out that Israel’s campaign, unlike the shorter retaliatory strikes of 2024, appears poised to extend over weeks, amplifying these risks. The agency also noted that diplomatic efforts to resolve the crisis, including two months of U.S.-led negotiations with Iran before Israel’s strikes, seem increasingly unlikely to yield a resolution.
In contrast, Fitch Ratings, another major credit rating agency, offered a more measured assessment, suggesting that the economic impact of the conflict may remain limited. In a separate report, Fitch analysts expressed confidence that the fighting is likely to remain contained between Israel and Iran and not persist beyond a few weeks. They pointed to Israel’s robust defensive capabilities, which have so far mitigated the economic damage from Iran’s missile strikes. Fitch also noted that Iran’s ability to retaliate through proxy groups in Gaza and Lebanon has been weakened by Israel’s prior military operations in those areas. These factors, according to Fitch, suggest that Iran’s responses are unlikely to cause significant economic harm to Israel. Like S&P, Fitch affirmed Israel’s A credit rating in April 2025 but maintained a negative outlook, acknowledging that the trajectory of the conflict will determine whether further downgrades are warranted. The agency emphasized that the risk of a downgrade would depend on whether the conflict remains limited to Israel and Iran or expands to involve other regional or global actors.
The contrasting assessments from S&P and Fitch highlight the uncertainty surrounding the economic fallout of the Israel-Iran conflict. While S&P focuses on the broader risks of a prolonged or escalated war, Fitch’s analysis leans on Israel’s defensive strengths and the diminished capacity of Iran’s regional proxies. Both agencies, however, agree that the conflict’s duration and scope are critical factors. A protracted campaign could strain Israel’s economy, particularly if it disrupts trade, energy supplies, or investor confidence. The Israeli government has already faced increased borrowing costs due to last year’s downgrades, and further reductions in its credit rating could exacerbate these challenges. Businesses and households, already struggling with the economic pressures of ongoing regional instability, could face higher loan rates and reduced access to credit, further complicating the economic landscape.
The international community has been closely monitoring the situation, with diplomatic efforts so far failing to halt the escalation. The U.S., which engaged in talks with Iran for two months prior to Israel’s strikes, has not publicly detailed its next steps, but S&P’s report suggests that a wider conflict involving the U.S. or Gulf states could significantly alter the economic and geopolitical calculus. For now, both Israel and Iran appear to be avoiding actions that would directly draw in external powers, but the situation remains fluid. Iran’s threats of broader retaliation have raised concerns about potential missteps that could spiral into a larger regional conflict, a scenario that S&P warns could have severe consequences for Israel’s economic stability.
With the conflict now in its second week, global attention remains intensely focused. The images of missile strikes over Tel Aviv serve as a stark reminder of the stakes involved, not only for the immediate parties but for the broader region. Israel’s determination to neutralize what it sees as a critical threat from Iran’s nuclear ambitions is matched by Iran’s resolve to defend its sovereignty, creating a volatile standoff with no clear resolution in sight. The economic implications, as outlined by S&P and Fitch, add another layer of complexity, as Israel faces the dual challenge of military engagement and financial strain. While Fitch remains cautiously optimistic about Israel’s resilience, S&P’s warnings reflect the fragility of the situation, where a single miscalculation could tip the balance toward greater economic and geopolitical turmoil. For now, the conflict remains a high-stakes gamble, with Israel’s credit rating and economic future hanging in the balance as the nation navigates this precarious moment.

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