Israel weekly economic wrap: rising geopolitical tensions, 2025 budget passes, but fiscal risks remain amid signs of economic softening

ISRAEL - In Brief 30 Mar 2025 by Sani Ziv

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The past week in Israel was marked primarily by heightened domestic tensions surrounding the judicial overhaul and the anticipated clash between the government and the Supreme Court. This stems from efforts to dismiss both the Attorney General and the head of Israel’s Security Agency (Shin Bet). Moody’s, the international credit rating agency, which had already downgraded Israel’s sovereign rating by three notches to Baa1 during the war, issued another warning: “Israel’s credit profile reflects very high political risks that are expected to weaken its economic and fiscal resilience”. Meanwhile, security tensions continue to rise. Fighting in Gaza has escalated, and, for the second time, rockets were fired from Lebanon toward northern Israel, prompting an Israeli airstrike on targets in Beirut—the first such strike since the ceasefire agreement at the end of November. Israel’s sovereign risk premium, as reflected in the 10Y CDS spread, edged higher to 126 basis points from 119 at the start of March, though it remains well below the wartime peak of 190 bps. The Tel Aviv 35 Index fell 1.6% for the week, closing at 2,461.3 points. On Sunday, the index extended its losses, dropping a further 1.37%. 2025 budget passes, but fiscal risks remain On the fiscal front, the government passed the 2025 budget in its second and third readings in the Knesset, which helps to reduce short-term economic uncertainty. Total government expenditures for 2025 are set at NIS 619.58 billion—about NIS 1 billion below the 2024 budget. The planned deficit for 2025 stands at 4.9% of projected GDP, which, based on our estimates, would allow the debt-to-GDP ratio to stabilize, assuming growth reaches ...