As the regional conflict extended beyond the Gaza strip, towards Lebanon, and air warfare continued in Iran, Syria, Iraq and Yemen, Israel’s financing needs grew. Hence, in 2024 and 2025, Israel’s bond issuance was among the largest on record – above USD75bn in 2024 and aboveUD60bn in 2025. Israel tapped international markets again in early 2026, issuing an additional USD6bn with sizable oversubscription. 

The war has had a negative impact on the overall state of government finances and the debt profile. The government deficit will be above 5% for a third year in a row, at -5.2% in 2026, after peaking at -8.3% in 2024. Public debt has grown by almost +20% in just four years, given the substantial increase in military spending. Public debt is projected at 70.4% in 2026 and is set to increase further through 2028. This has caused yields, especially at the long end, to increase by more than +20%. Short-term maturity yields have returned to pre-Hamas-attack levels. Credit default swaps dropped substantially (-50%) in late 2024, closer to Peru’s level, but they remain 30% above pre-war levels. As CDs indicate, the highest risks seem to have faded. In late 2025 and early 2026, both Moody’s and S&P revised Israel’s credit outlook to stable from negative. 

In parallel to the credit profile improvement, the New Israeli Shekel strengthened by 15% in 2025 against the USD and 1% against the euro, driven by the stronger performance of the Israeli economy, and the consistent external balance. Preliminary 2025 FDI data point towards a substantial improvement after two years of consistent deterioration, especially in the high tech (cybersecurity and software) sector, amid the global AI boom. In addition, many Israeli institutional investors shifted portfolios, reducing exposure, especially to USD, and increasing Shekel demand.

In recent months, several business reforms have been put in place to balance the economy in the post-war environment, notably a comprehensive high-tech tax reform aimed at enhancing competitiveness, and attracting foreign capital and talent. To offset the increased government deficit, the VAT increased to 18% and a minimum corporate tax framework was adopted (as in other OECD members). Trade developments with the US — Israel’s largest trading partner — could pose headwinds: the US has imposed a 15 % tariff on certain Israeli exports, while Israel has brought down the tariff on US imports to 0%. The special loan-assistance program that Israeli banks adopted early in the war — which let households and businesses defer loan/mortgage repayments with favorable terms — began winding down at the turn of 2025-2026. 

Tourism and construction were among the most impacted sectors and remain constrained by the business environment. Tourism arrivals remain 50% below 2022/23 levels, and well below pre-pandemic levels. Meanwhile, the labor market remains tight and has not fully recovered. Unemployment remains low, while the employment rate shifted up to 61% in late 2025. Total population growth dropped below 1% as net migration was negative, pushing down overall growth and reducing the overall size of the labor market.

The General election scheduled to take place by 27 October 2026 is the political event of the year. The Netanyahu coalition will be tested in the polls for the first time since the Hamas attacks in October 2023. The Government bloc has held together amid challenges from both centrist and member parties farther to the right. The opposition remains mostly divided even though a coalition could form before the election to concentrate votes. Meanwhile, polls remain split between government and the opposition bloc, while Netanyahu’s Likud party is leading as the main party. 

Israeli society has experienced divisions that have persisted even during times of conflict. Prior to the Hamas attacks in October 2023, debates surrounding a judicial reform aimed at adjusting the balance between the judiciary and legislative branches sparked social tensions. Although protests have since subsided, underlying divisions remain, with potential to resurface as military operations decrease. During the conflict, new societal challenges emerged, such as discussions around military service for ultra-Orthodox communities, which led to opposition and protests.