The Israeli Economy Stanley Fischer Bank of Israel November 2007

The Israeli Economy

Stanley FischerBank of IsraelNovember 2007

Macroeconomic Situation

Growth Rate of GDPGrowth Rate of GDP2000-20072000-2007%

8.9

-0.4 -0.6

2.3

5.2 5.3 5.2 5.4

-2

0

2

4

6

8

10

2000

2001

2002

2003

2004

2005

2006

2007

BI- Forecast

Rate of Inflation in Last 12 Months Rate of Inflation in Last 12 Months and Inflation Targets, and Inflation Targets, 1992-20071992-2007

-3

-1

1

3

5

7

9

11

13

15

17

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Inflation during previous 12 months

Inflation target

%

Bank of Israel Interest Rate, Inflation Bank of Israel Interest Rate, Inflation Expectations*, and the Fed’s interest Rate, Expectations*, and the Fed’s interest Rate,

2004-20072004-2007

0

1

2

3

4

5

6

01/0

402

/04

03/0

404

/04

05/0

406

/04

07/0

408

/04

09/0

410

/04

11/0

412

/04

01/0

502

/05

03/0

504

/05

05/0

506

/05

07/0

508

/05

09/0

510

/05

11/0

512

/05

01/0

602

/06

03/0

604

/06

05/0

606

/06

07/0

608

/06

09/0

610

/06

11/0

612

/06

01/0

702

/07

03/0

704

/07

05/0

706

/07

07/0

708

/07

09/0

710

/07

11/0

7

Bank of Israel interest rate

Inflation expectations

Fed's interest rate

%

*For 12 months, as derived from the capital market.

%

3.6

1.8

3.9 4.03.8

3.4

3.02.9

1.6

0.7

4.4

3.8

5.4

3.7

1.9

0.9 0.8

0

1

2

3

4

5

6

2000 2001 2002 2003 2004 2005* 2006 2007 2008

Deficit Target Actual Deficit

Budget Deficit** (percentage of GDP, 2000-2007)

*Percent of GDP; excluding credit extended. Until 1996, domestic deficit; from 1997, total deficit. *The data from 2000 refer to the deficit excluding the Bank of Israel’s profits.

Under the assumption

that the budget is fully

performed

Public Sector Debt,Percentage of GDP, 2000-2007 (year-end)

87.091.9

99.8 101.7 99.995.9

86.781.5

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006 2007E

%

International Aspects

The Nominal and the Real Exchange RateThe Nominal and the Real Exchange Rate2007 -2007 - 19971997

3.0

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

4.8

5.0

Shekel / Dollar Exchange Rate01/01/1997-30/10/2007

90

95

100

105

110

115

120

125

130

135

The Real Exchange Rate by Trading Partners

)100=01/1997 ,01/1997-10/2007(127.2

NIS

*The Nis/$ chart is on a daily basis, while the real exchange rate chart is on a monthly basis.

•A rise in the index indicates depreciation.

•The figure for October 2007 is calculated from spot exchange rates known for the half-month, our forecast CPI from the monthly model, and an extrapolation of inflation in the countries whose currencies are in the currency basket.

•SOURCE: IFS data. For April to October 2007, Bank of Israel calculations.

-5.1 -5.0

-3.1

-0.9-1.4

-0.8 -1.1 -0.8

1.2

2.4

3.33.8

5.6

-6

-4

-2

0

2

4

6

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

E

Current Account of Balance of PaymentsCurrent Account of Balance of Paymentsas Percentage of GDP, 1995-2007* (Annual)

* Foreign Currency Department forecast•SOURCE: Balance of Payments, Central Bureau of Statistics.

Openness of the Israeli Economy(percentage of GDP, 1995-2006)

30

32

34

36

38

40

42

44

46

48

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Imports

Exports

%

* Goods and Services.

Source: National accounts, CBS.

1995High36%

Medium-high28%

Medium-low21%

Low15%

Manufacturing Exports by Technology IntensityManufacturing Exports by Technology Intensity

High-technology Industries: office & computing equipment, electronic components, aircraft, electronic communication equipment, equipment for control & supervision, pharmaceutical products.

Medium-high-technology Industries: chemicals & refining petroleum, machinery & equipment, electronic equipments & electrical motors, transport equipment.

Medium-low-technology Industries: mining & quarrying, rubber & plastic products, non-metallic mineral products, basic metals, metal products, ships & boats, jewelry & silversmiths’, articles n.e.c.

Low-technology Industries: food products, beverages & tobacco, textiles, wearing apparel & leather, paper, printing & wood products.

2006 Low7%

Medium-low18%

Medium-high27%

High48%

Source: Foreign Trade, CBS.

Technology-Intensive Exports*(Percentage of GDP, 1999-2006)

*Including high technology industries and medium-high technology industries

10.9

12.5 12.3 12.1

13.9 14.3

15.4

13.2

0

2

4

6

8

10

12

14

16

18

1999 2000 2001 2002 2003 2004 2005 2006

%

Investment in Israel by Nonresidents(as percentage of GDP, 2000-2007*)

Investment of Israeli Residents Abroad (as percentage of GDP, 2000-2007*)

02468

101214161820

2000 2001 2002 2003 2004 2005 2006 Jun 2007

Direct investment Portfolio investment

0235689

1112141517

2000 2001 2002 2003 2004 2005 2006 Jun 2007

Direct investment Portfolio investment

SOURCE: Central Bureau of Statistics, Balance of Payments.

%

%

8,092

14,302

4,792

4,1386,871

2,0413,822

1,812

1,767

7233,626

755,062

5,058

8,956

14,3998,244

2,9304,544

2,381

2,0653,154

2,708982

1,623688

2,1493,336

* Foreign Currency Department forecast

1,615

4,878

4,025

4,458

Financial Markets and Risk Premium

The Share Markets: Israel, the US and the Emerging Markets,

(1/6/2006=100, 1/6/2006 - 30/10/07)

85

95

105

115

125

135

145

155

165

175

Israel (Tel Aviv 100) - right scale

right scale - EM (EMERGING MARKETS)

left scale - NASDAQ

Israel 5 year Credit Default Swap 6/2003 - 10/2007

0

20

40

60

80

100

120

140

5yr CDS

1722

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Israeli Shahar - US Government 10 Year Spread, 1/2006 - 10/2007

%

Science, Technology &Education

ICT value added ICT value added as percentage of business sector product as percentage of business sector product

20032003

4.85.7

6.7 6.9 6.97.6 7.6

8.1 8.2 8.4 8.5 8.5 8.6 8.8 9.1 9.19.8 9.9

10.510.811.8

13.2

14.915.716.0

0

2

4

6

8

10

12

14

16

18

SOURCE: Central Bureau of Statistics.

National Expenditure on R&D National Expenditure on R&D as percentage of GDPas percentage of GDP

20052005

0.50.8

1.0 1.1 1.11.3 1.4 1.4

1.6 1.7 1.7 1.8 1.8 1.9 2.0 2.12.4 2.4 2.5

2.8 2.9 2.9

3.33.5 3.6

4.4

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Greec

e

Portu

gal

New Z

eala

nd

Spain

Italy

Irela

nd

Czech

Rep

ublic

Norway

Unite

d Kin

gdom

Canad

a

Austra

lia

Nethe

rlands

Belgi

um

Franc

e

aver

age

OECD

Unite

d Sta

tes

Germ

any

Austri

a

Denem

ark

Icel

and

Korea

Switzer

land

Japan

Finla

nd

Sweden

Isra

el

SOURCE: Central Bureau of Statistics.

Share of the Population Aged 25-64 with Share of the Population Aged 25-64 with Tertiary-Level Education Tertiary-Level Education

20052005

1012 13 13 14 15

17 17 1821

25 25 26 27 27 28 29 29 30 30 30 31 31 32 32 33 34 35

39 40

46 46

0

10

20

30

40

50

Source: Education at a Glance (OECD), 2007.

Challenges

Rate of Unemployment2000.I-2007.II (Quarterly)

%

SOURCE: Based on Central Bureau of Statistics Labour Force Survey.

7.67.77.88.3

8.9 8.88.88.9

0

3

6

9

12

Poverty Rate, Relative Measure and a Constant Basket, 1997-2006

23.8%

16.1%

14.2%

12.7%

15.6%16.6% 16.9%

16.1%

23.7%23.2%

18.8% 18.8%19.6%

20.0%

17.7%

17.5%

21.6%

17.4%17.5%

13.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Poverty (relative measure)

Poverty (1997 basket)

•Excluding Jerusalem Arabs.

SOURCE: Central Bureau of Statistics Income and Expenditure Surveys.

Incidence of Relative Poverty among Individuals, 1997 and 2006a

38.5

22.5

13.710.2 10.9

51.6

34.1

24.219.9

11.4

0

10

20

30

40

50

60

0-8 9-10 11-12 13-15 16+

1997 2005

26.1

11.917.5

30.935.6

23.4

14.0

25.4

51.6

65.7

0

10

20

30

40

50

60

70

1 2-4 5-6 7-8 9+

1997 2005

12.3

39.335.9

13.3

58.8 56.1

0

10

20

30

40

50

60

70

Others Ultra-orthodox Arabs

1997 2005

a Excluding Jerusalem Arabs.

SOURCE: Central Bureau of Statistics Income and Expenditure Surveys.

By family sizeBy education of head of household

By number of wage earnersBy population group

60.1

20.4

2.1

78.1

36.1

4.5

0

10

20

30

40

50

60

70

80

90

0 1 2+

1997 2005

Average Class Size by Level of Education 2005

0

5

10

15

20

25

30

35

40Primary Education

Lower Secondary Education

Source: Education at a Glance (OECD), 2007.

Change in Expenditure on Educational Institutions for all Services per Student

(Between 1995 and 2004, 1995=100, constant prices 2004)

0

50

100

150

200

250

Switzerla

ndIs

rael

Germ

any

Italy

Norway

Sweden

United

Kingdom

Denmar

k

Finlan

d

Czech

Repub

lic

Japa

n

Mex

ico

United

State

s

Spain

Nether

lands

Australia

OECD aver

age

Portugal

Slovak

Rep

ublic

Hungary

Irela

nd

Poland

Greece

Turkey

Primary and Secondary Education Institutions*

Tertiary Education Institution

Source: Education at a Glance,2007.*incl. Intermediate schools and Pre-Academic Preparatory Courses

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