Research Department 1 Global Economic Crisis and the Israeli Economy Herzliya conference Dr. Karnit Flug Research Director, Bank of Israel February 2009

Research Department 2 Global Economic Crisis

Research Department 3 Annual Growth Rates F Source: International Monetary Fund – World Economic Outlook

Research Department 4 Forecast of World Economic Activity in 2009 Source: IMF – World Economic Outlook

Research Department 5 Indexed Price of Goods Excluding Oil and the Price of Oil 2004 – 2009 (daily data) Indexed Price of Goods Excluding Oil (Right Axis) Price of Oil (Left Axis) מדד Source: Bloomberg

Research Department 6 Index of Consumer Confidence in the U.S. and Israel (100 = 2000, )

Research Department 7 The Share Markets: Israel, the US and the Emerging Markets, (1/6/2006=100, 01/06/2006 – 28/01/2009) Israel (Tel Aviv 100) EM (EMERGING MARKETS) NASDAQ

Research Department Israel 5 year Credit Default Swap and EMBI+ 6/ /2009

Research Department 9 Factors Contributing to the Exposure/Vulnerability of the Israeli Economy to the Crisis. The Israeli economy is highly integrated in the global economy. Being a small open economy, growth is highly dependent on exports, particularly high tech. A large percentage of the high tech exports are to the U.S. which is at the epicenter of the crisis. Structural changes in the financial system caused the rapid expansion of non-bank credit which contracted sharply as a result of the global financial crisis. High debt-to-GDP ratio increases vulnerability and limits the scope for counter-cyclical fiscal policy.

Research Department 10 Factors Increasing the Resilience of the Israeli Economy High households savings ratio reduces the dependence of private consumption on credit availability. Current account surplus and positive net asset position on the external account. High (and rising) foreign exchange reserves. Conservative banking system: Relatively high capital adequacy ratio and low rate of non-performing loans at the onset of the crisis. No bubble in the real estate market.

Research Department 11 The Israeli Economy

Research Department 12

Research Department 13 Weighted Net Average of all Activity in the Business Sector by Industry

Research Department 14 Macro Economic Forecast 2010F2009F Gross Domestic Product Business-Sector Product Private Consumption Exports (excl. diamonds) Gross Domestic Investment Civilian Imports (excl. ship, planes and diamonds) Unemployment Rate Current Account ($ billions)

Research Department GDP Growth GDP Growth ( *) SOURCE: Based on Central Bureau of Statistics data. *BOI Forecast

Research Department 16 Growth Factor Decomposition (Annual Percent Changes) * Estimate for 2008 based on the first three quarters.

Research Department 17 Current Account of Balance of Payments Current Account of Balance of Payments as Percentage of GDP, * (Annual) SOURCE: Balance of Payments, Central Bureau of Statistics. * BOI Forecast

Research Department 18 % Employment and Unemployment Rates 2000 – 2010* % *Bank of Israel forecasts

Research Department 19 Macro Economic Policy

Research Department 20 % * Budget Deficit* (Percentage of GDP, **) *Percent of GDP; excluding credit extended. The data from 2000 refer to the deficit excluding the Bank of Israel’s profits. **BOI forecast for 2009 is based on the budget that has been approved by the government.

Research Department 21 % Gross Public Debt ( *, percentage of GDP) *Bank of Israel Forecasts

Research Department 22 Inflation Over the Past 12 Months, Inflation Targets and Inflation Expectations from the Capital Market Actual Inflation 10 Year Expectations 1 Year Inflation Expectation

Research Department 23 % Interest Rates of the Bank of Israel, the Fed and the European Central Bank ( ) *12 month rates, derived from the capital market

Research Department 24 Thank You

Research Department 25 The Nominal and the Real Exchange Rate Shekel / Dollar Exchange Rate 01/01/ /01/2009 The Real Exchange Rate by Trading Partners (100=01/1997, 01/ /2009) 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 January 2009 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 October 2008 to January 2009, Bank of Israel calculations.

Research Department 26 Financial Constraints According to Industry Weight in the Business Sector Scale of the severity of the constraint ranges from – No constraint 4 – Finance is a major constraint on expansion