The Israeli Economy Stanley Fischer Bank of Israel November 2007

Macroeconomic Situation

Growth Rate of GDP % BI- Forecast

Rate of Inflation in Last 12 Months and Inflation Targets, %

Bank of Israel Interest Rate, Inflation Expectations*, and the Fed’s interest Rate, % *For 12 months, as derived from the capital market.

% * Budget Deficit* (percentage of GDP, ) *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, ( year-end ) %

International Aspects

The Nominal and the Real Exchange Rate Shekel / Dollar Exchange Rate 01/01/ /10/2007 The Real Exchange Rate by Trading Partners (100=01/1997, 01/ /2007) 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.

Current Account of Balance of Payments Current Account of Balance of Payments as Percentage of GDP, * (Annual) * Foreign Currency Department forecast SOURCE: Balance of Payments, Central Bureau of Statistics.

Openness of the Israeli Economy (percentage of GDP, ) % * Goods and Services. Source: National accounts, CBS.

Manufacturing 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. Source: Foreign Trade, CBS.

Technology-Intensive Exports* (Percentage of GDP, ) *Including high technology industries and medium-high technology industries %

Investment in Israel by Nonresidents (as percentage of GDP, *) Investment of Israeli Residents Abroad (as percentage of GDP, *) SOURCE: Central Bureau of Statistics, Balance of Payments. % % 8,092 14,302 4,792 4,1386,871 2,0413,822 1,812 1, , ,062 5,058 8,956 14,399 8,244 2,9304,544 2,381 2,065 3,154 2, , ,149 3,336 * 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/ /10/07) Israel (Tel Aviv 100) - right scale right scale - EM (EMERGING MARKETS) left scale - NASDAQ

Israel 5 year Credit Default Swap 6/ /

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

Science, Technology & Education

ICT value added as percentage of business sector product 2003 SOURCE: Central Bureau of Statistics.

National Expenditure on R&D as percentage of GDP 2005 SOURCE: Central Bureau of Statistics.

Share of the Population Aged with Tertiary-Level Education 2005 Source: Education at a Glance (OECD), 2007.

Challenges

Rate of Unemployment 2000.I-2007.II (Quarterly) % SOURCE: Based on Central Bureau of Statistics Labour Force Survey.

Poverty Rate, Relative Measure and a Constant Basket, Excluding Jerusalem Arabs. SOURCE: Central Bureau of Statistics Income and Expenditure Surveys.

Incidence of Relative Poverty among Individuals, 1997 and 2006 a 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

Average Class Size by Level of Education 2005 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) Source: Education at a Glance,2007. *incl. Intermediate schools and Pre-Academic Preparatory Courses

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