September 2012 The Israeli Economy Strengths and Challenges

GDP ($ Billion) 244 Population (6/2012, Million) 7.9 GDP per capita ($) 31,385 Foreign Trade (% of GDP) 75% Total Exports (% of GDP) 37% Unemployment (7/12) 6.5% Business Sector share in GDP72% Industry share of business sector 21% The Israeli Economy – 2011 Facts & Figures The Manufacturers' Association of Israel 2

Main Strengths & Opportunities Towards 2013 The Manufacturers' Association of Israel 3

Strengths & Opportunities The Manufacturers' Association of Israel 4 The Resilience of Israeli Economy during 2008/9 Crisis Strong starting point towards 2012 Export oriented growth High-tech oriented growth World leadership in civilian R&D investments Conservative approach Responsible fiscal policy Diversion of Trade towards developing countries Attractive Corporate tax

Positive Growth in Israel Vs. Regression in Most Developed Countries The Manufacturers' Association of Israel 5

Relatively Moderate Regression in Israeli Industry during 2008/9 Crisis Source: OECD, CBS & MAI Economic Research Department The Manufacturers' Association of Israel 6

Nominal Change in Average Apartment Price, Relatively Moderate Increase in Real Estate Prices Before 2008/9 Crisis Source: Psagot Investment House. The Manufacturers' Association of Israel 7

Relatively moderate Dismissals During 2008/9 Global Crisis Employee Jobs in the Business Sector 8 The Manufacturers' Association of Israel

Employment Flexibility During 2008/9 Crisis Source: MAI Economic Research Department, Survey - February 2009 The Manufacturers' Association of Israel Concentrated vacation Shortened workweek 9

Strengths & Opportunities The Manufacturers' Association of Israel 10 The Resilience of Israeli Economy during 2008/9 Crisis Strong starting point towards 2012 Export oriented growth High-tech oriented growth World leadership in civilian R&D investments Conservative approach Responsible fiscal policy Diversion of Trade towards developing countries Attractive Corporate tax

Rapid Growth in Israeli Economy The Manufacturers' Association of Israel 11

Independent of Outside Funding A Decade of Current Account Surplus Source: ICBS, 2012 Forecast – MAI’s Economist Research department. The Manufacturers' Association of Israel12 The combination of a continual surplus in the current account and the large amount of foreign currency reserves, enable Israel to provide its import needs without dependence on external financing.

Companies & Individuals Lend Money to the World Source: Interdisciplinary Center (IDC) Herzliya. The Manufacturers' Association of Israel $ Billions 13 Net External Debt* (-) Sign: the economy is a net lender abroad Net external debt: External debt less foreign assets in debt instruments (excluding share capital).

14 The Manufacturers' Association of Israel Strengths & Opportunities The Resilience of Israeli Economy during 2008/9 Crisis Strong starting point towards 2012 Export oriented growth High-tech oriented growth World leadership in civilian R&D investments Conservative approach Responsible fiscal policy Diversion of Trade towards developing countries Attractive Corporate tax

Export Oriented Growth The Manufacturers' Association of Israel 15

16 The Manufacturers' Association of Israel Strengths & Opportunities The Resilience of Israeli Economy during 2008/9 Crisis Strong starting point towards 2012 Export oriented growth High-tech oriented growth World leadership in civilian R&D investments Conservative approach Responsible fiscal policy Diversion of Trade towards developing countries Attractive Corporate tax

The High Tech Sector Contribution to Industrial Growth The Manufacturers' Association of Israel –2011

The Israeli Industry is Undergoing Long term Structural Changes The Manufacturers' Association of Israel 18

High Share of ICT in the Business Sector ICT= Information & Communications Technologies, 2008 Source: Israeli CBS The Manufacturers' Association of Israel 19

20 The Manufacturers' Association of Israel Strengths & Opportunities The Resilience of Israeli Economy during 2008/9 Crisis Strong starting point towards 2012 Export oriented growth High-tech oriented growth World leadership in civilian R&D investments Conservative approach Responsible fiscal policy Diversion of Trade towards developing countries Attractive Corporate tax

World Leadership in Civilian R&D Investments Source: Israeli CBS The Manufacturers' Association of Israel 21

Global R&D and Innovation Center The Manufacturers' Association of Israel 22

23 The Manufacturers' Association of Israel Strengths & Opportunities The Resilience of Israeli Economy during 2008/9 Crisis Strong starting point towards 2012 Export oriented growth High-tech oriented growth World leadership in civilian R&D investments Conservative approach Responsible fiscal policy Diversion of Trade towards developing countries Attractive Corporate tax

High Private Saving Rate in Israel The Manufacturers' Association of Israel Source: OECD & BOI 24

25 The Manufacturers' Association of Israel Strengths & Opportunities The Resilience of Israeli Economy during 2008/9 Crisis Strong starting point towards 2012 Export oriented growth High-tech oriented growth World leadership in civilian R&D investments Conservative approach Responsible fiscal policy Diversion of Trade towards developing countries Attractive Corporate tax

Relatively Low Government Deficit in Israel The Manufacturers' Association of Israel Source: IMF, Caesarea Forum, The Israeli Democracy Institute (IDI). 26

Continuous Reduction of Public Debt Ratio The Manufacturers' Association of Israel Source: Bank of Israel. 27

Relatively Low Public Debt Ratio The Manufacturers' Association of Israel Source: IMF, Caesarea Forum, The Israeli Democracy Institute (IDI). 28

Israel Credit Rating September 2011 – S&P raised Israel’s credit ratings to A+ from A. S&P mentioned that their ratings on Israel are supported by their view of its "prosperous and resilient economy, strong institutions, ongoing fiscal consolidation, and robust external performance." December 2011 – Moody’s affirms Israel’s A1 rating. The Manufacturers' Association of Israel 29

30 The Manufacturers' Association of Israel Strengths & Opportunities The Resilience of Israeli Economy during 2008/9 Crisis Strong starting point towards 2012 Export oriented growth High-tech oriented growth World leadership in civilian R&D investments Conservative approach Responsible fiscal policy Diversion of Trade towards developing countries Attractive Corporate tax

Diversion of Trade to Asian Countries The Manufacturers' Association of Israel 31 41% 70% 14% 24%

32 The Manufacturers' Association of Israel Strengths & Opportunities The Resilience of Israeli Economy during 2008/9 Crisis Strong starting point towards 2012 Export oriented growth High-tech oriented growth World leadership in civilian R&D investments Conservative approach Responsible fiscal policy Diversion of Trade towards developing countries Attractive Corporate tax

The Manufacturers' Association of Israel INDUSTRIAL COMPANIES WITH EXPORT CAPABILITY :15% - 10% : 7% % 2015+: 6% - 12% INDUSTRIAL COMPANIES WITH EXPORT CAPABILITY :15% - 10% : 7% % 2015+: 6% - 12% 2012 Corporate Tax 33 Source: OECD. * Simple average of member countries.

Main Challenges Towards 2013 The Manufacturers' Association of Israel 34

Main Challenges Towards The Manufacturers' Association of Israel A Global economy slowdown High Import Penetration A slowdown in Israeli Economy Increasing Costs Controlled by the Government Wage pressure Credit crunch in industry Government bureaucracy Uncertain fiscal policy Off-shoring Geopolitical instability

Slowdown in World Trade The Manufacturers' Association of Israel 36

Unbalanced Growth Around the World The Manufacturers' Association of Israel 37

Main Challenges Towards The Manufacturers' Association of Israel A Global economy slowdown High Import Penetration A slowdown in Israeli Economy Increasing Costs Controlled by the Government Wage pressure Credit crunch in industry Government bureaucracy Uncertain fiscal policy Off-shoring Geopolitical instability

Import Penetration The Manufacturers' Association of Israel Source: OECD 39

Main Challenges Towards 2013 A Global economy slowdown High Import Penetration A slowdown in Israeli Economy Increasing Costs Controlled by the Government Wage pressure Credit crunch in industry Government bureaucracy Uncertain fiscal policy Off-shoring Geopolitical instability 40 The Manufacturers' Association of Israel

Slowdown in Israeli Economy The Manufacturers' Association of Israel 41

Main Challenges Towards The Manufacturers' Association of Israel A Global economy slowdown High Import Penetration A slowdown in Israeli Economy Increasing Costs Controlled by the Government Wage pressure Credit crunch in industry Government bureaucracy Uncertain fiscal policy Off-shoring Geopolitical instability

environmental protection laws initiatives-> increased costs World Energy Prices: upside risks (sanctions on Iran) Increasing Costs Controlled by the Government The Manufacturers' Association of Israel 43 * Business Economics Department Projections for 2012/3.

Main Challenges Towards The Manufacturers' Association of Israel A Global economy slowdown High Import Penetration A slowdown in Israeli Economy Increasing Costs Controlled by the Government Wage pressure Credit crunch in industry Government bureaucracy Uncertain fiscal policy Off-shoring Geopolitical instability

January ,850 NIS April 2011 (By law) 3,890 NIS July ,100 NIS (By law in 4/12) October 20124,300 NIS (By law in 4/13) Contractor workers agreement (Differential minimum wage/ Equal conditions??) An Additional Wage Updates are Expected The Manufacturers' Association of Israel due to the Minimum Wage Update 45

Difficulty in Recruiting Professional Employees for the Industry According to preliminary findings of a survey of expectations in industry The Manufacturers' Association of Israel 46

Main Challenges Towards The Manufacturers' Association of Israel A Global economy slowdown High Import Penetration A slowdown in Israeli Economy Increasing Costs Controlled by the Government Wage pressure Credit crunch in industry Government bureaucracy Uncertain fiscal policy Off-shoring Geopolitical instability

Credit Crunch in Industry ?? According to survey of expectations in industry Source: Survey of expectations in Industry, July 2012, 176 respondents. 48 The Manufacturers' Association of Israel

Main Challenges Towards The Manufacturers' Association of Israel A Global economy slowdown High Import Penetration A slowdown in Israeli Economy Increasing Costs Controlled by the Government Wage pressure Credit crunch in industry Government bureaucracy Uncertain fiscal policy Off-shoring Geopolitical instability

Israeli Government Bureaucracy: A Major Obstacle for Businesses The Manufacturers' Association of Israel 50 Source: The Global Competitiveness Report of World Economic Forum (WEF), the 2012/13 report covers 144 economies.

Ease of Doing Business 2012 The Manufacturers' Association of Israel Source: The World Bank report covers 183 economies. 51

Main Challenges Towards The Manufacturers' Association of Israel A Global economy slowdown High Import Penetration A slowdown in Israeli Economy Increasing Costs Controlled by the Government Wage pressure Credit crunch in industry Government bureaucracy Uncertain fiscal policy Off-shoring Geopolitical instability

Government’s Budgetary Deficit The Manufacturers' Association of Israel % As percent of GDP

Main Challenges Towards The Manufacturers' Association of Israel A Global economy slowdown High Import Penetration A slowdown in Israeli Economy Increasing Costs Controlled by the Government Wage pressure Credit crunch in industry Government bureaucracy Uncertain fiscal policy Off-shoring Geopolitical instability

Shifting Production Lines Abroad The Manufacturers' Association of Israel 55 Source: Survey of expectations in Industry, Economics division, MAI.

Main Challenges Towards The Manufacturers' Association of Israel A Global economy slowdown High Import Penetration A slowdown in Israeli Economy Increasing Costs Controlled by the Government Wage pressure Credit crunch in industry Government bureaucracy Uncertain fiscal policy Off-shoring Geopolitical instability

The Manufacturers' Association of Israel 57