ECONOMIC HIGHLIGHTS 4 th QUARTER 2008 STATE OF ISRAEL MINISTRY OF FINANCE INTERNATIONAL AFFAIRS DEPARTMENT February 2009 International Affairs Department International Affairs Department

Contents Note: You can return to the beginning of each chapter by clicking this symbols on the top of each slide. Economic Figures Economic Figures Balances International Comparisons International Comparisons Israel and the OECD Israel and the OECD International Treaties International Treaties Relevant Sites Relevant Sites Main Characteristics Main Characteristics About the Economic Crisis and Operation “Cast Lead” About the Economic Crisis and Operation “Cast Lead”

Israel’s Economy: Highly Educated Population. Rapid Development of Technology & High-Tech Industries. Entrepreneurial Culture. Open Economy. High Trade intensity. Main Characteristics

Economic Figures GDP and GDP per Capita Major GDP Components Growth: Israel compared to the World Exports of Goods and Services Exports of Goods by Region Foreign Investments Unemployment & Participation Rates Inflation Rate Estimates for 2008 Press for desired slide or continue: Back to Contents Main Indicators and Forecast Main Trading Partners13 Inflation Rate Worldwide 17 The Financial Crisis and operation “Cast Lead”5

Operation "Cast Lead" and the World Economic Crisis The economic indicators of the 3rd and 4th quarter of 2008, presented here throughout the presentation, show that the global crisis has started affecting the Israeli market. Initiatives such as the acceleration program, the pension safety net and the monetary program to increase liquidity are all aimed to offer new jobs, to protect private savings and to promote continuous growth in Israel. The impact of operation " Cast Lead " on Israel’s economy has been limited as most businesses in Israel’s southwest, near the Gaza strip, continued to operate. Israel’s financial and industrial center, located out of the rocket range, continued to operate in full scale. The ports and other trade facilities continued to operate as usual, ensuring the flow of goods in and out of the country were running smoothly. This Issue of " Economic Highlights " offers you a review of the 3rd and 4th quarter of A review of Israel's economy in 2008 and the full economic impacts of "Cast lead" will be presented in our next issue This Issue of " Economic Highlights " offers you a review of the 3rd and 4th quarter of A review of Israel's economy in 2008 and the full economic impacts of "Cast lead" will be presented in our next issue. 5

*Using public exchange rate. *** Based on the 3rd quarter of ** In current prices Main Economic Indicators 2008 (Estimated) Criteria GDP (current prices in $B)* 4.1%5.4%5.2%5.1%5.0%GDP Real Growth Rate (%) $27,409$25,762$28,169 GDP per Capita (PPP adjusted)*** --3.5%3.3% 3.2% GDP per Capita Growth Rate (%, Current prices) 80.6 (40.5%) 70.9 (43.2%) 62.5 (43.7%) 57.2 (43.0%) 52.7 (41.9%) Exports (Goods & Services)** $B* (As Percentage of GDP) 84.7 (42.6%) 73.7 (44.9%) 62.0 (43.3%) 62.2 (46.7%) 52.3 (41.6%) Imports (Goods & Services)** $B* (As Percentage of GDP) 6%***7.3%8.4%9.0%10.4%Unemployment Rate (%) 6

Criteria 78.9%79.8%85.5%94.3%98.2%Total Gross Debt (Percentage of GDP) 43.5%44.2%45.0%45.5%47.6% Government Expenditure (Percentage of GDP) 1%2.8%5.6%3.0%2.4%Current Account Surplus (% of GDP) 3.8%3.4%-0.1%2.4%1.2%Inflation Rate ( CPI, end of year) Fitch: A (Stable) S&P: A (Stable) Moody’s: A1 (Stable) Credit Rating ( Long-term Foreign Bonds ) About Credit Rating: The government’s credit rating reflects the economy’s level of risk and affects banks, companies and financial bodies in the market. The rating creates a “ceiling” which acts as a benchmark to their bond pricing. Credit rating indicates the macro-economic status of an economy and affects foreign investors’ decisions whether to invest in the market. Source: Ministry of Finance, Central Bureau of Statistics Main Economic Indicators (con.) 7

GDP and GDP per Capita (Annual rate of change (%), in Constant Prices) 8 In the past few years, Israel’s economy has enjoyed high growth rates. In light of the world economic crisis, Israel’s growth has slowed down. * Estimate. Source: Ministry of Finance.

GDP Growth Israel compared to Advanced Economies* (Annual rate of change (%), in constant prices) * Weighted average: US - 40%, Euro area – 42.8%, Japan – 2.7%, UK – 6.5%, Asian Newly Industrialized countries - 8% ** Estimate. Source: Ministry of Finance. Since 2004, Israel’s growth rate has exceeded the average growth rate of advanced economies. 9

Major GDP Components (Annual rate of change (%), in constant prices) Source: Ministry of Finance 10 Private Consumption grew by 3.5%. Exports grew by 3.6%. Public Consumption grew by 2.9% in 2008.

Source: Central Bureau of Statistics Exports of Goods and Services ( $B ) 11 In 2008, Exports grew by 3.6%.

Exports of Goods by Region (excluding Diamonds) Source: Central Bureau of Statistics (USA: 28%)

Israel’s Main Trading Partners (US$ Billions, excluding diamonds) Source: Central Bureau of Statistics EXPORT IMPORT 2007 China is becoming a leading trade partner for Israel

Net Foreign Investments in Israel (B$) Source: Ministry of Finance 14

Unemployment and Participation (As % of Total Labor Force) Source: Central Bureau of Statistics The Acceleration program, announced by the Ministry of Finance, is a package of economic measures designed to accelerate activity in the Israeli economy, with emphasis on the labor market. 15

Inflation Rate (Rate of Change in CPI, end of year) Source: Central Bureau of Statistics, Ministry of Finance The Consumer Price Index (CPI) grew by 3.8% during

Inflation Rate Worldwide (Rate of Change in CPI, end of 2007) Inflationary pressures in Israel have decreased, as a result of the world crisis. The CPI registered negative growth rates in October and November % Sources: Central Bureau of Statistics, OECD

Criteria + 4.1% Real GDP + 4.6% Business GDP + 3.6% Exports + 3.9% Private Consumption + 2.9% Public Consumption + 5.5% Investment in Fixed Assets Source: Ministry of Finance Growth of Main GDP Components (Estimated) 18

Balances Budget Deficit ; Current Account ; Net Foreign Debt General Government Expenditure Gross Public Debt Gross Tax Burden Back to Contents Press for desired slide or continue:

Gross Public Debt (as percentage of GDP) Source: Ministry of Finance Since 2003, the gross public debt has been on a downward trend. 20

Source: Ministry of Finance Budget Deficit and General Government Expenditure 21 Budget Deficit General Government Expenditure (% of GDP)

Current Account Balance and Net Foreign Debt * As of 30/06/08, as percentage of 2007 GDP. Source: Ministry of Finance. In 2003, current account turned positive, conversely with the decrease of the net foreign debt. Current Account Surplus (% of GDP) Net Foreign Debt (% of GDP) 22

Source: Ministry of Finance, OECD*As of 2006 Gross Tax Burden (as % of GDP) Tax burden has been in the vicinity of OECD average since OECD countries average: 35.9% *

International comparisons and additional data Central Bank Interest Rates NASDAQ and Tel Aviv 100 Indices Israel’s Credit Rating Global Competitiveness Index Global Competitiveness Index: Selected Issues Business Competitiveness Index ; Network Readiness Index Press for desired slide or continue: Back to Contents

Central Bank Interest Rates Israel vs. U.S.A Source: Bank of Israel (BOI), Federal Reserve Bank of Israel Rate (BOI) U.S. Federal Funds Rate 1.00% 0.0% 25 Coinciding with the decrease of the FED’s interest rate, BOI interest rate has been steadily decreased during the last quarter of 2008.

NASDAQ & Tel Aviv 100 (monthly average) Source: Tel Aviv Stock Exchange (TASE) and the Ministry of Finance. 26 Tel Aviv 100 reacts to the current events similarly to the NASDAQ, yet less drastically.

Source: Credit Rating Agencies, Accountant General Israel’s Credit Rating A1/A+ A2/A A3/A- Baa1/BBB+ Baa2/BBB Baa3 /BBB- 27 In January 2009, The Credit Rating Agencies Moody's and S&P Reconfirmed Israel's Credit Ratings Regarding operation "Cast Lead", S&P commented that "We do not expect the conflict with Hamas in Gaza to have significantly damaged the sovereign's creditworthiness".

Source: World Economic Forum, Global Competitiveness Index, Global Competitiveness Index, Countries that have been invited for open discussions for joining the OECD Israel Ranks 23 rd out of 134 Countries

Global Competitiveness Index, 2008/9 SELECTED CATEGORIES Venture Capital Availability Source: World Economic Forum, Global Competitiveness Index, Availability of Scientists & Engineers Quality of Scientific Research Institutions Company Spending on R&D RANK 29

Strength of Investor Protection Source: World Economic Forum; Global Competitiveness Index, Availability of Latest Technologies Utility Patents Legal Rights Index RANK Global Competitiveness Index, 2008/9 SELECTED CATEGORIES 30 (con.)

Countries that have been invited for open discussions for joining the OECD Source: World Economic Forum; Global Competitiveness Index (GCI), 2006; Global Information Technology Report *NRI: Measures the level of ICT (Information and Communication Technologies) development of nations [LINK TO SITE][LINK TO SITE] **GCI: Provides a holistic overview of factors critical to productivity and competitiveness [LINK TO SITE][LINK TO SITE] Network Readiness Index (NRI)* Business Competitiveness Index Israel’s Rank in Leading Indices 31 Greece Croatia Russia Italy Slovenia Estonia Spain Chile New Zealand Israel Ireland France Japan Finland Switzerland USA (1) 5.58 (5) 5.44 (7) 5.43 (9) 5.31 (11) 5.28 (14) 5.19 (16) 5.18 (18) 5.12 (20) 4.60 (28) 4.47 (30) 4.35 (34) 4.21 (42) 3.68 (72)

Israel and the OECD Real GDP growth in Unemployment Rate in Press for desired slide or continue: Back to Contents GDP Based on PPP per Capita in

Real GDP Growth (Annual percentage of change, partial list) Source and projections: OECD and the Ministry of Finance, Israel 2.6% 1.4% 07’ 08’ The global recession has influenced all of the OECD countries growth rates. 5.3% 07’ 4.1% 08’ 33

Unemployment Rate (average) Source: OECD, Ministry of Finance While the OECD average unemployment rate grew between 2007 – 2008, Israel’s Unemployment rate decreased by 1.3% ’ 07’ 08’ 07’ 08’ 07’ 08’ 07’ Change 07’-08’

GDP per capita based on purchasing-power-parity (PPP) 2007, (in US$) 33,294 25,758 Source: Economics and Research Department calculations from OECD and the Central Bureau of Statistics data 35

International Treaties Israel’s Free Trade Agreements Avoidance of Double Taxation Agreements Cooperation in Industrial R&D Agreements Protection of Investments Agreements International Organization Memberships Press for desired slide or continue: Back to Contents

Israel’s Free Trade Agreements European Union (Association Agreement) USA EFTA Canada Turkey Mexico MERCOSUR* * The agreement with Estonia has only been signed initially

Avoidance of Double Taxation AgreementsAustriaBelarusBelgiumBrazilBulgariaCanadaChina Czech Republic CroatiaDenmark Estonia * EthiopiaFinlandFranceGermanyGreeceHungaryIndiaIrelandItalyJamaicaJapanLatviaLithuania * The agreement with Estonia has only been signed initially 38

(con.)SwitzerlandThailand The Netherlands TurkeyUkraine United Kingdom UzbekistanUSALuxembourgMexicoMoldovaNorwayPhilippines Portugal * PolandRomaniaRussiaSingaporeSlovakiaSlovenia South Africa South Korea SpainSweden * The agreement with Portugal has been recently ratified Avoidance of Double Taxation Agreements 39

Cooperation in Industrial R&D Agreements Belgium Canada China France Hong Kong Italy Netherlands Portugal Spain UK USA Singapore Ireland Sweden Finland Germany IndiaAustria Korea 40

Protection of Investment Agreements 41 CroatiaCyprus Czech Republic El-SalvadorEstoniaGeorgiaGermany AlbaniaArgentinaArmeniaAzerbaijanBelarusBulgariaChinaGuatemalaIndiaKazakhstanKoreaLatvia

TurkmenistanUkraineUruguayUzbekistan QIZ Agreement EgyptJordan Protection of Investment Agreements (con.) 42LithuaniaMoldovaPolandRomaniaSlovakiaSlovenia South Africa ThailandTurkey

International Organization* Memberships: BIS | BSEC (observer) | CE (observer) CERN (observer) | EBRD | FAO | IADB | IAEA WBG – IBRD, IFC, IDA, MIGA | ICAO | ICC | ICCT (signatory) | ICFTU | IFAD | IFRCS (observer) | ILO | IMF IMO | Interpol | IOC | IOM | ISO | ITU | OAS (observer) | OECD (candidate)OPCW (signatory) OSCE (partner) | OECD (candidate) | OPCW (signatory) OSCE (partner) | PCA | UN | UNCTAD | UNECE | UNEP | UNESCO | UNHCR UNIDO | UPU | WCO | WFP | WHO | WIPO | WMO | WTOO WTRO | WTO | ICSID * Economic Organizations 43

Relevant Sites Back to Contents Government Institutions: Ministry of Finance OECD Stat Profile on Israel Bank of IsraelBank of Israel (BOI) Central Bureau of Statistics Israeli Government Portal Israel Securities Authority Ministry of Industry, Trade and Labor OECD Israel International Affairs Department Homepage:

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