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Overview of Israel’s Economy Government of Israel Ministry of Finance 2009 1 Discussion Outline 1 Economic Review and Global Crisis 2 Israel in the Global Economy 3 Israel’s Debt Profile 4 Conclusions 2 A Profile of Israel’s Recent Economic Performance Five consecutive years of growth above 4% per annum, spurred by private consumption and investment Low unemployment Conservative fiscal policy with declining government debt relative to GDP Inflation under control Current account surplus Large flows of foreign investment 3 Israel’s Economic Growth Rates Have Been Strong Compared to OECD Average GDP Growth (% per annum) 10% 8.9% Israel Average (4.8%) 8% 7.2% 7.0% 6.6% 6.6% 6.1% 6% 5.4% 5.0% 5.3% 5.2% 5.3% 4.2% 4% 4.0% 3.8% 2.8% 2.9% 2.3% 2% 0% -0.6% -2% -0.9% OECD Average (2.5%) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Central Bureau of Statistics 4 Government Policy and Rapid Growth Boosted Participation and Reduced Unemployment Unemployment and Participation Rates 57 10.3 10 Unemployment (%) 10.4 56.3 9.4 8.6 8.9 9.0 8.8 55.2 7.7 8 6.9 6.7 53.9 53.5 54.3 56.5 55.6 8.4 56 55 7.3 54.9 54.2 6 10.7 54.5 6.1 54.1 54 53.7 53.3 53 53.3 4 52 2 Participation Rate (%) 12 51 0 50 1995 Source: Bank of Israel 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 5 Inflation Has Been Brought Firmly Under Control Central Bank’s Key Interest Rate Year-End Inflation Rate 8 10 6.5 6 8 3.8 4 3.4 6 2.4 2 1.41 1.2 4 0 0 -0.1 2 -2 Feb 23, 2009 = 0.75% -1.9 -4 2000 2001 2002 Source: Bank of Israel 2003 2004 2005 2006 2007 2008 0 1/03 7/03 1/04 7/04 1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 6 Current Account Has Been in Surplus Six Years Despite Strength of the Shekel Current Account Balance Strength of the Shekel % of GDP 8% 70 7% 5.0% 5% 90 4% 100 3.0% 3% 2.6% Lower = Stronger 110 2.4% 2% 120 1.2% 130 0.3% 0.8% 0% -1% -0.8% -1.3% -1.3% -2% 140 -0.8% -1.2% 150 -1.0% 160 -2.1% -3.3% Source: Reuters and the Bank of Israel 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 GBP EUR NIS 02/01/2009 02/10/2008 02/07/2008 02/04/2008 02/01/2008 02/10/2007 02/07/2007 -6% 02/04/2007 -5.1% -5.1% 02/01/2007 -4.3% -5% 02/10/2006 170 -4% 02/07/2006 -3.5% 02/01/2006 -3% 02/04/2006 1% Higher = Weaker 80 6% PLN 7 High Tech, Enterprising Skills and Robust Growth Have Drawn Large Investment Inflows Net Inflows of Foreign Investment (US$ billions) 25.8 24 20 16 12.3 12 9.1 8 4 4.1 5.2 3.7 0 2000 2001 Total Foreign Investments 9.9 14.3 11.0 7.8 5.4 9.5 3.2 1.7 2002 3.9 2.1 2003 2004 Foreign Direct Investments 8.3 4.8 2005 2006 2007 2008 JanSept Some Examples … Microsoft, Berkshire Hathaway, IBM, Intel, GE, 3Com, HP, AOL Time Warner, SUN Microsystems, Boeing, Motorola, etc. Source: Bank of Israel 8 Disciplined Fiscal Policy Helped to Decrease Gross Public Debt as a % of GDP 100 100.6 97.4 99.9 96.8 101.3 98.4 99.9 97.6 95.3 95.1 92.6 97.4 98.2 96 94.3 92.2 89.9 87.4 85.1 85.5 82.6 83.5 80 79.8 77.9 78.5 77 60 40 20 0 1996 1997 Public Debt 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008* Central Gov. Debt Source: Bank of Israel and Ministry of Finance * Estimate 9 Broad Consensus On Conservative Fiscal Policy Has Kept Budget Deficit Under Control Government Budget Deficit General Government Expenditure (% of GDP) (% of GDP) 6.0% 55% 5.4% = Target 5.5% 53% 5.0% 4.5% 4.0% 4% 3.90% 3.60% 52% 51% 4.2% 3.9% 3.6% 53% 52% 52% 51% 51% 51% 50% 3.7% 3.40% 3.6% 3.5% 49% 3.00% 48% 3% 2.90% 3.0% 48% 2.6% 2.3% 2.2% 2.5% 47% 46% 2.1% 1.80% 2.0% 46% 1.8% 1.60% 45% 45% 1.5% 44% 1.0% 1.0% 43% 0.7% 0.5% 0.0% 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 Source: Ministry of Finance, Central Bureau of Statistics 1995 41% 0.0% 10 Strong Performance Driven by Consistent Pro-Market Reform Policies of Seven Consecutive Governments 1985: Stabilization Program 1995: First Pension Reform 1995: First Sovereign Int’l Debt Issuance Unity Government 1984–1988 Left Wing Government 1988–1992 1992–1996 Right Wing Government 1990: Successful absorption of massive immigration enhances growth 2000-2001: Capital Market Opening and Structural Reforms, Debt Burden Reduction Left Wing Government 1996–1999 1999–2001 Right Wing Government 1998: Foreign Currency Liberalization 1997–1998: Boost of Privatizations 2006–2009: Capital Markets Reforms, Fiscal Tightening, Financial Stimulus Package Centrist Government 2001–2005 2006–2009 Right Wing Government 2003: Government Cutbacks, Tax Reform, Second Pension Reform 11 2009 Forecasts Bank of Israel IMF Real GDP (YoY Growth) -1.1% 0.5% Unemployment Rate (%) 7.3% 7% 0-0.3% -0.1% Government Deficit (% of GDP) 5.8% 4.2% Debt to GDP Ratio 82.3% 80.9% CPI (YoY Change) 12 Robust Economic Conditions in Israel Will Help Mitigate the Impact of the Global Crisis Israel is well-positioned to handle current market volatility: Healthy Banking Sector Low exposure of the banking system to the international high-risk derivative market, CDOs, and complicated mortgage-backed securities “Israel's banking sector appears robust with interbank liquidity undisturbed.” – IMF, 2009 Robust Government Finances Net external creditor position Government budget deficit and government debt on a declining trend relative to GDP No domestic housing bubbles, housing prices remain stable Favorable debt structure Benefits from the backing of USAID and ‘Israel Bonds’ Programs Israel has not experienced an internal credit crisis like other countries, but as a small, open economy, Israel is experiencing indirect effects from the global crisis and has put in place several programs to mitigate the impact. 13 Government Programs Are Being Introduced In Response to the Global Crisis Financial Program Non-Bank Credit Credit for Small and Medium Businesses Bank Credit Acceleration Program Infrastructure Employees Taxation Research and Development 14 Government Response: Two Key Programs Financial Program: State guarantees for the banking sector – to raise capital for Tier Two capital (US$ 1.5B) Establishment of private investment funds with Government capital to increase availability of credit from the non-banking system (US$ 1.2B 3.6-4.8B*) Credit Funds for small/medium businesses and increased credit supply for exporters (US $552M*). Acceleration Program: Investment in infrastructure (US$ 2.3B) Guarantees for residential construction (US$ 50-120M) R&D investments (US$ 170M) Active labor market policies (US$ 130M) Leveraged * USD/ILS Rate as of 20-Feb-09: 4.1500 15 Discussion Outline 1 Economic Review and Global Crisis 2 Israel in the Global Economy 3 Israel’s Debt Profile 4 Conclusions 16 Steady Climb in Ratings Reflects Sound Policies and a Dynamic Private Sector Israel’s Current Rating Aa3/AAA1/A+ Moody’s - A1 (Stable) S&P – A (Stable) Fitch – A (Stable) Nov 2007 S&P upgrade Israel To A April 2008 Moody’s upgrade Israel To A1 Sovereign Foreign Currency Rating Peers Moody’s S&P Chile A2 A+ Czech R. A1 A Sovereign Lithuania A2 BBB+ A2/A S. Korea A2 A A3/A- Poland A2 A- China A1 A+ Slovakia A1 A+ Latvia Baa1 BB+ Cyprus Aa3 A+ Hungary A3 BBB Estonia A1 A Greece A1 A- Taiwan Aa3 AA- Feb 2008 Fitch upgrade Israel To A Baa1 Baa2/BBB Baa3/BBB- 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Moody's S&P "The upgrade reflects the rapid fall in the allimportant ratio of public debt/GDP, which reached an all-time low of just over 80% last year. Although still high, we expect further reductions in the debt ratio in the year ahead, despite likely slower economic growth due to the global slowdown." (Fitch, February ’08) Source: Credit Rating Agencies Fitch “Fiscal discipline has been maintained in spite of the many security-related demands on public finances, evidence of its commitment to reducing its large government debt.” (Moody’s 2008) “The rating affirmation reflects the government’s commitment to continued fiscal discipline and the resilience of the Israeli economy after five years of strong GDP growth at over 5%...” (S&P, January, 2009) 17 Israel’s Per Capita Income is Comparable to it’s OECD/EU Rating Peers 2008 Per Capita GDP (Current Prices, US Dollars) 70,000 AAA 60,000 AAA AAA 50,000 AAA AAA 40,000 AAA A-/A1 A/A1 AA A+ A A A A 20,000 A+ BBB BB+ ABBB+ BBB BB- A+ BBB+ IMF Mexico Chile Turkey Russia Lithuania Poland Latvia Hungary Slovakia Estonia Korea Malta Czech Republic Portugal Slovenia Israel Greece Germany Japan United States France Finland Switzerland 0 Bulgaria BBB 10,000 BBB+ South Africa 30,000 18 Free Access to Key Global Markets Enables Trade Diversification and Drives Export Growth Israel’s Trade Partners - Imports and Exports of Goods in 2008 Exports Imports European Union 35% European Union 29% N. America 12% N. America 33% Others 18% Others 32% Asia 21% Asia 20% Free Trade Agreements Source: Central Bureau of Statistics, 2008 19 Israel Has Become a World Leader in Science, Technology, and Innovation # 1 in the world for scientists per 10,000 workers. Scientific research is ranked #3 in the world* 2nd most companies listed on NASDAQ after the US #1 in the world for R&D investments (4.7% of GDP)** 2nd highest concentration of high tech companies in the world (after Silicon Valley)*** 2nd largest venture capital market in the world*** 4 Israelis in the last 5 years have won Nobel Prizes in the fields of Economics and Chemistry * 2008 WEF Global Competitiveness Yearbook. ** IMD World Competitiveness Yearbook 2007. *** IMD Word Competitiveness Report 2007-2008. 20 Discussion Outline 1 Economic Review and Global Crisis 2 Israel in the Global Economy 3 Israel’s Debt Profile 4 Conclusions 21 Size and Structure of Government Debt Total Government Debt as of 31 December 2008: US$ 131.7 billion Sovereign Bonds 17% Other 7% Bonds Org. 29% Foreign Currency 20% Bonds Guaranteed by the USA 47% Domestic Non Tradable 26% Insurance 24% Other 6% CPI Linked 42% Fixed Rate 42% Pension 70% Source: Ministry of Finance Domestic Tradable 54% USD/ILS Rate as of 20-Feb-09: 4.1500 Floating Rate 16% 22 Foreign Currency Debt Has Favorable Maturity Structure and Low Reliance on Markets Government Foreign Currency Debt as of 31 December 2008: USD 28.7 billion Source of Debt State of Israel bonds 29% Original Term to Maturity* Currency Denomination With Currency Swap (Hedging) Others 7% Other 2% ILS 4% Euro 13% 5+ Years 87% 1-5 Years 13% Sovereign bonds unguaranteed 17% USD 81% Tradable bonds guaranteed by the US gov. 47% Source: Ministry of Finance and Bank of Israel Of Public Sector External Debt 23 Bank of Israel’s Foreign Exchange Reserves Climbed Sharply in 2008 42.3 45 40 35 30 28.5 29.6 29.0 2005 2006 2007 27.2 25 20 15 10 5 0 2004 2008 FX Reserves (USD Billions) 24 The U.S. Loan Guarantee Program – Key Features Time Period: To be issued from 2003-2011. Issued (as of today): $4.1 Billion. Amount Remaining to be issued: $3.8 Billion. Status: Fully guaranteed by the United States of America. Past Yields: 31-38 basis points on top of the yield of the equivalent U.S. Treasuries. Maturity: 20-30 Years. 25 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 US$ million Funds Raised Through “Israel Bonds” Platform 1,600 World Recession + Intifada 1,400 1,200 The Gulf War 1,000 800 600 “Yom Kippur” War 400 Source: Ministry of Finance “Shelom Haglil” “6 Day” War 200 0 26 Discussion Outline 1 Economic Review and Global Crisis 2 Israel in the Global Economy 3 Israel’s Debt Profile 4 Conclusions 27 Conclusions Israel's sovereign credit quality is sound and resilient. Fundamentals compare favorably with higher-rated sovereigns. Market oriented economic and strong conservative fiscal policies have been consistent even with change of governments. Israel is in a good starting position and is taking necessary steps to deal with the global crisis. Has strong backing from the United States with US government bond guarantee program and “Israel Bonds” program. 28 Quality in Everything We Do 29 State of Israel Past Sovereign Issuance in International Capital Markets Original Spread Above SWAP Original Spread Above Bench Year Market Size (millions) Coupon (%) Yield (%) 1995 Yankee 250$ 6.375 6.49 Y10 12/2005 38bp 76bp 1996 EuroDollar 200$ 6.375 6.47 Y5 12/2001 25 50 1997 Samurai ¥ 20,000 3.0 3.02 10Y 8/2007 25 48 1998 Yankee 250$ 7.25 7.31 Y30 12/2028 162 225 1999 EMTN 400€ 4.75 4.91 Y7 06/2006 65 97 2000 Global 500$ 7.75 7.82 Y10 03/2010 40 144 2002 EMTN 400€ 5.875 5.98 Y7 02/2009 100 122 2003 Global 750$ 4.625 4.73 Y10 06/2013 120 153 2004 Global 500$ 5.125 5.20 Y10 03/2014 75 115 2005 EMTN 750€ 3.75 3.78 Y10 10/2015 53 64 2006 Global 1,000$ 5.5 5.58 Y10 11/2016 45 98 Maturity 30 Strong, Diversified Demand for Sovereign Issues Sets Benchmark for Israeli Credit State of Israel USD 1 Billion 5.5% Due 2016, Issued Nov. 2006 Breakdown by Geography Insurance 18% Fund Manager 40% Bank 25% Pensions 8% Retail and Highnet w orth 7% Central Banks and Official Institutions 2% Breakdown by Investor Type Germany 4% Sw itzerland 5% Asia Israel 4% 3% UK 18% Other Europe 9% USA 57% State of Israel EUR 750 million 3.75% Due 2015, Issued Sep. 2005 Breakdown by Geography Other Ow n Trading Pension Fund 2% 0% 5% Hedge Fund 5% Bank Insurance 40% 8% Retail 9% Breakdown by Investor Type Spain Denmark Italy 3% 2% 2% Israel 3% France Austria 4% Netherland 5% UK 26% 4% Sw itzerland 5% Fund Manager 31% Other 5% Germany 24% Ireland Singapore 7% 10% 31