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Government of Israel
Global Dollar Bond Offering
February 2004
Discussion Outline
1
1
Introduction
2
Israel: An Advanced Industrialized Economy
3
Economic Performance and Policy Priorities
4
Debt Profile and Credit Ratings
5
Conclusions
Israel’s Global USD Offering

Rating:
A2 (Moody’s)*
A- (Standard & Poor’s)**
A- (Fitch IBCA)*

Size:
USD 500 million

Format:
Fully Registered Global Bond

Maturity:
10 years

Listing:
Luxembourg

Governing Law:
New York

Use of Proceeds: General Government Financing Purposes

Lead Managers: Citigroup and UBS
* Stable outlook
2
** Negative outlook
Discussion Outline
3
1
Introduction
2
Israel: An Advanced Industrialized Economy
3
Economic Performance and Policy Priorities
4
Debt Profile and Credit Ratings
5
Conclusions
GDP Per Capita Matches Industrialized Countries
Per capita GDP (current prices, US dollars)
$
35,000
30,000
25,000
20,000
15,000
10,000
5,000
Source : IMF September 2003
A
U
S
U
K
an
y
G
er
m
Ita
ly
pa
in
S
ru
s
C
yp
d
al
an
Ze
Is
ra
el
G
re
ec
e
al
or
tu
g
P
N
ew
S
4
K
or
ea
ol
an
d
M
ex
ic
o
H
un
ga
ry
P
le
C
hi
ou
th
A
fr
ic
a
0
Highly Skilled and Educated Workforce
…the Product of Investment in Education
Expenditure on education
(% of GDP, 2000)
Percent of population age 25-64 with
12 or more years of education (1999)
9%
100%
8%
80%
7%
6%
60%
5%
4%
40%
3%
2%
20%
1%
Source :OECD Education at a Glance.2004
ra
el
Is
U
SA
K
or
ea
ce
Fr
an
Po
rt
u
ga
l
U
K
ai
n
Sp
Ja
pa
n
C
ze
ch
R
ep
.
ov
ak
Sl
US
A
n
Ja
pa
ad
a
Ca
n
ra
el
Is
UK
la
nd
Ire
e
G
re
ec
ly
Ita
ga
l
rtu
Po
5
R
ep
.
0%
0%
R&D Focus Adds Competitive Edge
Civilian R&D expenditure as % of GDP (2001)
6%
5%
4%
3%
2%
1%
Source: OECD and Central Bureau of Statistics
6
ae
l
Is
r
m
an
y
K
or
ea
Ja
pa
n
Fi
nl
an
Sw d
ed
en
SA
G
er
U
or
w
ay
C
an
N
ad
et
a
he
r la
nd
s
Fr
an
ce
D
en
m
ar
k
K
N
U
d
la
n
Ir e
Ita
ly
0%
Israeli Tech Companies Are Known for Their
Capacity to Innovate
7
Leading Technology Firms Invest in Israel
8
Importance of Tech Sector Reflected in
Structure of Exports
US$ billions
20
15
46%
10
30%
5
57%
0
13%
9%
1996
2003
Traditional Industries
Source: Central Bureau of Statistics
9
45%
Mixed Industries
High-Tech Industries
Discussion Outline
10
1
Introduction
2
Israel: An Advanced Industrialized Economy
3
Economic Performance and Policy Priorities
4
Debt Profile and Credit Ratings
5
Conclusions
Entering Economic Upswing Following Two-Year
Recession
Growth in GDP (% per annum)
2%
1.7%
1.2%
10%
0.8%
1%
8%
6%
7.1%
5.9%
7.0%
6.4%
0.0%
7.5%
0%
2002H1
2002H2
6.0%
5.3%
3.7%
4%
3.0%
3.3%
2.7%
2.5%
2%
1.3%
0%
11
20
04
F
20
03
E
20
02
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
Source: Central Bureau of Statistics
20
01
-0.9% -0.8%
-2%
2003H1
2003H2
Inflation Under Control, Interest Rates Falling
Year-end inflation rate
Central Bank’s key interest rate
%
20
%
18.0
20
17.6
18
18
16
16
14.5
14
11.3
12
9.4
10
14
10.6
12
8.1
7.0
10
8.6
8
8
6.5
6
6
1.4
1.3
4
4
0.0
2
-1.9
0
2
0
1/99 7/99 1/00 7/00 1/01 7/01 1/02 7/02 1/03 7/03 1/04
-2
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: Ministry of Finance and Bank of Israel
12
Exchange Rate Movements: Stable Against the
Dollar, Falling Against the Euro
The Shekel vs. US Dollar and the Currency Basket
5.4
Currency
Basket
5.2
5
4.8
4.6
Dollar
4.4
4.2
13
Source: Bank of Israel
1/
04
/0
3
11
9/
03
7/
03
5/
03
3/
03
1/
03
/0
2
11
9/
02
7/
02
5/
02
3/
02
1/
02
/0
1
11
9/
01
7/
01
5/
01
3/
01
1/
01
4
Israeli Exports on a Rising Trend
Growth in advanced economies
Industrial Exports*
%
$ millions
5
2,000
3.9
4
3.6
3.6
1,800
3.6
3.3
2.9
3
3.0
2.9
1,600
2.0
1.9
2
1,400
0.9
1
1,200
1,000
1/97
Source: Central Bureau of Statistics
14
1/99
1/00
1/01
1/02
1/03
04
F
03
1/98
20
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
19
94
0
*Non-Diamond (Millions of Dollars per month)
Full Access to Key Global Markets Enables Trade
Diversification
39.4%
31.6%
Exports
Imports
50.4%
19.0%
Europe
North America
15.6%
14.3%
Israel
4.3%
1.5%
South/ Central America
Asia
1.2%
1.7%
1.4%
Australia
Africa
11.6%
Source: Central Bureau of Statistics
15
7.5%
Other
0.5%
Tourism Responds to Improved Security Conditions
Number of tourist arrivals
Thousands
Per month
220
200
180
Pope visit
Palestinian
terrorist attacks
Palestinian
terrorist attacks
160
140
120
9/11/01
100
80
60
40
20
0
1995
War in Iraq
1996
1997
Source: Central Bureau of Statistics
16
1998
1999
2000
2001
2002
2003
Markets Point to Recovery of the Tech Sector in Israel
Investment in start-up
companies ($ millions)
NASDAQ
5000
NASDAQ
1200
4500
VC investments in Israel
1000
4000
800
3500
3000
600
2500
400
2000
200
1500
1000
0
1997
17
1998
Source: PWC and Bloomberg
1999
2000
2001
2002
2003
All Time Record of the Stock Market and a Dramatic
Drop in Long Term Yields
%
Index
13
Tel Aviv 25 index
525
12
475
11
10
425
9
375
8
325
10-year non linked
government bond
7
18
Source: Central Bureau of Statistics and the MOF
1/
04
12
/0
3
11
/0
3
10
/0
3
9/
03
8/
03
7/
03
6/
03
5/
03
4/
03
3/
03
6
2/
03
1/
03
275
Spreads in the Secondary Market Reflect
Reduction in Israel’s Risk Premium
Basis points
160
140
Israel 2013
120
100
80
Single-A SSB BIG Index
(7-10 years)
60
Israel 2010
40
20
1/03
2/03
Source: Citigroup
19
3/03
4/03
5/03
6/03
7/03
8/03
9/03
10/03 11/03 12/03
1/04
Foreign Direct Investment Back to Robust Level
Net inflows of foreign direct investment in Israel
$ billions
6
5.0
5
4
3.6
3.5
3.1
3
1.9
2
1.4
1.5
1.8
1.6
1
0.1
0.1
0.3
0.4
0.5
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
20
Source: Bank of Israel
Disciplined Fiscal Policy Capped Budget Deficit
and Slowed Growth of Government Debt
Domestic deficit as percentage of GDP
(excluding net allocation of credit)
Total debt as % of GDP
%
%
6.0
5.6
External Debt
160
Domestic Debt
5.0
Target
4.7
140
4.5
120
4.0
3.8
4.0
100
3.0
2.8
3.0
80
2.5
2.4
60
2.0
40
1.0
0.7
20
21
03
E
20
01
20
99
19
97
19
95
19
93
19
91
19
89
19
19
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
Source: Bank of Israel and Ministry of Finance
87
0
0.0
Acceleration of Reforms and Structural Changes
2003 reforms include:
Public sector
cutbacks
Tax
reform
Labor
market
reform
BOT, PFI projects involving
the business sector
22
Pension fund
reform
Transfer
payments
reform
Investment in
infrastructure
Privatization – a Key Element in Enhancing Growth
El Al Israel Airlines, Ltd.: Offering of options and shares
totaling 98% of El Al’s shares
ZIM (Israel navigation company): Sale of all government
holdings in the company (49%)
Bezeq (telecommunication corporation): Sale of 5.25% of
Bezeq’s shares. The company cease to be a State-owned
company
Bank Leumi: Offering of options and shares totaling 6.47%
of the shares. Legislation that will enable GoI to privatize
via TASE
On the agenda:
23
Discussion Outline
24
1
Introduction
2
Israel: An Advanced Industrialized Economy
3
Economic Performance and Policy Priorities
4
Debt Profile and Credit Ratings
5
Conclusions
Israel Becomes a Net Creditor to the World
%
Net external debt as % of GDP*
34
28.6
29
28.0
25.8
22.2
24
19.1
19
14.3
14
10.8
7.7
9
3.7
4
0.5
-1
-2.7
-6
1992
1993
1994
1995
1996
1997
1998
1999
2000
*Including the Public sector, Private sector and the Banking system
25
Source : Bank of Israel
2001
2002
-5.0
Sep.
2003
High Level of Foreign Exchange Reserves Leads the
Way to a Comfortable Liquidity Position
$millions
90%
Foreign Reserves
30,000
Gross Financing Gap (% of foreign reserves)
80%
Liquidity position
25,000
70%
60%
20,000
50%
15,000
40%
30%
10,000
20%
5,000
10%
0%
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Jan04
26
Source: Central Bureau of Statistics, Bank of Israel
Current Account Surplus Strengthens Israel’s
External Accounts
Million $
% of GDP
1,000
0.8%
1%
0.3%
0
0%
-1,000
-1.3%
-1%
-0.6%
-1.3% -1.5%
-2,000
-1.3%
-2%
-1.6%
-2.1%
-3,000
-3%
-3.6%
-4,000
-4%
-3.9%
-4.4%
-5,000
-5%
*
1Q3
02
20
03
Q
20
01
20
00
20
99
19
98
-6%
19
97
19
96
-5.6%
19
19
94
19
93
19
92
19
91
19
90
19
95
-5.5%
-6,000
Source: Central Bureau of Statistics
27
Government Debt has a Favorable Maturity
Structure and Low Reliance on Market Sources
External public sector debt as of December 2003
Source of debt
Foreign banks
1%
Original term to maturity
Foreign
governments &
international
institutions
9%
+5 years
88.6%
State of Israel
bonds
34%
Tradable bonds unguaranteed
10%
28
Source : Bank of Israel February 2004
Tradable bonds
guaranteed by the
US gov.
46%
1-5 years
10.6%
Up to one year
0.8%
Israel’s Credit Rating 1992 - 2004
Rating Agency
Rating
Moody’s
S&P
Fitch
A2
AA-
A1/A+
A2/A
A3/A-
Baa1
/BBB+
Moody's
S&P
Fitch
Baa2
/BBB
Baa3
/BBB-
1992
29
1993
1994
Source: Credit Rating Agencies
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Discussion Outline
30
1
Introduction
2
Israel: An Advanced Industrialized Economy
3
Economic Performance and Policy Priorities
4
Debt Profile and Credit Ratings
5
Conclusions
Conclusions
31

Israel's sovereign credit quality is sound and resilient

Fundamentals compare favorably with higher-rated
sovereigns

Structural reforms in the economy underpin Israel’s
sovereign credit profile and will lead to robust growth

The new geopolitical environment supports the economic
growth

Ongoing support by the Jewish community and strong
alliance with the U.S.
Additional Information...
Web sites addresses:
 Ministry of Finance
http://www.mof.gov.il/englishframe.htm
 Bank of Israel
http://www.bankisrael.gov.il/firsteng.htm
 Central Bureau of Statistics
http://www.cbs.gov.il/engindex.htm
32