Transcript Overview of Israel’s Economy

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