May 24 th 2011 The Israeli Economy

GDP ($Billion) 218 Population (3/2011, Million) 7.7 GDP per capita ($) 28,560 Foreign Trade (% of GDP) 72% Total Exports (% of GDP) 37% Unemployment (2/2011) 6% The Israeli Industry Share of business sector 21% Industrial Sales ($Billion) 95 Industrial Exports (% of sales) 43% Employees350K Main branches: Chemicals, Electronics & Food 2 The Israeli Economy – 2010 Facts & Figures The Manufacturers' Association of Israel

The Business sector - Main Branches

The Israeli Economy Resilience During the Global Crisis The Manufacturers' Association of Israel 4

5 Positive Growth in Israel Vs. Regression in Most Developed Countries

A Short Recession in the Israeli Economy The Manufacturers' Association of Israel 6

Relatively Moderate Regression in Israeli Industry Source: OECD, CBS & MAI Economic Research Department The Manufacturers' Association of Israel 7

The Israeli Economic Resilience Key factors Strong starting point Conservative Management High-tech oriented growth Export flexibility - Diversion of trade Flexible labor market Expanding monetary policy Responsible fiscal policy Social partnership model Automatic stabilizers - budget was not approved until mid 2009 The Manufacturers' Association of Israel 8

Before the Crisis: 5 Years of Rapid Growth in Israeli economy The Manufacturers' Association of Israel 9

Before the Crisis: 5 Years of Rapid Growth in Israeli industry The Manufacturers' Association of Israel 10

Before the Crisis: Relatively Low Unemployment Rate The Manufacturers' Association of Israel 11

Independent of Outside Funding A Continuing Current Account Surplus Source: CBS & MAI Economic Research Department The Manufacturers' Association of Israel12 The continual surplus in the current account + the large amount of foreign currency reserves (77 billion $), enable Israel to provide its import needs without depending on external financing. The balance of: foreign trade, net factor income and net transfer payments.

The Israeli Economic Resilience Strong starting point Conservative Management High-tech oriented growth Export flexibility - Diversion of trade Flexible labor market Expanding monetary policy Responsible fiscal policy Social partnership model Automatic stabilizers - budget was not approved until mid 2009 The Manufacturers' Association of Israel 13

Relatively High Private Saving Rate in Israel The Manufacturers' Association of Israel 14 Source: OECD & CBS Household saving rates - Percentage of disposable household income, 2009

Relatively Low Household Debt in Israel Household Debt to Disposable Income Ratio % GB USA Spain Canada Germany Israel France Source: Bank of Israel The Manufacturers' Association of Israel 15

The Banking System Conservative & Supervised % Source: Bank of Israel The Manufacturers' Association of Israel 16 Capital Adequacy Ratio (CAR) - The ratio of bank's capital to its risk assets.

Bank Nonperforming Loans to Total Loans -Low Ratio in Israel 17 The Manufacturers' Association of Israel Source: IMF

Nominal Change in Average Apartment Price, Real Estate Prices- Relatively Moderate Increase Before the Crisis Source: Psagot Investment House The Manufacturers' Association of Israel 18

The Israeli Economic Resilience Strong starting point Conservative Management High-tech oriented growth Export flexibility - Diversion of trade Flexible labor market Expanding monetary policy Responsible fiscal policy Social partnership model Automatic stabilizers - budget was not approved until mid 2009 The Manufacturers' Association of Israel 19

World Leadership in Civilian R&D Investments Source: Israeli CBS The Manufacturers' Association of Israel 20

High Share of ICT in the Business Sector ICT= Information & Communications Technologies, 2006 Source: Israeli CBS The Manufacturers' Association of Israel 21

Electronic Components Branch (Intel) Moderated Industrial Export Regression The Manufacturers' Association of Israel 22 6%

Industrial Export 23 The Manufacturers' Association of Israel

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

Structural change in the Israeli industry The Manufacturers' Association of Israel 25

The Israeli Economic Resilience Strong starting point Conservative Management High-tech oriented growth Export flexibility - Diversion of trade Flexible labor market Expanding monetary policy Responsible fiscal policy Social partnership model Automatic stabilizers - budget was not approved until mid 2009 The Manufacturers' Association of Israel 26

Diversion of Trade to Asian Countries The Manufacturers' Association of Israel 27 57% 16% 17% 3%

The Israeli Economic Resilience Strong starting point Conservative Management High-tech oriented growth Export flexibility - Diversion of trade Flexible labor market Expanding monetary policy Responsible fiscal policy Social partnership model Automatic stabilizers - budget was not approved until mid 2009 The Manufacturers' Association of Israel 28

Employment Flexibility The Manufacturers' Association of Israel Real Decrease in Wages at the Israeli Business Sector 29 The Israeli companies used extraordinary measures during the crisis, including: 1.Reducing Overtime 2.Concentrated Vacation 3.Non Payment Vacation 4.Shortened Workweek

30 The Manufacturers' Association of Israel Relatively moderate Dismissals Workers in the Business Sector +76K

The Israeli Economic Resilience Strong starting point Conservative Management High-tech oriented growth Export flexibility - Diversion of trade Flexible labor market Expanding monetary policy Responsible fiscal policy Social partnership model Automatic stabilizers - budget was not approved until mid 2009 The Manufacturers' Association of Israel 31

Expanding Monetary Policy Interest Rates of Central Banks O ver the World % Crisis begins Northern Rock Lehman-Brothers collapse Israel Source: Bank of Israel 32 The Manufacturers' Association of Israel Exceptional measures: Buying foreign currency & bonds Foreign currency reserves: 3/2008 – 29.4 billion $ 4/2011 – 77.4 billion $ Buying government bonds through open market operations: 263 million NIS

The Israeli Economic Resilience Strong starting point Conservative Management High-tech oriented growth Export flexibility - Diversion of trade Flexible labor market Expanding monetary policy Responsible fiscal policy Social partnership model Automatic stabilizers - budget was not approved until mid 2009 The Manufacturers' Association of Israel 33

Responsible Fiscal Policy Restrained Government Budgetary Deficit As Percentage of GDP The Manufacturers' Association of Israel 34 Source: Ministry of Finance

Relatively Low Government Deficit in Israel Source: Eurostat, IMF, MOF The Manufacturers' Association of Israel 35

Continuous Reduction of Public Debt Ratio The Manufacturers' Association of Israel Source: Ministry of Finance 36 As percent of GDP

Relatively Low Public Debt Ratio The Manufacturers' Association of Israel Source: Ministry of Finance, Eurostat, IMF 37

The Israeli Economic Resilience Strong starting point Conservative Management High-tech oriented growth Export flexibility - Diversion of trade Flexible labor market Expanding monetary policy Responsible fiscal policy Social partnership model Automatic stabilizers - budget was not approved until mid 2009 The Manufacturers' Association of Israel 38

Round Table Forum Social Partnership Model Government Employers Employees The Manufacturers' Association of Israel 39

Roundtable Forum An advisory forum to the Israeli Government on matters of social and economic policies, which aimed to deal with the economic crisis. (established on 4/2009). Members: representatives of the government, employers and employees. The goal: to achieve better cooperation in order to cope with the economic crisis and to create conditions for sustainable growth. The Roundtable led to the package deal of , in which each side contributed his Share to the Burden The Manufacturers' Association of Israel

Round Table Forum Social Partnership Model Government Employers Employees The Manufacturers' Association of Israel 41 Incentives for the business sector: Investment grants State guarantees Medium-sized businesses fund Acts to maintain competitiveness: Freezing costs like property tax, water, electricity. Tax reform Reducing by 50% the public service employees’ holiday pay during Increasing by 0.4% the national insurance employers taxes (up to level of 60% of average wage).

Reducing Direct Taxes Tax Reform Path The Manufacturers' Association of Israel 42

A Sharp Decrease in the Number of Strikes 43 The Manufacturers' Association of Israel

Opportunities Threats 2011 The Manufacturers' Association of Israel

2011 Threats An expected slowdown in global trade High level of commodity prices Inflationary pressures & rising interest rates Exchange rate appreciation Wage pressure Increased local costs Geopolitical instability Business environment Off-shoring The Manufacturers' Association of Israel 45 Local Global

46 A correlation of 0.81 between world trade and industrial exports An Expected Slowdown in World Trade The Manufacturers' Association of Israel

A peak in raw materials prices The Manufacturers' Association of Israel

Manufacturing Output Price The Manufacturers' Association of Israel

49 The expected rate of inflation according to: 3.2%Capital market = B.O.I = 3.2% 3.1%Economists forecasts = Accelerated Inflation The Manufacturers' Association of Israel

Source: Leumi Bank, 22/5/2011 Interest Rates Spread Between Israel and USA is Expected to Increase

Share of foreign investors in total T bills The Manufacturers' Association of Israel

Purchase of Israeli Short-Term T.B by Foreigners Vs. Purchase of Dollars by Bank of Israel 52 The Manufacturers' Association of Israel

Israel: A Sharp Revaluation Compared to Main Competitors The Manufacturers' Association of Israel

2011 Appreciation Damages at 3.5 NIS/$ scenario Manufacturers forecast –Total transactions loss: 3.4% ($ 3.4B) –Export transactions loss: 6.6% ($2.9B) –Local market transactions loss: 0.9% ($ 0.5B) –Employees (existing and/or prospective) loss: 2.5% (9K) Source: M.A.I Economic Research Department, Survey - oct The Manufacturers' Association of Israel

55 Real Wage in Industry The Manufacturers' Association of Israel

56 Ratio of minimum to mean wage, 2008 Source :OECD Minimum Wage The Manufacturers' Association of Israel

Logistics Performance Indicators, 2010 The Manufacturers' Association of Israel 57 Source: Connecting to Compete 2010: Trade Logistics in the Global Economy, report of the World Bank, LPI Total RankingLogistics competence International shipments Infrastructure

58 Quality of Infrastructre The Global Competitiveness Report 2010/11 of the WEF, out of 139 countries.

59 Shifting Production Lines Abroad Source: Survey of Expectations in Industry of MAI

Global Growth Increased Domestic Demand Negative to zero Real interest rate Attractive Company Tax Level No Credit Crunch Responsible Fiscal Policy Persistence A good starting point for 2011 Local Global 2011 Opportunities The Manufacturers' Association of Israel

Global Growth Forecast 61 The Manufacturers' Association of Israel

Wage increase Absorption of new employees Low unemployment - rate (2/2011 – 6.0%) Disposable income Increased due to tax reduction. Positive Wealth effect Many Factors Supports Private Consumption The Manufacturers' Association of Israel

63 Wealth Effect 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% Source: KPMG, Corporate Tax

No Credit Crunch The percentage of manufacturers reporting some difficulty in getting new credit: Source: Survey of Expectations in Industry of MAI

Responsible Fiscal Policy Persistence Biennial Budget Increased certainty & stability Improved governmental planning processes - Long-term planning Increased Efficiency Reduced Political pressure. New Formula to Limit Government Expenditure Target = R educing Debt/GDP ratio while maintaining an adequate level of public services. Formula: The Manufacturers' Association of Israel 66 60% / (Actual Debt/GDP) X (Annual growth rate in the past 10 years) 60% = Target Debt/GDP Ratio According to Maastricht Treaty

Macroeconomic Forecast for 2011

Industrial Output Source: Survey of Expectations in Industry, Apr. 2011, M.A.I Economic Research Department (186 industrial companies )

69 Survey of Expectations in Industry Source: Survey of Expectations in Industry, Apr. 2011, M.A.I Economic Research Department (186 industrial companies )

A Rapid Growth in Israel Compared to most developed countries 70 The Manufacturers' Association of Israel Source: IMF, April 2011

Thank you Daphna Aviram-Nitzan Head of Economic Research Department Manufacturers' Association of Israel Tel Mobile: