ECONOMIC HIGHLIGHTS4th QUARTER 2008STATE OF ISRAEL

MINISTRY OF FINANCE

INTERNATIONAL AFFAIRS DEPARTMENTFebruary 2009International Affairs Department

ContentsNote:You can return to the beginning of each chapter by clicking this symbols on the top of each slide.Economic FiguresBalancesInternational ComparisonsIsrael and the OECDInternational TreatiesRelevant SitesMain CharacteristicsAbout the Economic Crisis and Operation Cast Lead

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

Economic FiguresGDP and GDP per CapitaMajor GDP ComponentsGrowth: Israel compared to the WorldExports of Goods and ServicesExports of Goods by RegionForeign InvestmentsUnemployment & Participation RatesInflation RateEstimates for 2008Press for desired slide or continue:Back to ContentsMain Indicators and Forecast6-78910111214151618Main Trading Partners13Inflation Rate Worldwide17The Financial Crisis and operation Cast Lead5

Operation "Cast Lead" and the World Economic CrisisThe 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 Israels economy has been limited as most businesses in Israels southwest, near the Gaza strip, continued to operate. Israels 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 2008. A review of Israel's economy in 2008 and the full economic impacts of "Cast lead" will be presented in our next issue.

5

Main Economic Indicators*Using public exchange rate. *** Based on the 3rd quarter of 2008. ** In current prices 6

Source: Ministry of Finance, Central Bureau of StatisticsMain Economic Indicators(con.)7

GDP and GDP per Capita

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

GDP GrowthIsrael 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, Israels 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 Finance10

Exports of Goods and Services ($B)Source: Central Bureau of Statistics11In 2008, Exports grew by 3.6%.

Exports of Goods by Region (excluding Diamonds)Source: Central Bureau of Statistics(USA: 28%)(USA: 28%)2008200712

Israels Main Trading Partners

(US$ Billions, excluding diamonds)Source: Central Bureau of Statistics132007China is becoming a leading trade partner for Israel

Net Foreign Investments in Israel (B$)Source: Ministry of Finance14

Unemployment and Participation (As % of Total Labor Force)

Source: Central Bureau of StatisticsThe 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 FinanceThe Consumer Price Index (CPI) grew by 3.8% during 2008.16

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 2008.173.4%

Sources: Central Bureau of Statistics, OECD

Growth of Main GDP Components 2008Source: Ministry of Finance

2008 (Estimated)

18

BalancesBudget Deficit ;Current Account ;Net Foreign DebtGeneral Government ExpenditureGross Public DebtGross Tax BurdenBack to ContentsPress for desired slide or continue:20212223

Gross Public Debt

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

Budget Deficit and General Government Expenditure

Source: Ministry of Finance21Budget DeficitGeneral Government Expenditure (% of GDP)

2

0.435

0.442

0.45

0.455

0.476

0.504

1

20072006200520042003199920070.80%20070.02%

Budget Deficit0.02%1.00%1.90%3.60%5.40%3.20%20061.20%20061.00%

20051.60%20051.90%

20043.00%20043.60%

20034.80%20035.40%

20025.40%20023.60%

20014.60%20014.20%

20082007200620052004200320002.40%20000.70%

Government Expenditure43.50%44.20%45.00%45.50%47.60%50.40%19993.70%19993.20%

1

0

0

0

0

0

0

0

0

0

2

0.008

0.012

0.016

0.03

0.048

0.054

0.046

0.024

0.037

3

1

0.021

0

0.01

0.018

0.036

0.053

1

200820072006200520042003200220012000199920070.80%20070.02%

Budget Deficit2.10%0.00%1.00%1.80%3.60%5.30%3.50%4.20%0.70%3.20%20061.20%20061.00%

20051.60%20051.90%

20043.00%20043.60%

20034.80%20035.40%

20025.40%20023.60%

20014.60%20014.20%

200820072006200520042003200220012000199920002.40%20000.70%

Government Expenditure0.80%1.20%1.60%3.00%4.80%5.40%4.60%2.40%3.70%19993.70%19993.20%

1

0.0002

0.01

0.019

0.036

0.054

0.036

0.042

0.007

0.032

2

0

0

0

0

0

0

0

0

0

3

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

Gross Tax Burden (as % of GDP)Source: Ministry of Finance, OECD*As of 2006 Tax burden has been in the vicinity of OECD average since 200323- - - OECD countries average: 35.9%*

1

0.363

0.373

0.373

0.366

0.358

0.358

0.359

0.364

0.368

0.343

1

1999200020012002200320042005200620072008

36.30%37.30%37.30%36.60%35.80%35.80%35.90%36.40%36.80%34.30%

1

0

0

0

0

0

0

0

0

0

0

2

3

MBD000CDBDA.xls

International comparisonsand additional dataCentral Bank Interest RatesNASDAQ and Tel Aviv 100 IndicesIsraels Credit RatingGlobal Competitiveness IndexGlobal Competitiveness Index: Selected IssuesBusiness Competitiveness Index ;Network Readiness IndexPress for desired slide or continue:Back to Contents252627283129

Central Bank Interest Rates Israel vs. U.S.A

Source: Bank of Israel (BOI), Federal Reserve2006200720082009Bank of Israel Rate (BOI)U.S. Federal Funds Rate1.00%0.0%25Coinciding with the decrease of the FEDs 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.26Tel Aviv 100 reacts to the current events similarly to the NASDAQ, yet less drastically.

Israels Credit Rating 1992-2008Source: Credit Rating Agencies, Accountant General27In 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, 2008-9Global Competitiveness Index, 2008-2009Countries that have been invited for open discussions for joining the OECD.28Israel Ranks 23rd out of 134 Countries

Global Competitiveness Index, 2008/9SELECTED CATEGORIESVenture Capital AvailabilitySource: World Economic Forum, Global Competitiveness Index, 2008-9Availability of Scientists & EngineersQuality of Scientific Research InstitutionsCompany Spending on R&DRANKRANKRANK RANK 29

Strength of Investor ProtectionSource: World Economic Forum; Global Competitiveness Index, 2008-9Availability of Latest TechnologiesUtility PatentsLegal Rights IndexRANKRANKRANKRANKGlobal Competitiveness Index, 2008/9SELECTED CATEGORIES30

(con.)

Countries that have been invited for open discussions for joining the OECDSource: 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]**GCI: Provides a holistic overview of factors critical to productivity and competitiveness [LINK TO SITE]Network Readiness Index (NRI)* 2007-8Business Competitiveness Index2008-9Israels Rank in Leading Indices31GreeceCroatiaRussiaItalySloveniaEstoniaSpainChileNew ZealandIsraelIrelandFranceJapanFinlandSwitzerlandUSA

Israel and the OECDReal GDP growth in 2007-8Unemployment Rate in 2007-8Press for desired slide or continue:Back to ContentsGDP Based on PPP per Capita in 2006444543

Real GDP Growth

(Annual percentage of change, partial list)Source and projections: OECD and the Ministry of Finance, Israel2.6%1.4%The global recession has influenced all of the OECD countries growth rates.5.3% 074.1% 0833

Unemployment Rate (average)Source: OECD, Ministry of FinanceWhile the OECD average unemployment rate grew between 2007 2008, Israels Unemployment rate decreased by 1.3%.3408 0708 07080708 07Change 07-08

GDP per capita based on purchasing-power-parity (PPP) 2007, (in US$)33,29425,758Source: Economics and Research Department calculations from OECD and the Central Bureau of Statistics data35

International TreatiesIsraels Free Trade AgreementsAvoidance of Double Taxation AgreementsCooperation in Industrial R&D AgreementsProtection of Investments AgreementsInternational Organization MembershipsPress for desired slide or continue:Back to Contents38-94041-24337

Israels Free Trade Agreements371985199219971997European Union (Association Agreement)USAEFTACanadaTurkeyMexicoMERCOSUR*199920002007* The agreement with Estonia has only been signed initially

Avoidance of Double Taxation Agreements* The agreement with Estonia has only been signed initially38

(con.)

* The agreement with Portugal has been recently ratifiedAvoidance of Double Taxation Agreements39

Cooperation in Industrial R&D AgreementsBelgiumCanadaChinaFranceHong KongItalyNetherlandsPortugalSpainUKUSASingaporeIrelandSwedenFinlandGermanyIndiaAustriaKorea40

Protection of Investment Agreements 41

Protection of Investment Agreements (con.)42

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) | PCA | UN | UNCTAD | UNECE | UNEP | UNESCO | UNHCRUNIDO | UPU | WCO | WFP | WHO | WIPO | WMO | WTOOWTRO | WTO | ICSID* Economic Organizations43

Relevant SitesBack to ContentsGovernment Institutions:Ministry of FinanceOECD Stat Profile on IsraelBank of Israel (BOI)Central Bureau of StatisticsIsraeli Government PortalIsrael Securities AuthorityMinistry of Industry, Trade and Labor OECD IsraelWWW.FINANCEISRAEL.MOF.GOV.ILInternational Affairs Department Homepage:

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Ms. Ravit FriedbergInternational Affairs DepartmentMinistry of Finance, Jerusalem, IsraelFinanceIsrael@mof.gov.il Start AgainClick here for our website!www.FINANCEISRAEL.mof.gov.il