The Israeli Economy: Current Trends, Strength and Challenges

Jerusalem Press Club

Dr. Karnit Flug

Governor of the Bank of Israel

05.02.2017

1

GDP per capita Growth Rates

GDP per capita annual % change (2000-2016)

2 Source : IMF

Israel

Developing Economies

Advanced Economies

*Advanced economies: Simple average for 21 rich OECD countries **Developing economies: IMF “emerging markets” definition

-6

-4

-2

0

2

4

6

8

Source: CBS, OECD ,IMF

80

90

100

110

120

130

140

150

160

170

80

90

100

110

120

130

140

150

160

170

80

90

100

110

120

130

140

150

160

170

Israel’s Exports and the World Trade

מדד מדד מדד

World Trade

Israel

OECD*

USA

OECD*

USA

Goods Services Goods & Services

3

Israel

Israel

Goods and Services exports in Israel & OECD and the world trade, 2015-2016 Index, Q1-2007=100

Geographical composition of Israel’s Exports

Sources: CBS 4

Europe 34%

USA 31%

Asia 6%

Other 29%

Geographical composition of Israel’s Exports of goods excluding diamonds, 2015

Europe

29%

USA 24%

Asia 25%

Other 23%

Geographical composition of Israel’s Exports of

Business services, 2014

5

Participation Rate

Employment rate

Unemployment rate

Labor Market Quarterly, 1995-2016, 25-64

% %

Source : Central Bureau of Statistics Labor Force Survey

3.8

80.0

76.9

64

66

68

70

72

74

76

78

80

82

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5

11.5

12.5

Unemployment Rate, 25-64, 2015

0

5

10

15

20

25

Ko

rea

Icel

and

Jap

anM

exic

oN

orw

aySw

itze

rlan

dU

nit

ed K

ingd

om

New

Zea

lan

dU

nit

ed S

tate

sG

erm

any

Isra

elC

zech

Rep

ub

licA

ust

ralia

Au

stri

aC

hile

Den

mar

kEs

ton

iaSw

eden

Luxe

mb

ou

rgC

anad

aH

un

gary

Net

her

lan

ds

Po

lan

dO

ECD

Be

lgiu

mFi

nla

nd

Slo

ven

iaIr

elan

dTu

rkey

Fran

ceLa

tvia

Ital

ySl

ova

k R

epu

blic

Po

rtu

gal

Spai

nG

reec

e

%

Source: OECD and BoI 6

Real Wage per Employee Post* 1995-2016

NIS

*Seasonally adjusted, 12 months moving average, 2015 prices

Source : Central Bureau of Statistics Data 7

7,500

8,000

8,500

9,000

9,500

10,000

Last 12-month percent change

Business Sector

Total

Public Sector 2.2%

3.1%

3.7%

75%

2%

0% 13%

9% 1%

Banks Institutional Inverstors

Credit card companies Foreign residents

Government Households & others

Source: BoI 8

63% 13%

2%

13%

1% 8%

*Without credit to the government

The Financial System Structure

Distribution of Credit for Non-Financial Private Sector, by Lender

2000 2016

24%

7%

48%

21%

Banks

CurrentAccount

InstitutionalInvestors

Other

Source: BOI 9

38%

1% 36%

25%

The Financial System Structure

Distribution of the Public’s Assets Portfolio

2000 2016

*Other includes mostly cash, stocks and bonds held directly by the public

Separation of credit card companies from banks

Reducing entry barriers for new banks and other credit providers

Establishing a Credit Registry and credit bureaus

Increasing competition in the Payment Services

Setting up the Financial Stability Committee will help coordinate

among regulators, monitor risks and address them early

The Financial Reforms on the Agenda

10

Bank of Israel Policy

BOI’s Policy Objectives

Maintain price stability, as the central goal.

Support economic policy, primarily growth, employment and reducing social gaps.

Support the stability and orderly activity of the financial system.

12

-2

-1

0

1

2

3

4

5

6

7

%

* Forward inflation expectations 3-5 years

Inflation 12 month

Expectations Forward*

13 Source: Bol

Research Division Forecast

Actual Inflation and Inflation Expectations & Forecast, 2006-2018

Exchange Rates 2012-2016

NIS Index

Nominal Effective

14 Source : BoI

70

75

80

85

90

95

100

105

110

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

4.8

5.0

5.2

01

/12

03

/12

05

/12

07

/12

09

/12

11

/12

01

/13

03

/13

05

/13

07

/13

09

/13

11

/13

01

/14

03

/14

05

/14

07

/14

09

/14

11

/14

01

/15

03

/15

05

/15

07

/15

09

/15

11

/15

01

/16

03

/16

05

/16

07

/16

09

/16

11

/16

₪/$

₪/€

Index

Survey of Home Price and Loans for Residential Purposes 2005-2016, Monthly

Source : BoI, Banking Supervision Department 15

Survey of home prices

Loans for residential purposes

80

100

120

140

160

180

200

220

09

/05

03

/06

09

/06

03

/07

09

/07

03

/08

09

/08

03

/09

09

/09

03

/10

09

/10

03

/11

09

/11

03

/12

09

/12

03

/13

09

/13

03

/14

09

/14

03

/15

09

/15

03

/16

09

/16

Bank of Israel Policy Tools 2007-2016

0.1 0

1

2

3

4

5

01/0

7 0

6/0

7 1

1/0

7 0

4/0

8 0

9/0

8 0

2/0

9 0

7/0

9 1

2/0

9 0

5/1

0 1

0/1

0 0

3/1

1 0

8/1

1 0

1/1

2 0

6/1

2 1

1/1

2 0

4/1

3 0

9/1

3 0

2/1

4 0

7/1

4 1

2/1

4 0

5/1

5 1

0/1

5 0

3/1

6 0

8/1

6

FX Intervention

(US$)

Interest Rate (%)

01/0009/1305/2701/4110/5406/6802/8210/9507/0903/23

01/0

7 0

6/0

7 1

1/0

7 0

4/0

8 0

9/0

8 0

2/0

9 0

7/0

9 1

2/0

9 0

5/1

0 1

0/1

0 0

3/1

1 0

8/1

1 0

1/1

2 0

6/1

2 1

1/1

2 0

4/1

3 0

9/1

3 0

2/1

4 0

7/1

4 1

2/1

4 0

5/1

5 1

0/1

5 0

3/1

6

Additional provision

for high LTV loans

Higher capital

requirements for

high LTV

Variable Interest

Rate limit

LTV limit

PTI limit and

capital requirem

ent

Higher capital

requirements for high LTV

Bond Purchases

18 Billion NIS

Higher capital

requirements

Macroprudential

Measures

16

Natural Gas Purchase program + Intervention

Building reserves Intervention

“The Monetary Committee assesses that monetary policy

will remain accommodative for a considerable time”

Source : Bol

0

500

1,000

1,500

2,000

2,500

3,000

01/0

7 0

6/0

7 1

1/0

7 0

4/0

8 0

9/0

8 0

2/0

9 0

7/0

9 1

2/0

9 0

5/1

0 1

0/1

0 0

3/1

1 0

8/1

1 0

1/1

2 0

6/1

2 1

1/1

2 0

4/1

3 0

9/1

3 0

2/1

4 0

7/1

4 1

2/1

4 0

5/1

5 1

0/1

5 0

3/1

6

Fiscal Policy

Budget Deficit* and Deficit Target (Percent of GDP, 2000-2016)

%

*Percent of GDP; excluding credit extended. The data refers to the deficit excluding the Bank of Israel’s profits.

Source : Bol 18

2.9 2.9

0

1

2

3

4

5

6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

New Budget Target

Source : Bol and the OECD. 19

40

50

60

70

80

90

100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

%

Public Debt - Israel

1.4

2.8

-4.0

-2.0

0.0

2.0

4.0

No

rway

Ko

rea

Swed

en

Luxem

bo

urg

Eston

iaFin

land

Switzerlan

dJap

anA

ustralia

New

zealand

De

nm

arkN

etherlan

ds

Cze

ch R

epu

blic

Can

ada

Germ

any

Slovak R

epu

blic

OEC

DP

olan

dA

ustria

France

Un

ited

Kin

gdo

mIre

land

Spain

Be

lgium

Sloven

iaIsraelU

nite

d State

sG

reece

Hu

ngary

Icelan

dItalyP

ortu

gal

General government net debt interest payments Per cent of nominal GDP 2016

Public Debt in Israel is Decreasing but Net Interest Payments are Still High in International Comparison

34.3

0

5

10

15

20

25

30

35

40

45

50

31.4

%

Source: OECD Revenue Statistics 2015

Tax Burden 2015, Percent of GDP

20

%

Public Expenditure Percent of GDP, 2016

38.2

46.1

15

20

25

30

35

40

45

50

55

60

21 Source : OECD

29.8

41.8

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

Source :OECD and the Bol

• The data is calculated by decreasing the net debt interest payments and defense expenditure from the general government total outlays

%

Civilian Public Expenditure Excluding Interest Percent of GDP, 2015

22

The Strengths Behind Israel’s Economy

0

10

20

30

40

50

60

Share of the Population Aged 25-64 with Tertiary-Level Education , 2015

%

Source : OECD Education at a Glance 2015 24

Israel is Leading in International Innovation Rankings

Source: World Economic Forum 2016-2017 & Bloomberg Innovation Report 2015 25

Factors in Israel that encourage innovation Quality universities that provide the economy with human

capital, scientific aptitude, and technological abilities Collaboration between the universities and industry Government support for commercial R&D Developed venture capital industry

Ranking 2 10

Index

• 73 Israeli companies are listed on Nasdaq

• Over 300 international companies established Israeli R&D centers

• More than 5,000 startups : The world’s greatest concentration of

high tech companies outside Silicon Valley

• Leading in cyber security: 430 cyber security companies and

startups. In 2015, Israel’s share of private investment in the field was

nearly 20% (second only to the US).

Source: Israel Innovation Authority, Nasdaq, The National Cyber Bureau 26

Israel’s Relative Advantages - Technology

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

27

Triadic Patent Families Number per million inhabitants, 2013

Source: OECD

125 148

Israel’s Relative Advantages – Water Innovation

• World leader in desalination; With a network

of five coastal desalination plants, which

together produce 75% of all water supply to

households.

• Leading in Waste-Water Recycling with a rate

of 86%.

• Israel developed and patented the “Drip

Irrigation”, that has not only produced huge

reduction in agricultural water use, but has also

vastly increased yields, and it is used

worldwide.

28 Source: Israeli Water Authority , “Natafim”, “Mekorot”.

Share of Total ICT Gross Value Added out of GDP, 2013

0

1

2

3

4

5

6

7

8

Source: CBS & Eurostat 29

%

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.40%

0.45%

Gre

ece

Ital

y

Po

lan

d

Cze

ch R

epu

blic

Slo

vak

Rep

ub

lic

Slo

ven

ia

Spai

n

Au

stra

lia

Au

stri

a

Esto

nia

Ger

man

y

New

Zea

lan

d

Den

mar

k

Net

her

lan

ds

Be

lgiu

m

Po

rtu

gal

Fran

ce

Hu

nga

ry

No

rway

Swit

zerl

and

Un

ited

Kin

gdo

m

Jap

an

Irel

and

OEC

D

Fin

lan

d

Ko

rea

Swed

en

Can

ada

Un

ited

Sta

tes

Isra

el

Later stage venture Seed/start-up/early stage

Venture Capital Investment as % of GDP, 2014

Source : OECD 30

424 474

260 246 246 342 306 319

379 292 328

242 202 210

83 5

102

129

90 77 148

186 194

235

282

296

348 446

596

787

788

643

69

67

29 37

17

32 37

44

34

30

24 20

22

8

2

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Failed Running Successful

Flurry of High Tech Entrepreneurship: Taste for Risk Number of New Start-Ups by Year 1999-2014

31

Average: 640 new startups per year!

Source: IVC

Israeli Startup Companies: Number of Companies Established by Year and Success Index

1999-2014 8

Yet, There Are Challenges

$

Source : The Conference Board Total Economy Database 2015

Output Per Hour Worked 1995-2015,$ PPP, 2015 Constant Prices

33

0

10

20

30

40

50

60

70

Israel

OECD

21 Rich Countries

34

Agriculture, forestry and fishing

Food products, beverages and tobacco

Textiles, leather and footwear

Wood and products of wood and cork

Pulp, paper, paper products, printing and

publishing

Rubber and plastics products

non-metallic mineral products

Basic metals and fabricated metal products

Machinery and equipment

Electrical & optical equipment

Transport equipment

Construction

Wholesale and retail trade

Hotels and restaurants

Transport, storage and communications

Financial intermediation

Real estate, renting and business activities

Chemicals

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

Productivity Ratio

Exports as share of the industry’s output

Productivity Gap—Israel vs. OECD Average, and Exports’ Share of Output in Israel, by Industry, 2010

Source : Eurostat, OECD, BOI, CBS (Israel)

265

270

275

280

285

290

295

300

The Productivity Gap is the Result of Various Factors: Regulation, Human Capital & Trade Facilitation & Capital Stock

0

100,000

200,000

300,000

400,000

500,000

600,000

Me

xic

oP

ola

nd

Chile

Tu

rkey

New

Ze

ala

nd

Isra

el

Slo

vakia

Esto

nia

Hungary

Jap

an

Canada

Ice

lan

dA

ustr

alia

Cze

ch R

epublic

OE

CD

Slo

venia

United S

tate

sG

erm

any

Sw

eden

Sw

itzerlan

dU

nited K

ingdom

Latv

iaD

enm

ark

Fin

lan

dN

eth

erla

nds

Au

str

iaLuxem

bourg

Fra

nce

Po

rtuga

lB

elg

ium

Norw

ay

Sp

ain

Gre

ece

Irela

nd

Italy

Capital per employee in the business sector 2014, 2011 prices, $PPP

$

Source: BoI ,RAMA ,Doing Business

67

72

77

82

87

92

New

Ze

alan

dD

enm

ark

Ko

rea

No

rway

Un

ited

Kin

gdo

mU

nit

ed S

tate

sSw

eden

Esto

nia

Fin

lan

dLa

tvia

Au

stra

liaG

erm

any

Irel

and

Au

stri

aIc

elan

dC

anad

aP

ola

nd

Po

rtu

gal

Cze

ch R

epu

blic

Net

her

lan

ds

Fran

ceSl

ove

nia

Swit

zerl

and

Spai

nSl

ova

k R

epu

blic

Jap

anH

un

gary

Bel

giu

mM

exic

oIt

aly

Isra

elC

hile

Luxe

mb

ou

rgG

reec

eTu

rkey

Problems-solving in technology-rich environment scale, PIAAC survey

Aged 15+, 2015

35

Israel’s score

Doing Business 2017 Distance to Frontier (0-100)

10

12

14

16

18

20

Au

stra

liaN

eth

erla

nd

sIr

elan

dC

anad

aA

ust

ria

Swit

zerl

and

UK

Fin

lan

dN

ew Z

eal

and

USA

Jap

anSl

ove

nia

Den

mar

kK

ore

aP

ola

nd

Fran

ceSl

ova

kia

Ital

ySw

eden

Ger

man

yP

ort

uga

lM

exic

oSp

ain

Bel

giu

mC

hile

No

rway

Luxe

mb

urg

Cze

ch R

epu

blic

Esto

nia

Turk

eyH

un

gary

Isra

elG

ree

ce

OECD Trade Facilitation Indicators 2014

36

%

Source : Based on Central Bureau of Statistics Data

Women Employment Rate, 25-64 % Men Employment Rate, 25-64

Employment Rate by Population Groups

10

20

30

40

50

60

70

80

90

100

Jewish Non-Ultraorthodox Men

Ultraorthodox Men

Arab Men

OECD Men

0

10

20

30

40

50

60

70

80

90

100

Jewish Non-Ultraorthodox Women

Ultraorthodox Women

Arab Women

OECD Women

High Poverty rate and Income Inequality

Source: OECD 37

Gini Index, 2014, at disposable income, post taxes

and transfers Israel 2015

0

0.1

0.2

0.3

0.4

0.5

0.6

Icel

and

No

rway

Den

mar

kSl

ove

nia

Fin

lan

dC

ezch

Rep

ub

licB

elgi

um

Slo

vak

Rep

ub

licA

ust

ria

Luxe

mb

urg

Swed

enN

eth

elan

ds

Hu

nga

ryG

erm

any

Fran

ceSw

itze

rlan

dP

ola

nd

Ko

rea

Irel

and

OEC

DC

anad

aIt

aly

Jap

anN

ew Z

eala

nd

Au

stra

liaP

ort

uga

lG

ree

ceSp

ain

Latv

iaU

nit

red

Kin

gdo

mEs

ton

iaIs

rael

Turk

eyU

nit

ed

Sta

tes

Mex

ico

Ch

ile

0

2

4

6

8

10

12

14

16

18

20

Icel

and

Den

mar

kC

ezch

Rep

ublic

Fin

land

Nor

way

Fra

nce

Slo

vak

Rep

ublic

Luxe

mbu

rgN

ethe

land

sS

witz

erla

ndS

wed

enIr

elan

dA

ustr

iaG

erm

any

Slo

veni

aN

ew Z

eala

ndB

elgi

umH

unga

ryU

nite

d K

ingd

omP

olan

dO

EC

DC

anad

aA

ustr

alia

Italy

Por

tuga

lLa

tvia

Kor

eaG

reec

eS

pain

Japa

nE

ston

iaM

exic

oC

hile

Tur

key

Uni

ted

Sta

tes

Isra

el 2

015

Poverty rate, 2014 Israel 2015

38

To Sum Up

The Israeli Economy has a great potential, but while part of the

economy utilizes its strengths and resources, inclusive growth of

the economy as a whole requires a comprehensive and persistent

policy.

The main pillars of such policy should address economic inequality,

inefficient regulation and the need to increase both investment and

human capital.

Thank You