ECONOMIC HIGHLIGHTS3rd QUARTER 2007

STATE OF ISRAELSTATE OF ISRAELMINISTRY OF FINANCEMINISTRY OF FINANCE

INTERNATIONAL AFFAIRS DEPARTMENTINTERNATIONAL AFFAIRS DEPARTMENT

October 10, 2007

Contents:

Note:

You can return to the beginning of each chapter by clicking the button on the top left side.

Economic Figures

Balances

International Comparisons, additional data and industryIsrael and the OECD

International Treaties

Relevant Sites

Main Characteristics

Israel’s Economy:

• Export Oriented Growth

• Rapid Development of Technology &

High-Tech Industries

• Entrepreneurial Culture

• Supportive Environment for Business

• Investment and R&D Incentives

Main Characteristics

EconomicFigures

GDP and GDP per Capita

Major GDP Components

Growth: Israel compared to the World

Exports of Goods and Services

Exports of Goods by Region

Structure of Industrial Exports

Imports of Goods and Services

Imports of goods by Region

Foreign Investments

Unemployment Rate

Newly Employed Persons

Inflation Rate

Estimates for 2007

Press for desired slide or continue:

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Main Indicators and Forecast5

6

7

8

9

10

11

12

13

15

16

17

18

19

Main Trading Partners14

Criteria20032004200520062007F

GDP (current prices in B$)116.9124.8131.2139.1156.9*

GDP Real Growth Rate (%)2.3%5.2.%5.3%5.2%5.4%**

GDP per Capita (current prices, thousands of $)

17.218.118.920.120.8

GDP per Capita (OECD Calculated by PPP, thousands of $)

2006 data: Israel 21st compared to OECD

26.0527.68

GDP per Capita Growth Rate

(%, Current prices)0.4%3.4%3.5%3.4%3.6%

Exports of Goods & Services (B$)43.552.857.5762.986.7%

Imports of Goods & Services (B$)44.452.357.561.77.9%

Unemployment Rate (%)10.7%10.4%9.0%8.4%7.5%

Inflation Rate ( CPI, end of year)-1.9%1.2%2.4%-0.1%2.4%

Current Account (% of GDP)0.5%0.4%3.3%4.9%

Source: Central Bureau of Statistics, Bank of Israel, Ministry of Finance.

* Using the estimate NIS made by the Ministry of Finance, Multiplied by Bank of Israel’s average US$-NIS exchange rate for 2007.

** Predicted Annual % Change done by the Ministry of Finance. Note differences between real and nominal figures.

GDP per capita by PPP data was available only for 2005 and 2006.

Main Economic Indicators and Forecast

Economic Figures

5

Source: Central Bureau of Statistics, Ministry of Finance

8.0

4.6

-0.9

-2.9

-0.9

-2.9

2.3

0.4

5.2

3.4

5.3

3.5

5.2

3.4

5.4

3.6

-5.0

-3.0

-1.0

1.0

3.0

5.0

7.0

9.0

2000 2001 2002 2003 2004 2005 2006 2007F

GDP GDP per Capita

GDP and GDP per Capita (Annual rate of change (%), in Constant Prices)

Economic Figures

6

The market has made a quick recovery from the northern conflict

GDP Growth - Israel compared to the World (Annual rate of change (%), in constant prices)

1.6%

-0.9%

1.9%

-0.9%

2.7%2.3%

4.1%

5.2%

3.5%

5.3%

3.9%

5.2%

3.3%

5.4%

3.4%

4.2%

3.3%

4.0%

3.3%

4.1%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

World Growth Israel Growth

Source: Ministry of Finance, Israel Export Institution

Projections for 2007-8: Ministry of Finance; for 2008-9: Israel Export Institute

Economic Figures

7

Private consumption in Israel is a leading factor, as it is worldwide

0.8

5.0

-6.0

-2.3

1.2

-2.3

-5.6

8

5.6

-2.5

-0.4

18.2

4

2.92.3

4.34.5

2.3

10.1

5.9 5.23.7

9.1

6.7

-8

-3

2

7

12

17

2002 2003 2004 2005 2006 2007F

Private Consumption Government Consumption

Investment in Fixed Assets Exports of Goods and Services

Major GDP Components(Annual rate of change (%), in constant prices)

Economic Figures

Source: Central Bureau of Statistics, Ministry of Finance 8

2006 was characterized by sustainable growth in all GDP components

Source: Central Bureau of Statistics

H1: 1st half

Exports of Goods and Services (B$)

27.5

11.8

30.2

13.3

36.6

16.1

40.1

17.4

43.2

19.8

24.2

9.7

0

10

20

30

40

50

60

70

2002 2003 2004 2005 2006 2007 H1Goods Services

Economic Figures

9

Almost all forms of export registered high growth throughout 2006

Exports of Goods by Region(Excluding diamonds)

Source: Central Bureau of Statistics, Bank of Israel, Ministry of Finance

Rest of Europe Includes E.F.T.A.

H1: 1st half

2006 2007 H1

Other6.0%

Latin America3.1%

Africa2.9%

Asia15.2%

Rest of Europe

6.5%

European Union35.8%

North America30.6%

Africa3%

Other5%

Asia15.1%

Rest of Europe

6.8%

European Union32.9%

North America37.5% Of which: USA: 31.4%

Economic Figures

10

In 2006: Exports to the EU rose by 12% and to the US by 27.3%

Structure of Industrial Exports

7,895

15,962 14,862 13,525 14,16617,308 18,794

21,91524,732

8,216

5,1884,731

4,7304,836

4,277

6,3216,694

7,219

0

5,000

10,000

15,000

20,000

25,000

30,000

1995 2000 2001 2002 2003 2004 2005 2006 2007*

US

$ m

illi

on

s

traditional industries

hi-tech industries

35%

65%

23%24%

76%77%

27%

74%

26%27%

74%73%

26%

73%

75%

25%25%

75%

* Jan-Aug, seasonally adjusted, at annual rate.

Economic Figures

11

High Tech and pharmaceuticals rose by 20.6% and 50.7%, respectively, in 2006

Imports of Goods and Services (B$)

31.1

10.8

32.6

11.1

39.5

12.8

43.8

13.7

46.9

14.9

25.2

8.2

0

10

20

30

40

50

60

70

2002 2003 2004 2005 2006 2007 H1

Goods ServicesSource: Central Bureau of Statistics, Ministry of Finance

H1: 1st half

Economic Figures

12

Private vehicle imports comprised 46% of the trade deficit ($2.5 billion)

Imports of Goods by Region 2006 (excluding Diamonds)

Source: Central Bureau of Statistics, Bank of Israel, Ministry of Finance

H1: 1st half

Economic Figures

13

EU remains strongest source for imports and strongest destination for exports

Africa0.7%

Other 16.6%

Asia19%

Rest of Europe

9.9%

European Union36.9%

North America

16.9%Of which: USA: 13.4%

Rest of Europe 9.5%

Africa 0.8%

Asia 20.9%

North America

15.7%

European Union 36%

Other 17%

Of which: USA: 14.6%

2006 2007 H1

Israel’s Main Trading Partners($US Billions)

5.2

9.6

3.2

1.7

2.4

0.9

1.8

1.3

1.6

1.41.8

1.0

1.31.0

1.30.8

1.20.9

1.9

0.2

0

2

4

6

8

10

12

14

16

USAGerm

any

China

The Netherlands

UK ItalyFrance

Turkey

Belgium

Switzerland

14.8

4.9

3.3 3.1 3 2.82.3

2.1 2.1 2

Source: Central Bureau of Statistics; H1: 1st half

Additional data

14

4.7

3.1

1.6

0.9

1.5

0.4

0.9

0.8

1.0

0.6

0.8

0.8

0.7

0.6

0.8

0.5

0.9

0.4

0.6

0.5

0

1

2

3

4

5

6

7

8

USAGermany

ChinaThe Netherlands

ItalyUK France

Turkey

JapanBelgium

7.8

2.7

1.9 1.7 1.6 1.6 1.3 1.3 1.3 1.1

2006

2007 H1

EXPORT

IMPORT

1997 – 2006 has seen a 100% increase in industrial exports

Foreign Investments (B$)

Source: Ministry of Finance

1.7

4.53.1

9.6

5.2

12.3

1.73.2

3.95.4

2

9.1

4.8

9.5

14.2

25.8

9.010.6

0

5

10

15

20

25

30

1998 1999 2000 2002 2003 2004 2005 2006 Jan-Aug2007

Direct Investments

Total Investments

Economic Figures

15

2006 registered nearly one hundred purchases of Israeli technology companies

Unemployment and Participation Rates by Quarters(Rate of Total Labor Force)

Source: Central Bureau of Statistics

9.2%

9.0%8.9% 8.9%

8.8% 8.8%

7.6%

8.3%

7.8%7.7%54.9%

55.1%55.2%

55.6%55.5%

55.8%

56.6%

56.1%

55.5%55.6%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

2005Q1

Q2 Q3 Q4 2006Q1

Q2 Q3 Q4 2007Q1

Q254.0%

54.5%

55.0%

55.5%

56.0%

56.5%

57.0%

Unemployment Rate

Participation in the Labour Force

Economic Figures

16

Rapid business sector growth has contributed to the decline in unemployment

-11

30

50

13

42

6

74

- 3

96

25

48

16

62

22

2001 2002 2003 2004 2005 2006 2007 H1

Business Sector Public Sector

Newly Employed Persons in 2006 (Change in Israeli Employed Persons, in Thousands)

Source: Ministry of Finance, Bank of Israel

H1: 1st half

Economic Figures

17

Real wages rose by 1% in 2006 and by 3.6% between January and April 2007

Inflation Rate (Rate of Change in CPI, end of

year)

Source: Central Bureau of Statistics, Ministry of Finance

1.3% 0.0% 1.4%

6.5%

-1.9%

1.2%

2.4%

-0.1%

2.4%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

1999 2000 2001 2002 2003 2004 2005 2006 2007F

Economic Figures

18

Responsible fiscal policy and a strong NIS (vs. the $) have stabilized inflation

CriteriaEstimate for 2007

Real GDP+ 5.4%

Business GDP+ 6.2%

Exports+ 6.7%

Private Consumption+ 5.2%

Government Consumption+ 3.7%

Investment in Fixed Assets+ 9.1%

Source: Ministry of Finance

Estimated Growth of Main GDP Components 2007

Economic Figures

19

Balances

Budget Deficit;

Current Account;

Net Foreign Debt

General Government Expenditure

Gross Public Debt

Gross Tax Burden

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21

22

23

24

Gross Public Debt (as percentage of GDP)

Source: Ministry of Finance

99.6%

102.0%100.7%

97.0%

87.7%

81.7%

80%

85%

90%

95%

100%

105%

2002 2003 2004 2005 2006 2007F

Balances

21

A responsible fiscal policy continues to lead the reduction of the local debt

Source: Ministry of Finance, July 2007

Budget Deficit and General Government Expenditure (Both as percentage of GDP)

Balances

22

$5.6 billion surplus (1st half 2007) is $12b more than needed to achieve a 2.9% goal

3.7%

2.9%

0.9%

1.9%

5.4%

3.6%

4.2%

0.7%

3.2%

1999 2000 2001 2002 2003 2004 2005 2006 2007

Budget Deficit

Government Expenditure

2.9% is the planned deficit

(Expected: 0.5%)

45.4%46.8%

47.4%

49.2%

51.5%

50.0%

48.4%

51.1%

52.2%

Current Account and Net Foreign Debt (As percentage of GDP)

Source: Bank of Israel

-1.3% -0.6%1.2%

2.3%

3.4%

5.7%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2001 2002 2003 2004 2005 2006

Balances

23

Debt reduction and decreased immigration turned deficit into surplus in 2003

Current Account

Net Foreign Debt2.8%

0.1%

-2.3%

-5.7%

-9.3%

-16.7%

-24.5%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

2000 2001 2002 2003 2004 2005 2006

Source: Ministry of Finance

Gross Tax Burden (As percentage of GDP)

37.8%

36.8%

37.0%

38.1%38.2%

37.5%

36.6%36.7%

36.8%

37.2%

36.7%

36%

37%

38%

39%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007F

Balances

24

Income and corporate taxes are constantly being reduced

Internationalcomparisonsand additionaldata

ICT and Business Sector’s Product

Central Bank Interest Rates

NASDAQ and Tel Aviv 100 Indices

Israel’s Credit Rating

Global Competitiveness Index

GCI: Selected Issues

Business Competitiveness Index ;Network Readiness Index

Dividend Distribute in past years

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Capital raised by VC funds and High Tech Companies

26

28

29

30

31

32

27

33

34

Israel’s ICT* and Business Sector’s

Product (Annual % change)

-1.9%

-14.8%

-2.8%

0.7%

3.2%2.3%

7.2%

10.8%

6.5% 5.6% 6.5%

9.9%

-18%

-13%

-8%

-3%

2%

7%

12%

2001 2002 2003 2004 2005 2006

Business ICT

* Information and Communication Technology

Source: Central Bureau of Statistics, Israel Venture Capital

Additional data

26

Communications percentage from high-tech capital raised in a growing trend

Capital Raised by Israeli Venture Capital Funds* and High Tech Companies (M$)

1,438

1,013

2,587

3,092

1,317

1,986

393

1,138

6

1,011

585

1,4651,4601,337

473

1,622

842

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1999 2000 2001 2002 2003 2004 2005 2006 2007H1Venture Capital

High Tech*In vintage year: Year of first closing or first investment.

Source: IVC – Israel Venture Capital Research Center; H1: 1st half

Additional data

27

2007 :High tech investments could reach a five year record of $1.7 billion

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

Source: Bank of Israel (BOI), Federal Reserve

Bank of Israel Rate

Federal Reserve Rate

0%

1%

2%

3%

4%

5%

6%

Ja

n (1

)2 3 4 5 6 7 8 9 1

01

11

2J

an

(1)

2 3 4 5 6 7 8 9 10

11

12

Ja

n (1

)2 3 4 5 6 7 8 9 1

01

11

2J

an

(1)

2 3 4 5 6 7 8 9

Additional data

Currently: 4.0%

Currently: 4.75%

28

2004 2005 2006 2007

The latest FF rate 0.5 basis points decrease brings it close to the BOI rate

Nasdaq Index & Tel Aviv 100 (monthly average)

1000

1500

2000

2500

3000

3500

4000

01/2003

Jul 2003

Jan 2004

Jul 2004

Jan 2005

Jul 2005

Jan 2006

Jul 2006

Jan 2007

200

300

400

500

600

700

800

900

1000

1100

1200

Nasdaq Index (left scale)

Tel Aviv 100 (right scale)

Source: Tel Aviv Stock Exchange (TASE) and the Ministry of Finance.

Additional data

29

Israel stock exchange achieved an 18% yield, ranking 13th in the world

Source: Credit Rating Agencies, Accountant GeneralFTSE – Financial Times Stock Exchange

Israel’s Credit Rating 1992-2007

0

1

2

3

4

5

6

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Moody's A2 Stable S&P A- Stable Fitch A- Stable

A1/A+

A2/A

A3/A-

Baa1/BBB+

Baa2/BBB

Baa3 /BBB-

Additional data

30

FTSE upgrades Israel from “developing” to “developed” market status

Source: World Economic Forum, Global Competitiveness Index, 2006

Israel Ranks 15 Out of 125 Countries (2005 Rank was 23)

5958

4847

3428

2421

1815

108

64

1

42

Additional data

31

Global Competitiveness Index, 2006

Global Competitiveness Index, 2006SELECTED CATEGORIES

23

20

16

13

9

7

5

4

2

1

0 5 10 15 20 25

Japan

India

Germany

Singapore

Hong Kong

Ireland

United Kingdom

Finland

Israel

United States

21

17

14

12

10

8

6

3

2

1

0 5 10 15 20 25

Ireland

Canada

Taiwan

Finland

Denmark

United States

United Kingdom

Israel

Singapore

Sweden

15

14

10

7

6

5

4

3

2

1

0 5 10 15 20

Ireland

India

Singapore

Finland

Germany

Japan

Israel

United Kingdom

United States

Switzerland

Additional data

Venture Capital Availability

Source: World Economic Forum, Global Competitiveness Index, 2006; Israel Export Institute

14

12

11

9

7

6

4

3

2

1

0 5 10 15

France

Taiwan

Singapore

Korea

Israel

Finland

Germany

United States

Japan

Switzerland

Technological Readiness

Quality of Scientific Research Facilities Company Spending on R&D

32

Turkey

Greece

Italy

Spain

Portugal

France

Israel

Germany

Japan

Canada

United Kingdom

United States

Switzerland

Denmark

6455

49

46

30

2725

2219

1612

85

21

36

Additional data

33

Source: World Economic Forum, Global Competitiveness Index, 2006; Global Information Technology Report

GCI: Provides a holistic overview of factors critical to productivity and competitiveness [LINK TO SITE]

NRI: Measures the level of ICT (information and communication technologies) development of nations [LINK TO SITE]

5.71 )1(

5.58 )5(5.54 )7(

5.45 )9(

5.35 )11(5.27 )14(

5.22 )16(5.14 )18(

4.99 )23(4.48 )28(

4.35 )32(

4.19 )38(3.98 )48(

3.86 )52(

Network Readiness Index Business Competitiveness

Index

The business climate is a critical element of sustained economic growth

Dividend Distribution in the Past Years(NIS Millions)

2,559

6,196

222210178137106

19,747

14,609

11,917

54%

76%

79%

70%74%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2002 2003 2004 2005 2006

30%

40%

50%

60%

70%

80%

90%

Amout of companies distributing dividend

Total dividend distributed (NIS Millions)

Distributing companies – % from totalSource: Tel Aviv Stock Exchange

Additional data

34

The Israeli market continues to appeal to investors despite global competition

Israel and theOECD

Real GDP growth in 2006-7

Nominal GDP growth in 2006-7

Unemployment Rate in 2006-7

GDP per Capita in 2006

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GDP Based on PPP per Capita in 2005 (OECD)

37

38

39

40

36

Real GDP Growth(Annual percentage of change, partial list)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Source: OECD and the Ministry of Finance, Israel

Israel and the OECD

5.1%

3.2%

35

2.7%

5.4%

06’ 07’

OECD has invited Israel to discussions for membership of the organization…

Nominal GDP Growth in 2006 (Annual percent of change, partial list)

Source: OECD and the Ministry of Finance, Israel

Israel and the OECD

37

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

5.4%

7.5%

4.8%

5.9%

.. for it shares the same values of open market economy as OECD members …

06’ 07’

Unemployment Rate

(average)

0%

2%

4%

6%

8%

10%

12%

14%

Source: OECD, and the Central Bureau of Statistics, Israel

H1: 1st half

5.9%

8.4%

Israel and the OECD

38

7.8%

0%

2%

4%

6%

8%

10%

12%

5.6%

7.5%7.1%

2006

2007 H1

...and ranks among the world's leading countries with respect to scientists, engineers, high-tech start-ups and R&D spending per capita.

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000GDP (based on purchasing-power-parity

(PPP) ) per capita, in 2006,

IMF calculation, ($US)

Source: IMF, Ministry of Finance

Countries that have been invited for open discussions for joining the OECD.

30,464 23,843

22,677 12,98212,096

Israel and the OECD

39

In 1996, the OECD approved Israel’s request to participate in it’s activities

GDP (based on purchasing-power-parity (PPP) ) per capita

OECD calculation, 2006 ($US)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Turkey

Mexico

Poland

Slovak Republic

Hungary

Portugal

Czech Republic

Korea

New Zealand

Israel

Spain

ItalyFrance

Japan

Germ

any

OECD Average

Finland

United Kingdom

Denmark

Switzerland

Ireland

United States

Norway

Luxembourg

Israel and the OECD

Source and PPP calculated formula: OECD

32,098 27,688

40

Israel's GDP per capita ranks it 21st among OECD countries

InternationalTreaties

Israel’s Free Trade Agreements

Avoidance of Double Taxation Agreements

Cooperation in Industrial R&D Agreements

Protection of Investments Agreements

International Organization Memberships

Press for desired slide or continue:

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43

45

46

48

42

Israel’s Free Trade Agreements

USA (1985)

EFTA (1992)

Jordan (1995): Bilateral Trade Agreement

Canada (1997)

Turkey (1997)

Mexico (1999)

Romania (2000)

European Union – Association Agreement (2000)

Bulgaria (2002)

International Treaties

{Both Romania and

Bulgaria have recently joined the European

Union42

Egypt

Avoidance of Double Taxation International Treaties

Agreements

43

Croatia

Denmark

Estonia*

Ethiopia

Finland

France

Germany

Greece

Austria

Belarus

Belgium

Brazil

Bulgaria

Canada

China

Czech Republic

Hungary

India

Ireland

Italy

Jamaica

Japan

Latvia

Lithuania

The agreement with Estonia has only been signed initially

International Treaties

Avoidance of Double Taxation Agreements (con.)

44

Switzerland

Thailand

The Netherlands

Turkey

Ukraine

United Kingdom

Uzbekistan

USA

Luxembourg

Mexico

Moldova

Norway

Philippines

Portugal *

Poland

Romania

Russia

Singapore

Slovakia

Slovenia*

South Africa

South Korea

Spain

Sweden

* Agreements with Slovenia and Portugal have yet to have been ratified

Cooperation in Industrial R&D Agreements

Belgium

Canada

China

France

Hong Kong

Italy

Netherlands

Portugal

Spain

UK

USA

Singapore

Ireland

Sweden

Finland

Germany

IndiaAustria

Korea

International Treaties

45

Protection of Investment Agreements

International Treaties

Albania

Argentina

Armenia

Belarus

Bulgaria

Croatia

Cyprus

Czech Republic

El-Salvador

Estonia

Georgia

Germany

Hungary

India

Kazakhstan

Korea

46

Protection of Investment Agreements

International Treaties

Turkmenistan

Ukraine

Uruguay

Uzbekistan

QIZ Agreement

Egypt

Jordan

Latvia

Lithuania

Moldova

Poland

Romania

Slovakia

Slovenia

Thailand

Turkey47

)con(.

International Organization* Memberships:

BIS | BSEC (observer) | CE (observer)

CERN (observer) | EBRD | FAO | IADB | IAEA

IBRD | ICAO | ICC | ICCt (signatory) | ICFTU

IDA | IFAD | IFC | IFRCS (observer) | ILO | IMF

IMO | Interpol | IOC | IOM | ISO | ITU | OAS (observer)

OPCW (signatory) | OSCE (partner) | PCA | UN

UNCTAD | UNECE | UNEP | UNESCO | UNHCR

UNIDO | UPU | WB | WCO | WFP | WHO | WIPO | WMO

WToO | WTrO | WTO | MIGA | OECD (candidate)

* Economic Organizations

International Treaties

48

Relevant SitesGovernment Institutes:

Bank of Israel) BOI(

BOI Annual Report (Complete in English)

Central Bureau of Statistics

Israeli Government Portal

Ministry of Finance

Israel Securities Authority

Ministry of Industry,Trade and Labor

OECD Israel

Economic News:

“The Marker”

“Globes”

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We welcome your feedback!

Contact:

Uri Geva

International Affairs Department

Ministry of Finance, Jerusalem, Israel

FinanceIsrael@mof.gov.il

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