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Research Department

Global Economic Crisis Global Economic Crisis and the Israeli Economyand the Israeli Economy

Herzliya conferenceHerzliya conference

Dr. Karnit FlugDr. Karnit FlugResearch Director, Bank of IsraelResearch Director, Bank of Israel

February 2009February 2009

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Research Department

Global Economic Crisis

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Research Department

Annual Growth Rates 2007-2010F

2.0

8.3

-1.6

3.3

0.5

-0.2

5.2

2.61.1 1.0

3.4

6.3

-2.0

5.3

3.01.6

-4

-2

0

2

4

6

8

10

USA Europe Emerging andDevelopingEconomies

World

2007 2008 2009F 2010F

Source: International Monetary Fund – World Economic Outlook

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Research Department

Forecast of World Economic Activity in 2009

-3-2-101234567

World Output USA Euro Area Emerging andDevelopingEconomies

World Trade

04-2008 07-2008 10-2008 11-2008 01-2009

Source: IMF – World Economic Outlook

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Research Department

15

30

45

60

75

90

105

120

135

150

01-2004 07-2004 01-2005 07-2005 01-2006 07-2006 01-2007 07-2007 01-2008 07-2008 01-2009

דולרים

50

65

80

95

110

125

140

Indexed Price of Goods Excluding Oil and the Price of Oil 2004 – 2009 (daily data)

Indexed Price of Goods Excluding Oil (Right Axis)

Price of Oil) Left Axis(

מדד

Source: Bloomberg

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Research Department

20

30

40

50

60

70

80

90

100

110

120

01-0007-00

01-0107-01

01-0207-02

01-0307-03

01-0407-04

01-0507-05

01-0607-06

01-0707-07

01-0807-08

Israel (Globes)

U.S. (University of Michigan)

Index of Consumer Confidence in the U.S. and Israel

)100 = 2000, -2008 2000(

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Research Department

The Share Markets: Israel, the US and the Emerging Markets,

(1/6/2006=100, 01/06/2006 – 28/01/2009)

55

65

75

85

95

105

115

125

135

145

155

165

175

Israel (Tel Aviv 100)

EM (EMERGING MARKETS)

NASDAQ

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Research Department

0

50

100

150

200

250

300

350

400

450

500

550

600

650

700

750

800

5yr CDS EMBI+

654

200

Israel 5 year Credit Default Swap and EMBI+ 6/2003 - 01/2009

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Research Department

Factors Contributing to the

Exposure/Vulnerability of the Israeli Economy to the Crisis.

•The Israeli economy is highly integrated in the global economy.

•Being a small open economy, growth is highly dependent on exports, particularly high tech. A large percentage of the high tech exports are to the U.S. which is at the epicenter of the crisis.

•Structural changes in the financial system caused the rapid expansion of non-bank credit which contracted sharply as a result of the global financial crisis.

•High debt-to-GDP ratio increases vulnerability and limits the scope for counter-cyclical fiscal policy.

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Research Department

Factors Increasing the Resilience of the Israeli Economy

•High households savings ratio reduces the dependence of private consumption on credit availability.

•Current account surplus and positive net asset position on the external account.

•High (and rising) foreign exchange reserves.

•Conservative banking system: Relatively high capital adequacy ratio and low rate of non-performing loans at the onset of the crisis.

•No bubble in the real estate market.

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Research Department

The Israeli Economy

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Research Department

-40-30-20-1001020304050

Weighted Net Balance of Business-Sector Activity

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Research Department

Weighted Net Average of all Activity in the Business Sector by Industry

Trade - Net Balance of Sales

-60

-40

-20

0

20

40

60Percent

Manufacturing Industries - Net Balance of Output

-50

-30

-10

10

30

Percent

Construction - Net Balance of Activity

-60

-40

-20

0

20

40

60

PercentHotels-Net Balance of Total Activity

-100

-50

0

50

100

Percent

**לעומת הרביע המקביל אשתקד.

Transport and Communications - Net Balance of Total Activity

-70-50

-30-1010

305070

PercentServices - Net Balance of Total Revenue from Current Activity

-60

-40

-20

0

20

40

60

Percent

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Research Department

Macro Economic ForecastMacro Economic Forecast

20082009F2010FGross Domestic Product4.0-0.22.7Business-Sector Product4.4-0.93.3Private Consumption3.91.13.7Exports (excl. diamonds)9.1-2.44.6Gross Domestic Investment4.1-5.94.2-

Civilian Imports (excl. ship, planes and diamonds)7.5-2.71.6Unemployment Rate6.17.67.6Current Account ($ billions)1.92.04.0

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Research Department

3.52.5 2.5 2.4 2.6 2.7 2.4 2 1.8 1.8 1.8 1.8 1.8 1.7 1.7 1.7

3.6

2.9

0.3

1.80.4

6.3

-2.7 -2.7

0.4

3.2 3.5 3.4 3.5

2.3

1.0

-1.9

-4

-2

0

2

4

6

8

10

Per capita GDP

Population

4.0

5.15.2

2.30.4-

-0.2

4.2

2.92.8

5.4

7.1

8.9

0.6-

5.2

GDP GrowthGDP Growth (1990-2010*)

•SOURCE: Based on Central Bureau of Statistics data.

*BOI Forecast

5.4

2.7

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Research Department

Growth Factor Decomposition (Annual Percent Changes)

2000-2008

-6%-4%-2%0%2%4%6%8%

10%12%

Labor Input Capital Stock Total Factor Productivity

* Estimate for 2008 based on the first three quarters.

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Research Department

-5.0 -4.9

-3.1

-0.9-1.3

-0.8 -1.1 -0.8

1.1

2.13.0

1.0 1.1

2.12.7

5.6

-6

-4

-2

0

2

4

6

8

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009F

2010F

Current Account of Balance of PaymentsCurrent Account of Balance of Paymentsas Percentage of GDP, 1995-2010* (Annual)

•SOURCE: Balance of Payments, Central Bureau of Statistics.

*BOI Forecast

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Research Department

0

2

4

6

8

10

12

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F2010F

464748495051525354

Unemployment Rate Employment Rate

%

Employment and Unemployment Rates2000 – 2010*

%

*Bank of Israel forecasts

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Research Department

Macro Economic Policy

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Research Department

%

3.6

1.8

3.9

3.0

4.0

3.4

3.02.9

1.6

0.7

4.4

3.8

5.4

3.6

1.9

0.9

0.0

2.1

4.1

0

1

2

3

4

5

6

2000 2001 2002 2003 2004 2005* 2006 2007 2008 2009*

Deficit Target Actual Deficit

Budget Deficit** (Percentage of GDP, 2000-2009**)

*Percent of GDP; excluding credit extended. The data from 2000 refer to the deficit excluding the Bank of Israel’s profits.**BOI forecast for 2009 is based on the budget that has been approved by the government.

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Research Department

85.1

89.9

99.9

94.3

85.5

79.581.977.6

98.297.6

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F

%Gross Public Debt

(2000-2009*, percentage of GDP)

*Bank of Israel Forecasts

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Research Department

Inflation Over the Past 12 Months, Inflation Targets and Inflation Expectations from the Capital Market

2001-2009.1

-4

-2

0

2

4

6

8

Actual Inflation

10 Year Expectations

1 Year Inflation Expectation

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Research Department

0

1

2

3

4

5

6

Bank of Israel Interest Rate

Fed's Interest Rate

ECB Interest Rate

%

Interest Rates of the Bank of Israel, the Fed and the Interest Rates of the Bank of Israel, the Fed and the European Central Bank European Central Bank (2005-2009)(2005-2009)

*12 month rates, derived from the capital market

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Research Department

Thank You

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Research Department

The Nominal and the Real Exchange RateThe Nominal and the Real Exchange Rate2009 -2009 - 19971997

3.0

3.2

3.4

3.6

3.84.0

4.2

4.4

4.6

4.8

5.0

Shekel / Dollar Exchange Rate01/01/1997-31/01/2009

90

95

100

105

110

115

120

125

130

135

The Real Exchange Rate by Trading Partners

)100=01/1997 ,01/1997-01/2009(

114.4

NIS

*The Nis/$ chart is on a daily basis, while the real exchange rate chart is on a monthly basis.

•A rise in the index indicates depreciation.

•The figure for January 2009 is calculated from spot exchange rates known for the half-month, our forecast CPI from the monthly model, and an extrapolation of inflation in the countries whose currencies are in the currency basket.

•SOURCE: IFS data. For October 2008 to January 2009, Bank of Israel calculations.

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Research Department

0

0.25

0.5

0.75

1

1.25

1.5

1.75

2

Small Medium Large

Financial Constraints According to Industry Weight in the Business Sector

Scale of the severity of the constraint ranges from 0-4.0 – No constraint4 – Finance is a major constraint on expansion