The Israeli Economy:The Israeli Economy:Ongoing ProgressOngoing Progress

November 2007

Government of Israel

2

GDP Growth (% per annum)

7.0%6.6%

5.4%

2.8%

4.2%

2.9%

8.9%

2.3%

5.2% 5.3% 5.2% 5.4%

4.2%

-0.4%-0.6%-1%

1%

3%

5%

7%

9%

Source: Central Bureau of Statistics and Ministry of Finance Projections

Macro Economic Performance – High Growth, Low Inflation and significantly improving Labor Market

Israel Average (4.2%)

OECD Average (3.2%)

%

3

-1.3%

-3.5%

-5.1%

-3.3%

-4.3%

-2.1%

-5.1%

5.6%

0.3%

-1.2%

-1.5%

-1.2%

-1.3%

-0.6%

1.2%

2.4%

3.3%

5.1%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

Current Account as % of GDP

Sources: Central Bureau of Statistics and the Bank of Israel

Emergence of Current Account Surplus Reflects the New Dynamics of the Israeli Economy

2006

H2

– 20

07H

1 *Including the Public sector, Private sector and the Banking system

Net Inflows of Foreign Investment

( US$ billions)

12.3

4.13.2

5.4

9.1 9.5

5.1

3.6

1.7

3.9

2.0

4.8

14.3

25.8

0

4

8

12

16

20

24

2000 2001 2002 2003 2004 2005 2006

Total Foreign Investments

Foreign Direct Investments

2006:

Total FI = 18% GDP

FDI = 10% GDP

Foreign Investments At All-time Record

4

The Tel Aviv Stock Market & Long-term Government Yields, Reflect Health of the Israeli Economy

Source: Reuters and the Bank of Israel

200

300

400

500

600

700

800

900

1000

1100

1200

4

5

6

7

8

9

10

11

12

TA-25 Index and Yields on 10Y Government Fix Rate NIS Bonds

Yield on 10Y Gov. Bond

The Tel Aviv 25 Index

5

Education and R&D Underpin Israel’s High-Tech Sector, The Engine of the Economy

Source: OECD Education at a Glance. 2005& 2006

Public Expenditure on Education %) of GDP, 2004(

Civilian R&D Expenditure as % of GDP (2005)4.8 4.7 4.9 4.85.1

5.9 5.96.3 6.1

6.97.2

7.6

8.3

4

5

6

7

8

9

0.5%0.7%

1.1%1.3%

1.6%1.6% 1.8% 1.9%2.0% 2.1%2.4%

3.5% 3.7%

4.4%

0%

1%

2%

3%

4%

5%

6

Budget disciplineBudget discipline

Tax reductionTax reduction

From welfare to workFrom welfare to work

Market economy – privatization & reformsMarket economy – privatization & reforms

Clear and Consistent Economic Policy- 4 Main Pillars

7

3.2% 3.2%

0.7%

4.2%

3.6%

5.4%

3.6%

1.9%

1.0%

0.3%

3.1%

4.0%4.2%

1.6%

1.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007F

2008E

2009E

Source: Bank of Israel and Ministry of Finance Projections

An Impressive Budget Performance - The Product of a Prudent Fiscal Policy

Government Budget Deficit (% of GDP)

52.4% 52.2%

50.2%

48.4%

51.0%

52.2%

43.5%

52.6%

51.2%

48.1%

46.3%

45.6%

44.6%

51.0%

41%

43%

45%

47%

49%

51%

53%

55%

General Government Expenditure (% of GDP)

Deficit Ceilings

8

78.9

81.5

86.7

95.9

99.9101.7

99.8

91.9

87.1

97.5

103.3101.8102.5

104.5

75

80

85

90

95

100

105

110

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007E 2008F

Public Debt Central Gov. Debt

A Clear and Sustainable Trends of Decreasing Public Debt Ratio

Gross Public and Government Debt as % of GDP%

Assuming: Deficit of: 0.3% (2007), 1.6% (2008) and 1% (2009 and onwards)Growth of: 5.4% (2007), 4.2% (2008), and 4% (2009 and onwards)Inflation of: 2.6% (2007), 2.2% (2008) and 2% (2009 and onwards)No Privatization Proceeds from 2008 onwards

40%

50%

60%

70%

80%

90%

100%

110%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

Public Debt Ratio Simulation for 2007-2025

Source: Bank of Israel and Ministry of Finance Projections

9

Tax Reduction

Year Tax rate

2003 36%

2004 35%

2005 34%

2006 31%

2007 29%

2008 27%

2009 26%

2010 25% Monthly income, NIS, 2007 prices

Average tax rate on personal incomeAverage tax rate on personal income

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

2007

2002

2010

Corporate tax rateCorporate tax rate

Source: Ministry of Finance

10

6.88 6.68

7.68

8.558.88 8.8

9.4

10.310.7

10.4

98.4

7.5 7.2

53.953.5

53.3 53.353.7

55.655.2

54.954.5

54.354.2 54.1

56.5

57.2

0

2

4

6

8

10

12

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007E 2008F

51

52

53

54

55

56

57

58

Unemployment and Participation Rate

From Welfare to Work

%%

Source: Central Bureau of Statistics and Ministry of Finance Projections

11

Oil Refinery Ashdod & Haifa

Bezeq (telecom corp)

Bank Leumi

Discount Bank

El Al Israel Airlines, Ltd

ZIM (Israel navigation corp)

Tax ReformsTax ReformsPension Pension

Fund Fund ReformsReforms

Capital Market Capital Market ReformsReforms

Investment Investment in in

InfrastructureInfrastructure

Domestic Domestic GovernmentGovernment

Bonds Bonds ReformsReforms

Sea Ports Sea Ports StructuralStructural ReformReform

Highlights of Structural Reforms and Privatization from The Last Years

12

Enhance Enhance CompetitionCompetition

In Public In Public TransportationTransportation

LandLandReformReform

Electricity Electricity Sector ReformSector Reform

Labor Market Labor Market ReformReform

Education Education Reform Reform

Many More Structural Reforms and Privatizations are on The Agenda

Capital Capital MarketMarket

committeecommittee

Israel Electric Corp.

Israel Postal Company

Israel Military Industries

Israel Aircraft Industries

Bank Leumi (The remaining 10%)

Industrial Development bank

Israel Gov’s Coins and Medals Corp.

13

Ongoing Progress of TheCapital Markets Reform – Credit Market

Source: Source: Bank of Israel and Ministry of Finance Projections

0

10

20

30

40

50

60

70

80

2000 2003 2004 2005 2006 9/2007

Bank Sources

Non-bank Substitutes

Distribution of The Business Credit

%

14

Ongoing Progress of TheCapital Markets Reform – Stock Market

Source: Source: Bank of Israel and Ministry of Finance Projections

Holding of Shares, 2000-2007

6364

1712

17

1718

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Institutionalinvestors

GovernmentNon-residentinvestors

Public

09/2007

2006

2004

2002

2000

%

15

Distribution of Selected Items of the Long-Term Savings Institutions’ Asset Portfolio,1996 – 2006

Effect of increased exposure to capital markets and increasing diversification

%

16

Summary

Clear and consistent economic policy

Commitment to budget discipline, tax reduction and debt reduction

Commitment to structural reforms

Investing in human and capital infrastructure

Impressive economic performance 4 consecutive years

Economy has proven highly resilient to external shocks

Commitment to establish a competitive basis in the Israeli capital markets

Increasing investment flexibility help to improve the Israeli capital markets