The Israeli Economy:

Recent Trends and Outlook

Presentation by Yoel Naveh

Chief Economist, Ministry of Finance

January 2017
 Growth in consumption and investments contributed
to growth in 2016
13%

11%

9% Global
Economic
7% Crisis
The Second
Intifada
5%

3%

1%

-1%

Source: CBS
 Consumption has led the economic growth in recent years. Sharp increase in
investments in 2016 contributed to overall growth

In 2016, the GDP was 1,224 billion NIS GDP Components: Average growth rate
for the years 2012-2016

5.0%
22% 4.3%
20% 3.8%
Public 4.0% 3.6%
3.2%
Consumption Investments 3.0% 2.8%

3% 2.0%
Net Exports
1.0%
0.3%
Private
Consumption 0.0%
55%

Source: CBS. The Chief Economist Dept. calculations. 3

 Robust growth is reflected in Israel’s rising GDP per capita
GDP per Capita GDP per Capita
(current prices, USD, 2015)
(fixed prices and in USD)
China AA-
Mexico
160 ,000 350 00

BBB+ 34,458
Poland BBB+ 33,747
Chile AA- 150 ,000 33,049 32,833
330 00

Slovakia A+ 31,894
30,732 30,818
310 00

Estonia AA- 140 ,000

Czech Republic AA- 290 00

Slovenia A 130 ,000

126,098
123,873
Taiwan AA- 121,806 123,270
118,285 118,895
270 00

Korea AA 120 ,000

114,688
Japan A+ 250 00

Israel A+ 110 ,000

OECD Median 230 00

New Zealand AA 100 ,000

France AA 210 00

Germany AAA 90, 000

Hong Kong AAA 190 00

Finland +AA 80, 000

United Kingdom AA 170 00

Singapore AAA
United States +AA
70, 000 150 00

Switzerland AAA 2010 2011 2012 2013 2014 2015 2016

0 25,000 50,000 75,000 100,000 GDP per capita (NIS) GDP per capita (USD)

7 Source: IMF World Economic Outlook October 2016; S&P; MOF.

 Exports of services grew in a fast pace reflecting the developments in
high-tech sector. Future growth requires investment in human capital
5.0
Employees in the high-tech sector 20% VC investments in Israel
390 Billions $US
4.5
18%
High-tech employees
340 4.0
(LHS) Local VC Foreign VC
16%
High-tech employees, 3.5
290 as % of business sector 14%
employment (RHS) 3.0 87%
240 12% 85%
2.5
10% 83%
190 2.0
8% 1.5
62% 70% 76%
140
6% 60% 61% 73%
1.0
90 64% 63%
4% 0.5
40% 39% 38% 36% 37% 30% 27% 24% 17% 15% 13%
40 2% 0.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: CBS. Source: IVC. 5

Israeli population is highly educated. The spending on R&D is among the
highest, indicating a high level of innovation and scientific research
Gross domestic spending on R&D (2014)
5% 4.1%
4%
3% 2.4%
2%
1%
0%

60% Population with higher education 25-64

48.5%
50% % of total, 2014 or latest available data
40% 34.0%
30%
20%
10%
0%

Source: The World Bank, OECD

Scientific research and innovation are ever expanding, elevating Israel to the top
10 countries ranked in the 2017 Bloomberg Innovation Index
• Israel is the leading country in researcher concentration
• Ranked 2nd in spending on R&D as a percentage of GDP
• Ranked 3rd in high-tech density
Researcher Concentration Ranking High-Tech density
Israel U.S.
Denmark France
Finland Israel
S. Korea S. Korea
Sweden Germany
Singapore Netherlands
Norway Sweden
Japan Japan
Austria Belgium
Australia Switzerland
Switzerland Norway
Netherlands Denmark
Germany U.K.
U.K. Finland
France Ireland
Belgium Singapore
U.S. Australia
Ireland Austria
0 5 10 15 20 25 0 5 10 15 20 25

Researcher concentration indicates the number of High-Tech density indicates the number of public high-tech companies,
professionals engaged in R&D, per million people. as a percentage of domestic public listed companies,
and as a share of the world’s total high-tech companies.
Source: Bloomberg Innovation Index 2017
 Israel is an attractive location for leading multinational firms

General Electric
Since 1983 Since 1994 Since 2006 Since 2015
Market Cap: $7bn Market Cap: $63bn Market Cap: $373bn Since 2012 Market Cap: $199bn

Market Cap: $764bn

Since 1949 Since 1970
Market Cap: $170bn Market Cap: $279bn

1920
1930 1940 1950 1960 1970 1980 1990 2000 2010 2015

Since 1964 Since 1989 Since 1998 Since 20121

Since 2015
Market Cap: $12bn Market Cap: $379bn Market Cap: $17bn Market Cap: $167bn
Market Cap: $163bn

Since 2013
Market Cap: $1bn

Since 1974 Since 1991

Market Cap: $159bn Market Cap: $25bn

Since 2014
Since 1995 Since 2005 Since 2013 Market Cap: $13.4bn

Market Cap: $149bn Market Cap: $73bn Market Cap: $226bn

- Technology - Financial
- Natural Resources - Misc
Source: Invest in Israel website; Bloomberg; other publically available info.
1 Barclays and Citi had been actively involved in the Israeli market before they established the R&D centres in 2011 and 2012, respectively.
14
 Labor market indicators reflect full employment

Participation rate and unemployment rate in Israel

Age 15 and older
12% 65%
64.1%

10% Participation Rate 63%

(RHS)

8% 61%
Unemployment Rate
(LHS)

6% 59%

4.8%

4% 57%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: CBS.
9
 Wages increased significantly since 2014 reflecting the tightness of the
labor market
9,800 The increase in wages reflects a high
Wages
Fixed prices (2011) level of employment, correction to
9,600 Wage growth previous years and the implementation
between 2008-2011 of policy measures (min. wage and
9,400 was lower than the salary agreements in the public sector) 2.7%

9,200 growth in labor

productivity 2.9%
9,000
0.8%
1.2%
8,800

8,600
Monthly data
8,400
Annual average
8,200

2015 2016 2017 2018

Source: CBS. Minimum wage impact is calculated

% change in minimum wage 6.1 3.8 6.1 5.5
by the Chief Economist Department. % contribution to average wage 1.2 0.8 1.2 1.1
10
The high-tech sector, gas production and the decline in energy prices have
contributed to the growing surplus in the current account
14 Current Account Balance 14%
In $US billions and as percentage of GDP
12 12%
$US Billions (LHS)
10 10%

8 % of GDP (RHS) 8%

6 6%

4 4.8% 4.6% 4%
3.9% 3.9% 3.9%
3.4% 3.3% 3.5% 3.3%
2 2.5% 2%
1.9%
1.4%
0 0.7% 0.6% 0%

-0.7% -1.0%
-2 -1.4% -1.4% -1.5% -2%

-4 -2.8% -4%

-4.8% -4.7%
-6 -6%

* 2016 – First three quarters average

Source: CBS. 11
 Trade is diversified geographically
(in USD and as % of total)

Exports Divided Almost Equally Amongst US, Europe and Europe Is the Main Source of Israel’s Imports
Asia $73.5bn $73.1bn $72.0bn $72.3bn
$67.7bn $69.0bn $62.0bn
$66.8bn $59.2bn
$64.0bn
$63.1bn 21.1% 19.4%
21.9% 22.5%
$58.5bn 12.4%
12.3% 12.8%
12.2% 13.2%
13.4%
12.5% 21.5%
24.4% 25.2% 22.2% 20.7% 22.7%
25.0% 21.1%
27.7% 24.6%
25.0%
23.6%
22.5%

34.7% 36.0% 35.4%

32.3% 33.8% 31.8% 44.9% 44.5% 45.1% 46.1%
49.1%
44.8%

31.6% 28.7% 31.6% 26.2% 26.9% 28.3%

11.3% 11.8% 12.9% 11.3% 11.8% 13.0%

2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015

US Europe Asia Others US Europe Asia Others

Israel Has Extensive International Trade Ties, Supported by Numerous Multi- and Bi-lateral Agreements

Trade Agreements with International Organizations and Countries*, including: EU, USA, EFTA, MERCOSUR, Turkey, Canada, Mexico;
Colombia, Panama**; India, Vietnam, Ukraine***
Source: MOF; CBS (2014 Asia data restated as per latest CBS data).
14 *Including signed and under negotiations, ** to be ratified, *** under negotiations.
Natural Gas: game changer for trade and energy sectors
2006
Decreasing Reliance on Fuel Imports Shift in Israel Electric Fossil Fuels
22.3% Consumption 2006
20.5%
17.8% 18.8% 17.9%
Petroleum Coal
12.1% Products 71%
11%
16.1 14.6
13.6 12.8 Natural
10.5
7.4 Gas
18%
2010 2011 2012 2013 2014 2015 2010
Petroleum
Fuels Imports (USD bn) Fuels Imports as % of Total Imports Products Coal
2% 61%
Natural Gas Discoveries Natural
Gas
2000 2009 2010 2011 2012 2013 37%

Yam Tamar/
Leviathan Dolphin Tanin Karish Q3 2016
Tethys SW
Other
c. 18-22 c. 0.1 c. 1.3 Coal
c. 1 TCF c. 11 TCF c. 1 TCF 1%
TCF TCF TCF 51%
Liquefie
d Gas Natural
Dalit Gas
3%
c. 0.5 45%
TCF
20 Source: CBS; IEC Company’s filings; Delek Drilling LP Company’s filings; Noble Energy Inc.
 Israel continues to attract foreign investments

30 Foreign investments in Israel

27.3
Portfolio FDI (In billions of $US )
25

20 19.0
17.8
14.9 14.6
15 13.4
9.4
10.4 10.1 11.1 9.7
10 7.9 4.9 1.5

5 4.3
2.1 2.7

-5
2000 2002 2004 2006 2008 2010 2012 2014 *2016

*January-September of 2016, in annual terms

Source: CBS
Investments abroad allow for better diversification and lower risk

Total investments abroad

45 (In billions of $US )
Reserves assets 40
40 39
Investments abroad 35
35

30
26 26
25 23 24 23
22
20
20 16
15
15
12
10
10 8
5 4
5

-5
2000 2002 2004 2006 2008 2010 2012 2014 *2016
*January-September of 2016, in annual terms
Source: CBS
 Large FX reserves and a “Net Lender” position reflect the strong
external stance of the economy
100%
Foreign Currency reserves as % of GDP 2015
80%

60%

40%

20%

0%

Source: IMF, OECD

 Reforms reduced the size of the public sector. Since 2009 the share of interest
payments and defense expenditure in GDP terms have leveled

60% General Government Expenditure

as % of GDP

50% 50% 50%

50% 49% 48% 49% 48%
47%
45% 45%
9% 9% 8% 44% 43%
8% 8% 9% 8% 42% 41% 41%
8%
8% 8% 40% 39% 40% 40% 40% 39% 39%
40% 6% 6% 6% 6% 8% 8%
5% 4% 5% 7% 7% 6%
5% 6% 6% 6% 6% 6% 6% 6%
5% 5%
5% 4% 4%
3% 3% 3% 3% 3% 3% 3% 3% 3%
30%

36% 36% 36% 35% 34% 35% 35% 35%

33% 32% 31% 31% 31% 31% 31% 31%
20% 30% 31% 31% 31% 30% 31%

10%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Civilian expenditure Interest payments Military expenditure
Source: CBS, Chief Economist Dept. calculations. 17
 The downward trend of the government debt to GDP ratio continues

105%
Public Debt
As percentage of GDP
100% 98.9%
96.6% 96.4%
95.1%
95% 93.8%
92.2%
90.3% 91.0% Global
90% 88.9% Economic
Crisis
84.4%
85%
81.1%
80.1%
80%
75.1%
75% 74.0%
72.9%
70.9%
70% 68.9%
67.9% 67.2%
66.7%
65% 63.9%
62.1%

60%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: MoF, CBS, The Chief Economist Dept. calculations. 18
 Summary

• Economic growth in 2016 was strong, supported by increase in private

consumption and investments

• The high-tech sector has become large and developed, leads in

productivity and supports wage growth

• Labor market indicators reflect full employment

• The external stance of the economy is strong due to a surplus in the

current account and foreign assets

• As a small open economy, Israel is affected by global developments

19
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