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					Israel: Current Economic Conditions
Israel - Real GDP Growth
1990 Prices
Percent Change, Year Ago

• •

Growth in GDP in 1998 is projected to be 1.7%. Reasons: the tapering off of immigration after 1996, adherence to fiscal restraint, political and security uncertainty, and the events in world markets. Inflation continues to decline at a modest rate. Expected to meet 1998 target of 7-10% range. The currency depreciated as domestic investors took steps to reduce risk exposure and foreign investors sold financial assets in response global turmoil. Sharp year-end shekel devaluation caused 5.7% price increase and sent short-term interest rates soaring.

12 10 8 6 4 2 0 -2 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: IFS

• •

•

Israel - Inflation Rate
Consumer Price Index
Percent Change, Year Ago Percent

Israel - Short-Term Interest Rate
3 Month T-Bill
18 16 14 12 10 8

25 20 15 10 5 0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: IFS

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: Datastream

Israel - Exchange Rate
Shekels per US Dollar
NIS/US$ Index

Israel - Equity Index
Stock Exchange General Index
300

1.5 2.0

250 2.5 3.0 3.5 150 4.0 4.5 100 200

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: IFS

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: Bloomberg

AFRICA AND THE MIDDLE EAST VII-9
March 10, 1999 www.milken-inst.org

Israel: Current Economic Conditions
Israel - Official Reserves
Total Reserves Minus Gold and as Percent of GDP
US$ Billions Percent

• •

25
Reserves Minus Gold - L Reserves as % of GDP

100

Domestic deficit of the public sector should be around 2.4% of GDP target for the year. Industrial production increased at a moderate level. Lower exports, decreased construction, and sluggish growth of commerce and tourism placed extra pressure on industrial production. Unemployment accelerated in 1998 to over 9%. Immigrants constitute about 20% of this number. There is a shortage of labor in high-tech industries. Current account deficit was lower in 1998 with a decline in the import surplus. The deficit was also financed by a slight reduction in official reserves.
Israel - Industrial Production
Industrial Production
Percent Change, Year Ago

20

80

•

15 60 10 40

• • • •

5

0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Sources: IFS; Milken Institute

20

Israel - Current Account Balance
As Percent of GDP
Percent

1.0

20 15 10

0.5

0.0 5 -0.5 0 -5

-1.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Sources: IFS; WEFA

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: IFS

Israel - Unemployment Rate
Seasonally Adjusted
Percent Percent

Israel - Budget Balance
Government Surplus/Deficit as Percent of GDP
0

12 11

-2 10 9 8 -6 7 6 -8 -4

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: WEFA

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: Datastream

AFRICA AND THE MIDDLE EAST March 10, 1999 www.milken-inst.org

VII-10

Israel: International Trade
Israel - Composition of Exports 1997
Agricultural goods 4% Diamonds 25% Other 2%

• • • • •

Trade deficit shrank by approximately 15%. Rate of increase of exports slowed as a result of the global financial crisis. Exports to South America and Russia declined for the first time in 1998. The reduction in exports to East Asia and Japan continued. Flat exports were due mostly to a decline in industrial goods, specifically machinery, equipment, and food. Diamond industry eroded because East Asia and Japan are major markets in the trade.

Industrial goods 69%

•

So urce: Eco no mist Intelligence Unit

Israel - Composition of Imports 1997
Ships & aircraft 1%

Israel - Trade Balance
Merchandise Exports, Imports, and Balance
US$ Billions

10 8 6 4

Consumer goods 14%

Fuel 8%

Exports Imports Trade Balance

Raw materials 44%

2 0 -2 -4 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: IFS

Diamonds 17%

Investment goods 16%
So urce: Eco no mist Intelligence Unit

Israel - Destination of Exports 1996

Israel - Origin of Imports 1996

Other 40%

US 31%

US 20% Other 36% BelgiumLuxembourg 12% Switzerland 6% Germany 9%

UK 7% Germany Japan 5% 6% Hong Kong Belgium5% Netherlands 6% So urce: Eco no mist Intelligence Unit

Italy 8%

UK 9%

So urce: Eco no mist Intelligence Unit

AFRICA AND THE MIDDLE EAST VII-11
March 10, 1999 www.milken-inst.org

Israel: Finance
Israel - Foreign Direct Investment
Direct Investment Inflows
US$ Billions

•

1.00 0.80 0.60 0.40 0.20 0.00
Note: Data not available for 1991Q2

FDI flows decreased because of the slowdown in privatization and the issue of new equities on the New York Stock exchange. Portfolio flows were up in 1998. Gross fixed investment declined in 1998.

•

•

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: IFS

Israel - Portfolio Investment
Inflows and Outflows
US$ Billions

Israel - Foreign Liabilities
As Percent of GDP
Percent

2.0 1.5 1.0

Inflows into Israel Outflows from Israel

1.0 0.8 0.6

0.5
0.4

0.0 -0.5 -1.0
0.2 0.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: IFS

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: IFS

Israel - Government Debt
As Percent of GDP
Percent Percent

Israel - Gross Fixed Investment
As Percent of GDP
24

116 114 112 110

22

20 108 106 104 102 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: Datastream

18

16

80

82

84

86

88

90

92

94

96

98

Source: Datastream

AFRICA AND THE MIDDLE EAST March 10, 1999 www.milken-inst.org

VII-12

Israel in a Regional Context
Middle Eastern Countries by Economy Size
Nominal GDP, 1997
US$ Billions Percent Change

Middle Eastern Markets
Average Real GDP Growth, 1994-1997
7 6 5 4 3 2 1

160 140 120 100 80 60 40 20 0 Jordan Iran Egypt Israel Bahrain Qatar Kuwait Syria S. Arabia
Source: IFS

0 Qatar

S. Arabia Iran Bahrain

Syria Egypt Israel

Jordan

Source: IFS

Export-Oriented vs. Inward-Looking Economies
Exports as Percent of GDP, 1996
Percent

•

60 50 40 30 20 10 0

Note: S. Arabia 1995 Data

Even with a small population and a non-oil economy, Israel is the second largest and the most diverse economy in the Middle East. Israel’s economy is growing even faster than the region’s largest economy – Saudi Arabia. The composition of Israel’s export industries is shifting from low to high human-capital industries. Saudi Arabia, Jordan, Kuwait, and Syria’s exports are predominantly oil. This heavy reliance on one volatile sector places a high level of risk for their economies.

• • • •
Egypt Iran
Source: IFS

Israel Syria S. Arabia

Jordan Kuwait

Government Involvement in the Economy
Government Consumption as Percent of GDP, 1996
Percent

• •

30 25 20 15 10 5 0

Israel’s government plays a significant role in the economy. Government consumption as percentage of GDP is higher than for any of its Middle Eastern neighbors and is almost twice that of the United States. However, privatization and liberalization efforts are reducing the government’s role in the market.

Note: S. Arabia 1995 Data

•

Syria Egypt
Source: IFS

Jordan Iran S. Arabia

Kuwait Israel

AFRICA AND THE MIDDLE EAST VII-13
March 10, 1999 www.milken-inst.org

Israel in a Regional Context
Israel Equity Market
TASE 100
Index Index

Egypt Equity Market
Egypt Capital Market
400 350

350 300 250 200 150 100

300 250 200

50 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: Datastream

150

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: Datastream

Jordan Equity Market
Amman SE Financial Market
Index Index

Turkey Equity Market
Istanbul SE National 100
5000 4000

200 180 160 140 120 100

3000 2000 1000

80 60 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: Datastream

0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: Datastream

•

Regional Stock Markets
November 31, 1998

Overall, regional equity markets are up with the exception of Turkey, which relies heavily on oil exports. The stock markets of Egypt, Jordan, and Palestine have very small market values; only Turkey rivals Israel. There is a need for increased investment throughout the region. Access to capital is essential for existing and new business. Israel’s prospects are limited if the countries around them are doing poorly.

• Number of Market Listed Capitalization Trading Volume Country Companies (US$ billions) (US$ millions) Israel 652 36.0 975.0 • Egypt 834 23.0 350.0 Jordan 150 5.6 134.0 • Turkey 278 34.2 45.0 Palestinian Authority 70 0.7 N/A
Note: The Palestine Securities Exchange opened in February 1997. Sources: International Finance Corporation; Link Magazine

•

AFRICA AND THE MIDDLE EAST March 10, 1999 www.milken-inst.org

VII-14

Israel: Human Capital
Population Dynamics
Annual population Increase, 1970-1997
Persons, Thousands Persons, Millions

•

200
Number of New Immigrants - L Natural Increase - L Total Population - R

6.0 5.5 5.0 4.5

800,000 immigrants were absorbed (15% of base population) since 1990. Over 600,000 are from the former Soviet Union This has amounted to what is one of the greatest human capital transfers in history. Greatest high-tech labor force concentration in the world. This creates a comparative advantage in an information-based world. In a global environment where brain power is an increasingly valuable commodity, Israel stands out among nations. Human capital has becomes Israel’s most valuable resource with an educated work force.

150

• •

100
4.0 3.5 3.0

50

•

0

70

75

80

85

90

95

2.5

Source: Central Bureau of Statistics (Israel)

•

High-Tech Society
Scientists and Engineers Engaged in R&D
Persons Per 10,000 Labor Force

140 120 100 80 60 40 20

Immigrants to Israel
By Country of Birth Country Former Soviet Union Ethiopia US Other Total 1996 48,524 1,414 1,652 19,389 70,919 1990-1995 581,409 21,177 9,678 73,483 685,682

Source: Central Bureau of Statistics (Israel)

1993

1994

1995

1996

1997

Source: Israel Ministry of Industry and Trade, 1996

High-Tech Society
Scientists and Engineers Engaged in R&D
Persons Per 10,000 Labor Force

Years of Schooling 1995 Total Population of Persons Aged 15 and Over
0 to 4 Years 7% 13+ Years 35% 5 to 10 Years 24%

140 120 100 80 60 40 20

1993

1994

1995

1996

1997

Source: Israel Ministry of Industry and Trade, 1996

11 to 12 Years 34%
So urce: Central B ureau o f Statistics (Israel)

AFRICA AND THE MIDDLE EAST VII-15
March 10, 1999 www.milken-inst.org

Israel: Capital Market
Israel's Capital Market
As of December 31, 1997 (NIS billions) Indexed Negotiable earmarked Treasury bonds bonds bills 57.6 0.4 5.9 8.6 32.1 0.8 33.8 139.2 7.1 81.8 1.3 28.2 2.4

Total Institutions Provident funds Established pension funds New pesnion funds Life insurance plans Mutual funds Housholds and firms Nonresidents Commercial banks Total
Source: Bank of Israel, Annual Report 1997

Shares 17.0

Other 43.6 4.5 0.3 12.5 1.5

127.0 86.3 1.9 48.1 19.8 79.2 30.1 40.9 432.4

1.4 7.3 38.7 29.2 93.6

118.3

2.5 8.4 0.1 -7.1 20.5

60.9

Israel's Capital Market Distribution of Assets
As of December 31, 1997 (Percent) Indexed Negotiable earmarked bonds bonds 45 21 12 43 41 3 83 32 6 95 68 59 Treasury bills 2

Shares Institutions Provident funds Established pension funds New pesnion funds Life insurance plans Mutual funds Housholds and firms Nonresidents Commercial banks Total
Source: Bank of Israel, Annual Report 1997

Other 34 5 16 26 8

13

3 37 49 97 22

13 11

27

5

0 14

Privatization Revenues
1986-1997
US$ Millions

• • • • •

1400 1200 1000 800 600 400 200 0

Government still plays dominant role in capital markets. Most public and private savings channeled into government bonds, not equities or corporate bonds. Over 60% of assets are government fixed-income securities. Israel’s private capital market has been crowed out by the state. Is needs a broad, deep market to flourish. Privatization should help foster a nation of capital owners to help provide sustainable growth. Privatization will not yield efficiency gains required for growth without deregulation and restructuring.

General Banks

86 87 88 89 90 91 92 93 94 95 96 97 98 99
Source: Government Corporation Authority

•

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