Israel: A Resilient Global Economy

"The Israeli economy is strong and dynamic and notes favorably the coherent macroeconomic policy implemented by the Israeli government." - Moody's

The Swiss-based Institute for Management Development (IMD) has ranked the Bank of Israel highest among central banks for its efficient functioning in its 2011 World Competitiveness Yearbook for the second year in a row.. The report also ranked Israel's economy 9^th highest for its durability in the face of the global financial crisis.

Strong Fundamentals Confront the Global Economic Slowdown

At a time when the Israeli economy's resilience was put to the test by ongoing financial pressures resulting from the global credit crisis, the world's three largest rating agencies in a vote of confidence maintained high ratings for Israel. In 2011, Standard & Poor's Rating Services upgraded Israel's credit rating to A+, while Moody's Credit Rating Agency left Israel's A1-Stable rating unchanged and Fitch Ratings kept Israel's A Stable rating. While Israel has not been immune to the effects of the global credit crunch, as its main trading partners are hit by the lingering crisis, the country's sound macroeconomic fundamentals and strict fiscal policy serve as a buffer to dampen the impact of ongoing financial tremors.

As a consequence of the macroeconomic strategy adopted by Israel during the last two decades, together with the relatively conservative approach that was undertaken by the Israeli banking sector and the regulation carried out by the supervisor of banks, the Israeli economy was relatively well prepared to confront the challenges of the global crisis, including the prospects for economic slowdown. Though the crisis continues to loom from nearby Europe and a consequential slowdown could impact trade with the continent with which Israel has considerable commercial ties, Israel's comparatively strong economic performance throughout the crisis vouches for its ability to continue to withstand any further financial pressures.

The Israeli policy of removing barriers to trade and to open capital movements has served the economy extremely well.  Israel is committed to openness as a strategic approach, while recognizing the importance of financial sector regulation.  The adoption of this strategy contributed significantly to Israel's economic growth and its increased economic efficiency.   

Measures Aimed to Boost the Economy

To help safeguard the economy, Israel’s Ministry of Finance, Ministry of Industry, Trade and Labor and the Bank of Israel implemented special initiatives including creation of a pension safety net and a monetary program to help increase liquidity, create new jobs, protect private savings and promote continuous growth in Israel.

To help the economy deal with the effects of the global crisis, the Bank of Israel lowered the key lending rate to a record low of 0.50%; from late 2008 to early 2009 the central bank slashed lending rates by a cumulative 3.75%. The rate cuts, which were meant to support the economy by lowering the cost of credit and thereby contribute to financial stability and partially offset the downward pressure on prices, were in line with the policies of central banks globally. As the Israeli market is heavily dependent on revenues from exports, the expansionary monetary policy also served to curb the shekel's strength relative to many of the globally weaker currencies to assist the competitiveness of Israeli products internationally. In August 2009, the Bank of Israel was the first central bank to start raising short-term lending rates again, in line with the continuous recovery of the Israeli economy while maintaining inflation within the range of 1% to 3%, which is defined as price stability. Israel's key lending rate stood at 2.75% in December 2011.

To help support the economy, beginning in March 2008 the Bank of Israel also increased the level of foreign exchange reserves by purchasing about $100 million per business day with the aim of increasing reserves. By December 2011 foreign reserves had been increased to $75 billion.

Outstanding Economic Performance

Though Israel is a small country with limited resources, responsible fiscal and monetary policies and a host of reforms aimed at liberalizing the economy, have allowed it to stand out as one of the world's most competitive economies. 

Over the past 20 years, Israel – with a population of just 7.8 million – was ranked as one of the world's five fastest growing emerging markets and in 2010, Israel was upgraded from an emerging market to a developed market in the MSCI Index.

The IMD ranked Israel 17th out of 59 of the world's most economically developed nations in its 2011 World Competitiveness Yearbook, the same as its 2010 ranking.

The effectiveness of Israel's fiscal and monetary policy is further reflected in its economic performance. Gross Public Debt as a percentage of GDP contracted from 102% in 2003 to 75% in 2011, while unemployment declined to a record low and stood at 5.6% in December 2011 while maintaining price stability.

The country's market economy can be characterized as resilient, globally-oriented and technologically advanced.  Over the last two decades, Israel has become famous for its high-tech capacity, particularly in telecommunications, information technology, water and environment, as well as electronics and life sciences.  Its capacity for innovation coupled with a highly-educated, skilled workforce have played a key role in its rating as a high-tech center second only to Silicon Valley in California and Route 128 in the Boston area.

Despite the pressures of the global financial crisis, the Israeli economy continued to grow in 2011. Gross domestic product grew 3.4% in the third quarter of 2011, while overall growth for 2010 reached 4.6%, in line with high growth seen in the years prior to the global financial crisis. The Israeli economy grew 5% annually on average between 2005 and 2008 and in purchasing-power-parity (PPP) terms, Israel's GDP per capita has averaged close to $30,000 in recent years. In recognition of the continuous progress of the Israeli economy, Israel was unanimously accepted intothe OECD in May 2010 following careful review with respect to its compliance with OECD standards and benchmarks.

Growth of the Israeli economy is largely fueled by a steady increase in exports and foreign investment.  Foreigners continue to show their recognition of Israel's economic potential by increasing their investments in the country. Foreign direct investment in Israel reached $4.4 billion and $5.1 billion in 2009 and 2010 respectively.

Israel's Economic Indicators

Criteria	2007	2008	2009	2010
GDP (current prices, B$)	164.1	191.8	193	202
GDP Real Growth Rate (%)	5.3	4.2	0.8	4.7
GDP per Capita Growth Rate (%, Current Prices)	3.4	2.4	-1.1	2.8
GDP per Capita (thousands of $, based on purchasing power parity)	27,395	28,473	28,581	29,531
Exports of Goods & Services (B$)	71.2	80.4	76.3	86.6
Imports of Goods & Services (B$)	74.0	84.1	72	81.1
Unemployment Rate (%)	7.3	6.1	7.6	6.6
Inflation Rate ( CPI, end of year)	0.5	4.6	3.3	2.7
Inward FDI (current prices in B$)	8.8	10.9	4.4	5.2
Current Account (% of GDP)	2.9	0.8	3.6	2.9

Sources: The Ministry of Finance (2011), Central Bureau of Statistics (2011)

Exports Lead the Way

Exports are the engine that drives the Israeli economy. Israel's trade deficit stood at $7.7 billion in 2010; exports amounted to 83.3% of imports in 2010. The share of industrial exports in 2010 accounted for 79.8%, while the high-tech sector made up 49.6% of total industrial exports, maintaining Israel's position as one of the most technologically oriented markets in the world. 

Though exports were weighed down by the effects of the credit crisis, they continued to be supported by an extensive network of international trade and economic agreements. Israel is integrated into the global economy through free trade area agreements with the NAFTA countries (the U.S.A., Canada and Mexico), the European Union, Mercosur (Brazil, Argentina, Uruguay and Paraguay), EFTA, and Turkey. It also cooperates with neighboring Egypt and Jordan through US-sponsored Qualified Industrial Zone (QIZ) agreements, giving co-produced goods preferential access to U.S. markets; a similar arrangement of accumulation of origin also exists with the EU.

In addition, Israel has developed an extensive network of technical cooperation, through R&D accords with many countries as well as R&D agreements with MNCs, several of which chose Israel as their first international location and have been here for over 40 years. Indeed, some of these MNCs most innovative breakthroughs were developed in Israel.

The Way Out of the Crisis: An Ecosystem of Support

Through government agencies like the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor, a network of technology incubators for very-early-stage technologies and an active and alert private venture capital system, Israel provides extensive support for new ideas and technologies, and assists the refinement and further development of more traditional industries. Israel invests strongly in R&D, where its investment of nearly 5% of GDP is one of the highest in the world. The investor-friendly environment is enhanced by government policies including lower tax rates and investment benefits. 

It's hard to ignore the important role of Israel's venture capital industry, which the World Economic Forum has ranked second in the world after the United States. Venture capital continues to pump a steady stream of essential financial resources into the technology sector by channeling its funds and knowledge into early-stage companies.

This ecosystem of support has fostered what has become the world's highest percentage of high-tech production relative to GDP, and the second highest concentration of high-tech companies, after California's Silicon Valley. The fact that Israel is the foreign country with the most companies listed on NASDAQ, the main stock exchange for technology companies, is testimony to its high-tech prowess.

The Investors Keep Coming

In recent years, Israel has become a magnet for foreign investors.  The list of those who have taken advantage of Israel's uniquely skilled, and highly educated workforce and cutting-edge R&D capabilities by establishing subsidiaries, production lines or R&D centers include top international companies like Intel, Microsoft, Motorola, Google, Applied Materials, HP, Deutsche Telekom,  and Samsung among others. Even Apple has recently announced its intention to open its first overseas R&D center in Israel.  Given Israel's emphasis on innovative technologies and research, Israeli companies continue to attract foreign investors. Despite the global credit crisis multinational concerns continue to invest in Israeli expertise. Global demand for breakthrough technologies in the field of life sciences is expected to be less affected by the slowdown, due to the long R&D processes required in this field, and the culmination of patent licenses for some popular medicines in upcoming years. Hence, analysts expect the Israeli sector to be largely safeguarded from financial pressures. Multinational companies have been acquiring Israeli companies from all different sectors for several years. Some recent examples include: Akamai's acquisition of Cotendo for $268 million,  DG FastChannel's purchase of (DGIT) MediaMind Technologies for $517 million, CSR's acquisition of Zoran for $679 million, Intel's purchase of Telmap Ltd for $300 million and Broadcom's acquisition of Provigent for $313 million.