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Published on March 19, 2008

Author: Vilfrid

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The Effects of Current Events on the Israeli Economy and Investments:  The Effects of Current Events on the Israeli Economy and Investments Foreign Trade Administration Investment Promotion Center Ministry of Industry and Trade Updated March 19, 2003 Updated: 25 March, 2002 The Basics:  The Basics Israeli businesses, factories and companies are operating at full capacity, with 100% manpower, across the country. Ports, communications, transport, power, water and all other forms of infrastructure are operating as normal. “We feel that we must be in Israel today, It is an innovative and competent country. Ericsson is in Israel to stay”:  “We feel that we must be in Israel today, It is an innovative and competent country. Ericsson is in Israel to stay” Kurt Hellstrom CEO, Ericssonn “Dagens Nyheter Newspaper”, 11.12.02 Slide4:  Hi-tech Non-hi-tech industries The economy as a whole The Current State of Affairs 1. Hi-Tech:  1. Hi-Tech “As far as Israeli technology is concerned, the security situation has had no special impact….. R&D activity…. is not affected by events, because R&D centers are located… far from the flashpoints.” (Goldman Sachs- 15.10.00) “Despite the ongoing political and economic upheaval in the Middle East, Israel’s innovative high-tech sector has lost little of its dynamism” (McKinsey & Co. Report 27.8.01) Global Recession:  Global Recession Comparisons of investment and stock market indicators suggest that the decrease in investment and sales activity in Israel’s high-tech sector is largely a result of the global economic downturn, rather than local political or security problems. What Affects Israeli Hi-tech?:  What Affects Israeli Hi-tech? The next slide shows that the Tel Aviv stock market mirrors what happens on Wall St, rather than being largely affected by domestic events. The following slide illustrates investment trends. Once again, it can clearly be seen that investment in Israel, is affected by global factors. Tel Aviv-100 Dow Jones Nasdaq:  Tel Aviv-100 Dow Jones Nasdaq VC Investments: US and Israel:  VC Investments: US and Israel Source: PwC The Mirror Effect:  The Mirror Effect January 2001- April 2002 Global Investment:  Global Investment Israel’s decrease mirrors countries such as the US and the UK. Hi-tech Capital Raised (1995-2002):  Hi-tech Capital Raised (1995-2002) Source: IVC Online Hi-tech Capital Raised (by quarter):  Hi-tech Capital Raised (by quarter) Effects on Investment:  Effects on Investment In light of the current security situation many Israeli business people continue to travel to investors and business meetings abroad. Israeli companies are also well represented at trade fairs and conventions throughout the world. This compensates for those potential investors and foreign business people who find it difficult to visit Israel at present. Investment Continues:  Investment Continues Despite changes in the security situation in September 2000, foreign investment in Israeli hi-tech has continued. Israeli VCs, as well as foreign funds dedicated to Israeli technology companies, have continued to raise substantial capital. Multinationals have continued to expand their presence in Israel. VCs: September 2000:  VCs: September 2000 * Dedicated Israel fund ** Dedicated Europe and Israel fund VCs: 2001 - 2002:  VCs: 2001 - 2002 * Dedicated Israel fund ** Dedicated Europe and Israel fund Multinationals Confident:  Multinationals Confident December 2000: Intel began construction of its new R&D facility in Jerusalem. August 2001: Applied Materials announced a $15m investment to expand its Israeli facilities (in Rehovot). March 2001: Sequoia Capital opened its first non-US VC fund, in Israel. July 2002: Boston Scientific opened its first Israel office. October 2002: Hewlett-Packard opening new Israel R&D center. Multinationals Invest:  Multinationals Invest April 2001: SAP (Germany) bought TopTier Software for $400m cash. Jan 2002: Philips (Medical Systems) announced a major expansion of its Haifa R&D facility. February 2002: Applied Materials invests $100m in R&D in Israel. May 2002: Fox Paine & Co. bought Paradigm Geophysical for $100m. November 2002: Veritas bought Precise Software for $557m cash. December 2002: IBM signed cooperation agreements with 19 Israeli companies. Recent Israeli Headlines: 2002:  Recent Israeli Headlines: 2002 Verint Raises $72 million in Nasdaq IPO Cisco and Sequoia Capital Invest in Riverhead Networks Harvest II Fund Closed at $90 million Sequoia Capital and Kodak Invest in Traiana First Israeli Company Listed on Australian Stock Exchange First Israeli Company Enters the Nasdaq 100 Index Tower Semiconductors Raises $35m Hoover to Establish Israeli R&D Center Two New Israeli Seed Funds Established Intel Invests in Passave AOL-Time Warner Invests in Big Band Networks PwC Effort to Accelerate Israeli Biotech Hitachi Set to Expand Israel Investments Venture Funding:  Venture Funding 2001 figures used for comparison Foreign Investors:  Foreign Investors Forbes: “There’s a good investment opportunity in Israeli technology stocks… Buy now.” 22 July, 2002 A. Gillies, “Wish Upon a Star” in Forbes Magazine. “The entry into Israel of an investment fund the size of Fox Paine is a vote of confidence in the Israeli economy and its strength. .. We are now working on several mergers and acquisitions in the hundreds of millions of dollars. All involve foreign investors wanting to invest in Israel.” 27 May, 2002 : A. Malik, Reliance Capital CEO on Fox Paine’s purchase of Israeli company Paradigm Geophysical for $100 million CEO, Shamrock Holdings:  CEO, Shamrock Holdings “If you liked investing in Israel in the late 1990s, you’ve got to love it today. Same talent. Same opportunity. Better prices.” July 28, 2002. Mr.Stanley Gold, Director, Walt Disney Company; CEO, Shamrock Holdings. 2. Non- Hi-tech Industries:  2. Non- Hi-tech Industries Many of Israel’s non-high-tech industries have been affected by the current situation. * Agriculture * Construction * Tourism Agriculture:  Agriculture The agricultural sector, which represents 2.5 % of Israel's GDP, has been adversely affected due to the depletion of its workforce. Construction:  Construction Homebuilding, infrastructure, public and commercial buildings make up 25% of GDP. There has been a 17.6% drop in investments in construction. Tourism:  Tourism Tourism, which accounts for about 3% of GDP, has been the sector worst hit by the current conflict. Hotel stays by overseas guests declined by 60.5% in 2001 and by 31.2% in 2002. These figures were partially offset by a 6.2% increase in domestic tourism in 2002. The number of hotel employees dropped by 50%. Tourism:  Tourism Tourism Revenue: 2000 $3.4 billion 2001 $2.4 billion 2002 $2.1 billion Tourism:  Tourism Unemployment:  Unemployment As a result of the crisis, around 40,000 people have lost their jobs in the tourism sector. Around 12,000 people lost jobs in other sectors. Exports to the PA:  Exports to the PA Exports to the areas controlled by the Palestinian Authority accounted for about 5% of Israeli exports in 1999. In Q4 2000, these figures plummeted by 50% over the previous quarter and have remained low. These exports mainly generate very low value added for Israel (i.e. durable products imported via Israel). Security Industries:  Security Industries Since September 11, 2001 Israeli security industries, long recognized as industry leaders have experienced strong growth. The main areas are: perimeter intrusion security, civilian protective equipment, data and online security as well as bio and chemical threat protection. Civilian exports by Israeli security companies were up 20% in the year following September 11. 3. The Economy as a Whole:  3. The Economy as a Whole “(The economic downturn) has not undermined foundations laid in prior years” Moody's Vice President Jonathan Schiffer, March 6, 2003 Fundamentally Strong Economy:  Fundamentally Strong Economy Around 4,000 hi-tech companies in Israel, the highest concentration outside California. A mature, developed, diversified economy Sound and tight monetary and fiscal policy. A government policy of deregulation, liberalization and privatization. Moody’s:  Moody’s In July 2000, Moody’s raised Israel’s credit rating to A2. In its accompanying report, Moody’s stated that: “the improved credit worthiness implied by this performance is less and less sensitive to potential risks from a geopolitical environment that reflects Israel’s relations with Middle Eastern states and with the Palestinian Authority.” Salomon Smith Barney:  Salomon Smith Barney “The economic conditions were in very good shape and could take a hit without losing credit quality.” From “Israel: Managing Well Under Duress”, Stephen Taran, Head of Sovereign Credit Research, Salomon Smith Barney, May 31, 2001 Economy Remains Strong:  Economy Remains Strong The current security situation flared up on heels of a fundamentally strong economy and a record year during 2000. As a result, the economy withstood not only the effects of a deterioration in the security situation, but also stood firm in the face of the even more serious global economic downturn. Crisis Has Not Affected Fundamentals:  Crisis Has Not Affected Fundamentals The Israeli economy is in a mature, developed and stable condition. The various international ratings agencies have consistently maintained Israel’s ratings and reaffirmed their confidence in the Israeli economy despite the ongoing violence. Fitch:  Fitch Dec 2000: Reaffirmed Israel’s credit rating citing Israel’s “dynamic and diversified economy combined with its democratic values.” Oct 2002 & Jan 2003: Again reaffirmed Israel’s rating. Jan 2003: Fitch Sovereign Ratings senior director Richard Fox commenting on Israel: “We’re calm.” Moody’s:  Moody’s February 2001: Reaffirmed Israel’s credit rating stating “the outlook for all Israeli ratings is stable.” February 2002: Reaffirmed Israel’s rating saying “plentiful and stable foreign currency reserves ($25 billion) suggest that Israel can withstand temporary difficulties.” March 2003: Moody’s announced that Israel’s credit rating remains unchanged. Standard & Poor’s:  Standard & Poor’s July 2001, Oct 2001 & Oct 2002: Standard & Poor’s repeatedly reaffirmed Israel’s credit rating. IMF Reports 2001-2003:  IMF Reports 2001-2003 “Optimism that the Israeli economy will emerge from the current downturn with financial stability intact, and poised for a resumption of rapid, sustainable output growth.” IMF, 2001 “Once global demand begins to recover, there is a good chance that the economy will return to its high potential growth path relatively quickly.” IMF, 2002 “Financial stability not threatened…The term ‘financial crisis’ does not apply to the Israeli market, but to states… like those in South America.” IMF, 2003 Recovery:  Recovery “When the US economy stages a recovery, the flexibility and structural characteristics of the Israeli economy means that it will be well-placed to stage a quick recovery of its own.” International ratings agency, Fitch- report on Israel, Feb 10, 2002. "We believe in the fundamental strength of Israel's economy and have confidence in its long-term potential." White House spokesman Ari Fleischer, 16 October, 2002 History:  History History has shown that the path to peace has many upswings and downswings. Despite this, the Israeli economy has continued to grow and expand even during times of conflict. There is no reason to believe that the current problems will significantly affect Israeli industry. During 1991, the year of the Gulf War, Israel experienced 6% GDP growth. A Global Economy:  A Global Economy Since the 1980’s, the Israeli economy has been closely linked to those of the western world. During the 1990’s, when the “Asian flu” caused weak economies to collapse across Asia, South America and Eastern Europe, the Israeli economy continued to grow, in line with other strong, stable and mature economies. Therefore, all factors point to the conclusion that the Israeli economy will recover in line with global trends. Conclusion:  Conclusion The Israeli economy is mature, stable and strong. The effects of the ongoing security unrest on the economy will be relatively mild and should not affect fundamentals. “We are confident that the economy will survive the turmoil and continue to grow at an impressive rate in the coming years.” Morgan Stanley Dean Witter Report, as reported in Ha’aretz, February 14, 2001 Ministry of Industry and Trade Foreign Trade Administration Investment Promotion Center:  Ministry of Industry and Trade Foreign Trade Administration Investment Promotion Center 30 Agron St, Jerusalem Israel, 94190 www.moit.gov.il Presented by Dani Wassner/Daniel Meyer danmush@moit.gov.il Last Updated: March 19, 2003

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