The Effects of Current Events on the Israeli Economy and Investments

1
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

2
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.

3
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

4

The Current State of Affairs

• Hi-tech
• Non-hi-tech industries
• The economy as a whole

5
1. Hi-Tech

• As far as Israeli technology is concerned, the
  security situation has had no special impact..
  RD activity. is not affected by events, because
  RD centers are located far from the
  flashpoints. (Goldman Sachs- 15.10.00)
• Despite the ongoing political and economic
  upheaval in the Middle East, Israels innovative
  high-tech sector has lost little of its dynamism
  (McKinsey Co. Report 27.8.01)

6
Global Recession

• Comparisons of investment and stock market
  indicators suggest that the decrease in
  investment and sales activity in Israels
  high-tech sector is largely a result of the
  global economic downturn, rather than local
  political or security problems.

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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.

8
Tel Aviv-100 Dow Jones Nasdaq
9
VC Investments US and Israel
Source PwC
10
The Mirror Effect
January 2001- April 2002
11
Global Investment
Israels decrease mirrors countries such as the
US and the UK.
12
Hi-tech Capital Raised (1995-2002)
Source IVC Online
13
Hi-tech Capital Raised(by quarter)
14
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.

15
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.

16
VCs September 2000
Dedicated Israel fund Dedicated Europe and
Israel fund
17
VCs 2001 - 2002
Dedicated Israel fund Dedicated Europe and
Israel fund
18
Multinationals Confident

• December 2000 Intel began construction of its
  new RD 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
  RD center.

19
Multinationals Invest

• April 2001 SAP (Germany) bought TopTier Software
  for 400m cash.
• Jan 2002 Philips (Medical Systems) announced a
  major expansion of its Haifa RD facility.
• February 2002 Applied Materials invests 100m in
  RD 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.

20
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 RD 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

21
Venture Funding
2001 figures used for comparison
22
Foreign Investors

• Forbes Theres 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 Paines purchase of
• Israeli company Paradigm
  Geophysical for 100 million

23
CEO, Shamrock Holdings

• If you liked investing in Israel in the late
  1990s, youve got to love it today. Same talent.
  Same opportunity. Better prices.
• July 28, 2002. Mr.Stanley Gold, Director, Walt
  Disney Company CEO, Shamrock Holdings.

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2. Non- Hi-tech Industries

• Many of Israels non-high-tech industries have
  been affected by the current situation.
• Agriculture
• Construction
• Tourism

25
Agriculture

• The agricultural sector, which represents 2.5
  of Israel's GDP, has been adversely affected due
  to the depletion of its workforce.

26
Construction

• Homebuilding, infrastructure, public and
  commercial buildings make up 25 of GDP.
• There has been a 17.6 drop in investments in
  construction.

27
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.

28
Tourism

• Tourism Revenue 2000 3.4 billion
• 2001 2.4 billion
• 2002 2.1 billion

29
Tourism
30
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.

31
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).

32
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.

33
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

34
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.

35
Moodys

• In July 2000, Moodys raised Israels credit
  rating to A2. In its accompanying report, Moodys
  stated that
• the improved credit worthiness implied by this
  performance is less and less sensitive to
  potential risks from a geopolitical environment
  that reflects Israels relations with Middle
  Eastern states and with the Palestinian
  Authority.

36
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

37
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.

38
Crisis Has Not Affected Fundamentals

• The Israeli economy is in a mature, developed and
  stable condition.
• The various international ratings agencies have
  consistently maintained Israels ratings and
  reaffirmed their confidence in the Israeli
  economy despite the ongoing violence.

39
Fitch

• Dec 2000 Reaffirmed Israels credit rating
  citing Israels dynamic and diversified economy
  combined with its democratic values.
• Oct 2002 Jan 2003 Again reaffirmed Israels
  rating.
• Jan 2003 Fitch Sovereign Ratings senior director
  Richard Fox commenting on Israel Were calm.

40
Moodys

• February 2001 Reaffirmed Israels credit rating
  stating the outlook for all Israeli ratings is
  stable.
• February 2002 Reaffirmed Israels rating saying
  plentiful and stable foreign currency reserves
  (25 billion) suggest that Israel can withstand
  temporary difficulties.
• March 2003 Moodys announced that Israels
  credit rating remains unchanged.

41
Standard Poors

• July 2001, Oct 2001 Oct 2002 Standard Poors
  repeatedly reaffirmed Israels credit rating.

42
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 threatenedThe term
  financial crisis does not apply to the Israeli
  market, but to states like those in South
  America. IMF, 2003

43
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

44
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.

45
A Global Economy

• Since the 1980s, the Israeli economy has been
  closely linked to those of the western world.
• During the 1990s, 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.

46
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 Haaretz, February
  14, 2001

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Ministry of Industry and TradeForeign Trade
AdministrationInvestment Promotion Center

• 30 Agron St, Jerusalem
• Israel, 94190
• www.moit.gov.il
• Presented by Dani Wassner/Daniel Meyer
• danmush_at_moit.gov.il Last Updated March 19, 2003