*Bank of IsraelAnnual Report 2008April 19, 2009

*2008: A Turning PointFollowing five years of fast growth, in the second half of 2008 the economy reached a turning point, and the economy went into a recession as a result of the worsening global financial crisis and its increased effects on the local economy.

In the first half of the year the economy continued the same trends that had typified the fast growth period:High level of economic activityLow rate of unemploymentSurplus of the current accountHigh savings rateReduction in the debt/GDP ratioHigh profits in the business sector

In the last quarter of the year the economy entered a recession:Sharp decreases in exports and tax revenuesReduction in private consumptionLabor market: employment expansion came to a halt, wages fell and unemployment began to rise

Inflation turnaround:Until September high, as a result of rising world oil and commodities prices and excess demandAfter September dramatic decline as a result of falling world prices and a moderation of the excess demand

*2008: A Turning Point (cont.)

Accelerated rates of inflation in the middle of the year as a result of the closed output gap and increased commodity prices; monetary policy at the time dealt with curbing the rise in inflation.

With the worsening of the global crisis since September and the drop in inflation, the interest rate has been reduced dramatically to an unprecedented level in Israels history. The Bank of Israel has purchased considerable sums of foreign currency in order to increase the countrys reserves and as a measure to deal with the accelerated currency appreciation; In February 2009 the Bank of Israel began to purchase government bonds to ease credit conditions.

The shock to Israels financial system was considerable, yet comparatively moderate: Stocks and private bonds fell and spreads in the credit market rose considerably.Banks demonstrated stabilityThe main impact occurred in the non-bank credit market

The budget deficit grew and the decline in the debt/GDP ratio slowed as a result of the slowdown in activity and drops in the capital market, which affected tax revenues, and due to further tax reductions.

*GDP Growth Rates in Israel Were Higher than in the Advanced Economies%-The quarterly data is the seasonally adjusted rate of change from the previous quarter at an annualized rate.-The growth rate for the advanced economies is a simple average of their individual growth rates (excluding Luxembourg and Iceland).Source: OECD Data and the Bank of Israel

*Steep Decline in Exports and a Drop in Private Consumption%- The quarterly data is the seasonally adjusted rate of change from the previous quarter at an annualized rate.- Exports of goods and services excluding support paymentsSource: CBS

*Current Account of Balance of Paymentsas Percentage of GDP, 2000-2008Source: Balance of payments, CBS%

Budget Deficit* (Percentage of GDP, 2000-2009**)%*Percent of GDP; excluding credit extended. The data refers to the deficit excluding the Bank of Israels profits.**BOI forecast for 2009 is based on the budget that has been approved by the government.

*Actual and Expected Rates of Inflation

%The data of Inflation Expectations (both annually and quarterly) is the average of the relevant time period.The quarterly data of inflation is the quarterly average of the Consumer Price Index over the last 12 months.Source: Bank of Israel

*Rate of Unemployment: Turnaround in the Last Quarter of 2008(2000-2008)Source: CBS%

*Five Years of Growth: What Have We Gained?A rise of 10% in real per capita GDP since 2000 and 15% compared with 2001-02Sustained surplus in the current accountA decline in absolute poverty levels, in almost all population groupsIncrease in the participation and employment levels and a decrease in unemployment in all population groupsImproved fiscal environment: reduction in the budget deficit, public debt and public expenditure as a percentage of GDP accompanied by tax cuts

What havent we gained? Cyclically adjusted, the declines in deficits have been modest Per capita GDP relative to the U.S. return to 60% (level preceding the recession)An increase in relative poverty (although it declined in the last two years)

*Per capita GDP2(14.9%)Per capita GDP in Israel Relative to the Advanced Economies1 based on Purchasing Power ParitiesPer capita GDP (2008 prices, NIS thousands)1.The Per capita GDP in the Advanced Economies of the OECD excluding Luxembourg and Iceland is the simple average of their individual per capita GDP.2. Rate of change between 2001-2002 and 2008

*Overall Unemployment Rate and the Rate for those with 0-10 Years of Education Dropped to Low LevelsSource: CBS, Labor Force Surveys%%0-10 Years of EducationOverall

*%%%%Rate of Relative Poverty by Group,a 1997, 2003 and 2007/8bBy education level of head of household (years of schooling)By family sizeBy population groupBy number of earnersa Not including Arabs of Jerusalemb The data are based on a survey conducted between July 2007 and June 2008SOURCE: Based on data from Central Bureau of Statistics and Income Surveys

*%%%%Rate of Absolute Poverty by Group,a 1997, 2003 and 2007/8bBy education level of head of household (years of schooling)By family sizeBy population groupBy number of earnersa Not including Arabs of Jerusalemb The data are based on a survey conducted between July 2007 and June 2008SOURCE: Based on data from Central Bureau of Statistics and Income Surveys

*%Public Expenditure as a Percentage of GDP Source: Bank of Israel%Debt/GDP Ratio (gross)Fiscal Indicators

*The 2001-03 Recession and the Current Recession

*Unindexed 5-Year Government Bond Yields(01/2000-02/2009) Source: Bank of Israel and the Federal Reserve Bank of St. Louis*Spread between the yields of the 5 year Shahar (derived from the 0-curve) and the 5 year unindexed U.S. Treasury bond.

*%Interest Rates of the Bank of Israel, the Fed and the ECB (2000-2009)Source: Bank of Israel Research Department and OECD StatisticsPrevious Recession 2001-2003Current Recession

*Ratio of Credit in the Market to Business Sector Product(quarterly data, current prices)Source: Bank of IsraelCurrent RecessionPrevious Recession 2001-2003

*Banking System Indicators in IsraelRate of Loan Loss Provision Capital Adequacy Ratio- Data refers to the end of the relevant period.Source: Bank of Israel

The Nominal and the Real Exchange Rate2009 - 1997NISShekel / Dollar Exchange Rate 01/97-04/09))

The Real Exchange Rate by Trading Partners (100=01/1997, 01/1997-04/2009) 119.8 Previous Recession 2001-2003Current RecessionPrevious Recession 2001-2003Current RecessionA rise in the index indicates depreciation.The figure for April 2009 is calculated from spot exchange rates known for the half-month, our forecast CPI from the monthly model, and an extrapolation of inflation in the countries whose currencies are in the currency basket.SOURCE: IFS data. For October 2008 to April 2009, Bank of Israel calculations.

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*Forecast

Development of Forecasts of World Economic Activity in 2009* Forecast for world trade in 2009 is a Bank of Israel estimate.Source: IMF World Economic Outlook%*

**Forecasts for 2009 and 2010 are given as a possible range.Source: IMF World Economic Outlook 03/20093.5 to 4.51.5 to 2.5-0.5 to -1.01.5 to 2.5Annual GDP Growth Rates 2008-2010F%

*Forecast for Main Macroeconomic Indicators (2008-2010)Source: Bank of Israel Research DepartmentUnless otherwise indicated the figures are rates of change.

*Thank you

*Starting Conditions: Situation on the Eve of the Recession*The figure refers to the condition on the eve of the recession (3rd quarter of 2000 and the 2nd quarter of 2008)**Annual dataSource: Bank of Israel

*Current Account of the Balance of Payments(percent of GDP)Source: CBS, Balance of Payments%

Real Wages per Employee Post* for the Overall Population and for those with 0-10 Years of EducationSource: CBSNISNIS*Real wages per employee posts at 2004 prices0-10 Year of EducationOverall*

Overall Employment Levels and Employment Levels for those with 0-10 Years of Education%%0-10 Years of EducationOverallSource: CBS, Labor Force Surveys*

*%*Bank of Israel forecastsSource: CBS and the Bank of IsraelAnnual GDP Growth Rates2000 2010**

*%Current Account of Balance of Paymentsas Percentage of GDP, 1995-2010* (Annual)SOURCE: Balance of Payments, Central Bureau of Statistics.* BOI Forecasts

*GDP per Capita in Israel Relative to the U.S. 1980-2000Source: Bank of Israel calculations and the IMF World Economic Outlook Database 10/2008RatioPrevious Recession 2001-2003

*%Government Expenditure in Israel 2002 & 2008 Compared to the OECD Countries - 2008(percent of GDP)

The figure for Israel is adjusted to international standards by adding an indexed instrument to the interest payments, based on a 2% inflation rate.Source: OECD Economic Outlook 84, Bank of Israel

**General government**Simple averageSource: OECD Economic Outlook 84 and the Bank of IsraelPublic-Sector Gross Debt* in Israel (2002 & 2008) and in the OECD Countries (2008) (percent of GDP)%

*The Tax Burden in Israel - 2008 and in the OECD Countries - 2007 (percentage of GDP)

Source: OECD dataIncluding income tax, National Insurance, levies and fines.Including taxes on goods and services, import taxes, special levied taxed taxes on specific goods and services as well as value taxes.%

*Actual and Expected Rates of Inflation

- The quarterly data is the seasonally adjusted rate of change from the previous quarter annualized.Inflation expectation are a 12 month average derived from the capital markets.Source: Bank of Israel%

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