MINISTRY OF FINANCE

THE INTERNATIONAL DIVISION

September 2, 1996

ECONOMIC INFORMATION ABROAD – Circular # 6/96

1. ISRAEL – NATIONAL DEBT

ISRAEL GOVERNMENT DEBT HOLDS STEADY IN REAL TERMS.

The Bank of Israel said government debt totaled 306.4 billion shekels at the end of June compared with 286 billion shekels at the end of 1995. But the increase matched inflation and there was no growth in real terms, the bank said. The government’s domestic debt was 230.5 billion shekels at end-June compared with 213 billion shekels at end-December and foreign debt totaled 75.9 billion against 73 billion. Total government debt was 108 percent of GDP at end-June compared with 110 percent at end-1995 and 116 percent at end-1994.

The amount of domestic debt linked to the consumer price index (CPI) was 89 percent compared with 91 percent in 1995. The amount of domestic debt linked to the dollar was 5.0 percent, unchanged from last year, and the part of domestic debt that was unlinked was 6.0 percent against 4.0 percent in 1995.

The average interest rate on government bonds linked to the CPI was 4.4 percent in the first half of the year against 4.5 percent in 1995. On dollar-linked bonds average interest rates were 6.5 percent compared with 7.1 percent in 1995 and on unlinked bonds 16.5 percent against 15.6 percent. The average interest rates on bonds sold abroad was 6.5 percent in the first half of 1996 compared with 7.1 percent in all of 1995.

(Reuter News Service, 28.8.96)

2. ISRAEL-PRIVATIZATION

ISRAEL: ISRAEL PRIVATIZATION PLANS TO BE REVEALED SOON.

Israel hopes to have its detailed privatization program ready by October or November this year, said a senior official at the prime minister’s office.

At a briefing with foreign journalists Moshe Lion, senior deputy director general of the Prime Minister’s office said the government would not be put off by difficulties arising in the process. "We will not be deterred by our aim. There is an aim we must reach and we will not get stuck on the way."

The program is being prepared by the Government Corporations Authority and the Prime Minsiter’s office.

Lion refused to give details on the companies that will be privatized first and any timetable for the plan. He said that all kinds of privatization methods would be considered, including public offerings in Israel and abroad and sale of stakes in the companies through tenders. "Both the Prime Minister and I are of the idea not to concentrate sales in the hands of private bodies and that it is better to sell off as many companies through public offerings" he said.

Asked to comment on the fact that the group of investors led by Claridge Israel had decided to pull out of the tender for a stake in Bank Hapoalim, Lion said: "They have pulled out, it is a fact. We have to move forward."

He said he expected the sale of the banks would get a push during 1997.

Lion said the aim of the government was to sell its entire stake in a privatized company, albeit taking into account security and national interests.

He added that a plan for the restructuring of the economy would be put before the government in the coming month.

(Reuter News Service 27.8.96)

3. MIDDLE EAST

MEANWHILE, THE FIRST CAIRO CONFERENCE

The two-day First Cairo Conference, pre-dating the Middle East Business

("Cairo") Conference initiated by Mubarak, will be inaugurated on October 12th. Its theme will be "privatization and industrialization in the Middle East and North Africa". Speeches will be delivered by delegates from Egypt, the Arab League, the Gulf Co- operation Council, the World Bank, Turkey, Jordan, France, Abu Dhabi, UN aid institutions, Saudi Arabia, Tunisia and Bahrain.

The principal topics of debate will be privatization and industrialization in the Gulf states, the privatization process and structural adjustments in Arab states, proposed economic reforms and their implications in Egypt and Jordan, the success of the privatization process in Turkey, and industrialization processes in the Arab states in light of regional and world-wide economic changes.

The conference will also discuss the possible privatization of infrastructures, privatization in the light of the European experience, globalisation of privatization, the development of capital markets in the Arab states, with the emphasis on Saudi Arabia, the Gulf States and Tunisia, and accelerated private sector involvement in privatization and industrialization processes and in the development of capital markets.

(Israel’s Business Arena by Globes, 29.8.96)

4. MIDDLE EAST

SPECIAL REPORT – ISRAEL – FORMING A TRADE AND PROCESSING HUB.

The government of Israel will present at the Middle East Summit Conference scheduled to take place in November in Cairo a plan for turning the Middle East into a trade and processing hub. This plan will be based on co-operation between Israel, Egypt, Jordan and the Palestinian Autonomy.

The following are features of this plan:

The past two decades have witnessed vast changes in global economic activity. The combination of technological improvements in transport and communications, changing patterns of industrial production, and increasingly liberal trade regimes have sparked immense changes in both the structure and volume of international trade.

The direction of these changes is towards economic globalisation. Firms seeking competitive advantage in global markets focus attention worldwide on upstream and downstream production activities that can enhance competitive positioning.

In their quest for competitive advantages, nationally and internationally based firms are searching more and more for locations and mechanisms that will assist them in reducing costs and attaining strategic positions in the global economy.

As international production and transport increase, national and regional economic systems are becoming more highly integrated, generating vast opportunities for inter-regional trade and reinforcing existing trends of increased trans-boundary investment and production of goods and services for global markets.

The hub concept is premised on these trends towards increased global integration of both production and trade. The fast pace of technological advance has led to the achievement of significant economies in manufacturing and other ‘on-stream’ activities. Realizing further efficiencies may well depend on identifying less costly sources of management and skilled workforces and on decreasing the costs of ‘down-stream’ production activities, such as marketing and distribution. The latter includes assembly, transportation, storage, packaging, distribution and servicing. While these ‘down-stream’ activities need not necessarily be conducted ‘down-stream’ in a physical sense, transport and energy are critical in the cost function of production.

Hence, it is important that activities take place en route to final markets. The combination of geography and human resource base provide the rationale for conducting downstream production activities in the Middle East. Together, the countries in the region can form a hub for the processing and inter-regional conveyance of goods and people.

Since ancient times, the Middle East has served as a geographical crossroads for both overland and maritime trade. This region connects three continents and two oceans. By virtue of its location, it has traditionally played an important role in international trade and commerce. Despite this pivotal position, however, countries in the region have not always been able to translate geographic advantage to economic gain.

In view of the emerging political situation, the region can now assert itself as a trade and processing hub for inter-regional economic activity by providing commercial, manufacturing, financial, telecommunications and marketing services for the wide array of goods and services passing through its gates. In doing so, local economies would vastly benefit by exploiting geographic location to create added value in service and industrial sectors.

Each of the core parties comprising the hub will benefit from its creation and each has something to contribute to it. Creation of a hub clearly constitutes a ‘sum-plus’ opportunity for all participants.

Some partners can build on existing production and service infrastructures to achieve integration into global production systems. Others can develop production activities around human resources. In either case, extensive development of logistic infrastructures is required to enhance the Middle East’s capacity to serve inter-regional trade and production processes.

In addition, national regulatory regimes will have to be notified to fit the pattern of global economic developments. In this regard, policies favouring trade liberalization and the encouragement of foreign direct investment are two key elements in realizing the Middle East’s potential as a trade and processing hub. To be most effective, promotion of the hub concept should be undertaken as a regional objective. Bi-and multi-lateral infrastructure projects, designed to increase logistic capacity, should be given high priority. Reform policies in each of the countries and territories adopted over the past few years are directed towards opening up the parties to trade and foreign investment.

Co-ordinated efforts between the parties, directed at unifying trade practices, simplifying transportation procedures and creating a positive business environment on a regional scale, can significantly help catalyze the process. Similarly, identification of specific hub-related activities and mutual recognition of country-specific advantages, will reduce unnecessary duplication of efforts and foster a more timely and efficient evolution of the hub. In this manner, the countries and territories will be able to best exploit both global trends and local resources, to further national and regional economic development.

Specific development options of a bi-and multi-lateral nature have been incorporated in the sectoral chapters of this document. These include:

Logistics, Trade and Industry: enhancing logistic capacity along trade routes; a Jordanian-Israeli free port and rail corridor; Aqaba-Eilat logistic centre; Eilat-Aqaba-Taba agro-industrial trade zone; TEAM-Area free trade zone.

Transportation: enhancement of international road systems through the region; Aqaba port development program; Wadi Araba International airport; development of ‘stop-over’ tourism; Rafah regional airport; Haifa-Mafraq railway connection; railway network between the Red Sea and Mediterranean ports via the Dead Sea; Mediterranean coastal railway line; Trans-Sinai line from Ismailiya to Beer Sheva and the Palestinian Authority.

Energy: Medor oil refinery in Alexandria; stretching an extension of the TAP pipeline to Haifa; stretching an extension to the Yanbu pipeline to Aqaba/Eilat; connecting the Zarqa refinery via a pipeline to the Haifa Port; Gaza oil refinery; Qatar-Saudi Arabia – Near East pipeline; the Middle East Gas Loop; the Egypt-Israel-Turkey Levant gas project; LNG regasification plant in Aqaba.

Telecommunications: joint use of submarine cables; joining the international communications cable in the Aqaba-Eilat Gulf; submarine telecommunications cable to the Mediterranean shores; joint ground stations for satellite communications; teleports.

Flow of goods: Global economic trends vindicate expectations for increasing traffic demand along the Mediterranean-Indian Ocean route. The recent successes of several emerging market economies coupled with increasing liberalization of investment and trade regimes contributes significantly to the opening up of new markets in various regions throughout the world. Expected developments in energy markets strengthen assessments for growing activity along this important trade route.

The rationale for the creation of a trade and processing hub in the Middle East derives from current trade flows and anticipated patterns of both trade (of finished goods) and production processes. Currently the following trade flows can be identified:

Commodities: Commodities from Africa to East Mediterranean and East European countries; commodities from Central and East Asia to Europe; commodities from the Far East and Australasia to Southern Europe, the Mediterranean Basin and East Europe.

Container traffic: general merchandise from the Far East to Mediterranean countries and Central Europe; manufactured goods from Europe to the Persian Gulf states, Central Asia and the Far East.

Oil: oil from the Persian Gulf to the Mediterranean. Gas: gas for power generation and petrochemical production from the Persian Gulf to Mediterranean countries. International trade in gas is not yet developed but current trends point to the potential for future development.

Air Freight: general cargo and agricultural produce from the Far East and Asia to Europe; general cargo from Europe to the Persian Gulf, Central Asia and the Far East.

Commercial Airline Traffic: passenger airline routes between various destinations in Europe, the Middle East, Africa and Asia.

Telecommunications: telecommunication services between Asia, Northeast Europe and the Mediterranean. The core region lies at the confluence of international submarine fibre optic cable systems in the Indian Ocean and Mediterranean Sea.

Electricity: while there is currently no inter-regional flow of electricity, completion of regional grid linkages will connect to the Mediterranean power pool and create continuity throughout the region.

Added-value options: The development of a regional hub will help spur productivity and economic efficiency in the region, create employment opportunities for virtually all sectors of the workforce, and generate foreign currency income. Hub activities would entail not only the provision of conveyance and transport services, but also a wide array of activities which would contribute added value to products on route.

Product handling: storage, refining and processing of oil products; conveyance and processing of gas for power generation and production of petrochemical products; storage, packaging and distribution of manufactured goods and agricultural products; assembly and other manufacturing services; storage and distribution of mail and air cargo; cold storage of agricultural produce, processed food and dairy products; intermodal transfer; transshipment including sea-rail and sea-air transshipment.

Related services: maintenance of ships, aircraft, engines and equipment; catering and fueling services to the transport industry; duty-free shopping; telecommunications and information services; financial services relating to import-export; in-transit air traffic service for passengers. A combination of initiative and collaboration, drawing on comparative advantages, can provide leverage for the creation of added-value through these economic activities. This will have the dual benefit of stimulating regional economic growth and providing clients from outside the region with more efficient and cost-effective services.

Lloyd’s of London Press Limited. LLOYD’S LIST 26/8/96

5. EUROPE – FINANCE

EASDAQ – THE EUROPEAN OPTION

By the end of September, Israeli entrepreneurs dreaming of sweeping high-tech issuance successes, will have one more address. EASDAQ, European sister of the US NASDAQ, will be inaugurated in Brussels, Belgium, and its founders hope for a no less resounding success than that reaped by the one in New York. The day EASDAQ opens for business, shares of 20 European companies already traded on the NASDAQ will register there. Within 3-4 months, some twenty companies will be seen going in for a European flotation.

EASDAQ is designed to supply Europe with what it currently lacks in terms of high-tech financing: a securities market specializing in growth companies. Entities specializing in financing may come to converge on the EASDAQ.

The problem the EASDAQ will have to deal with is mainly that of the dearth of a European entrepreneuring culture. Experience shows that investors throughout the continent are more inclined to conservatism, and are in no hurry to leap at the shares of high risk companies. If, in the course of time, the price levels of issuances in Europe are found to be too low, the market will expire before ever really coming to life. If, on the other hand, the old continent can muster a core of investors converging around the local venture capital industry, then new investment companies will arise, and Europe may look forward to no less a prosperous high-tech market than the US enjoys.

What makes the EASDAQ especially attractive, from the point of view of the Israeli

entrepreneur and the local high-tech market, may well be the sheer opportunity for raising capital from new sources, especially in the case of companies most of whose activity takes place in Europe in any event. An EASDAQ issuance frees the issuing company of the need to undergo the complicated process of exposure and compliance with the requirements of the US stock market. (Israel’s Business Arena by Globes, 29.8.96)

ECONOMIC INFORMATION ABROAD – Danit Levinson 972-2-705300 E-mail: mofisr@mail.netvision.net.il