Israel Finance Ministry, Yearly Pension Plan Report

PUBLIC DEBT

General

Public sector debt ("public debt") in Israel consists of the internal and external debt of the public sector. Net public debt as a percentage of GDP has generally declined over the last ten years to a level of 89.6% of GDP.
Table No. 29

Ratio of Net Public Debt to GDP Ratio
(percentage of GDP at end-of-year prices)

	Year
	1994	1995	1996	1997	1998
Internal⁽¹⁾	74.1%	73.6%	76.6%	83.9%	85.0%
External⁽²⁾	19.5	16.9	13.8	5.5	4.7
Total	93.6%	90.5%	90.3%	89.3%	89.6%

____________________

Internal public debt includes debt of local authorities and excludes debt of public non-profit institutions as well as the Government's commitments under the Bank Shares Arrangement.

External public debt equals the Government's foreign liabilities less foreign reserves (change in foreign reserves less repayment of principal).

Source: Bank of Israel.

Table No. 30

Net Public Debt
(at end-of-year current prices in billions of NIS)

	Year
	1994	1995	1996	1997	1998
Internal⁽¹⁾	173.7	201.7	241.4	292.1	326.5
External⁽²⁾	45.6	46.3	43.4	19.1	17.9
Total	219.3	248.0	284.8	311.2	344.4

____________________

(1) Internal public debt includes debt of local authorities and excludes debt of public non-profit institutions as well as the Government's commitments under the Bank Shares Agreement.

(2) External public debt equals the Government's foreign liabilities less foreign reserves (change in foreign reserves less repayment of principal).

Source: Bank of Israel.

Internal Public Debt

The internal net public debt is defined in the consolidated balance sheet of the Government and the Bank of Israel as the Government debt and the debt of local authorities, less the liabilities of private sector debtors to the public sector. In 1998, the internal net public debt increased in real terms (at 1995 constant prices) by 6.0% to NIS 326.5 billion. On December 31, 1998, the total internal net short-term indebtedness of the Government was estimated to be NIS 23.5 billion.

While the income from privatization (approximately 1.0% of GDP in 1998) tended to reduce the public debt/GDP ratio, the depreciation of the NIS tended to increase the public debt/GDP ratio (by approximately 0.6% of GDP in 1998).
Table No. 31

Annual Domestic Government Debt Issuances
(gross proceeds in billions of NIS)

	Year
	1994	1995	1996	1997	1998
Total Issuances
Tradable	12.3	14.9	24.2	17.2	25.1
Non-tradable.	6.9	7.9	8.6	9.5	10.7
Total	19.2	22.8	32.8	26.7	35.8
Average Maturity (in years)
Tradable	7.8	6.6	5.0	6.6	5.9
Non-tradable.	13.6	14.0	13.9	12.4	14.3
All	9.9	9.2	7.3	8.7	9.4

____________________

Source: Bank of Israel.

External Public Debt

Except as otherwise specified and for the purposes of presenting the statistical data in this report, public sector external debt means all debt of the public sector that is required to be paid in a currency other than the NIS (excluding any indebtedness originally issued within Israel or to an Israeli person or entity). Israel's public sector external debt balance totaled $27.3 billion at the end of 1998, an increase of $1.2 billion from the end of 1997. On December 31, 1998, Israel had no external short-term floating rate indebtedness. The Government is the principal public sector borrower. In 1998, the public sector's share in Israel's gross external debt was 50%. The share of the Government's gross external debt in its total (external and internal) debt was 26% in 1998, compared with 25% in 1997 and 1996.

During the period from 1994 through 1998, net capital imports by the Government increased slightly. During the same period, total public sector external debt increased by $4.8
billion, including accrued interest on zero coupon bonds, U.S guaranteed loans made available to the Israeli banking system to finance infrastructure projects undertaken by the business sector, and foreign borrowings replacing domestic liabilities denominated in foreign currency to Israeli banks. The increase reflected the Government's response to the rise in private sector deficits in 1993 and 1994, caused by the increase in immigration in the late 1980s and early 1990s. In 1995-1998, total assets of the public sector also increased sharply, primarily as a result of increased foreign investments and other capital inflows. Consequently, during the period from 1994 to 1998, net public sector external debt decreased by $11.0 billion.

Israel's access to external funding has broadened increasingly over the past decade. From the mid-1980s to 1992, the major source of external net borrowings by the Government was State of Israel Bonds, the remainder coming from governments, international institutions, and foreign banks. State of Israel Bonds have been sold by the Government exclusively through the Development Corporation for Israel ("DCI") since the State's creation. $18.5 billion has been raised through sales of State of Israel Bonds since 1951. State of Israel Bonds are not freely transferable. The State of Israel Bonds have proven to be a reliable and important source of financing for the State, particularly under adverse circumstances, because many purchasers are individuals and institutions, including the Jewish community around the world, that have an interest in Israel. Israel expects to continue to issue State of Israel Bonds through DCI in the future.

By 1991, the annual amount raised by the Government through the sale of State of Israel Bonds reached an average of $1 billion per year. The outstanding balance of State of Israel Bonds of $7.9 billion on December 31, 1998 represented approximately 29% of Israel's total public sector external debt.

From 1993 through 1998, the largest source of external borrowings by the Government was the U.S. loan guarantee program. This program was enacted in 1992 for the stated purpose of supporting "Israel's extraordinary humanitarian effort to resettle and absorb immigrants into Israel from the republics of the former Soviet Union, Ethiopia and other countries." The U.S. loan guarantee program provides for the guarantee of up to $10 billion in principal amount of loans to Israel during U.S. government fiscal years 1993 through 1998. Under the program, the United States guarantees all payments of principal and interest on guaranteed loans issued by Israel.

As of December 31, 1998, Israel had borrowed a total of $9.3 billion under the U.S. loan guarantee program through the issuance of guaranteed notes having various terms, interest rates, and maturities. At the end of 1998, approximately $3 billion of the proceeds from these loans remained in the Government's account with the Bank of Israel to be applied to the budget over the next three years. Du1998, Israel borrowed a total of approximately $2.5 billion abroad, of which $1.4 billion was borrowed under the U.S. loan guarantee program, approximately $0.9 billion was borrowed through State of Israel Bonds, and $250 million was borrowed through a Yankee bond issue in the U.S in December 1998.

The net external debt of the public sector, defined as the public sector external debt less foreign assets of the public sector, sharply declined in the period from 1994 to 1998. As a percentage of GDP, net public sector external debt as of December 31, 1998, was 5.0%, down from the peak of 55% in 1985, and 5.7% at the end of 1997. Furthermore, the average maturity of the net external debt has lengthened in recent years and the cost of servicing such debt has also declined in both absolute and relative terms.

Approximately 90% of Israeli's public external debt is denominated in U.S. dollars, and approximately 4.8% is denominated in German marks.

Table No. 32

The Public Sector External Debt
(in millions of dollars)

	Balance at Year End
	1994	1995	1996	1997	1998
Public sector external debt
U.S. government	3,387	3,144	2,937	2,746	2,555
Other foreign governments and international institutions	2,362	2,337	1,995	1,448	1,476
Transferable bonds (guaranteed by the U.S. government)⁽¹⁾	9,425	9,784	11,297	12,569	14,404
Public capital markets issuances	-	250	450	604	876
Non-transferable State of Israel Bonds (DCI)⁽²⁾	7,323	7,450	7,707	8,068	8,027
Foreign banks	352	588	740	512	407
Israeli banks overseas	272	204	150	145	141
Total	23,121	23,757	25,276	26,092	27,886
Total public sector external assets⁽³⁾	7,174	8,607	11,834	20,694	22,925
Net public sector external debt	15,947	15,150	13,442	5,398	4,961

____________________

(1)Includes accrued interest on zero coupon bonds, which totaled $1,180 million at the end of 1998.

(2)Includes accrued interest on zero coupon and savings bonds.

(3)Consists of holdings of foreign currencies. The Government sold all of its remaining holdings of gold in 1992.

Source: Bank of Israel.

Israel's major sources of external financing have been low-cost, long-term debt from other sovereigns or backed by guarantees of other sovereigns, and State of Israel Bonds. Consequently, two-thirds of Israel's outstanding public sector external debt was issued at favorable interest rates with a maturity of greater than 10 years.

Table No. 33

Estimated Repayment Schedule of Public Sector External Debt
(in millions of dollars)

	Outstanding Amounts as of December 31, 1998	1999⁽¹⁾	2000⁽¹⁾	2001⁽¹⁾	2002⁽¹⁾	2003⁽¹⁾	2004 and Thereafter⁽¹⁾
U.S. government	2,555	192	192	194	195	196	1,586
Other foreign governments and international institutions	1,475	139	81	75	72	65	1,043
Transferable bonds	12,599⁽²⁾	993	767	779	733	1,231	8,096
Public capital market issuances	876	-	-	200	-	-	676
Non-transferable State of Israel Bonds (DCI)	7,849⁽³⁾	379	379	813	1,068	1,204	4,006
Foreign banks	408	40	27	58	87	86	110
Israeli banks overseas	141	28	41	53	11	6	2
Total	25,903	1,771	1,487	2,172	2,164	2,788	15,519

____________________

(1)Estimated repayments were calculated according to representative rates published by the Bank of Israel on December 31, 1998.

(2)Backed by a guarantee of the U.S. government, and does not include $1,180 million interest accrued on zero coupon bonds at the end of 1998.

(3)Does not include interest accrued on zero coupon bonds at the end of 1998.

Source: Bank of Israel.

Government Guarantees

In certain cases, the State May issue financial guarantees of third-party obligations if the Government determines that the issuance of such guarantees is in the best interest of the State. These guarantees are generally made on a secured basis and require the payment of a fee to the State. Each guarantee or guarantee program must be specifically approved in advance by the Finance Committee of the Knesset, and the aggregate obligations under such guarantees (not including guarantees set forth under category (iii) below) issued during each budget year May not exceed 10% of the total budget expenditures of the same year. Government guarantees fall into three general categories: (i) guarantees to support economic activities, including encouragement of capital investment, small business activity, and investment in publicly traded venture capital funds pursuant to the Government's publicly announced policy of encouraging development of the private sector; (ii) special guarantees to support Government-controlled entities, particularly those in the defense sector, or to support other enterprises or activities on a case-by-case basis; and (iii) guarantees given to support foreign trade made through Israel Foreign Trade Risks Insurance Company ("IFTRIC"), a Government-controlled company that provides import and export guarantees, guarantees of the capital of IFTRIC, guarantees against foreign political risks on a transaction-by-transaction basis, and direct guarantees for certain large individual transactions, particularly those involving military equipment. These guarantees, fees, and other receipts associated with them are included in the national accounts but, other than some of the guarantees discussed in clause (i), are not part of the Government's annual budget. As of December 31,
1998, there were approximately $4.4 billion of Government guarantees outstanding.

The following table sets forth the outstanding Government guarantees of third-party indebtedness by category.

Table No. 34

Government Guarantees by Category
(as of December 31, 1997)
(in thousands of NIS)

Support of Economic Activities		Guarantees of Indebtedness		Guarantees for International Trade
Guarantee Programs		State-Owned Enterprises		IFTRIC
IEC Corporation	8,081,120	Israel Aircraft Industries	3,980,096	Foreign Trade Insurance	935,834
Small Business Funds	70,700	Israel Military Industries	326,373	Other export credit guarantees	347
Venture Capital Funds	131,759
Capital Investment Law	496,580
Development Bank Loans	82,027
Subtotal	8,862,181	Subtotal	4,306,469	Subtotal	936,181

Case-by-Case Guarantees		Case-by-Case Guarantees		Case-by-Case Guarantees
		Miscellaneous	14,369	IEC Corporation	1,994,800
Absorption and Construction	1,296,306			EL AL Israel Airlines	713,064
Education and health	7,615
Other industries	74,603		__________		_______
Subtotal	1,378,524	Subtotal	14,369	Subtotal	2,707,864
Total	10,240,705	Total	4,320,838	Total	3,644,045

______________________

Source: Ministry of Finance.

DEBT RECORD

Israel has never defaulted in the payment of principal or interest on any of its internal or external indebtedness.