The eurozone’s weaker members since the onset of the 2008 financial crisis have been designated the ‘PIIGS’; an acronym for the economically-stricken countries of Portugal, Ireland, Italy, Greece and Spain. While all five patients remain on the critical list, with mounting social unrest in the latter two countries, the new year began with
that some may be responding to the harsh austerity medicine administered.
The indicators are particularly positive for Ireland, according to the accounting and consulting group Grant Thornton’s international business report (IBR) for 2013, which found that 36% of Irish chief executive officers (CEOs) are optimistic about the country’s economic prospects; a percentage that compares with a European Union (EU) average of 27%. According to Grant Thornton, many of Ireland’s EU partners have been slower in adapting to the “painful realities of fiscal and structural reform”.
Ireland ranked as the fifth most optimistic of the 10 eurozone countries covered by the Grant Thornton report, which also finds that 54% of Irish businesses anticipate profits growth in the year ahead, against 30% at the start of 2012, while 92% expect employment to either increase or remain stable in the year ahead.
Back on the Growth Path
The Irish economy is likely to have achieved no more than 0.4% growth in gross domestic product (GDP) in 2012, but managed a 1.4% rise in 2011. Moreover, both figures compare favourably with the sharp contractions in Italy and Spain, as well as the UK’s recent double dip recession. Ireland’s current account moved into surplus during 2010 and a mixture of high unemployment, currently 14.6%, and austerity measures has significantly improved its labour costs.
The 2013 IBR also finds that Ireland ranks fourth out of 44 countries surveyed for export growth expectations, exceeded only by Turkey, India and China and ahead of all the other EU member states surveyed. Ireland’s current account deficit, which exceeded €10bn just before its property market bubble burst five years ago, edged back into a €1.5bn surplus in 2011 and increased to €6.9bn, over 5% of gross national product (GNP) last year.
New Government Bonds Sold
The improvements have been noted by investors. On 8 January, Ireland’s debt management agency, the National Treasury Management Agency (NTMA), sold €2.5bn of 2017 in the first syndicated sovereign deal since the European Union (EU) and the International Monetary Fund (IMF) assembled a bailout programme for the country in December 2010. The offering was heavily oversubscribed, with orders received topping €7bn, and encouraged the NTMA to talk of raising a further €7.5bn from the markets this year; prospective offerings including a 10-year bond and a syndicated dollar deal.
According to credit ratings agency (CRA) Fitch, the debt sale marked another step in Ireland’s progress towards regaining full market access. Last year began with yields on Irish government bonds maturing in 2020 standing at 8.5%; by December this had fallen to 4.5% as appetite for Irish debt steadily revived and the government regained partial access to the bond markets.
In response, Fitch revised the outlook on the country’s BBB+ rating from ‘negative’ to ‘stable’ in November; its first positive eurozone sovereign rating agency since 2009. Fitch said that it expects Ireland to have achieved full market access once more by the end of 2013, while cautioning that it “is not assured and vulnerable to an intensification of the eurozone crisis or worse than expected economic and fiscal outcomes.”
Ireland has also been able to retain its low corporate tax rate of 12.5%, despite both France and Germany having stated that it gives the country an unfair advantage in attracting foreign investment. Many US companies have set up operations in the country, with pharmaceuticals, IT and financial services making a particularly strong contribution and the number of new projects in both 2011 and 2012 reached the highest level for a decade.
Gain Through Pain
All of this spells good news for Irish corporate treasurers, many of whose companies found that the collapse of the booming property market and the resulting woes of Ireland’s banks cut them off from their traditional sources of financing. During 2010 and 2011 Ireland’s banking system appeared close to collapse, making funding problematic even for corporates in the sectors most resistant to recession.
Several of the main financial institutions, including the country’s two largest banks Allied Irish Bank (AIB) and Bank of Ireland (BoI), needed government assistance to survive, while Anglo Irish was nationalised four years ago when the government determined that even recapitalisation would not be enough to salvage it. The rising cost of government support for a total of six guaranteed banks ultimately led to an €85bn bail-out from the European central Bank (ECB) and IMF in November 2010, when the government took a majority stake in AIB.
While an IMF research paper issued last summer reported that Ireland’s banking crisis since 2008 had been the costliest of any major economy since the Great Depression, there have more recently been indications that the sector is now seeing a degree of stability. In November 2012, BoI and AIB raised a total of €1.5bn from a successful issue of three-year bonds secured on Irish mortgages and last month BoI followed up by issuing €250m subordinated debt with a 10-year maturity; albeit at a rate of 10%.
Not Yet Out of the Woods
If this progress encourages those who see Ireland’s glass as half-full, there are still many who continue to regard it as half-empty. Grant Thornton partner Patrick Burke was quoted in the Irish press as conceding that Irish businesses had become leaner and more efficient since the onset of the financial and subsequent eurozone crisis, but added: “The improving outlook on jobs and investment is particularly welcome, but we have a long way to go before we could describe the Irish economy as returning to robust growth.
“It continues to be a two-speed economy, with the export sector showing growth, but the domestic economy remaining weak. Fiscal measures to plug the hole in the government’s balance sheet are a drag on consumer sentiment and spending that might otherwise help drive domestic growth.” Burke added that despite job creation initiatives from bodies such as Enterprise Ireland and the Industrial Development Association (IDA) Ireland, significantly reducing the jobless rate would take years rather than months.
His concerns are shared by others who believe that Ireland’s return to financial health will take years, or is simply not achievable. Another of the main CRAs, Moody’s, remains more pessimistic than Fitch; it still rates Ireland as sub-investment grade. The banks may be well-capitalised but they are also unprofitable, their funding costs are high and their market access, although improving, is still limited.
A heavy reliance on the contribution made by foreign firms to offset depressed domestic demand – still weighed down by excessive debt, the government’s continuing austerity programme and a financial squeeze – is reflected in the fact that Ireland has a wide and growing gap between GDP and GNP. The country’s slow recovery is contingent upon world economic growth recovering in 2013 and 2014. The progress achieved to date has by no means been painless and there is still a danger that it could yet be reversed.
Indeed, despite its overall positive tone Grant Thornton’s 2013 IBR warns that Ireland’s business sector continues to face major challenges as the government continues to address the debt burden and the country’s sizeable public sector pension deficit. Higher taxes and the knock-on effect on consumer spending could still put the skids under the country’s nascent recovery, but at least Ireland is showing modest signs of recovery and offering some hope to its fellow PIIGS.
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