This week the International Monetary Fund has been reviewing the state of the Irish bailout on its way to approving a further 950 million Euros of aid. This means that it will have committed some 20.83 billion Euros out of a promised 22.5 billion. So this phase of the support operation is heading to its conclusion and when it does so Ireland will have borrowed some 1548% of its IMF quota. Rather intriguingly Ireland must have transferred funds in the other direction to the IMF at the same time as receiving them as this sum was originally recorded as 2322% of its quota. Rather bizarre don’t you think?
The IMF view on Ireland
The Irish received praise for their policy implementation.
Two and a half years into their program, the Irish authorities maintain steadfast policy implementation
Mind you praising austerity is slightly awkward these days for the IMF as its head Christine Lagarde criticised the United States on the same grounds. However once we get to actual progress the language is much more circumspect.
The Irish economy grew modestly for a second year in 2012 and positive signs are emerging with employment rising just over 1 percent year-on-year in the first quarter of 2013, though the rate of unemployment remains high at 13.7 percent.
Mind you this is by far the best performance of the Euro area bailouts as we watch both Greece and Portugal sucked into an economic version of a black hole. However even the IMF cannot avoid pointing out that troubles remain on the menu.
In the banking sector, just over 25 percent of loans are nonperforming and losses persist, hindering new lending.
Yet economic recovery is not well established and risks to debt sustainability remain….public debt is expected to peak at around 123 percent of GDP this year.
Those banking sector figures are in fact much worse than the (published) Spanish ones about which there is so much media concern. Also if we look at the debt dynamics for Ireland her Gross National Product or GNP matters to and her national debt will be 150% of it using the IMF numbers.
For the public debt situation to peak in 2013 we need to find a familiar feature in the IMF projections.
with growth projected to accelerate from 2014
How has that worked out?
For a little late week light, if somewhat gallows humour I would like us all to jump into Dr.Who’s TARDIS and go back to 2007. The IMF can take up the story.
Directors welcomed the indicators confirming the soundness of the Irish banking system,
Given the Irish economy’s strong fundamentals and the authorities’ commitment to sound policies, Directors expected economic growth to remain robust over the medium term.
The Executive Directors commended Ireland’s continued impressive economic performance,
Not much sign of a crystal ball there!
Still they were not the only ones as Jean Claude Trichet who was then head of the European Central Bank joined in on the 10th of May 2007.
very often, I and my colleagues of the Governing Council are mentioning the Irish economy as a role model in many respects for the euro area.
Monsieur Trichet did turn out to be correct that some Irish data was “very impressive” but not I suspect in the way that he meant it!
So for now let us leave the growth projection of 2.2% for Ireland in 2014 as unsupported by any real evidence.
What about trade?
Here the IMF has come up with some interesting numbers. The first salvo hints at a challenge to what is normally perceived as an Irish strength and success story.
The current account surplus rose to almost 5 percent of GDP, but to a significant extent this reflects firms domiciling in Ireland.
The issue here comes from this.
In recent years, an increasing number of firms appear to have relocated their headquarters to Ireland
These companies do not operate in Ireland as such but the transfers of funds they make to and from their headquarters do impact on the official statistics. Below is a description of what happens.
Their large foreign profits are considered as income inflows, increasing the current account and GNP. But the corresponding outflows are only recorded when these firms pay out dividends to their foreign owners. Hence undistributed profits raise the official current account balance and GNP.
Let me put that into the current account situation and you will see the impact.
The adjusted current account balance shows a much smaller surplus in 2012……the adjusted current account surplus is estimated at 0.8 percent of GNP, some 5.3 percentage points below the official figure
So Ireland may be in a much weaker trade position than it at first appears. This has a knock-on effect on both economic growth and the size of her economy.
His (John FitzGerald) calculations show that undistributed profits accounted for 1.1 percent of GDP in 2009 and rose to 4.3 percent of GDP in 2012. With these earnings stripped out, adjusted GNP fell more than officially recorded in 2009–11 and also grew at a lower rate in 2012. This adjusted GNP path appears to be more consistent with other economic indicators,
This analysis leads to the view that the Irish trade position remains relatively good if we compare it to Greece or Portugal but is much more precarious than previously thought. Also her debt sustainability is weaker if we lower her GNP output numbers.
Just for clarity the IMF have muddied the waters here by using GDP as a benchmark at one point as it is unaffected (the numbers net out). Apologies on their behalf.
Also there is a final irony for Ireland from this analysis.
A final implication of these data is that the large retained earnings of the redomiciled plcs raise Gross National Income – the base on which Irish contributions to the EU Budget are calculated. Thus, while these companies confer no significant benefit on the Irish economy in terms of employment or taxes, they do give rise to a higher EU budgetary contribution.
The Patent Cliff
In the autumn of 2012 the Irish economy was hit by what is called the “Patent Cliff” where a “blockbuster” (anti-cholesterol) drug came off patent and found itself under generic competition. I discussed this back then and here is an update on the effect of this.
On average, industrial production of chemicals (most of which are pharmaceutical products) has fallen by around 10 percent since August 2012, with chemicals exports declining by a similar amount.
This is quite a reversal on what had been happening as this has become a major part of the Celtic Tiger image.
At present, chemicals constitute around 60 percent of merchandise exports, an increase of almost 15 percentage points since 2005. These exports have proven to be a-cyclical, growing on average by around 7 percent annually even during the recession years of 2008–10.
The official view repeated by the IMF is that these developments are not a big deal for the Irish economy. I find the position to be more troubling. As the numbers below show Irish industrial production has recovered from the shock of last autumn.
On an annual basis production for April 2013 increased by 1.5% when compared with April 2012
However I wonder how many more such shocks it could withstand.
This series has continued its decline as shown below.
The total number of all new vehicles licensed during May 2013 was 9,070 compared with 9,895 during the same month in 2012 – a decrease of 8.3%.
This of course is something of a European trend from which the UK seems oddly immune.
The analysis above shows that there are challenges ahead for the Irish economy. Even the IMF has only given a lukewarm approval of the state of play before singing along what appears to be its forecasting anthem from D:Ream.
Things can only get better
Can only get better
However a contrasting impression has been given by today’s figures from the Central Bank of Ireland on mortgage arrears. Of a total mortgage book of some 110 billion Euros it reports that 25.4 billion Euros worth were in arrears as of the end of March. Of this a chilling 5.35 billion Euros worth of mortgages are more than two years in arrears. No wonder there is little sign of an expansion in bank lending in Ireland with a particular credit squeeze on smaller businesses being reported.
If we take these developments and look forwards there is another factor to add in. This is that the austerity programme is about to kick in more harshly. This years fiscal or budget deficit is at 7.5% of GDP forecast to be similar to that of 2012 but 2014′s is planned to be only 4.4% and 2015′s only 2.2%. So quite a tightening is on its way and we know from the experience of Portugal and Greece what that implies.
As the original bailout is nearly over it leaves me with the thought that Ireland may well need another one.