Ireland: Only ever a Celtic Tigger?

Posted by robin in Financial Articles Friday November 6, 2009 3:27 pm

Where to now for Ireland?

Yesterday’s pin up for success, today’s case study of excess.

Branded the “Celtic Tiger” following an analyst’s research note 1994, last year’s bust exposed more Tigger than Tiger.

An optimistic and exuberant Tigger that was hyperactive in the construction business – a sector accounting for 12% of its workforce and almost 10% of its economy – redeveloping, renewing and building aplenty: houses… apartments… gleaming glass offices…roads to nowhere.

Of course, Tigger bounced around the banking sector too, lending huge sums at cheap rates to finance the national rebuild while the easy money flowed.

An IMF report in 2000 concluded the Irish property market had peaked. The market wasn’t listening and duly tripled over the next six years.

Since 2000, Ireland was building around 75,000 homes a year for its 4m odd residents. The UK, with fifteen times the population and more than three times the size, appears to have managed a little over twice that build rate.

Today many homes stand empty. A September estimate put the vacancy rate at 350,000 though this includes a fair few holiday homes. Still for a country that counted less than 1.3m households in 2002, that’s an overhang that will take some draining.

There was other fuel fanning the flames of the property market too. Mortgage interest relief, long ago scrapped in the UK, is still available today though crimped in the April 2009 emergency budget and likely to go altogether perhaps in the next one on December 9. In the boom, affluent types were sometimes desperate for a trust-based pension plan that permitted residential and commercial property purchase with gearing…up to 75% says one. It all went into the mix on the journey to becoming the most indebted nation on earth by CNBC’s reckoning, with more than $500,000 in foreign debt per head.

Sated with Irish conquests, overseas buying became fashionable. Cape Verde was briefly a hotspot for the property speculator, even though there was apparently no direct flight from Ireland. And if you’re wondering where Cape Verde is (I did), look for an island archipelago off West Africa.

A fully paid up member of the EU, Ireland received transfer payments up to 4% of national income. When the time came, there was no hesitation signing up to the euro. It was among the first through the door, ditching the punt. Since then, it has enjoyed and now endures the too low ECB interest rates that came with the ticket. Now it finds itself with a high priced currency in a low valued economy. One problem not shared by their euro-wary neighbours across the Irish Sea, where a devalued sterling reflects the devalued economy that prints it.

Credit is due as Ireland has come a long way, of course. One of the poorest nations in the EU in 1986, it became one of the richest. It opened its doors, threw off the regulatory shackles and pitched for high-end foreign direct investment (FDI), successfully making the leap from agrarian backwater to self-styled ‘Smart Economy’ serving the single market.

The EU is the cornerstone of their success and ploughed in transfer payments to help them along. But Ireland made good use of its inclusion in the club in other ways. Together with a corporation tax rate of 12.5%, the country developed into a tax-privileged landing strip for multinationals launching trading sorties into the single market.

At the end of 2008, this ‘Smart Economy’ had 980 companies established, almost half from the US. The names installed reads like a who’s who of the glittering uplands of the tech revolution…with Dell, Fujitsu, Google, Hewlett Packard, Honeywell, IBM, Intel, Lucent, McAfee, Microsoft, Oracle and Yahoo amongst them. Pharma and medical instruments is another big sector and includes Abbott Laboratories, Braun, GlaxoSmithKline, Merck, Pfizer, Phillips, Ranbaxy, Reckitt Benckiser, Roche, and Wyeth.

The establishment of the International Financial Services Centre in 1987 established Ireland’s FDI appeal to the financial services sector too. It created good jobs and with a 10% corporation tax rate lured the likes of JP Morgan, Citibank, BNP Paribas and a host of other banks and insurance companies. The initial tax rate has now gone, harmonised in 2006 with the national 12.5% corporation tax rate.

All told the FDI imports have been a great success. They bring modern high-paying skilled employment together with the service companies that feed them. At the end of 2008, FDI companies employed 136,000 staff from a national workforce total of a little over 2m.

And what of home grown industry? The EIU record that Irish exports totalled $118bn in 2008. The Irish Development Agency record FDI company exports totalled $92bn. Take away FDI exports from the total and net Irish exports are €26bn. This line of thinking suggests domestic industry’s export prowess is a pygmy in comparison. The Irish Development Agency, which spearheads FDI in Ireland, adds to this conviction when it voiced its opinion in a press statement in September:

“One of the most serious, if rarely discussed weaknesses of the Irish economy, was and is the poor performance of home-grown businesses. Although there have been some real successes which give reason for optimism over the medium to long term, indigenous industry is not only weak, it is falling further behind its competitors as measured by the most broad-ranging and important indicator - exports.”

Look around the local Irish businesses and it’s more a legacy economy than a smart one that resonates. Ireland’s stock market in equities boasts a modest 83 main market listings, strip out the exchange traded funds and there are 50-plus companies. Cast your eye down the names and it’s the less cutting edge activities of natural resources, banks, insurers, Fyffes banana business and Waterford Wedgwood’s bone china, that catch the eye.

Ireland has some entrepreneurial buccaneers. Gobby airline boss Michael O’Leary for one, who has successfully built up Ryanair, but all in, unlike Irish culture, business treads a light footprint internationally. The government recognises the issue and is encouraging home grown prosperity. Money is pumped into higher education and Enterprise Ireland promotes Irish exports in the EU. There’s plenty of work to do. This is where Ireland really needs a tiger for its economy.

Nobel economist and New York Times columnist, Paul Krugman said of Ireland in April 2009:

“As far as responding to the recession goes, Ireland appears to be really, truly without options, other than to hope for an export-led recovery if and when the rest of the world bounces back.”

With the economic clouds lifting, the chances are that is already probably happening. But Ireland’s interest in it rests predominantly with the 75% plus of exports generated by their FDI imports.

The Irish government now treads a fine line. Desperate for tax revenue it knows that if it upsets the FDI, it walks. Dell’s announcement to close its manufacturing operation in Limerick in January in favour of EU newer boy Poland was a reminder that the roots of some FDI are only as deep as the commercial advantages that justify residence. It took 1,900 jobs with it leaving a significant hole in a small economy. Globalised commercial decisions with brutal local impact can be signed off in boardrooms a continent away.

So not without good cause is the government resolutely clinging to the 12.5% corporation tax rate, while seeking to tax the pants off everything else and trying to expand a relatively narrow tax base.

In normal times, Ireland has a budget each December and runs a calendar tax year. As we know too well, 2008 was abnormal. The banks had to be bailed out and Anglo-Irish Bank was nationalised. By the end of the year the government knew (and the IMF made clear) they were in the deepest doo and in April 2009 enacted an emergency budget…up went taxes again, down came spending.

Minister of Finance Brian Lenihan commented at the time that tax revenues had effectively fallen off a cliff: from €47bn in 2007, to an estimated €34bn in 2009. The government’s own forecast for net spending in 2009 weighed in at €57bn. With a few adjustments here and there they reckoned they would be €18bn short for the year…and another €18bn short next year…a further €15bn in 2011 and another €10bn in 2012. Oh, and another €5bn in 2013. Mr Micawber would be apoplectic.

In passing it’s worth noting that once meagre welfare benefits have more than doubled in the past decade. The state pension for one is up from €113 to €230pw. Welfare was spared that time though an axe fell on other public spending, namely salaries and pensions in the public sector. Amongst the measures a new income tax, introduced in January, was doubled in May.

So how is the fiscal medicine working?

The early signs aren’t encouraging. A recent update reckons tax revenues will be nearer €32bn than €34bn. The shortfall was blamed on the halving of those paying top rate income tax (41%) and wage cuts removing some of the lower paid from tax altogether. Cue the deficit for the year to October is now estimated at €22.7bn as of 3 November. With a couple of months still to go in the current financial year, this is one to watch…a ballooning deficit count in real time.

A factor that wasn’t mentioned but casts something of a dark shadow in the Irish psyche, not to mention a huge headache for its policymakers, is emigration. Between 1995 and 2007, Ireland received net migration into the country. The tide turned in 2008 when a small net outflow was recorded, a little under 8,000 souls; amongst them East Europeans returning home now the party’s over.

The question is: will Ireland’s own, more ambitious youth stick around to help pay the debts of their elders? Debts that include a mountainous €54bn “bad bank” scheme to foist bum property deals on the taxpayer. (This is the game we heard about: privatised profits and socialised losses.)

As the economy goes backwards (forecast to shrink around 14% by 2010) and unemployment soars – up from 5% at the turn of the year to around 12.5% in October - a recent report suggests they are increasingly voting with their feet. Attracting rather than losing young talent is a priority in many ways not least demographically, where Ireland shares the concerns of most of the developed world. 34% of the population may be under 25 today but tomorrow anticpates challenges from an ageing population and extended life expectancies. For every resident of pensionable age there were six of working age to support them in 2006, that ratio is forecast to drop to less than two by 2050.

When state coffers run down, the borrowing goes up. For many years Ireland had successfully reduced their debt as a proportion of national income. Suffice to say that trend came to an abrupt end in 2008 as the credit crunch wrecking ball smashed into the house of Ireland.

National debt jumped from €38bn in 2007 to €50bn in 2008. Already this year a busy National Treasury Management Agency, had by October added another €34bn. This is well ahead of the €25bn government target as it happens, so confounding doubters who questioned whether there would be sufficient takers. To date, borrowing to plug the gap has been the easy part. Tapping and holding on to the tax base is proving more tricky. And as I publish today, the Irish Times reports a union-backed rally in Dublin today where “tens of thousands” are expected to protest government budget measures.

Ireland doubtless makes a remarkable study for economic transition. It has played its EU club card well. The supranational body has given it a pass into the single market, fed it with cash, tolerated its tax competition and provided credibility for an otherwise incredible bank bailout. Not without reason did they vote yes to Lisbon, even if it was at the second time of asking. But take away the construction and the FDI and what have you got?

I sign off with a completely disconnected thought. A few melancholy few lines from occultist, hermetic and Nobel prize- winning Irish poet, W B Yeats, which I chanced on during a recent visit to Dublin. I love it:

Come away, O human child!

To the waters and the wild

With a faery hand in hand

For the world is more full of weeping than you can understand

The Stolen Child

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