Thursday, March 29, 2012

29/3/2012: China's Banking Sector Analysis

A very revealing paper on Chinese banking sector - link here. A lengthy summary of some points:

The study describes "aggregate developments of the sector and compare them to the situation in other countries. ...Our results confirm that the Chinese banking sector is truly in a class of its own, especially given the level of China’s economic development. Despite significant reforms, the state and various public organizations still own controlling shares in the largest commercial banks. The state is also present on the borrowers’ side; it is estimated that about half of state-owned commercial bank lending still goes to state-controlled companies." [Note: this induces rather unique risk into China's banking sector - the risk of losses on both sides of the transaction and also quality risk to banks assets, as state-owned enterprises in China tend to be higher risk]. 

Furthermore: "More than 90% of total banking sector assets are state-owned in China (Economist, 2010), while Vernikov (2009) puts the corresponding figure for Russia at 56%. In general, reforms in the Chinese banking sector have lagged relative to other sectors of the economy."

Thus, "Chinese policy has striking parallels to the Russian experience; there has never been a major effort to privatize banking and banks today continue to be directly or indirectly controlled by the state or public institutions." Except, in Russian case, there are far fewer state enterprises and once controlled for extraction sector enterprises [less subject to traditional risks], there are even fewer state-controlled enterprises links to state-controlled banks of the lender/borrower relations side. Furthermore, "the lack of capital controls, of course, means that Russians have greater freedom in choosing providers of their financial services."

"Despite listing and the presence of foreign investors, all the large commercial banks are still majority state-owned. The share of state and state-owned entities at the end of 2010 was 83.1% in ABC, 70.7 % in ICBC, 67.8 % in BOC, and 60.1 % in CCB. The corresponding number for the Bank of Communications was 32.4 %"

"In this way, the banking system can serve as an important policy tool. (see below)

"Another distinctive feature of the Chinese banking sector is the variety of its banking institutions. New types of banking institutions, especially those serving rural areas, are emerging all the time. While equity and debt markets are still tiny relative to the banking sector and their importance as sources of financing of investment remain minor, they have evolved rapidly in recent years."

Some interesting facts: "The government’s stimulus efforts to avoid recession in 2009 resulted in a massive spike in bank lending that increased the consolidated banking sector balance sheet by approximately a third. Rather than pull back, bank lending went on to expand an additional 20 % in 2010. Lending outside the banking sector’s balance sheet has also grown strongly (García-Herrero and Santabarbara, 2011). These lending trends in themselves should be sufficient to raise concerns about the quality of bank loan portfolios and the need to curtail growth of bank lending in coming years..."

"Bank loans are the most important source of external funding for the non-financial sector in China. They accounted for 75% of all external funding sources at the end of 2010, and exceeded 80% during the crisis years of 2008 and 2009 when other external sources were difficult to obtain. As we saw in early 2009, the Chinese authorities can turn to bank lending as a policy tool when the need arises."

The unbalanced nature of Chinese banking translates into significant concentration of State power in lending: "Bank lending grew between 2006 and 2010 at the average rate of 20% a year, thanks in part to the government stimulus program in the face of the global economic re- cession. Loans to non-financial companies accounted for around 70% of new loans. State- owned commercial banks (SOCBs), traditionally the biggest loan providers, accounted for 43% of all new loans issued in 2009 (their share was 51% in 2001). SOCBs accounted for about half of the total banking sector loan stock at the end of 2010. This proportion corresponds to their share in total sector assets."

And more: "Even though the Chinese banking sector is huge for a middle-income nation, bank lending is heavily skewed to state-owned companies. Allen et al. (2008) note that the size of China’s banking system, in terms of total bank credit to non-state sectors, was 31% of GDP in 2005. This figure is not too different from the average of other major emerging economies with a weighted average of 32% of GDP. Looking at total bank credit, including loans to state sectors, the ratio of China’s bank credit to GDP rises to 110% − a level higher than even in countries with German-origin legal systems (weighted average 106%). The difference between total bank credit and private credit suggests that most of the bank credit is issued to companies that are ultimately owned by the state. Also Okazaki et al. (2011) report that bank lending in the recent years has mostly gone to large SOEs. In 2009, about 50% of SOCB loans were extended to large SOEs. Private enterprises received some 14% of total lending provided by the banking sector."

29/3/2012: Promissory Note 'deal' 2012

Trying to sort out the convoluted 'deal' announced by the Minister today and juggle two kids, plus struggle against the computer on a strike from too many files open is a challenge. I might be missing something, but here's my understanding of the thing.

  1. €3.06bn will be delivered not i cash, but in a long-term Government bond of the equivalent fair value
  2. We do not know maturity, but 2025 was mentioned before. Ditto for coupon rate, though Prof Honohan mentioned 5.4% coupon.
  3. Current pricing in around 88% of the FV, so €3.06*0.88=€3.47bn issuance to deliver fair value. If average  over longer term horizon is taken - that would go up. If yield is higher - that will go up. It is unclear what fees will be involved as the transaction is complicated (see following).
  4. As is - at current market pricing, there will be an increase in Government debt of roughly €410 million, plus the cost of transactions.
  5. As described above, and as indicated by Minister Noonan, Government deficit will increase by €90mln (approximately: 5.40%*410mln=€22mln plus margin on Government bond yield over interest rate holiday under Promo Notes in 2012).
  6. IBRC will receive the bonds and will repo them to Bank of Ireland on a 1 year deal. In other words, Bank of Ireland will buy the bond from IBRC then put it into ECB repo operations. LTRO being now closed, this will have to be normal repo with ECB. Bank of Ireland will repo IBRC-owned Government bond at ECB Repo rate (1%) + 1.35% margin. In effect, margin is the gross profit to the Bank of Ireland on this transaction.
  7. Before Bank of Ireland formally approves the transaction, bond will be financed by NAMA against IBRC collateral (now, imagine that - NAMA holds IBRC's assets and has a working relationship with IBRC. IBRC has no collateral that is equivalent to Government bonds - hence it cannot repo anything at ECB. So by definition, the collateralized pool backing NAMA-IBRC repo will have to be stretched). A year later, BofI might reconsider and roll the deal, but one has to assume that the margin will remain either fixed or go up, plus whatever the repo rate will be then?
  8. NAMA, as far as I understand, has no mandate to carry any of these operations, thus potentially acting outside its legal mandate.
  9. Minister for Finance will guarantee the entire set of transactions, including Bank of Ireland exposure. In effect, Minister will guarantee Government bonds (which is silly), collateral from IBRC, NAMA exposure, Bank of Ireland exposure and so on.
  10. NAMA will use own cash to finance the bridging transaction.
  11. Having received the funds from the repo, IBRC will remit these to (€3.06bn) to the CBofI to cancel corresponding amount in ELA.
  12. Has Net Present Value of the debt been altered? We do not know. We need to have exact data on bond maturity and the coupon rate, plus on overall profile of the rest of the notes to make any judgement here. Any change in the NPV under the above outline (1-5) is immaterial. 
  13. The positive factor of so-called 'more flexible fiscal buffer' is a red herring, in my view. The idea is that we are 'saving' cash allocation of €3.06bn this year, making it 'available' for borrowing in 2013. This is rather stretching the reality - the 'cushion' has been pre-provided to us by the Troika deal and is specific to the Promissory Notes. There is no indication that it can be used for any other purposes. Even if it were to be used for any other purpose, it would be an addition to the bond issued, so our debt will increase by the amount we use from the 'cushion'. Furthermore, the deal runs out in 2013 and thereafter no 'cushion' is available. So on the net, we have just paid 400mln increase in debt, plus 90mln in deficit to buy ourselves an 'insurance' policy that should we need 3bn in 2013, we will be able to ask for it from the kindness of the EU and have it for no longer than a year. That's pretty damn expensive insurance policy.
  14. The negative factor is that we now have almost 3.5bn worth of extra debt that is senior to the promissory notes it replaced and once it is repoed at the ECB it will be senior to ELA exposure. 
  15. Furthermore, this debt is in the form of Government bonds. So suppose we want to return to the debt markets in 2014. We have higher stock / supply of Government bonds (albeit 3.47bn isn't much - just a few percentage points increase) that markets will price in. Higher supply, ceteris paribus, means lower price, higher yield on bonds we are to issue in 2014. 
  16. Minister Noonan and a number of other Government parties' members have mentioned 'jobs creation' capacity expansion as the result of this deal. The only way, in theory, this deal can lead any jobs creation is if the Government were to use €3.1bn allocation available for Promo Notes under the Troika deal for some sort of public spending programme. Which, of course, means our debt will increase by the very same amount used.
Brian Hayes on Today FM described the 'deal' (H/T to Prof Karl Whelan) as 'A creative piece of financial engineering.' Presume safely that Brian Hayes has a firm idea that this description is a 'net positive' for the Government.

Following the announcement by the Minister, there were no questions allowed by Dail members and the Minister moved on to the really important stuff - straight to press briefing in the Department of Finance. He might have opted for the right move, however, since the Dail, without any interrruption vigorously engaged in a debate on this important topic:

On that note, the last word (for now) goes to Prof Whelan: "Ok, after exchanges with very wise @OwenCallan I have decided that this deal defers the 3.1bn payment by only one year. Worse than hoped for" (quoting a tweet).

Welcome to the wonderland of wonderlenders.


Adding to the above, it is worth postulating directly - as I have argued consistently, ELA is the only debt we can - at least in theory - restructure and promo notes are a perfect candidate for such a restructuring. By converting a part of these into Government debt we are now de fact increasing probability of a sovereign default or restructuring.

Karl Whelan has an excellent post on the 'deal' - here.

ECB statement on Ireland's 'deal' is here. This clearly states that there is no deferral of any payment on Promo Notes and that the Noonan's 'deal' is a one-off. Thank gods it is - because at a cost of €400mln in added debt, plus €90mln in deficit, repeating this exercise in PR spin would be pretty expensive.

Update 30/03/2012:

Today Irish Times is reporting that:

"Minister for Finance Michael Noonan said the big benefit was the money would not have to be borrowed to pay this year’s instalment on the promissory notes, the State IOUs paying for the bailouts."

A truly extraordinary statement, given the state will borrow the money (some €410mln more in principal and €90 mln more in interest than actually it had to borrow) using a Government bond to pay said IOU!

The Irish Times headline reads: "Government wins backing on €3.06bn payment". Yet there is no any 'backing' from anyone on this deal, because the deal does not change the payment itself. Read the above-linked ECB statement on the 'deal'.

In another extraordinary statement, the Irish Times (this is their own claim) says: "Further talks on a long-term deal on the remaining repayments as part of a wider restructuring of the banks will continue between the Government and the troika of the EU Commission, the ECB and the International Monetary Fund." Is there ANY evidence that any such negotiations are ongoing? Where is this evidence? Please, produce!

And an excellent piece from Namawinelake on the above: here.

Wednesday, March 28, 2012

28/3/2012: Sunday Times 25/3/2012 - Irish emigration curse

Below is the unedited version of my article for Sunday Times from 25/03/2012.

Last week, as Ireland and the world celebrated the St Patrick’s Day, close to fifteen hundred Irish residents, including close to a thousand of Irish nationals, have left this country. In all the celebratory public relations kitsch, no Irish official has bothered to remember those who are currently being driven out of their native and adopted homeland by the realities of our dire economic situation.

According to the latest CSO report – covering the period from 1987 through 2011, emigration from Ireland has hit a record high. In a year to April 2011 some 76,400 Irish residents have chosen to leave the country, against the previous high of 70,600 recorded in 1989. For the first time since 1990, emigration has surpassed the number of births.

Given the CSO methodology, it is highly probable that the above figures tell only a part of the story. Our official emigration statistics are based on the Quarterly National Household Survey, unlikely to cover with reasonable accuracy highly mobile and less likely to engage in official surveys younger households, especially those that moved to Ireland from East Central Europe.

For example, emigration numbers for Irish nationals rose 200% between 2008 and 2011, with steady increases recorded every year since the onset of the crisis. Over the same period of time, growth in emigration outflows of EU15 (ex-UK) nationals from Ireland peaked in 2008-2009 and halved since then. Prior to 2010, Irish nationals contributed between 0% and 10% of the total net migration numbers. By 2010 and 2011 this rose to 42% and 68% respectively. Meanwhile, the largest driver of net migration inflows prior to the crisis - EU12 states nationals - were the source of the largest emigration outflows in 2009, but their share of net outflows has fallen to 39% and 13% in 2010 and 2011 respectively. There were no corresponding shifts in Irish and non-Irish nationals’ shares on the Live Register. In other words, unemployment data for non-Nationals does not appear to collaborate the official emigration statistics, most likely reflecting some significant under-reporting of actual emigration rates for EU12 and other non-EU nationals.

There are more worrisome facts that point to a dramatic change in the migration flows in recent years. Back in 2004-2007 there were a number of boisterous reports issued by banks and stockbrokerages that claimed that Irish population and migration dynamics were driving significant and long-term sustainable growth into the Irish economy. The so-called demographic dividend, we were told, was the vote of confidence in the future of this economy, the driver of demand for property and investment, savings and consumption.

In 2006, one illustrious stockbrokerage research outfit produced the following conclusions: “The population [of Ireland] is forecast to reach 5 million in 2015… The labour force is projected to grow at an annual average 2.2% over the whole period 2005 to 2015. Combined with sustained 3% annual growth in productivity, this suggests the underlying potential real rate of growth in Irish GDP in the five years to 2010 could be close to 5.75%. Between 2011 and 2015, the potential GDP growth rate could cool down to around 5%.”

Since the onset of the crisis, however, the ‘dividend’ has turned into a loss, as I predicted back in 2006 in response to the aforementioned report publication. People tend to follow opportunities, not stick around in a hope of old-age pay-outs on having kids. In 2009, only 33% of new holders of PPS numbers were employed. Back in 2004 that number was 68%. Amazingly, only one third of those who moved to Ireland in 2004-2007 were still in employment in 2009. Almost half of those who came here in 2008 had no employment activity in the last 2 years on record (2008 and 2009) and for those who came here in 2009 the figure was two thirds.

In more simple terms, prior to the crisis, majority (up to 68%) of those who came here did so to work. Now (at least in 2009 – the last year we have official record for) only one third did the same. It is not only the gross emigration of the Nationals and Non-Nationals that is working against Ireland today. Instead, the changes in employability of Non-Nationals who continue to move into Ireland are compounding the overall cost of emigration.

In order to assess these costs, let us first consider the evidence on net emigration in excess of immigration. In every year – pre-crisis and since 2008, there were both simultaneous inflows and outflows of people to and from Ireland. In 2006, the number of people immigrating into Ireland was above the number of people emigrating from Ireland by 71,800. Last year, there was net emigration of 34,100. Between 2009 and 2011, some 76,400 more people left Ireland than moved here.

Assuming that 2004-2007 period was the period of ‘demographic dividend’, total net outflows of people from the country in the period since 2008 through 2011 compared to the pre-crisis migration trend is 203,400 people. In other words, were the ‘demographic dividend’ continued at the rates of 2004-2007 unabated through the years of the current crisis, working population addition to Ireland from net migration would have been around 2/3rds of 203,400 net migrants or roughly 136,000 people. Based on the latest average earnings of €689.54 per week, recorded in Q4 2011, and an extremely conservative value added multiplier of 2.5 times earnings, the total cost of the ‘demographic losses’ arising from emigration can be close to 8% of our GDP. And that is before we factor in substantial costs of keeping a small army of immigrants on the Live Register. Some dividend this is.

This is only the tip of an iceberg, when it comes to capturing the economic costs of emigration as the estimates above ignore some other, for now unquantifiable losses, that are still working through the system.

In recent years, Ireland experienced a small, but noticeable baby boom. In 2007-2007, the average annual number of births in Ireland stood at just below 60,000. During 2009-2011 period that number rose by almost 25%. 2011 marked the record year of births in Ireland since 1987 – at 75,100. In the environment of high unemployment, elevated birth rates can act to actually temporarily moderate overall emigration, since maternity benefits are not generally transferable from Ireland to other countries, especially the countries outside the EU. Even when these benefits do transfer with families, new host country benefits replacement may be much lower than the benefits in Ireland. Which, of course, means that a number of emigrants from Ireland can be temporarily under-reported until that time when the maternity benefits run their course and spouses reunite abroad.

Even absent the above lags and reporting errors, net migration is now running close to its historic high. In 2011, there were total net emigration of 34,100 from Ireland against 34,500 in 2010. These represent the second and the first highest rates of net emigration since 1990.

At this stage, it is pretty much irrelevant – from the policy debate point of view – whether or not emigrants are leaving this country because they are forced to do so by the jobs losses or are compelled to make such a choice because of their perceptions of the potential for having a future in Ireland. And it is wholly academic as to whether or not these people have any intentions of returning at some point in their lives. What matters is that Ireland is once again a large-scale exporter of skills, talents and productive capacity of hundreds of thousands of people. The dividend is now exhausted, replaced by a massive economic, not to mention personal, social, and political costs that come along with the Government policies that see massive scale emigration as a ‘safety valve’ and/or ‘personal choice’.



On 14th of March, Governor of the Central Bank of Ireland, Professor Honohan has told Limerick Law Society that Irish banks should be less inhibited about repossessing properties held against investment or buy-to-let mortgages. This conjecture cuts across a number of points, ranging from the capital implications of accelerated foreclosures to economic risks. However, one little known set of facts casts an even darker shadow over the banks capacity to what professor Honohan suggests they should. All of the core banking institutions in the country currently run large scale undertakings relating to covered bonds and securitizations they issued prior to 2008 crisis. Since 2008, the combination of falling credit ratings for the banks and accumulation of arrears in the mortgages accounts has meant that the banks were forced to increase the collateral held in the asset pools that back the bonds. In the case of just one Irish bank this over-collateralization increased by 60% in the last 4 years. This is done in order to increase security of the Covered Bond pool for the benefit of the Bondholders and is achieved by transferring additional mortgages into the pool. In just one year to December 2011, the said bank transferred over 26,000 new mortgages into one such pool. As the result of this, the bank can face restrictions and/or additional costs were it to foreclose on the mortgages within the pool. Things are even worse than that. In many cases, banks now hold mortgages that had their principal value pledged as a collateral in one vehicle while interest payments they generate has been collateralized through a separate vehicle. The mortgage itself can potentially even be double-collateralized into the security pool as described above. The big questions for the Central Bank in this context are: 1) Can the banks legally foreclose on such loans? and 2) Do the banks have sufficient capital and new collateral to cover the shortfalls arising from foreclosing mortgages without undermining Covered Bonds security?

Tuesday, March 27, 2012

27/3/2012: One song, two charts... oh, dear

So long and thanks for all the fish
So sad that it should come to this
We tried to warn you all but oh dear

You may not share our intellect
Which might explain your disrespect
For all the natural wonders that
grow around you

So long, so long and thanks
for all the fish...


Do spot that Bank of Ireland name in the above.

via FTAlphaville today's suckers are European taxpayers and economies as the 'dolphin' of Irish banking are stuck in high gear shifting ELA funding for ECB funding. And don't forget that IL&P too dipped in for a cool 2bn (here).And that, of course is translating into the brilliant 'reduction' in Irish banks ELA debts as detailed in the chart here (H/T to AD).

A game of shells big enough to:

The world's about to be destroyed
There's no point getting all annoyed
Lie back and let the planet dissolve
Around you...

Well, may be not the world, but enough to toast Irish economy.

27/3/2012: Two Sovereign Debt Crisis charts

Two interesting charts on the fundamental sources of risks relating to sovereign crises of the 2009-present. No comment needed, really...

Monday, March 26, 2012

26/3/2012: Residential Property in Ireland - things are still getting worse, faster

Residential Property Price Index for February is out today and, surprise, the property price deflation is accelerating.


  • All properties headline index now stands at 66.1 down from 67.6 in January 2012 and 80.4 in February 2011. So mom contraction of 2.22% in February 2012 makes this the fastest rate of monthly decline since March 2009 and the third fastest rate of monthly decline in history. Relative to peak, residential property price index is now down 49.35%. 12mo MA of monthly declines is at 1.62% and January-February average is at 2.05%. Year on year index is down 17.79%. Which is what it says on the tin - third month of accelerating declines in prices in a row.
  • House prices sub-index is now at 69.0 against January 2012 reading of 70.4 and February 2011 reading of 83.5. Monthly rate of decline in February was 1.99% - steeper than anything recorded since October 2011, marking third consecutive month of accelerating monthly drops. Year on year, the index is down 17.37%. Compared to peak valuations, house prices index is now 47.73% down. Year-to-date average monthly drop is 1.90% against 12 mo MA decline of 1.58%. Again, house prices are dropping at an accelerated rate now as well.
  • Apartments sub-index has reversed two months of consecutive shallow gains in November -December 2011 and run a 4.30% contraction inJanuary 2012. February 2012 monthly drop was even larger at 5.47%. The sub-index now reads 48.4 against February 2011 reading of 63.5. Year on year February apartments prices index stood at -23.78%. 12mo MA decline is 2.06% and this has dramatically accelerated to January-February average of 4.88% monthly rate of price declines.
  • Dublin properties prices sub-index was at 57.6 in February 2012, down 1.2% on January 2012 and down 20.33% on February 2011. This is the only major sub-index that posted de-acceleration in monthly contraction rates. 12mo MA contraction rate is 1.87% and January-February average is 2.58%, but January mom decline was 3.95% against 1.20% drop in February.
Charts to illustrate:

Note: no update to my forecasts.

Nama valuations:

26/3/2012: QNA Q4 2011 - Part 6

In the first post on QNA results for 2011 I covered data for annual GDP and GNP in constant prices terms. The second post focused on GDP/GNP gap and the cost of the ongoing Great Recession on the potential GDP and GNP. The third post focused on quarterly sectoral decomposition of GDP and GNP in constant prices terms. And a short digression from QNA results here showed how difficult it is, really, to reach any consensus on some of Ireland's economic performance parameters. Following these, Part 4 of QNA analysis focused on nominal (current prices) quarterly data. Part 5 of the analysis focused on decline in capital investment in Ireland during the crisis.

In this, last, post onQNA results for 2011, I will focus on the idea of the 'exports-led' recovery.

We are all familiar with the thesis that exports will drive this economy out of the recession. This has been the leitmotif of the Irish Governments since 2008 and it remains to be the core conjecture still. And there are some reasonable logical grounds for believing this proposition:

  • In real terms, Irish exports of goods and services have posted a spectacular run up since the beginning of the Crisis, rising from €142.03bn in 2006 to €161.47bn in 2011. Year on year exports grew 4.11% in 2011 and that follows on 6.31% growth in 2010.Compared to 2007 total exports in constatant prices terms stood at €7,491mln higher (an uplift of 4.86%). This increase can be broken into €4,987 million uplift in exports of services and €2,504 mln uplift in exports of goods.
  • Adding to the strength of exports impact on GDP and GNP, imports collapsed. Total imports fell to €123.45bn in 2011, down 0.7% yoy after rising 2.7% in 2010. Imports of goods and services are now down 10.23% on 2007 levels - a saving, in terms of national accounts - of €14,075mln on 2007 (broken down to a reduction in goods imports of €19,623mln and increase of €5,549mln in services imports).
  • Trade balance has been going from strength to strength on the back of divergent swings in exports and imports. In 2011 our trade balance was €38,027mln in real terms (composed of €41,671mln surplus on goods side and a deficit of €3,644mln on services side). This is more than three times the trade surplus achieved in 2006 and is 131% ahead of the 2007 levels of trade surplus. Compared to 2007, our trade surplus is now €21,566 mln higher (composed of an increase in trade surplus on goods side of €22,127mln and a deterioration in trade deficit on services side of €562mln).
Alas, of course, as noted in the previous posts, much of these surpluses and exports are due to transfer pricing and outflows of factor payments to the rest of the world have been rampant. Net factor income (in constant prices terms) outflows to the rest of the world from Ireland have reached €33,824mln in 2011, up 18.62% on 2007 levels.

In reality, of course, whatever one says about trade performance, international trade, once we net out imports of intermediate inputs into exports production and transfers abroad as a payment of profits by the multinationals, is by far not as huge as the Government would love to claim. And international trade-supported employment is also relatively small. Pair that with the fact that our economy had experienced a massive collapse of domestic activity and you get the picture: there will be no recovery from the crisis unless domestic economy regains growth momentum.

But here's a more worrisome picture, folks:

It turns out that there is zero statistical relationship between levels of exports and GDP and GNP growth, while there is (as a check on data) strong relationship between exports and imports. More worryingly: higher exports are associated with lower GDP and GNP (albeit there is no, as I said, statistical significance).

How can that be, you ask? Simples: if you think of it, higher exports are delivered primarily by the MNCs operating in Ireland. And during the crisis this delivery has been associated with:
  • Virtually no net jobs creation and falling earnings (IDA brags about the latter as a 'positive' sign of improved competitiveness) - which means that employment & personal spending & household investment effects of record exports is negligible (if not negative)
  • Virtually no new investment (or at least not enough new FDI to offset massive collapse in investment described in the previous post) - which means that gross fixed capital formation part of GDP and GNP is out as well
  • Massive profits repatriation and transfer pricing - which means that Irish economy has only a tiny (less than corporate tax rate-sized) claim on these record exports (corporate tax revenues are not booming, are they?)
Where would the huge links between economic well-being and exports, required to compensate for steep declines in domestic spending and investment activities, come from, then?

Now, don't take me wrong - exports do provide huge support for our economy and real benefits and jobs. I wrote about this time and again. But these are not nearly enough to keep this economy afloat. What Ireland needs to get out of this mess are - very broadly speaking - two sets of outcomes:
  1. Most important short-term - restoration of domestic economic activity (especially starting with domestic investment)
  2. Most important longer-term - diversification of our exports base away from the MNCs toward domestic exporters.
In both - Irish policies are currently failing us and record-busting exports as we know them today are not providing the rescue vehicle we require.

26/3/2012: QNA Q4 2011 - Part 5

In the first post on QNA results for 2011 I covered data for annual GDP and GNP in constant prices terms. The second post focused on GDP/GNP gap and the cost of the ongoing Great Recession on the potential GDP and GNP. The third post focused on quarterly sectoral decomposition of GDP and GNP in constant prices terms. And a short digression from QNA results here showed how difficult it is, really, to reach any consensus on some of Ireland's economic performance parameters. Following these, Part 4 of QNA analysis focused on nominal (current prices) quarterly data. 

In this and subsequent posts I will provide some brief snapshots of specific points of interest arising from the QNA data. This post will focus on capital investment decline during the crisis.

As chart above clearly shows, in real terms (controlling for inflation):

  • Gross fixed capital formation stood at €16,924 million in 2011, which was 10.87% below the levels of gross investment in 2010 and 57.17% below the levels of investment at the peak of pre-crisis activity in 2007.
  • Cumulated gross fixed capital investment in the ten years of 2001-2010 was €311,111mln, which at 8% annual amortization & depreciation rate implies demand for €24,889mln in gross financing to maintain. Thus gross fixed capital formation came in some €7,965mln short of amortization & depreciation requirements of the economy.
  • Current level of gross fixed capital formation is consistent with €16,852mln attained in 1996 - remember, these are in constant prices.

In current market prices terms, Gross fixed capital formation in Q4 2011 was 1.9% below that in Q4 2010 and 66.8% below Q4 2007 levels. In Q3 2011, capital investment was down 18.3% yoy.

These figures show that Irish economy is equivalent to a body that consumes itself. It also shows that the alleged 'huge FDI inflows' are not sufficient to offset for domestic capital investment collapse.

26/3/2012: QNA Q4 2011 - Part 4

In the first post on QNA results for 2011 I covered data for annual GDP and GNP in constant prices terms. The second post focused on GDP/GNP gap and the cost of the ongoing Great Recession on the potential GDP and GNP. The third post focused on quarterly sectoral decomposition of GDP and GNP in constant prices terms. And a short digression from QNA results here showed how difficult it is, really, to reach any consensus on some of Ireland's economic performance parameters.

In this post, let's consider the decomposition of the GDP and GNP on the basis of expenditure lines, as measured in current market prices.

Headline numbers:

  • In Q4 2011 personal consumption of goods and services rose 0.9% qoq to €20,319mln, but declined 0.8% yoy. Compared with the same period of 2007 personal consumption is now dow 15.3%. YOY -0.8% contraction in Q4 2011 followed on 2.96% contraction in Q3 2011. In Q4 2011 personal consumption accounted for 52.45% of quarterly GDP, this is actually higher than the share of GDPit took in Q4 2007 (49.89%) - so much for 'unsustainable consumption binge' back at the peak of the Celtic Tiger period.
  • Q4 2011 net expenditure by central and local government stood at €5,991mln which was 5.1% down qoq and down 8.1% yoy. This follows on 2.32% contraction in yoy terms in Q3 2011. Relative to Q4 2007 net expenditure by central and local government now stands at -17.1%. However, the share of net government expenditure in overall GDP rose from 15.04% in Q4 2007 to 15.46% in Q4 2011.
  • Gross domestic capital formation at Q4 2011 stood at €3,923mln which was up 12.7% qoq, but down 1.9% yoy and the annual decline in Q4 2011 came in after an 18.3% contraction in Q3 2011. Fixed capital formation was down 66.8% in Q4 2011 compared to Q4 2007. In Q4 2007 gross fixed capital formation accounted for 24.56% of GDP, while inQ4 2011 this share fell to 10.13%.
Chart below illustrates the above changes

  • Exports of goods and services hit another historic record at €41,766mln in Q4 2011 - a rise of 0.4% qoq and 6.2% yoy. In Q3 2011 exports rose 1.7% yoy. Q4 2011 exports were 8.3% ahead of Q4 2007 and if in 2007 exports accounted for 80.24% of our GDP, in Q4 2011 this share was 107.8% of quarterly GDP. This is a remarkable performance.
  • Imports rose 0.4% in qoq terms to €332,904mln in Q4 2011. Q4 2011 imports are up also 0.4% yoy and this follows on a 0.35% contraction in Q3 2011. Relative to Q4 2007 imports are down 5.2%. Back in Q4 2007 imports stood at the level of 72.23% of quarterly GDP. In Q4 2011 this share was 84.93%.
  • Net trade surplus hit a record of €8,862mln - third consecutive quarterly record and third consecutive quarter with trade surpluses in excess of €8 billion. Trade surplus was up 0.3% qoq and 34.8% up yoy inQ4 2011, which comes on foot of a 10.60% yoy increase inQ3 2011. Stellar performance. In Q4 2011 trade surplus was 22.88% of GDP and this is up from 8.01% of Q4 2007 GDP. Compared to Q4 2007 trade surplus in Q4 2011 rose massive 130.2%.
  • Once again, trade figures confirm the simple reality that exports-led growth is not capable of sustaining economic recovery. Average quarterly trade surplus in 2007 stood at €4,295mln and 2005-2007 average quarterly trade surplus was €4,467mln. In 2009 average quarterly trade surplus rose to €6,234mln, followed by €7,467mln in 2010 and €8,408mln in 2011. In other words, Ireland experienced a massive exports boom for the last 3 years in a row, and yet we are continuing to remain in a recession.

  • GDP at current market prices stood at €38,743 in Q4 2011 which is 0.9 below Q3 2011, marking the second consecutive qoq decline, which is consistent with Ireland officially entering a new recession. 
  • GDP actually rose in yoy terms by 3.4% inQ4 2011 which comes on foot of a 0.79% contraction in Q3 2011. relative to Q4 2007, GDP in current market prices is now down 19.4%.
  • Net factor income from the rest of the world rose 10.8% qoq to -€9,017mln, which marks the first quarter since Q1 2010 when outflows of payments abroad exceeded trade surplus. This attests to the extreme levels of transfer pricing deployed by the MNCs in the Irish economy. Net factor income losses in Irish economy in Q4 2011 were up65.3% year on year, following a 19.5% rise in yoy terms in Q3 2011. Transfer payments abroad rose 28.3 on Q4 2007. Overall, an equivalent of some 23.27% of Irish GDP was paid out in factor payments to foreigners in Q4 2011 which is up from 14.62% in Q4 2007.
  • As the result, GNP fell to €30,051mln in Q4 2011 down 2.8% qoq marking the fifth consecutive quarter of qoq declines. Yoy, GNP in current market prices was down a massive 5.4% in Q4 2011 which comes on foot of an equally large 5.16% contraction in Q3 2011. These figures reflect deep recession continuing to ravage the Irish economy. It is incorrect to attribute the entire GNP to solely domestic activity as it includes net exports (trade balance) activity that is not expatriated abroad.
  • Overall, Irish GNP in current market price in Q4 2011 stood at 26.5% below the levels attained in Q4 2007. This means that more than 1/4 of the overall domestic and non-transfer pricing MNCs' activity has been wiped off the Irish national accounts during the current crisis.

The chart below highlights the evolution of transfers abroad relative to GDP, GNP and to trade balance. Transfers of income to the rest of the world from ireland has hit 101.75% of the trade surplus in Q4 2011 - rising above 100% for the first times since Q1 2010 when it stood at 101.80%. We are still well behind the levels of 2005-2009 when it averaged 138.74%. Which, given the negative sign with which transfers of income abroad enter the national accounts means that we have loads of room more for reductions in GNP on the back of 'exports recovery'.

Sunday, March 25, 2012

25/3/2012: Irish GDP and Structural Deficits - forecasting unpredictable?

The pitfalls of forecasting Irish GDP and structural deficit in handy charts...

First - the range of forecasts and outruns for annual GDP growth in constant prices:

Not only the range of forecasts is wide (exclude the 2008-2009 period for obvious reasons), but what is worse is that there is virtually no agreement within the WEO database on past rates of growth. For example, take year 2000:
  • WEO September 2011 claims 2000 saw growth of 9.298%
  • WEO April 2011 and September 2010 state it was 9.665%
  • WEO April 2010 and October 2009 claimed it was 9.447%
  • WEO April 2009 and October 2008 set it at 9.237%
  • WEO April 2008 at 9.15%
  • WEOOctober 2007 at 9.1%
  • WEOApril 2007 reported it to be 9.4%
  • WEOOctober 2006 and April 2006 showed 9.2%
So which is the real growth rate, then? And how long do we need to wait to confirm it? Of course, much of the above is due to referencing to different prices bases - in other words, inflation 'target' changes' but you do get the point - even past rates are changing over time, implying the difficulty of actually comparing past performance.

Meanwhile, the range of forecasts is outright massively all over the place. Take this year forecasts (and we exclude the fact that between WEO database releases twice a year, we have intermediate updated forecasts published in separate documents without actually updating the database. So back in 2009 the IMF predicted 2012 rate of growth to be 2.325% to 2.337% (April-October versions). By April 2010 it was 2.306% and by October 2010 it was 2.446%. InApril 2011 the forecast for 2012 was revised to 1.908% and in September 2011 it was revised to 1.484%. So much for planning: the range over just 1.5 years is 2.446% to 1.484%.

Structural deficits - the reverse is true. Forecasts are tighter (as potential GDP assumes away cyclical effects) and outrun estimates are all over the place instead:

There is also a strangely strong correlation between conservative estimates of the structural deficits and the average estimates of the structural deficit and the IMF reported and forecast GDP growth rates. In other words, the models used by the IMF appear to produce more consistent lower end deficit estimates.

Which, of course, begs a question. You see, per IMF, Ireland's structural deficits were on average and at the minimum levels strongly outside the fiscal sustainability in 2000-2006 and well outside the Fiscal Compact bound of -0.5%. Over the same period of time, EUCommission reported structural deficits were actually within the parameter bounds for Fiscal Compact. Given that the IMF min and average estimates closely reflect the growth estimates and reported outruns, it appears that the IMF metric is probably a more reasonable reflection of the fiscal realities than that of the EUCommission.

Which is not exactly the great news for the Fiscal Compact as far as the treaty expected ability to achieve any real impact on fiscal discipline goes.

25/3/2012: QNA Q4 2011 - Part 3

In part 1 of the QNA analysis we covered annual results for annual GDP and GNP in constant prices terms. Part 2 analysis focused on GDP/GNP gap and losses in national income compared to pre-crisis trend. Here, we cover some quarterly trends for GDP and GNP based on constant prices data.

Let's consider changes by sector:

  • Agriculture, forestry and fishing sector output fell 5.1% yoy in Q4 2011 following a 9.34% rise yoy in Q3 2011. In Q4 2011 the sector accounted for just 1.26% of the total quarterly GDP. Compared to Q4 2007 the sector output is now down 6.0%.
  • Industry output rose 2.3% yoy in Q4 2011 after rising 6.25% in Q3 2011. The sector is now accounting for 28.34% of the quarterly domestic output. Sector output is now down 3.3% when compared against Q4 2007.
  • Building & Construction sub-sector of Industry sector posted yoy decline of 6.7% inQ4 2011 that follows on 39.32% drop in Q3 2011. The sub-sector is now accounting for just 2.62% of total output and is down 55.0% on Q4 2007.
  • Distribution transport and communications sector shrunk 0.6% yoy in Q4 2011 which follows 4.99% drop in Q3 2011. The sector accounts for 13.23% of total output and is down 17.3% on Q4 2007.
  • Public administration and defence sector shrunk 3.8% yoy in Q4 2011 which follows on a 6.53% contraction in Q3 2011. The sector now accounts for 3.58% of the domestic output and is down 6.5% on Q4 2007.
  • Other services including rents output contracted 3.1% yoy in Q4 2011 following on a 5.14% contraction in Q3 2011. The sector accounts for 42.37% of the economy and is down 12.5% on Q4 2007.
  • As the result of this, GDPat constant factor cost expanded in Q4 2011 by 1.1% yoy and this follows on a rise of 0.88% in Q3 2011. This metric of domestic output is now dow 10.6% on Q4 2007.
  • Taxes net of subsidies are down 2.3% yoy in Q4 2011 and this follows a 2.76% drop in Q3 2011. This accounts for 9.70% of GDP and the category is now down 30.0% compared to Q4 2007.
  • Headline GDP at constant market prices rose 0.7% yoy after expanding 0.52% in Q3 2011. The GDP at constant prices in Q4 2011 was 12.8 below that in Q4 2007.
  • Net factor income from the rest of the world (aka largely transfer pricing net of receipts by Irish corporates and individuals on their foreign investments) grew 59.9% yoy in Q4 2011 which follows on 7.41% growth in Q3 2007. These transfers now account for 18.51% of our GDP and were running 10.0% ahead of the levels recorded in Q4 2007.
  • Headline GNP in constant prices in Q4 2011 fell 7.1% yoy following a 1.18% contraction in Q3 2011. National income in constant prices is now 16.6% below that attained in Q4 2007.
  • GDP/GNP gap stood at 18.51% in Q4 2011 slightly down on 20.18% in Q3 2011.

More sectoral analysis to follow in the next post.