17/12/2011: The Plan and a Pie

Yes, yes, folks, I know, we have a plan. It's the plan to pay our debts (well, at least Government debts) from our 'exports-led growth'. We even had foreign experts telling us that we can do it - coming down from the Continent with lectures full of graphs and sums.

In reality, of course, the plan is a porky. We have booming trade in goods which is slowing down on growth rates, but remains pretty healthy. We have trade in services - that is not reported by the CSO in monthly series. That is in a deficit. Then there are other so-called 'invisibles' that are negative as well (see below). On the net, in 2010, our 'external surplus' measured by trade alone, including the invisibles (current account) was just €761mln. But then we have to add capital account - the inflows and outflows of capital - and that gives us the full external surplus - the Balance of payments bit - of a whooping debt-busting... €88 million.

Let's run through those figures... shall we?

Merchandise trade balance in Q3 2011 stood at €9,862mln or 6.9% ahead of Q2. Year on year, however, trade in goods shrunk 1.02% and for the first 9 months of 2011, trade balance in goods was 2.78% behind the same period of 2010. In other words, not a spectacular development so far in our strongest exporting sector. Certainly not what we would expect if we were to reach that 4.3-5.8 targets various Government documents set out for exports growth in 2011.

Services trade balance shows a deficit as of Q3 2011 at €379mln. The encouraging thing is that this is falling, and falling rapidly. But income flows abroad and current transfers abroad are running high at €8,170mln and €463mln respectively. This means total invisibles balance is in a deep deficit of €9,012mln in Q3 2011, improved by €700 mln on Q2 2011, but worse than same period 2010 by €227mln.

Adding up trade balance in goods and invisibles yields current account surplus of €850mln in Q3 2011. But for the 9 months of 2011, cumulated current account stands in a deficit of €669mln, not a surplus. And compared to same period 2010 this deficit in an improvement of €125mln.

Capital account for Ireland is in a small deficit in Q3 2011 of €12mln, slightly deeper than €8mln in Q2 2011, but worse  for 9 months through September 2011 (at €6mln deficit) than for the same period a year ago (surplus of €23mln).

Adding current and capital accounts yields balance of payments for Ireland - the full external balance - which in Q3 2011 stood at €838mln surplus. In 9 months through September 2011, the balance of payments was in cumulative deficit of €675mln - an improvement on the same period of 2010 when the balance of payments was in a deficit of €771mln.

Charts below illustrate the trends on the annual basis, providing forecast for 2011 based on data through September.

So let's ask that uncomfortable question: Can external surpluses get us out of the debt jail? table below sums up cumulated external accounts balances for 1998-2011(forecast).

Yep, that's right. Suppose we want to pay down original €100bn of government debt out of the external surpluses consistent with the booming exports trade of 2009-2011 and we take the best quarterly performance for each metric of the external balance. Suppose we assume that debt is financed at 3.5% perpetually. How long will it take Ireland to half its current debt exposure? Roughly speaking - 64 years based on trade balance (current account surpluses) and 85 years based on full balance of payments.

And the above does not factor in any current or future slowdowns in trade etc. Just based on our best performance, with exports at boom levels and imports permanently shrunk, we still cannot count on that magic bullet of 'external trade will save us' from the debt overhang.

So that Plan for External Surpluses as a vehicle out of our debt jail... well it's sort of:

27/01/2011: External trade (goods)

Latest data for Ireland's external trade in goods was released yesterday, showing another month of spectacular trade balance performance in Ireland, albeit with a slight easing in month-on-month activity.
The value of exports in November 2010 rose robust 17% year on year while the value of imports was up by 2%. The trade surplus increased by a spectacular 37% to €4,086mln, marking a third consecutive month when the trade surplus exceeded €4bn. However, seasonally adjusted exports fell 1% in November mom, as did imports, leaving seasonally adjusted trade balance virtually unchanged.

The main drivers of trade balance in the first 10 months of 2010, compared against the same period of 2009 were:

• Medical and pharmaceutical products exports rose 15% or €2,705mln, while imports were down 21%
• Organic chemicals exports up 3% or €429mln.
• Computer equipment exports fell 32% or -€1,724mln, while imports declined 31% or €994mln
• Other transport equipment (inc aircraft) exports fell by 70% or €458mln, but imports fell 31% or -€1,069mln.
• Imports of Petroleum fell 34%,
• Imports of Road vehicles declined by 74%

Now to updated charts showing the above dynamics:
Headline series show two trends - a relatively flat trend (though down-sloping slightly) in exports and a robustly negative trend in imports. Exports and imports in the short run are still performing above the trend and the persistence of performance suggests that the trend is likely to reverse onto positive in exports and flatten out in imports. While continuing to signal strong performance in trade surplus, the trend suggests that future growth in trade balance might be moderating in months to come.

Chart above clearly highlights an emerging problem of deteriorating terms of trade (ratio of exports prices to imports prices). This process has been on-going and is now starting to present a major headwind for exporters.

That said, due to a heavy exposure of our trade to MNCs, volumes of trade have little relationship with the short and medium term pressures on terms of trade:The above suggests that the headwinds will be strongly felt by domestic exporters.

A summary of cumulative changes in exports and trade surplus in 2010 relative to 2007:

Notice weakening performance (relative to pre-crisis conditions) in October and November - something to watch.

Economics 24/12/10: Ireland's Trade Balance

With a slight delay, here is a deeper look into Ireland's trade performance through October.

First - exports and imports in levels:
Notice first that Imports are following steeply down-trending line, while Exports are trending flat and even slightly down over 2007-to-date period. Encouragingly, since May 2010, Exports are managing to stay well above their longer term trend line.

Summarized in the tables below, monthly and annual figures show clearly that significant gains in the trade balance are driven primarily by the continued declines in imports.


Hence, trade balance gains - impressive at +7.46% month on month and 11.95% in year on year terms:

At the same time, strong performance in Trade Balance is coming against the tide of adverse changes in the terms of trade: September marked the 4th consecutive month of deteriorating terms of trade, with a fall of 0.7% on August. Overall, since May 2010 terms of trade
have fallen by a cumulative 5.11% through September 2010. We can now expect this process to continue through October-November and cumulative May-October loss in terms of trade to rise to 5.9-6%.

It is worth taking a closer look at the relationships between trade balance components and terms of trade over the 2007-2010 period.

There is no statistical relationship between the level of exports and the terms of trade over 2007-2010 (through October). The relationship stands at y = 0.0175x + 7257.1, R2 = 1E-08. There is a relativeley weak, but strengthening relationship between trade balance and the terms of trade (as reflected in levels). In 2007-2009 data, terms of trade were able to explain roughly 0.32% of variation in the Trade Balance (y = 14.215x + 1385.2; R2 = 0.0032). Including data through October 2010 provides for much stronger explanatory power of 12.3% (y = 90.668x - 4989.4; R2 = 0.1228).

As chart below shows, correlation between levels of exports and imports has reversed sign in 10 months through October 2010 (to – 0.1458) compared with the first 10 months of 2009 (+0.3264). In longer terms, 2007-May 2010 data implied relationship between the levels of exports and imports was: y = 0.3266x + 5726.9; with a strong R2 = 0.2171. Adding data through October 2010: y = 0.1953x + 6398.5 and lower R2 = 0.0802.

Looking at the annual data:

Using annual data for 1990-2010 (where 2010 is my forecast values) we have weak relationships between growth rates in imports, exports and trade balance as a function of terms of trade changes. My full year 2010 forecasts are: Imports value €43,506mln, Exports value €85,209mln and Trade Balance of €41,703mln. This represents a forecast of 3.4% drop year on year in imports, 2.02% rise in exports and a jump of 8.4% in trade balance.

All of this data clearly suggests accelerated process of transfer pricing by profit-generative MNCs during the 2010 period. In fact, looking at log-relationships, growth in the trade balance is currently being explained by faster shrinking imports than the changes in exports. Coupled with deteriorating terms of trade, we have strong suggestion that our trade performance is being sustained primarily by the MNCs driving through strong expansion of profit-booking transfer pricing.

Of course, one should remember that whether due to transfer pricing or organic exports growth or - as indeed is the case, both - the improving Trade Balance is about the only positive news we can count on in 2010.

Economics 23/12/2009: Couple more points on Ireland's trade data

Wading through CSO latest data, table below shows just how important the MNCs are to our trade and GDP:
Absent MNCs-led sectors in our economy, we would be running massive deficits even accounting for the wholesale collapse of consumer imports. And note that as our own economy is shrinking, net contribution of MNC's own trade balance to our GDP is rising in importance.

Let's look at geography:

1. Overall exports are declining faster in September than they were over the last 9 months
2. Exports to Great Britain, EU overall, and Euro area are falling faster in September 2009 than over the first 9 months of 2009
3. Exports to France are falling slower in September 2009 than over the first 9 months of 2009
4. Exports to Germany, Italy, the Netherlands, Spain and Sweden are falling faster in September 2009 than over the first 9 months of 2009
5. Exports to Australia, China, Japan, Switzerland, and the USA are significantly improving over September 2009 relative to the first 9 months of 2009 – a strange result, given these exports are subject to dollar – euro exchange rate fluctuations.

And another way of looking at it is through the trade balance by country:
And one caveat - the cases where dramatic improvements in trade balance do not match those in exports are, of course, reflective of the collapse in imports.