Economics 03/07/2009: Exchequer returns

So we have June Exchequer returns. Pretty nasty stuff, though some say it’s all ok. Here is why I disagree:

Much of the effect in flatter declines in tax revenue was due to frontloading corporation tax (October 2008 Budget). Now, Government April 2009 budgetary forecast did not reflect the expected revenue from this source, so the windfall should have boosted the overall tax receipts in June. Hmmm... but we are still €188m or 1.2% behind forecasts.

What gives? Brian Leninham has unleashed a savage April 2009 mini-Budget (-1.3% of the national disposable income was expropriated by the State or Euro 1.23bn, split as 2/3 to income tax and 1/3 to Health and PRSI levies – the latter two not entering tax receipts on the Exchequer banalce sheet, but counted as income to Government departments, yet another trick by which our obscenely high tax regime is classified as a ‘low tax’ one) and June was the first month where all new changes (errr – tax hikes) were in. So consumers are now on a renewed push down in spending:

Excise duty down 11.5% yoy in June, as opposed to 8.1% in May – tell me that after the improbably strong fall in 2008 a new double digit dip is not a collapse, and I would have to ask you what you are having for a drink that’s so strong;

VAT was down 23.3% in June yoy – also deeper than the -21.2% average decline in a year to May (although these are not seasonally adjusted figures);

Income tax is down 15.6% yoy or 2 percentage points behind DofF estimates.

Net result: deficit is now at €14.71bn against revenue of €16.31bn. Chart below illustrates revenue trends in terms of monthly average receipts.

All of this, however, is beyond the main point - even if revenue is flowing in at the rate the DofF forecast - which seems to be the desired objective of all our observers, analysts and the Government, this revenue will be bleeding the real economy. There is no point of balancing the Government expenditure at the cost of killing the economy - which is what our Exchequer is currently attempting to do...

NTMA - a problem foretold

For months now I have been saying that soon, very soon, there will come a moment when the markets are not going to take any more of the Irish Government IOUs. At least not at the yields consistent with AAA, AA+, AA or even AA- ratings. The Government, its eager-to-please economic advisers and its boffins in the CBFSAI and DofF were not listening and continued to pile on debt commitments as if they were running a San Fran Fed, not an economy with 4.5mln people in it.

Today's NTMA results show that I was (and am) on the right track. I can't stress the fact that, in my view, NTMA are doing a good job in the current conditions, so whatever is to yet to come - it will be the fault of their masters in DofF and the Government.

In a quick summary, NTMA issued €1bn worth of bonds today in 5 and 9-year paper, with the markets willing to bid only €1.24bn on the offer - a 124% coverage overall. This compares with x3 times cover (300%+) for the previous auction. And, this time around, there was plenty of cash in the sovereign debt markets (not the case with the previous auction) with estimated €19bn worth of funds available for 'fishing'.

So what's at play? The 'bait' was off and the fish were too smart to line up for the Irish cast.

Last point first: Ireland to date has raised €12bn in its annual borrowing requirement (per DofF rosy estimate) of €25bn. This is just the stuff to finance the current deficit with. Again, per my projections we would need another €2-4bn in additional borrowings this year. How this can be achieved is unclear, as markets are getting thinner by the day and at €1bn per month, we are not getting there at any rate. But investors are bound to start getting even less welcoming when they realise that with NAMA, Ireland will have to open the flood gates for bonds issues - even at a hefty 40% discount, €90bn-strong NAMA will require €54bn in bond financing. That is the amount needed before we consider re-issuance of maturing paper...

Now to the wrong bait issue - the pricing of the bonds was very ambitious in my view - at 4% for €300mln worth 5-year paper (cover of 160%) and at 4.5% for a 9-year issue (cover at 110%). In March 24 auction, cover ratios achieved were 380% and 270%.

The next to watch is Thursday auction of short-term paper: 1-mo (€400-500mln), 3-mo (€500-600mln) and 6-mo (€400-500mln) T-Bills. If successful in finding a solid market, these might push Irish Government to switch into more aggressive financing through short-term debt - effectively creating a credit card system of financing for Irish deficits.

But even if the Government keeps short-term paper issuance at the going rate, it does appear to me that a part of the Government strategy is to use short-term bonds to finance spending in a hope that either:
(A) the economy improves dramatically (good luck to you chaps), or
(B) Brian Lenihan will raid the taxpayers in an even more massive robbery, comes Budget, or
(C) The ECB will take the balance off Brian's hands (in effect, we are borrowing recklessly short-term in a hope that a rich uncle rides into town with a wallet full of cash).
Otherwise, issuing 1-9mo debt when your problem is a structural deficit of ca €15bn (roughly 45% of your revenue) per annum is as close to playing a Russian Roulette as one can come.

But either way - (A) implies we can't deal with our mess ourselves (an embarrassing line of policy to take), (B) implies that the Government has no moral right to rule, while (C) implies that the Government is willing to go hat-in-hand to the world only to avoid threatening the Trade Unions. Take your pick.

Melting Down Lenihan Style & Daily Economics 27/03/2009

According to the Irish Times, Brian Lenihan is now admitting that the revenue receipts for March are going to show even further deterioration in the fiscal position. This time around, Lenihan is claiming we will fall to €34bn in receipts, as opposed to the DofF forecast issued in January, assuming receipts of €37bn. Oh, Brian, thou are an incorrigible optimist. Anyone who has read this blog knows that I predicted this much in February (see here). That was then and despite the fact that our Minister Lenihan, with his new advisers from NUI (or 'yes-men' as I would put it), are catching up with my numbers, I have to move the targets once again.

(can someone figure it out what's the value of all these paid economists working for him if they are a month-and-a-half behind this free blog in forecasting?)

So here is my latest forecast - it will be subject to a revision once the actual Exchequer returns come out for March.Notice that I have dropped expected gross tax revenue to €31.4bn (inclusive of non-tax items), consistent with tax revenue of €31bn. I have also computed the General Government Deficit as a function of my forecast for 6.5-7% drop in GDP this year. Thus, 2009 Gen Gov Deficit is now expected to reach 11.8% of GDP and by the end of 2013 this will drop to 7.13%, not 2.5% that DofF predicted in January 2009 estimates. The reason for this later-years discrepancy is to a large extent driven by the short-term debt being issued by the NTMA to finance current spending.

So, Brian, here is a challenge - how soon will you and your advisers get down to my forecast figures? Or, should you want to save some dosh for the taxpayers - you can fire a couple of them and hire myself - I'll do their jobs (obviously) better and for, say, 1/4 of their price?

Now another update - new Eurocoin forecast for Euro-area economic activity is out, so time to update my own forecasts. Here is the chart. Lines in red denote my forecast forward.

External Trade stats for December 2008 are out and things are looking bad. Jan-Dec 2008 imports down 10%, exports down 3% y-o-y.

MNCs lead in declines, with Computer equipment exports down from €12,577m to €9,322m (-26%) and Organic chemicals from €19,641m to €17,853m (-9%). These are real declines, not offset by transfer pricing. In other words - these are jobs under threat or being lost. In other MNCs-led sectors: Chemicals exports increased from €2,664m to €3,483m (+31%), Pharma from €14,749m to €16,704m (+13%) and Professional, scientific & controlling apparatus from €2,109m to €2,779m (+32%). These are transfer-pricing driven, but at least for now, jobs are being supported, if only by our Bahamas-on-the-Liffey tax shelter, if not by superior productivity. How do we know this? Look at imports: Pharma imports up from €2,397m to €2,866m (+20%), Petroleum & relateds from €4,479m to €4,813m (+7%) and Natural gas from
€1,039m to €1,378m (+33%). These are inputs into the sectors where MNCs-led exports still are growing.

Goods shipped to Great Britain decreased from €15,002m to €14,302m (-5%) - evidence that our exporters are absorbing exchange rates changes into their bottom lines - and to Switzerland from €3,251m to €2,555m (-21%). Goods to the United States increased from €15,825m to €16,657m (+5% - also evidence of significant real competitiveness improvements, given still adverse terms of trade conditions), to China from €1,989m to €2,323m (+17%), to Malaysia from €694m to €1,062m (+53%) and to Spain from €3,281m to €3,587m (+9%). These are strong geographical results, showing, amongst other things that we are moving away from intra-EU trade dependency.

Inter-temporally: December 2008 the value of exports was +10% on December 2007, while imports were down -19%. But seasonally adjusted exports were down 4% on November 2008, while imports were down 11%. Preliminary estimates for January 2009 show exports of
€7,014m, down 1% on January 2008 and imports of €3,946m, down 28%. This is (good) mixed result showing that exports in general remain relatively buoyant when compared against domestic economy collapse.

Per separate data from CSO: the volume of output in building & construction decreased by 26.7% in Q4 2008 compared with Q4 2007. The value of production decreased by 24.3% in the same period. This tells me that the anticipated Exchequer savings due to lower cost of construction are unlikely to be significant: volume falls outstripping value falls implies unit cost of construction is up!