27/3/15: Inching toward default: Ukraine CDS

Ukraine default scenarios (and debt restructuring) is now in the front line news, especially with IMF declaring then un-declaring its distaste for Russian position on EUR3 billion debt Ukraine owes Moscow that is due this year: http://www.reuters.com/article/2015/03/27/ukraine-crisis-imf-idUSL2N0WS1FO20150327. So much so, even Reuters are confused...

But here's the markets absent any confusion: Ukraine CDS are now trading with implied probability of default of 98.2%.

Source: @Schuldensuehner 

Which is, at this stage, only a question of whether or when the ISDA call the default.

Whether you like it or not, Ukraine needs to restructure its debts. Its economy cannot carry the interest burden and it cannot sustain any sort of recovery absent a significant debt writedown. Lending to the country to repay some of these debts is madness of highest order - so much so that even the IMF knows it. Even if Ukraine gets a massive writedown of debt, it will have years of extremely painful reforms ahead of it, and its economic development model will have to be re-written in its entirety. But at least the Ukrainian people will be able to think of this pain as not going to fund foreign legacy lenders. A small consolation, but a necessary one.

26/3/15: Russian imports outlook 2015-2016

Per BOFIT, Russian imports "will react strongly in 2015, partly dragged down by the economic contraction" and in part by weaker ruble and continued counter-sanctions. Import volumes adjust sharply during Russian recessions: in 2009 imports volumes fell 30% as GDP contracted by 8%. However, current Ruble is in a weaker position than in 2009: "the real exchange rate of the rouble has now depreciated much more than in 2009: it is a quarter weaker than the average rate for 2014. Russia’s income on exports, which dropped by a third in 2009, will deteriorate under the forecast oil price assumption[USD55 pb], by almost a quarter in 2015."

All of this means that Russian "imports will have to adjust to the smaller export income even more than usual [more than in 2009], since it would be difficult to fund a current account deficit in the present situation." It is worth noting that Russian economy does not run current account deficits to smooth out volatility in imports. "The current account last posted a deficit for a short period only, during the crisis of 1998."

Which means that BOFIT projects sharper decline in imports this time around: "import volumes are estimated to fall by a fifth in 2015. [On top of already sharp contraction in 2014]. The decline in imports will level off after 2015 as the economic contraction eases. In addition, the rouble’s real exchange rate will strengthen, since inflation is considerably faster in Russia than in its trading partners (the difference has grown to over 10%). In the absence of shocks which would lead to capital outflows, the rouble’s nominal exchange rate is expected to remain fairly stable, because net capital outflows stemming from e.g. repayment of foreign debt by non-financial corporations and banks will not necessarily exceed the surplus on the current account."

In other words, BOFIT does not expect an external funding crisis to be triggered by the debt redemptions.

"The current account will be bolstered by diminishing imports and a recovery in Russia’s export income resulting from rising oil prices. The recovery in export income will, in turn, create room for an increase in imports."

All of which is consistent with the Government policy: "the Russian Government has increased reactive manual steering in several areas ahead of the recession. Import controls have been intensified, e.g. by raising certain import duties and favouring domestic products in public procurement and also projects of state-owned enterprises. Capital outflows have been restricted by e.g. strengthening banking controls and issuing instructions to state-owned enterprises. Companies have been encouraged to apply targeted price controls, although this has not been widely used, as yet."

Exporters to Russia, especially from the EU, can expect some rough years ahead.

26/3/15: The Second Best Little Country for Electricity Costs Rip-off?..

It's the happiness of the Semi-State: the dysfunctional Irish electricity market.

Here's the latest from the IEA (see full publication here: http://www.iea.org/publications/freepublications/publication/KeyWorld2014.pdf) and an OECD chart summing up the plight of Irish consumers - industrial and household:

Yes, Ireland - the best small country to do business in is the second worst small country to be user of electricity in (after Denmark) and the fourth worst in absolute terms for households. We are also the fifth worst in terms of industry costs of the same, and the second worst small country in terms of industrial users costs.

But, remember, we are the Saudi Arabia of wind… 

26/3/15: BOFIT Latest Forecasts for Russian Economy 2015-2017

BOFIT published their new forecasts for the Russian economy. Here is the summary with my comments:

Pre-conditions: "Russian economic growth has slowed for three years in a row, due to e.g. waning growth in the available labour force, capital and productivity. In addition, a slight decline in export prices, the Ukraine crisis, sanctions, Russia’s counter-sanctions and other negative measures, with the accompanying increase in uncertainty, slowed Russian GDP growth to just over 0.5% in 2014. ...The impact [of oil price drop in H2 2014] began to show in the early months of 2015, with a slight contraction in GDP. Without transient factors, the economy would already have contracted in 2014."

What transient factors supported growth in 2014?

• "As in 2013, industrial production was partly supported by strong growth in defence spending."
• "The depreciation in the real exchange rate of the rouble since the early months of 2013 has [created room for some industrial imports substitution], and may also have slightly boosted exports of certain non-energy basic commodities."
• "The rouble’s strong depreciation led to consumer spending rushes, which kept private consumption growth at some 2%. However, wage growth slowed, as did pension growth. Inflation rocketed (to almost 17% in February) on the back of rouble depreciation and Russia’s counter-sanctions in the form of restrictions on food imports. Consequently, real household incomes contracted in annual terms for the first time since 1999. Aggregate income was underpinned by employment, which remained buoyant for the time being. Household borrowing decreased further."
• "Steered by the government, investment by most large state enterprises was relatively high. This was, however, insufficient to prevent total investment from falling by some 2%. The net capital outflows of the corporate sector increased, due partly to repayment of foreign debt and considerable constraints in access to foreign funding as a result of domestic uncertainties and external financial sanctions."

External position forward: "Export volumes declined by 2%. Exports of crude oil and gas dwindled markedly, while exports of petroleum products continued to grow at a robust pace. As the fall in ex-port prices steepened, export income in the last months of 2014 was already well over 10% lower (in euro terms) than a year earlier. Import volumes declined by 7% in 2014 and have now been in decline for 1½ years. The decline steepened considerably towards the end of the year."

BOFIT forecasts for 2015 assume oil price at USD55 pb and above and sanctions and counter-sanctions to remain in place "unchanged for a relatively long period".

"The impact of [oil price] change will be profound, since energy exports ac-count for almost a fifth of Russia’s GDP."

Do note: energy exports include not just crude petroleum and natural gas, but also refined products and electricity (including nuclear). This puts the Russian economy into perspective not usually considered in the Western media - the economy is much more diversified than many believe and claim. Further note, energy (total energy, not just oil and gas) accounts for just over 60% of total exports income.

Outlook summary: "...Russian GDP will contract by over 4% in 2015. The high degree of uncertainty will cause a shrinkage in private investment, while private consumption will be cut particularly by rapid inflation. Even though Russian imports have already edged down, they are estimated to fall further, by one fifth, in response to the sharp depreciation of the rouble during the last months of 2014. In 2016–2017, global economic growth and world trade will pick up, and it is assumed the oil price will rise to around USD 65 a barrel. The Russian economy is expected to continue slightly downward, before a slow recovery in 2017. The drop in investment is expected to flatten out towards the end of the forecast period. With real household income remaining low, it will also take time for private consumption to recover. Export volumes will grow at a very subdued pace. Imports will recover after 2016."

All in-line with my own outlook.

Private consumption "…will decrease substantially in 2015, and slightly further in 2016" driven primarily by inflation eroding household incomes and weak prospects for growth in private sector wages in nominal terms and public sector wages expansion below the rate of inflation. Notably, "the government is also seeking to cut the number of public sector employees." BOFIT expects pensions to "barely keep pace with inflation, at best".

Household credit will remain subdued, "even though the debt-servicing burdens stemming from payback of short-term loans will ease gradually. As during the crisis of 2009, savings may be rather substantial."

Public consumption "will decline amid pressures on the central government finances."

Investment "…will dwindle substantially this year and next. Private investment, in particular, will be depressed by a number of uncertainties relating to the ongoing tensions in East Ukraine, uncertain prospects for sanctions and the unpredictability of Russian economic and trade-related measures stemming from possible additional sanctions and recession countermeasures." So no surprises, then.

Fiscal side: "…the federal budget deficit is set to grow so large in 2015 (to about 3.5% of GDP) that the government Reserve Fund may be eroded by as much as a half. It is possible that support measures will be implemented using government bonds (as in the bank support operations in December 2014, which amounted to 1.4% of GDP). The support operations can also draw on debtors’ bonds (as in the funding of the state-owned oil giant Rosneft, which was just under 1% of GDP)."

The longer-term outlook is deteriorating: "The foundations of growth are being eroded by the contraction in private investment. Government spending is focused increasingly on defence and pensions, while public investment is subject to the largest cuts."

Chart below summarises forecasts:

Sources: Rosstat, BOFIT Forecast for Russia 2015–2017

26/3/15: The New Financial Regulation – Part 1: The Financial Transactions Tax

My latest post for LearnSignal blog opens a new series - covering the major financial services regulatory headaches in the works. This week: it is Financial Transactions Tax turn: http://blog.learnsignal.com/?p=166

26/3/15: Irish Planning Permissions 2014: The Crisis Drags On

CSO published Q4 2014 figures for Planning Permissions in Ireland, confirming the trend toward de-acceleration in the already weak data.

Here are the details.

On an annual basis:

• There were 15,724 planning permissions granted in Ireland in 2014 for all types of construction, up 13.11% y/y but still down 1.7% on 2011. Current level of planning permissions is below 2011 reading and is below any year between 1992 and 2011. Historical average from 1992 through 2014 is 33,333 which means current running rate is more than 2 times lower than the average. We are in the third worst year in the series history.
• Dwellings permissions rose from 3,316 in 2013 to 3,606 in 2014 (+8.7%). 2014 level of activity is below any year from 1992 through 2012. Dwellings permissions granted in 2014 were 24.4% below 2011 levels and represent the second worst year in history of the series. Historical average for 1992-2014 period is for 14,882 dwellings permissions to be granted, which means that in 2014, levels of dwellings-related planning activity was more than 4 times lower than historical average.
• Excluding dwellings, all other new construction-related permissions granted rose to 4,299 in 2014 from 3,431 in 2013 (+25.3% y/y), and up 45.0% on 2011, but still 77.8% below pre-crisis peak and 1.4 times below the historical average. 2014 was the third worst year in history for these sub-series and only marginally above the second worst year. 

Charts to illustrate:

Key point: given the absurdly low levels of activity in 2013, growth in 2014 is far from impressive. The bottlenecks created in 2010-2014, amounting to cumulative shortfall in planning permissions of 108,820 permissions relative to 1997-2001 average, and for dwellings this shortfall is 82,309 permissions. This shortfall is, put simply, catastrophic and is only increasing, given the current trends to-date.

Next: floor area relating to new permissions:

As shown in the chart above, 

• Floor area relating to planning permissions granted for all types of construction fell in 2014 to 3,184,000 sqm from 3,338,000 sqm in 2013 (down 4.6% y/y), representing a decline of 21.9% on 2011 levels. Relative to peak, total floor area approved is now down 86.7% and 2014 level of activity is 3.3 times lower than historical average (1992-2014).
• Planning permissions approved for dwellings had underlying floor area of 1,366,000 sqm, up 4.7% on 1,304,000 sqm approved in 2013.  2014 reading is 89.6% down on pre-crisis peak, and 4.5 times below the historical average activity.
• Floor area approved for non-dwellings permissions fell from 1,306,000 sqm in 2013 to 1,064,000 sqm (-18.5% y/y) and is down 88.6% on pre-crisis peak. Activity in this area is running 2.9 times lower than historical average.

Key points: 2014 was the worst year on record for the construction permissions activity measured by the total floor area of approvals, with overall square meterage of new permissions approved falling to an absolute historical low. 2014 was the third worst year on record for square meterage approvals for new dwellings construction and the absolute historical low for non-dwellings activity.

Summary of on-peak changes and historical shortfalls below:

Overall, 2014 data on planning permissions suggests little real improvement in the investment pipeline relating to construction sector. This evidence does not support the National Accounts tale of revival in domestic real estate investment and investment in general. According to the National Accounts, building & construction sector activity and Gross Fixed Capital Formation have both been running in excess of 2011 levels in both 2013 and 2014. Yet, there is no corresponding performance in planning permissions terms. This strongly suggests that current construction sector activity relates predominantly to past permissions pipeline, implying downside risk to the sector in the near future; and that our real estate investment 'boom' is driven predominantly by the re-sale markets (flipping of existent capacity, rather than creating new capital stock additions).

26/3/15: De-dollarisation of Russian accounts: media catching up, but risks remain

As I highlighted a week ago here: http://trueeconomics.blogspot.ie/2015/03/18315-russian-deposits-dollarisation.html, Russian households are starting de-dolarising their accounts in the wake of some regained confidence in the Ruble and the banking sector:

• See here on Ruble relative performance, recently: http://trueeconomics.blogspot.ie/2015/03/23315-em-currencies-on-rise.html
• See here on latest Russian banking sector stats: http://trueeconomics.blogspot.ie/2015/03/1732015-russian-banks-latest-stats.html

Now, the Moscow Times (h/t to +Russia Insider ) is covering same trend: http://www.themoscowtimes.com/business/article/ruble-panic-recedes-as-russians-start-selling-dollars/518053.html

However, not all is well, still and risks remain. Here is BOFIT analysis of the forward risks relating to oil prices and the banking sector (more on the latest forecasts later on the blog): "If the oil price remains, as assumed, at around USD 55 a barrel, and despite savings decisions, the federal budget deficit is set to grow so large in 2015 (to about 3.5% of GDP) that the government Reserve Fund may be eroded by as much as a half. It is possible that support measures will be implemented using government bonds (as in the bank support operations in December 2014, which amounted to 1.4% of GDP). The support operations can also draw on debtors’ bonds (as in the funding of the state-owned oil giant Rosneft, which was just under 1% of GDP). Where necessary, banks can use both instruments as collateral against even relatively long-term central bank funding. Recourse to the central bank has already become more substantial than ever before."

And more: in the face of oil price risks, "Bank panic situations where households and enterprises withdraw their funds from banks are possible, even though the authorities have intensified banking supervision. On the other hand, the Bank of Russia is ready to take immediate support measures."

All of which means that from the macroeconomic perspective, the current reprieve in dollarisation trends can be temporary. Over the next six months, I still expect continued decline in investment, with private sector capex depressed by a number of factors that are still at play: the Ukrainian crisis, the looming threat of deeper sanctions and oil price risks. State enterprises and larger state banks are likely to continue cutting back on large debt-funded investments and more resources will continue to outflow on redemption of maturing corporate and banking debt. 

So keep that seat belt fastened: the bumpy ride ain't over, yet.

25/3/15: IMF on Ireland: Risk Assessment and Growth Outlook 2015-2016

In the previous post covering IMF latest research on Ireland, I looked at the IMF point of view relating to the distortions to our National Accounts and growth figures induced by the tax-optimising MNCs.

Here, let's take a look at the key Article IV conclusions.

All of the IMF assessment, disappointingly, still references Q1-Q3 2014 figures, even though more current data is now available. Overall, the IMF is happy with the onset of the recovery in Ireland and is full of praise on the positives.

It's assessment of the property markets is that "property markets are bouncing back rapidly from their lows but valuations do not yet appear stretched." This is pretty much in line with the latest data: see http://trueeconomics.blogspot.ie/2015/03/25315-irish-residential-property-prices.html

The fund notes that in a boom year of 2014 for Irish commercial property transactions "the volume of turnover in Irish commercial real estate in
2014 was higher than in the mid 2000s, with 37.5 percent from offshore investors." This roughly shows a share of the sales by Nama. Chart below illustrates the trend (also highlighted in my normal Irish Economy deck):

However what the cadet above fails to recognise is that even local purchases also involve, predominantly, Nama sales and are often based on REITs and other investment vehicles purchases co-funded from abroad. My estimate is that less than a third of the total volume of transactions in 2014 was down to organic domestic investment activity and, possibly, as little as 1/10th of this was likely to feed into the pipeline of value-added activities (new build, refurbishment, upgrading) in 2015. The vast majority of the purchases transactions excluding MNCs and public sector are down to "hold-and-flip" strategies consistent with vulture funds.

Decomposing the investment picture, the IMF states that "Investment is reviving but remains low by historical standards, with residential construction recovery modest to date. Investment (excluding aircraft orders and intangibles) in the year to Q3 2014 was up almost 40 percent from two years earlier, led by a rise in machinery and equipment spending."

Unfortunately, we have no idea how much of this is down to MNCs investments and how much down to domestic economy growth. Furthermore, we have no idea how much of the domestic growth is in non-agricultural sectors (remember, milk quotas abolition is triggering significant investment boom in agri-food sector, which is fine and handy).

"But the ratio of investment to GDP, at 16 percent, is still well below its 22 percent pre-boom average, primarily reflecting low construction. While house completions rose by 33 percent y/y in 2014, they remain just under one-half of estimated household formation needs. Rising house prices are making new construction more profitable, yet high costs appear to be slowing the supply response together with developers’ depleted equity and their slow transition to
using external equity financing."

All of this is not new to the readers of my blog.

The key to IMF Article IV papers, however, is not the praise for the past, but the assessment of the risks for the future. And here they are in the context of Ireland - unwelcome by the Ministers, but noted by the Fund.

While GDP growth prospects remain positive for Ireland (chart below), "growth is projected to moderate to 3½ percent in 2015 and to gradually ease to a 2½ percent pace", as "export growth is projected to revert to about 4 percent from 2015". Now, here the IMF may be too conservative - remember our 'knowledge development box' unveiled under a heavy veil of obscurity in Budget 2015? We are likely to see continued strong MNCs-led growth in 2015 on foot of that, except this time around via services side of the economy. After all, as IMF notes: "Competitiveness is strong in the services export sector, albeit driven by industries with relatively low domestic value added." Read: the Silicon Dock.

Here are the projections by the IMF across various parts of the National Accounts:

So now onto the risks: "Risks to Ireland’s growth prospects are broadly balanced within a wide range, with key sources being:

• "Financial market volatility could be triggered by a range of factors, yet Ireland’s vulnerability appears to be contained. Financial conditions are currently exceptionally favorable for both the sovereign and banks. A reassessment of sovereign risk in Europe or geopolitical developments could result in renewed volatility and spread widening. But market developments currently suggest contagion to Ireland would be contained by [ECB policies interventions]. Yet continued easy international financial conditions could lead to vulnerabilities in the medium term. For example, if the international search for yield drove up Irish commercial property prices, risks of an eventual slump in prices and construction would increase, weakening economic activity and potentially impacting domestic banks." In other words, unwinding the excesses of QE policies, globally, is likely to contain risks for the open economy, like Ireland.
• "Euro area stagnation would impede exports. Export projections are below the average growth in the past five years of 4¾ percent, implying some upside especially given recent euro depreciation. Yet Ireland is vulnerable to stagnation of the euro area, which accounts for 40 percent of exports. Over time, international action on corporate taxation could reduce Ireland’s attractiveness for some export-oriented FDI, but the authorities see limited risks in practice given other competitive advantages and as the corporate tax rate is not affected."
• "Domestic demand could sustain its recent momentum, yet concerns remain around possible weak lending in the medium term. Consumption growth may exceed the pace projected in coming years given improving property and labor market conditions. However, domestic demand recovery could in time be hindered by a weak lending revival if Basel III capital requirements became binding owing to insufficient bank profits, or if slow NPL resolution were to limit the redeployment of capital to profitable new loans." Do note that in the table listing IMF forecasts above, credit to the private sector is unlikely to return to growth until 2016 and even then, credit growth contribution will remain sluggish into 2017.

And the full risk assessment matrix:

Oh, and then there is debt. Glorious debt.

I blogged on IMF's view of the household debt earlier here: http://trueeconomics.blogspot.ie/2015/03/25315-imf-on-irish-household-debt-crisis.html and next will blog on Government debt risks, so stay tuned.

25/3/15: IMF on Irish household debt crisis

IMF on Irish household debt crisis (from today's Article IV paper):

"Household balance sheets are healing gradually, yet loan distress remains high and over half of arrears cases are prolonged. Households have cut nominal debts by 20 percent from peak through repayments primarily funded by a 4 percentage point rise in their trend savings rate. Debt ratio falls have been large by international standards but debt levels remain relatively high at 177 percent of disposable income. Household net worth has risen 25 percent
from its trough."

One note of caution: IMF statement ignores sales of household debt out of the Central Bank-covered statistics to vulture funds. Furthermore, repossessions, insolvencies, bankruptcies, voluntary surrenders and some mortgages restructurings have also contributed to the reduction in household debt. Thus, not all of the debt reduction is down to organic debt repayment by households.

It is also worth noting that per chart above, Irish household debt is currently at the levels of 2005-2006 - hardly a robust reduction on crisis-peak.

More from the IMF: "A recent survey finds household debts concentrated among families with mortgages, having 2 to 3 children, with the reference person aged 35 to 44, and in the two top income quintiles. Yet, their debt servicing burden is still similar to other groups, reflecting the high share of long-term “tracker” mortgages, with an average interest rate of 1.05 percent at end 2014."

The problem is that the recent survey IMF cites covers data through 2013 only! (http://www.cso.ie/en/media/csoie/releasespublications/documents/socialconditions/2013/hfcs2013.pdf).

Overall issues, therefore, are:

1. Irish household debts remain extreme relative to disposable income;
2. Distribution of household debts is adversely impacting the most productive segment of Irish population and the segment of population in critical years for pensions savings; and
3. Deleveraging of the households is by no means completed and remains exposed to the risk of rising interest rates in the future.

All points I raised before and all points largely ignored by Irish policymakers.

25/3/15: As Bogus Is, Bogus Does... IMF on Irish MNCs-led Growth

The IMF has published its Article IV consultation paper for Ireland and I will be blogging more on this later today. For now the top-level issue that I have been covering for some time now and that has been at the crux of the problems with irish economic 'growth' data: the role of MNCs.

My most recent post on this matter is here: http://trueeconomics.blogspot.ie/2015/03/24315-theres-no-number-left-untouched.html

IMF's Selected Issues paper published today alongside Article IV paper covers some of this in detail.

In dealing with the issues of technical challenges in estimating potential output in Ireland, the IMF states that "Irish GDP data volatility and revisions make it difficult to assess the cyclical position of the economy in the short-run. Ireland’s quarterly GDP growth data are among the most volatile of all European Union countries, more than twice the variability typically seen."

The IMF provides a handy chart:

And due to long lags in reporting final figures, as well as volatility, our GDP figures, even those reported, not just projected, are rather uncertain in their nature:

However, as IMF notes: other structural issues with the economy, besides poor reporting timing and quality and inherent volatility, further 'complicate' analysis:

"Multinational enterprises (MNE) accounting for one-quarter of Irish GDP can vary their output substantially with little change in domestic resource utilization. As shown in a recent study, MNEs represent only 2.1 percent of the number in enterprises in Ireland but slightly over half of the value added in the business economy. MNE output swings, sometimes related to sectoral idiosyncratic shocks (e.g., the “patent" cliff” in 2013...), can occur with little apparent change in
domestic resource utilization."

In other words, there is little tangible connection between output of many MNEs and the real economy. And the latest iteration of tax optimisation schemes deployed by the MNCs is not helping the matters: "The sharp increase in offshore contract manufacturing observed in 2014 is another example of such a shock. Such shocks to the productivity of the MNE sector may be best treated as shifts in potential GDP, because the result is a change in GDP without any significant change in resource tensions or slack in the
economy."

But MNCs are important for Ireland's tax base, right? Because apparently they are not that important for determining real rates of growth. Alas, the IMF has the following to say on that: "Swings in the value added of MNEs contribute substantially to variations in Irish GDP. Yet such swings are not found to have a significant effect on [government] revenues."


How big of an effect do MNCs have on the real economic growth as opposed to registered growth? IMF obliges: "The gross value added excluding the sectors dominated by MNEs behaves quite differently from aggregate GDP in some years. For example, in 2013 it grows by 3 percent at a time when official GDP data
were flat." In other words, the real, non-MNCs-led economy shrunk by roughly the amount of growth in the MNCs to result in near-zero growth across the official GDP.

However, since 2013 (over the course of 2014) a new optimisation scheme emerged as the dominant driver of manufacturing MNCs-led growth: contract manufacturing. IMF Article IV itself contains a handy box-out on that scheme, so important it is in distorting our GDP and GNP figures. Per IMF: "In 2014, multinational enterprises (MNEs) operating in Ireland made greater use of offshore
manufacturing under contract."

A handy CSO graphic illustrates what the hell IMF is talking about:

As covered in the link to my earlier blog post above, "Goods produced through contracted manufacturing agreements are treated differently in the national accounts than in customs measures of trade. As these goods do not cross the Irish border, they are not included in customs data on exports. If, however, the goods remain under the ownership of the Irish company, they are recorded as exports in the national accounts. Payments for manufacturing services and patent and royalty payments are service imports in the national accounts, offsetting in part the positive GDP impact of contracted manufacturing."

And to confirm my conclusions, here is IMF on the impact of contract manufacturing (just ONE scheme of many MNCs employ in Ireland) on Irish growth figures: "Contracted manufacturing appears to have had a significant impact on GDP growth in 2014 although it is difficult to make a precise estimate. Customs data on goods exports rose by 2.8 percent y/y in volume terms in the first nine months of 2014. In contrast, national accounts data on exports rose 12 percent in the same period. The gap between these two export measures can be attributed in part to contracted production, but could also reflect other factors like warehousing (goods produced in Ireland but stored and sold overseas) and valuation effects." Note: I cover this in more detail in my post.

"Assuming conservatively that contract manufacturing accounted for about half of the difference between customs and national accounts data, the implied gross contribution to GDP growth in the first three quarters of 2014 from contract manufacturing is 2 percentage points. However, there is a need to take into account the likelihood that service imports were higher than otherwise, but it is not possible to identify the volume of additional service imports linked to contract manufacturing."

One scheme by MNCs accounts for more than 2/5ths of the entire Irish 'miracle of growth'. Just one scheme!

And now… to the punchline:

Update: Seamus Coffey commented on the 2013 figure for domestic (real) economy cited above with an interesting point of view, also relating to the broader issue of the Contract Manufacturing: http://twishort.com/DTShc and his blogpost on the subject is here: http://economic-incentives.blogspot.ie/2015/03/the-growth-effect-of-contract.html

25/3/15: Irish Residential Property Prices Fell Marginally in February

The residential property price index from CSO covering Irish property markets has posted second monthly contraction in February, falling from 80.3 in January to 80.0 last month. With that, y/y on growth rate in Irish residential property prices has slowed from 15.54% in January to 14.94% in February, the first sub-15% reading since September 2014. In effect, property prices in Ireland have now fallen back to the levels between September and October 2014. Cumulated gains in property prices over the last 24 months are now totalling 24.22% or an annualised gain of 11.46%, outpacing growth in the economy by roughly 5-fold.

Based on Nama valuations formula, residential property prices are now somewhere 18.5% below Nama business model expectations.

Prices of all residential properties excluding Dublin  remained static in February at 74.8, same as in January and up 8.25% y/y, marking a slowdown in the y/y growth from 9.20% recorded in January.


The decline in national prices was driven by Dublin prices, which fell for the second month in a row from 82.2 in January to 81.6 in February. This is the lowest index reading since September 2014 and marks a slowdown in y/y growth rates to 21.43% - the slowest rate of growth since April 2014. Still, cumulated expansion in Dublin residential property prices over the last 24 months is blistering 37.6% (annualised rate of 17.3%).

Within Dublin segment:

• Houses were the driver to the downside in overall property prices, with houses price index for Dublin standing at 86.0 in February 2015, down from 86.9 in January 2015 and back to the levels of September 2014. Y/y rate of growth in Dublin house prices fell from 21.7% in January to 21.1% in February, although over the last 24 months hose prices in Dublin are still up cumulatively 37.6% (+17.3% annualised). 
• Apartments prices in Dublin rose in index terms to 72.2 in February from 70.8 in January, erasing the declines that took place during Q3-Q4 2014. Cumulated gains in Dublin apartments prices over the last 24 months stand at 37.5% (+17.3% annualised) and y/y prices are up 24.5% - the fastest growth rate in 3 months.

Few charts to illustrate the above trends:

 Lastly, summary of price changes on pre-crisis peak and y/y:

Despite all the talk about the new bubble in house prices in Ireland, three themes remain true:

1. Property prices are still far below fundamentals-justified levels. In Dublin, undershooting of long-run (inflation-linked) prices is around 26-27%.
2. Property price increases are worryingly high, especially in the Dublin segment, warranting some ongoing concern; and
3. Moderation in property prices and downward correction over the last two months, driven by Dublin (but likely to translate into similar outside Dublin with a lag), predicted on this blog before, is a welcome change. However, I suspect we will see renewed increases in property prices later this year, albeit at rates more sustainable in the longer run.

24/3/15: There's no number left untouched: Irish GDP, GNP and economy

According to Bloomberg, US companies are stashing some USD2.1 trillion of overseas cash reserves away from the IRS: http://www.bloomberg.com/news/articles/2015-03-04/u-s-companies-are-stashing-2-1-trillion-overseas-to-avoid-taxes?hootPostID=ffda3e167ae0ebabc3da4188e9bd22de

Ireland is named once in the report in a rather obscure case. Despite the fact we have been named on numerous other occasions in much larger cases. But beyond this, let's give a quick wonder.

1) Last year, exports of goods in Ireland leaped EUR89,074 million based on trade accounts with Q1-Q3 accounts showing exports of EUR66,148 million compared to the same period of 2013 at EUR65,381 million - a rise of 1.01% or EUR767 million. Full year rise was EUR2,075 million. So far so good. Now, national accounts also report exports of goods. These show: exports of goods in Q1-Q3 2013 at EUR69,731 million and exports of goods in Q1-Q3 2014 at EUR78,835 million, making y/y increase of EUR9,104 million. Full year 2014 - EUR108.989 billion a rise of EUR15.98 billion y/y. The discrepancy, for only 3 quarters, is EUR8,337 million or a massive 6.1% of GDP over the same period. For the full year it is EUR19.92 billion or 11% of annual GDP. Much of this difference of EUR19.92 billion was down to 'contract manufacturing' - yet another novel way for the MNCs to stash cash for the bash… IMF estimated the share of contract manufacturing to be at around 2/3rds of the annual rise in Q1-Q3 figures. Which suggests that around EUR7.4 billion (once we take account of imports of goods) of Irish GDP rise in 2014 was down to... err... just one tax optimisation scheme. That is EUR7.4 billion of increase out of EUR8.275 billion total economic expansion in the MiracleGrow state of ours.

2) Last month, Services activity index for Ireland posted a massive spike: overall services activity rose 12.59% y/y, the dynamic similar to what happened in Q2-Q3 last year with goods exports (Q1 2014 y/y +8.2%, Q2 2014 y/y +12.9% and Q3 2014 y/y +17.9%). Even more telling is the composition of Services growth by sectors: wholesales & retail trade sector up 8.83% (a third lower than the overall growth rate), transportation and storage - ditto at 8.4%, admin & supportive services +2.91%. Accommodation and food services posted rapid rise of 14.03% and professional, scientific & technical activities rose 13.97%. Meanwhile, tax optimisation-driven information & communication services activity was up 21.15%. What could have happened to generate such an expansion? Anybody's guess. Mine is 3 words: "knowledge development box" - a non-transparent black-box solution for tax optimisation announced as a replacement for the notorious "double-Irish" scheme. So let's suppose that half of the services sectors growth is down to MNCs and will have an effect on our 'exports'. In Q3 2014 these expanded by 13.4% y/y and in Q2 by 10.8% - adding EUR5,560 million to exports. January data on services activity suggests, under the above assumption, roughly the same trend continuing so far, which by year end can lead to a further MNCs-induced distortion of some EUR11 billion to our accounts on foot of Services sectors exports.

Take (1) and (2) together, you have roughly EUR21-22 billion of annual activity in the export areas of services and goods sectors that is likely (in 2015) to be down to MNCs washing profits through Ireland through just two schemes.

Then there are our factor payments abroad - what MNCs ship out of Ireland, in basic terms. As our total exports of goods and services been rising, the MNCs are taking less and less profit out of Ireland. Chart below sums these up. While profitability of MNCs is rising - a worldwide trend - Ireland-based MNCs remittances of profits are falling as percentage of exports. 2008-2012 average for the ratio of net remittances to exports is 18%, which suggests that even absent any uplift in profit margins, some EUR27.5 billion worth of profits should have been repatriated in Q1-Q3 2014 instead of EUR22.16 billion that was repatriated - a difference of EUR5.36 billion over 3 quarters or annualised rate of over EUR7.1 billion. Factoring in seasonality, the annualised rate jumps to closer to EUR8 billion.

On an annualised basis, for full year 2014, exports of goods and services from Ireland rose y EUR23.28 billion year-on-year, while net exports rose EUR3.784 billion. Meanwhile, profits repatriations (net) rose only EUR719 million. Aptly, for each euro of exports in 2013, Ireland's national accounts registered 74.2 cents in net factor payments abroad. In 2014 this figure hit historical low of 69.1 cent.

My guess is, MNCs have washed via Ireland close to EUR30 billion worth of profits or equivalent of 17.1% of 2013 full year GDP and close to 16.5% of 2014 GDP. Guess what was the GDP-GNP gap in 2013? 18.5 percent. And in 2014? 15.4%. Pretty darn close to my estimates.

Let's check this figure against aggregate differences in 2008-2014 GDP and GNP. The cumulated gap between the two measures, in nominal terms, stands at EUR201.3 billion, closer to EUR204 billion once we factor in seasonality in Q4 numbers to the estimate based on Q1-Q3 data. The above estimate of EUR29.97 billion in 'retained' profits implies, over 7 years a cumulated figure of EUR209.8 billion, or a variance of EUR827-1,200 million. Not much of a margin of error. I'll leave it to paid boffins of irish economics to complete estimates beyond Q3 2014, but you get the picture.

And now back to points (1) and (2) above: how much of the Irish growth in manufacturing and services - growth captured by one of the two exports accounts and by the likes of PMI metrics and sectoral activities indices is real and how much of it is an accounting trick? And what about other schemes run by the MNCs? And, finally and crucially, do note that contract manufacturing and knowledge development box types of tax optimisation schemes contribute to both GDP and GNP growth, thus completing the demolition job on Irish National Accounts. There is not a number left in this economy that is worth reading.


Update: we also have this handy graphic from the BusinessInsider (http://uk.businessinsider.com/us-corporate-cash-stashed-overseas-2015-3?r=US) charting the evolution of U.S. MNCs stash of cash offshore:

Ah, those U.S. MNCs err... FDI... mattresses...