18/1/2014: Moody's Upgrade for Ireland

Moody's Investor Services upgraded Irish sovereign ratings tonight in a move that was expected by the analysts (http://trueeconomics.blogspot.ie/2013/09/2092013-irelands-credit-risk-scores.html) and was overdue.

Moody's release on this is here: https://www.moodys.com/research/Moodys-upgrades-Irelands-sovereign-ratings-to-Baa3P-3-outlook-changed--PR_290559?WT.mc_id=%40moodysratings

Key takeaways from the release:

1. Rationale for the upgrade: "The two main drivers for the upgrade are: (1) The growth potential of the Irish economy, which together with ongoing fiscal consolidation is expected to bring government debt ratios down from their recent peak; (2) The Irish government's exit from its EU/IMF support programme on schedule, with improved solvency and restored market access.
2. On growth potential: "Moody's expects a stronger expansion of net exports in the next few years as the negative impact lessens from the expiry of key pharmaceutical patents and as Ireland's major trading partners register more robust growth. Improved competitiveness ...since the 2009 recession, contributing to the shift from large current account deficits before the crisis to the current surpluses. Moreover, there are signs of a revival in domestic demand as household savings rates come down from historic highs. Foreign direct investment also remains extremely strong, attracted by Ireland's innovative and flexible labour force, and the housing sector appears to have stabilized."
3. On fiscal side: "The second driver of the upgrade is the Irish government's exit from its three-year economic adjustment programme in mid-December 2013. Its ability to do so without a precautionary credit line reflects that the government's reform agenda stayed largely on track throughout the programme, despite weaker than expected domestic and external economic conditions. The government regularly outperformed quantitative fiscal goals, which helped it regain and retain market confidence. Similarly, Moody's expects that Ireland will be able to address its excessive deficit (i.e. bringing it sustainably below 3% of GDP) by 2015."

Readers of this blog would know my views as to the risks associated with some aspects of the above assessments. However, the risks are unlikely to play out over the next 12 months horizon and are not carrying significant probability to derail overall low-growth recovery trend. So, in my view, Moody's is justified in shifting ratings up to Baa3 from Ba1.

On risks side, moody's cite: "That said, the clean-up of the banking system's non-performing loans is still in the early stages. In 2013, the Central Bank of Ireland (CBI) used its increased powers to establish a schedule requiring banks to resolve mortgage and SME loan arrears on a sustainable basis. The CBI is also demanding that banks strengthen collection efforts from customers who are able to pay. In the meantime, however, these mortgage resolutions are likely to increase foreclosures, impairing profitability and potentially dampening the housing market recovery."

Agree with their view, though other risks also exist, beyond the mortgages resolution process and banking sector performance.

Nice bit about the upgrade - it comes after Moody's delayed any changes to Portugal's ratings last week, a move that was interpreted by some analysts as a signal that the agency could have left Ireland's debt ratings unchanged as well.

My view on the ratings is that Ireland is moving into the same category of debt as Belgium (aptly, along with Belgium's longer term growth trajectory of ca 1.5% pa and Belgium's long-term struggle of shifting out of the 100% debt/GDP ratio for sovereign debt). It is a net gain for us, given the scale of the crisis we are starting to recover from.

Note: a H/T & thanks to Conrad Bryan @conradbryan and Dave Ryan @MailPidgeon for alerting me to Moody's action this late at night.

17/1/2014: BlackRock Institute Survey: N. America & W. Europe, January

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region was covered here: http://trueeconomics.blogspot.ie/2014/01/1712014-blackrock-institute-survey-emea.html.

Now, on to survey results for North America and Western Europe region. emphasis is always, mine.

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 83% of 109 economists expecting the world economy will get stronger over the next year, marginally higher than 81% reported in December. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."

"At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen except Portugal, which is expected to remain the same."

Of note:

• Ireland is now moved into the middle of 'growth distribution' from previous position firmly ahead of the entire region. Italy and Spain are now posting stronger expectations than Ireland.
• Eurozone expansion expectations are still lagging those of the UK and the US.
• Germany continues to lead the Eurozone expectations.

Out to 6 months horizon: "Eurozone is described to be in an expansionary phase of the cycle and expected to remain so over the next 2 quarters. Within the bloc, most respondents expect only Greece to remain in a recessionary phase at the 6 month horizon."

"Over the Atlantic, the consensus view is firmly that North America as a whole is in mid-cycle expansion and is to remain so over the next 6 months."

Red dot denotes Austria, Germany, Norway and Switzerland



Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

17/1/2014: BlackRock Institute Survey: EMEA, January

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region. Emphasis is mine.

"With caveat on the depth of country-level responses, which can differ widely, this month’s EMEA Economic Cycle Survey presented a bullish outlook for the region."

The consensus of respondents describe Slovenia, Croatia, Egypt and, the Ukraine to be in a recessionary state and expected to remain so over the next 6 months except for Croatia, where there is an even split between expansion and contraction.

Note: Red dot represents Czech Republic, Kazakhstan, Hungary, Romania, Israel, Poland and Slovakia

At the 12 month horizon, the positive theme continues with the consensus expecting all EMEA countries to strengthen with the exception of Turkey. So Russia is improving 6mo forward improvement in outlook on current phase (see above chart), but Ukraine is expected to remain in a late cycle recession. Out at 12mo horizon, Ukraine is still expected to underperform Russia.

Note Slovenia's performance expectations. It is worth noting that the IMF is releasing Slovenia's economy's assessment, so it would be interesting to take a comparative look at the Fund expectations.


Globally, respondents to the EMEA survey "remain positive on the global growth cycle with a net 82% of 61 respondents expecting a strengthening world economy over the next 12 months – an 8% increase from the net 75% figure last month. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

17/1/2014: Goods Exports: A Story of Irish Tax Arbitrage Mode of Growth?

I covered monthly and annual trends in Irish Trade in Goods statistics yesterday (http://trueeconomics.blogspot.ie/2014/01/1612014-trade-in-goods-november-2013.html), noting that

1. Irish exports of goods are continuing to shrink - not grow at a slower rate, but grow at a negative rate - over 2013
2. Irish trade surplus in goods is now in negative growth territory for the third year in a row.
3. Past resilience of Irish trade in goods statistics was predominantly down to the collapse in imports.

In the past, I have argued that we are likely to witness further deterioration in external balance for Ireland once the domestic economy moves back into growth cycle (imports of consumer goods and capital goods will all rise). Given the overall problematic situation with domestic disposable after-tax income, this implies that we can lose the only pillar supporting our debt sustainability (external balance) if capex ramps up, while employment creation and wages growth is lagging. In other words, a jobless recovery on foot of capex expansion can end up being a pyrrhic victory for Ireland.

To see this, consider imports/exports ratio in the economy (to remove monthly volatility, we use half-yearly aggregates):

Following a large jump in the ratio of exports to imports on foot a significant decline in imports, we are now running below the historical trend. This suggests that our exports of goods are becoming less, rather than more, tax-efficient (which, of course, is consistent with pharma sector decline in our exports of goods). Good news is that this means our exports are also potentially becoming better anchored to real value added carried out in this economy, and less tax arbitrage-driven. But the bad news is that at the same time, exports growth rates are collapsing:

And the decade-averages, shown in the chart above are telling this story.

This is worrying... doubly so because what is taking place of our good exports is the 'success' story of our ICT services sector, which is growing on foot of tax arbitrage. We are replaying the same 'advantage' as before - instead of developing successful, value-added based exporting model we are just switching from one tax arbitrage play to another. ICT manufacturing tax arbitrage of the 1990s gave way to Pharma tax arbitrage play of the 2000s, which is now giving way to ICT services tax arbitrage play of the 2010s... 

16/1/2014: Trade in Goods: November 2013

Ireland's seasonally adjusted trade surplus for trade in goods only (excluding services) was down 15% in November compared to October.

Per CSO, there was "a decrease in seasonally adjusted exports of €327 million (-5%) to €7,009 million" in November 2013 compared to October. Seasonally
adjusted imports rose by €132 million (+3%) to €4,472 million. Thus, seasonally adjusted trade surplus fell to €2,538 million - "the lowest seasonally adjusted trade surplus since August 2008."

Year on year, "the value of exports decreased by €607 million (-7%) to €7,710 million. The main drivers were decreases of €572 million (-25%) in the exports of Medical and pharmaceutical products and €158 million (-8%) in the exports of Organic chemicals. … Comparing November 2013 with November 2012, the value of imports rose by €335 million (+8%) to €4,377 million. Imports of Machinery specialised for particular industries increased by €121 million (+175%)."

With 11 months of data in, we can provide a reasonable approximation for H2 2013 data and full year outlook. Caveat - these are simple extrapolations from 11 months data.

The first chart shows annual data for exports. Based on January-November data:

- Annual imports are set to rise by ca 0.4% y/y, after having posted a 1.76% rise in 2012 and 5.55% rise in 2011. On a cumulative basis, imports rose by EUR3.582bn over 2011-2013 period.
- Annual exports of goods are set to post a contraction of approximately 4.3% y/y against 2012 annual growth of 0.5% and 2011 annual expansion of 1.70%. Cumulatively from January 2011 through the end of 2013, exports of goods are set to shrink by EUR1.975bn.
- Note that in all three years: 2011, 2012 and 2013 exports growth under performed imports growth and this is before any significant uptick in domestic consumption demand for imports or domestic capes demand for imported capital goods.
- Trade surplus for 2013 is expected to decline by around 9.8% on 2012 levels, after having posted a decline o 0.9% in 2012 and a decline of 2.3% in 2011. Cumulatively over the last 3 years, the decline in trade surplus amounted to EUR5.557bn.

The next chart plots annual rates of growth and 10-year growth rates averages. This shows that the current decade is the worst in the history of the state with exception of the 1930s, with the decade of 2000-2009 being the third worst.

This puts into perspective the problem with the assumed debt sustainability framework based on growth in exports. The chart above shows exports of goods only, omitting exports of services. Two points, however:
1) In the 1990s, recovery was led by exports which were predominantly on the goods side, so the average rates in the chart for the decade of the 1990s are closely correlated with total exports growth rates. Today, growth in services exports outpacing growth in goods services has much lower impact on the economy overall, since exports of services are less anchored to the domestic economy and are more reflective of the aggressive tax optimisation strategies of the MNCs operating in the ICT and IFS services areas.
2)Services exports growth is slowing so far as well. This was covered here: http://trueeconomics.blogspot.ie/2013/12/20122013-how-real-is-that-gdp-and-gnp.html

Finally, the last chart plots exports of goods adjusted for prices changes and exchange rates using Trade Price Index for Exports, expressed in 2006 euros.

The upward correction in 2009 and 2010 period now is almost fully erased by declines since 2010. And the decline seems to be accelerating.

Most of the above declines in exports in the last two-three years has been driven by the pharmaceuticals sector. I will be covering this topic when dealing with more detailed composition of exports once we have data for December 2013. In the mean time, you can see CSO data for January-November 2013 y/y comparatives in Table 3 here: http://www.cso.ie/en/media/csoie/releasespublications/documents/externaltrade/2013/gei_nov2013.pdf

16/1/2014: Some thoughts on Ireland's Rankings in the Index of Economic Freedom

Here are my thoughts on the Heritage 2014 Index of Economic Freedom scoring for Ireland (covered here: http://trueeconomics.blogspot.ie/2014/01/1612014-2014-index-of-economic-freedom.html) :

First off: the positive is that Ireland's score is rising (the ranking improvement is a major positive, but I have some reservations about that, voiced below). Another positive is that the improvements are occasionally structural although predominantly they risk being cyclical:

• Government spending gains are, in my view, largely cyclical (driven by tax extraction measures and capital spending cuts, plus banks measures tapering of) with some structural changes (some of tax systems put in place are sustainability enhancing, such as property tax).
• Fiscal policy gains are largely symbolic and driven by the EU-wide changes (6-pack, 2-pack and Fiscal Compact, etc).
• Labour markets improvements, especially some activation measures deployed are structurally sustainable and often positive. Unfortunately, their impact today runs against high unemployment and low jobs creation. In other words, we are pursuing right reforms at the wrong time. Aside from these, there is preciously little change in the structure of the labour markets. Competitiveness gains, stripping out the effects of sectoral composition, are flattening out, albeit these are still significant compared to pre-crisis.
• Trade freedom improvement is puzzling. There has been no major improvement in the EU treaties or bilateral trade agreements. Aside from this, there has been little change to the regulatory systems and costs involved in exporting from and importing into Ireland. On financial services side, there has been an increase in regulatory barriers to transactions, including compliance tightening, enhanced reporting requirements and higher costs.

Now on to unpleasant bits. The report on Ireland is raising some questions:

1) Debt restructuring is cited in relation to the February 2013 swap of the IBRC Promissory notes for senior sovereign bonds. It is alleged that this resulted in a significant reduction in debt levels. In my opinion, the swap did not deliver significant material alteration to the total debt. Instead it achieved markedly improved maturity profile of debt, and reduced front-end cash flow requirements relating to the original promissory notes. The swap was a net positive, but of modest impact when it comes to debt levels.

2) On property rights: since May 2011 the Irish Government is engaged in expropriation of private pension funds via a levy on capital component of the funds and this levy was increased in the Budget 2014. Further, Irish Government forced (since 2010 and ongoing under the IBRC shutdown proceedings) sales of distressed assets to the State agency, NAMA. This can be treated as a de facto (de jury bit remains to be tested in the courts) expropriation of a large number of private assets, especially where such assets included at-the-time fully performing loans.

4) Top income tax rate is 41%, but it applies to earnings above a very low threshold. Heritage analysis also excludes the USC and PRSI both of which are taxes on individual income. The analysis ignores the differences in taxation of the self-employed and PAYE incomes. Counting all income tax measures, upper marginal tax rate on income in Ireland stands at above 50%. In the case of businesses, the report does not cite rates - a major component of tax costs. The report quotes tax receipts as a share of Gross Domestic Income, which really means GDP. However, stripping out transfer pricing and tax transfers by the multinationals (which are not fully captured by the tax base) Irish Government tax burden is significantly above 27.6% of our economy.

5) The report cites prices as being 'generally set by market forces'. However, many goods and services traded in Ireland's domestic economy are either directly priced by the state regulators, disproportionately impacted by state taxes, levies and duties and/or are set by state oligopolies. These include energy prices, prices relating to all forms of public transport and even some private transport, majority of health services, pharmaceuticals, education, alcohol, tobacco, fuel, social protection, etc. They also include many professional services costs set under the power of professional bodies that are granted market power by the state. Whilst private sectors are in a deflationary environment, state-controlled prices are up double digits over the course of the crisis.

6) Irish lending and investment climate is assessed as unchanged year on year. Credit supply in Ireland is continuing to contract, especially to indigenous firms, while domestic investment in new enterprises is now nearly fully state-captured via state-controlled or regulated funding schemes. Meanwhile, the banking sector saw no meaningful reforms other than continued shift toward a duopoly model. Competition in banking sector is collapsing and this is an ongoing development. Irish banks are becoming  more domestic, cross-border financing is becoming less available.

7) The report cites 'public debt' at 117% of GDP. Assuming this covers General Government Debt the actual figure is at 124.1% of GDP per latest official estimate for 2013. Public debt traditionally includes liabilities of the local authorities and state bodies, which pushes the above figure well ahead of the reported percentage. Once again, given that a meaningful comparative for Irish economy is not GDP, but some metric closer to GNP, even 124.1% figure is a massive underestimate of the true extent of the 'public' debt overhang.

Conclusion: In my opinion, the above caveats do not necessarily imply that Ireland's position in the IEF deteriorated significantly year on year in 2013. However, they do pose some questions about the improvement recorded in the overall ranking for Ireland compared to 2013.

16/1/2014: 2014 Index of Economic Freedom: Ireland Up 2 Rankings

Heritage Institute's 2014 Index of Economic Freedom was out on Tuesday and here are some details of Ireland's performance:

1) We are ranked number 9 in the world, up from 11th in 2013. Which is good news. We are second best in Europe and 1st in the EU28.

2) We posted a small improvement in our score (+0.5 to 76.2), the first time we recorded an improvement in the score since 2010.

So key improvements are on Government spending and fiscal performance (say thanks to the Troika?), improved labour markets score (say thanks to the Troika?) and improved trade freedom.

More on these:

The above, in effect, highlights the shortcomings of the Heritage Index (as compared to http://www.freetheworld.com/) as Heritage inputs into analysis can be relatively narrow and excessively qualitative in some areas.

Note, on property rights, the Heritage seemingly ignores the issues related to expropriation of pension funds that continued in 2013.

3) Comparative:

You can visualise more comparatives here: http://www.heritage.org/index/visualize

16/1/2014: Fresh Signs of Euro Area Banks Deleveraging Out of Global Growth

For some time now I have been pointing at the ongoing exits by the European banks from the rest of the world (obviously there are some exceptions)... Here's a reminder http://trueeconomics.blogspot.ie/2012/10/13102012-europes-banks-are-now-global.html

Now, more evidence trickling in:

And the process ain't over yet...

15/1/2014: BusinessInsider's Investment Ideas For The Next Decade

BusinessInsider is running a 10-year investment suggestions from some analysts...
http://www.businessinsider.com/best-investment-ideas-for-the-next-decade-2014-1#ixzz2qUatCHZj

Warning: my suggestion is at number 17.

I should put some disclaimers around this - in my view, one should aim to hold a diversified portfolio of investments, structured to match your life-cycle objectives and risk preferences, as well as reflecting income and wealth specifics, etc. Hence, my contribution should be looked at in this context, as food for thought...

The idea of 10 years-out outlook gave me a bit of a thought... and although I am not known for providing trading ideas, here are my 5 cents on 15 and 30 year horizons:

For the next 15 years: A basket of precious metals: Both monetary conditions and physical demand dynamics suggest that a non-speculative (cost-averaging-based) accumulation of these within a balanced portfolio will provide a reasonable long term hedge against upcoming risks and demand pressures. This is not a speculative bet, but a view that long-term, small fixed share of a balanced portfolio should be maintained in the gradually accumulated precious metals positions.

For the next 30 years: arable land with substantial water rights in Northern US and Central Canada. A combination of rising global temperatures, declining fresh water reserves and rising pressures on food production make it a compelling investment case. Opening up of the Northern Sea Route and generally increased accessibility of Northern Territories, coupled with stable institutional and legal environments are making it a good risk hedge for potential geopolitical risks that logically likely to accompany the aforementioned pressures.

15/1/2014: Things are fine... things are working...

On foot of disastrous (for euro area) long range forecasts from DG ECFIN (covered here: http://trueeconomics.blogspot.ie/2014/01/1412014-dg-ecfin-latest-long-range.html), Morgan Stanley latest forecast for the global economy is here:

H/T Fabrizio Goria @FGoria

2012 outrun: euro area = lowest growth
2013 estimated outrun: euro area = lowest growth
2014 forecast: euro area = lowest growth
2015 forecast: euro area = lowest growth on par with Japan

Unpleasant, to put it mildly... Meanwhile, here's some bragging about the great euro area achievements... obviously not to be confused with those stated above... via ESM Press Office:

@ESM_Press:
#ESM MD Klaus #Regling in hearing with EU Parliament Members, Strasbourg: lv/stream at 15:00 http://www.europarl.europa.eu/ep-live/en/schedule …
#Regling: I welcome this debate because I think transparency & discussion are essential ingredients for lively democracies
#Regling: not my role to defend troika, support overall eco. approach. €area faced existential crisis with no tools, so troika was set up
#Regling: I worked for #IMF & know well #IMF program design which was model for program of €countries under assistance
#Regling: our critics miss the point. GR, IR, POR, CY faced choice: buying time with #EFSF/#ESM program or collaps w/ adjustment overnight
#Regling: no #EFSF/#ESM program would have meant risk of leaving €area; polls show citizens of concerned countries want to stay in €area
#Regling: disagree that there is no democratic control for programs; troika advises, political decision is taken by elected governments
#Regling: In POR & IR even opposition parties at the time, which are today in government, committed to assistance programme
#Regling: decisions on #EFSF/#ESM financial assistance is for national gov/parl because risk is on national budgets
#Regling: am not minimizing the difficulties that the countries are facing, especially unemployment
#Regling: there are clear signs that our strategy is working, in Dec IRL & ES had successfully exited their programs.

Happy times... and -0.6-0.5+0.6+1.1 is just a fine, fine, fine arithmetic... cause you know... 'things are working'...

15/1/2014: Simple, but entertaining... a democratic elites 'score card'

Recently, I cam across the following highly simplified, but rather amusing graphic highlighting some differences between the US and Italy

It is, as I noted, a highly stylised and simplified sort of information. Nonetheless, it does make a valid point: why are European democracies top-heavier than other democracies?

And then I checked Ireland:

• Population 4.589 million (2012)
• Senators: 60 (76,483 persons per senator)
• Dail Eireann: 166 TDs (27,645 persons per TD)
• Ministers: 14 Ministers and 15 Ministers of State (158,241 persons per Minister)

Just for your bemusement, not for some scientific or even economic argument sake...

Note: Auto Blu references state cars and Carburante references cost of petrol per litre.

15/1/2014: Are Irish Family Benefits Really the Highest in the OECD?..

An interesting chart on public spending relating to families across the OECD states:

Ireland is a clear leader in terms of family supports. But the bulk of our lead comes from cash payments (second only to Lux). Which suggests that Irish families do not need another tax break or lower tax burden.

There is a problem, however, with this assessment. Here's why.

Per methodological note behind the chart (see here: http://www.oecd.org/els/family/PF1_1_Public_spending_on_family_benefits_Dec2013.pdf)

"Child-related cash transfers to families with children [include] …child allowances, with payment levels that …sometimes are income-tested (PF1.3); public income support payments during periods of parental leave (PF2.1) and income support for sole parents families." Which, obviously, means the chart is distorted by non-working parents allowances and payments.

Furthermore, "Public spending on services for families with children includes, direct financing and subsidising of providers of childcare and early education facilities, public childcare support through earmarked payments to parents (PF3.4), public spending on assistance for young people and residential facilities, public spending on family services, including centre-based facilities and home help services for families in need." Which largely does not apply to the majority of Irish families outside income-tested cases.

Finally, "Financial support for families provided through the tax system. Tax expenditures towards families include tax exemptions (e.g. income from child benefits that is not included in the tax base); child tax allowances (amounts for children that are deducted from gross income and are not included in taxable income), child tax credits, amounts that are deducted from the tax liability…" Some of these do apply to working families with children in Ireland.

Worse: "…tax advantages for married people as exists in, for example, Belgium, France, Germany and Japan are not considered to serve a ‘social purpose’, and are not included here (regardless of whether or not such measures are part of the basic tax structure). Only the value of support for children through such measures is included."

Lastly, it appears that data above is not adjusted for the size of families.

In other words, we have no idea as to where Ireland really stands in comparison to other countries in terms of subsidies/supports for working families...