The National Treasury Management Agency (NTMA) announced today that nominal value of Ireland's National Debt, which is calculated net of Exchequer cash balances, is estimated to be €38.5 billion at end 2005; this is €659 million higher than the end 2004 level of €37.8 billion. The increase in the Debt reflects the projected Exchequer Deficit of €852 million which was partially offset by a gain of €191m in respect of bond issuance.
The National Debt/GNP ratio fell from 30.5 per cent at end 2004 to 28.6 per cent at end 2005. The reduction in the ratio is due to the fact that the increase in the nominal size of the debt was less than the increase in nominal GNP.
The General Government Debt (GG Debt) is the standard measure used within the EU. The National Debt is the principal component of the GG Debt but, as the GG Debt is a gross measure of debt, it makes no allowance for the netting of Exchequer cash balances; in addition, it applies a wider definition of "Government" which includes Local Government debt and some other minor liabilities of Government. The GG Debt also includes the estimated accrued interest on the Government retail savings schemes. The GG Debt is estimated to have increased from €43.6 billion at end 2004 to €44.8 billion at end 2005.
The GG Debt/GDP ratio also fell during 2005 – from 29.4 per cent at the end of 2004 to an estimated 28.0 per cent at end 2005. The decrease in the ratio reflected the fact that the additional borrowings by the wider Government sector were outweighed by the growth in nominal GDP this year.
The National Pension Reserve Fund earned a return of 19.2 per cent or €2,291 million in 2005 excluding the Government contribution of €1,320 million. Its estimated market value at 30 December 2005 was €15,300 million (11.4 per cent of GNP) compared with €11,689 million at 31 December 2004.
The National Pensions Reserve Fund was established in April 2001 under the National Pensions Reserve Fund Act 2000. Its objective is to meet as much as possible of the costs of social welfare and public service pensions from 2025 onwards when these costs are projected to increase dramatically due to the ageing of the population.
The Fund is controlled by the National Pensions Reserve Fund Commission. The NTMA has been appointed as the Manager of the Fund until end March 2011 and the Commission is required to perform its functions through the Manager as its agent.
The Fund’s strong performance was driven by its heavy concentration in equities and sustained growth in world equity markets, particularly in Europe and Asia, as corporate earnings grew strongly and inflationary concerns remained in check. Performance was also aided by euro weakness, particularly against the dollar, which markedly improved returns on the Fund’s non-euro assets in euro denominated terms (the Fund’s policy is to hedge 50% of its non-euro denominated equity holdings).
In February 2005, the Fund announced a significant diversification of the its strategic asset allocation, primarily through an 18 per cent allocation to alternative asset classes – property (8 per cent), private equity (8 per cent) and commodities (2% per cent of which 0.5% is to forestry). The strategy also involves an increase in the Fund’s small cap equity allocation from 2 per cent to 4 per cent and a 2 per cent allocation to emerging markets equities. The purpose of the diversification of the Fund’s investments is to exploit potential sources of additional long-term return without substantially altering the Fund’s risk profile. Investment in property and private equity will take place on a phased basis in order to build up high quality diversified portfolios through time. The Commission expects to reach its target allocations in respect of these asset classes by end 2009.
Significant progress was made on this diversification strategy during the year. €630 million was invested in global equity markets. Of this, €188 million was invested in small cap equities and €292 million in emerging markets equities. Two institutional pooled funds, managed by Alliance Capital Management and Emerging Markets Management respectively, were chosen in 2005 for these emerging markets investments.
€170 million was invested in commodities. The Commission is adopting a passive approach to this asset class through investment in certificates that deliver the return on the Goldman Sachs Commodity Index.
As eurozone bond yields rose from their September lows, the Commission committed €136 million to bond markets in December. It had previously taken a tactical decision not to make new investments in bonds while yields were at or near historic lows. Investment will continue on a phased basis if, and as, yields rise further.
The Fund is accessing the property market indirectly through international property investment vehicles rather than through acquiring and holding a physical property portfolio. Its aim is to reach its 8% investment target by end 2009 and this is likely to entail investments in the region of €2 billion over that time period. Moneys committed to property will be drawn down as the general partners of the chosen investment vehicles identify suitable investment opportunities. As of end 2005 €402 million had been committed to property of which €124 million was drawn down.
The Fund is also accessing the private equity market through international investment vehicles and, as with property, the investment programme is likely to entail investment in the region of €2 billion over the period to end 2009. Again, as with property, moneys committed to private equity will be drawn down as general partners of the chosen investment vehicles identify suitable investment opportunities. As of end 2005 €180 million had been committed to private equity investments of which €8 million was drawn down.