Irish Economy
Irish Economy 2011: Two tiered jobless recovery expected this year; NCB says sovereign debt restructuring cannot be ruled out
By Michael Hennigan, Founder and Editor of Finfacts
Feb 8, 2011 - 11:45 AM

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Irish Economy 2011: NCB Stockbrokers today published a report which says a two tiered, jobless recovery is expected for the Irish economy in 2011. It says that sovereign debt restructuring cannot be ruled out.

The report says that in its low growth scenario, it is difficult to see how Ireland would be able to wean itself completely off EU aid post 2013. As such, the central view is that Ireland will need EU help to raise funds and as a result be rolled into the permanent European Stability Mechanism . Sovereign debt restructuring may form part of the ESM, but NCB sees it as being a last resort after other efforts have been exhausted. A lowering of the interest rate on EU loans, however, would give Ireland a higher probability of weaning itself off aid by 2014.

The report focuses on the Economy, Banking Sector, Irish Sovereign Debt, Irish Bonds, Irish Equities, M&A Market, Saleable State Assets, Foreign Direct Investment (FDI) and the Corporation Tax issue.

NCB terms its report, Ireland Moves Forward (pdf), "the most comprehensive produced to date on Ireland, describes the emergence of a two tier economy and identifies the associated threats and opportunities that will confront the new administration that will take office following the General Election which is currently underway."

The report is indeed comprehensive but we provide a link to the recent Finfacts article on jobs which provides a reality check for some of the conventional wisdom that should be subject to more scepticism.

We for example have a large stock of Foreign Direct Investment (FDI) in Ireland and the report says FDI increased significantly in 2010, "despite global FDI declining by 8%, with the Industrial Development Agency (IDA) securing 126 investments and IDA sponsored firms creating almost 11,000 jobs. Ireland has developed a fast growing reputation as a favourable location for global technology companies with 9 of the World’s top 10 ICT companies now located in Ireland."

There were a net 1,300 jobs added, which isn't a key point either way but what should be noted is that the number of investments are raw counts and in recent years, many of the projects have been small, reflecting our past success in attracting the main payers in US growth sectors.

The fact that pharmaceutical/medical device exports have risen by 38% since 2004 without any change in job numbers, should raise some questions.

Ireland's location relative to the emerging markets, makes the task of attracting big FDI projects more challenging.

What is important, is that employment in the internationally tradable goods and services sector has fallen back to 1997 levels when the total workforce was 25% smaller.

Finfacts article:Irish General Election 2011: The challenge of creating 200,000 new jobs

NCB's key highlights from the report include:

  • A two tiered, jobless recovery will be the order of the day for the Irish economy in 2011 with exports continuing to grow but domestic demand remaining weak;

  • Irish competitiveness has improved significantly through the downturn evidenced by the balance of payments current account, which registered a surplus in Q3 2010 for the first time since 2003;

  • Irish exports increased to the highest figure ever recorded in 2010, increasing 7% year-on-year;

  • Foreign Direct Investment (FDI) in Ireland has increased significantly in 2010, despite global FDI declining by 8%;

  • Despite this backdrop NCB’s central view, based on the current EU/ECB/IMF package, is that Ireland will need further EU help post 2013 to raise funds and as a result will be rolled into the permanent European Stability Mechanism;

  • Having received aid from the EU/IMF, Ireland did not have to make any commitments to alter its corporation tax rate of 12.5% and a common consolidated tax base cannot be imposed on Member States as unanimity is required and Ireland has a veto;

  • The banks remain reliant on the Sovereign for capital and on the European and Irish Central Banks for liquidity. The March 2011 stress tests will determine whether any additional capital is required apart from the €10bn already earmarked to bring Core Tier 1 (CT1) ratios above 12% by the end of February 2011;

  • House price declines in Ireland are not over and the average national peak to trough decline in achieved prices is expected to be in the region of 45-55%. This implies a further 10% fall from peak levels;

  • Irish bonds which mature before June 2013 look attractive on an outright basis as they are essentially guaranteed by the EU/IMF;

  • The Irish equity market is no longer a play on the Irish economy. Irish profits now represent only 17% of overall operating profits of the core group of Irish publicly quoted companies. This compares to 36% in 2006;

  • The report identifies a number of state assets that could be sold, including those in the areas of forestry, energy, networks and ports;

  • NAMA, which has become one of the largest property companies in the world, will be a significant dictator of activity in 2011 and beyond, while publicly quoted companies in the food and construction sector are likely to be active in mergers and acquisitions;

  • The area of renewable energy/cleantech continues to be an area of significant investor interest both in public markets/IPOs and venture capital fundraising. There are several Irish companies (mainly privately owned) with a significant exposure to this sector.

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