IRISH BUSINESS CLUB – SHAMROCK AWARD SPEECH, HELSINKI 29.10.08
OVERVIEW OF THE IRISH ECONOMY
The CELTIC TIGER = Unprecedented growth since the mid 90’s
Background
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Low Corporation Tax - 12,5 % ( earlier 10 % )
IDA and its role in attracting foreign investment since the late 1960s had laid a
solid foundation by offering : factory buildings and infra structure, various types
of grants ( e.g. training & educational), long term loans and credit facilities, tax
concessions etc.
Highly educated & trained work force with targeted education system to support
inward investment – ICT, Pharmaceutical and Bio-Chemical industries.
Especially US companies attracted by Ireland as an English speaking country and
many of them established their European HQ in Ireland.
This industry was Export oriented with access to world markets.
The official bureaucracy was ‘ Investor Friendly ‘.
A substantial Financial Services Industry had established itself in Dublin with the
world’s leading financial institutions represented. The Irish Financial Services
Centre IFSC became a substantial employer of well paid jobs.
A very Determined and Consistent Economic Policy by successive Governments.
Ireland very skillful in obtaining EU grants.
Positive Results at height of the Tiger – around 2006
- Full employment at it’s peak around 2006 ( 4-5 % unemployment)
- An unbroken GDP growth of over 5 % ( peaked at > 10 % ) for over 10 years
- Exports performing strongly, still.
- Much improved road and transport infrastructure ( Luas light rail, Port Tunnel,
Motorways ) Other infrastructural projects e.g. Croke Park, Lansdowne Road stadiums.
- Increased welfare payments for the elderly and improved Health Care.
- Free third level education. (university level)
Worrying Signs at height of the Tiger – around 2006
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Rising cost level had lead to a deterioration in competitiveness of Irish based
industry.
New inward and re-investment being lost to China, India, Russia, Eastern Europe.
The abnormally large share of construction of GDP growth over the years..
Aggressive lending by financial institutions had led to artificially high property
prices and an increasing level of debt – both private and commercial.
Alarming growth in private consumption funded by credit.
Around this time (2006) it was acknowledged that the Economic Cycle had to come to an
end and a ‘ Soft Landing ‘ was predicted. It was, however, also accepted that a small
open economy like Ireland’s was vulnerable to External Factors and every one was
following keenly foreign and especially US developments for danger signs. The weak
US and UK currencies had added extra difficulties for the export industry and in 2007 it
became clear that the Economy had in fact already slowed down although GDP growth
was still a remarkable 6 %.
EXTERNAL FACTORS – The Credit Crunch, the Meltdown of the Global Financial
Markets.
It should be noted that Irish banks had no exposure to the US Sub Prime Market but it’s
collapse very much triggered the avalanche internationally which of course has also hit
Ireland very hard. To find the reasons why Ireland has been hit so badly by the
international credit squeeze, collapse of stock markets etc. we have to go back to the
boom years and look at the underlying reasons for Ireland’s prolonged upswing which
really lasted for well over 10 years :
CREDIT GROWTH in Ireland from 1994 onwards was way above the EU average :
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
12 %
10 %
17 %
25 %
25 %
30 %
20 %
16 %
14 %
20 %
25 %
28 %
25 %
17 %
Funded by :
- Big increase in borrowings from abroad, largely on the interbank market.
- Reduction in holdings of Government debt
- Borrowings from the Irish Central Bank
- Reduction in amount required to be placed with the Central Bank as reserves
In 2007 Ireland had the highest private sector credit growth as % of GDP than any other
country in the Euro zone.
Another example : Annual Growth in Mortgages i.e. Home Loans alone rose from 12.5 %
in 1994 to 26 % in 2003.
CONSTRUCTION as % of GDP peaked in 2000 and 2006 at around 11 % and still in
2007 employed 282.000 people plus another 113.000 in industries servicing the sector.
In 2006, 90.000 private houses were built for a population of 4.5 mill. UK was building
only twice as many with more than 15 times the population.
It must be remembered that Construction has been an important source of Government
Revenue in the form of Stamp Duty, VAT and other property related tax plus the
resulting spin off in retail sales, tax on furniture, renovations etc. In 2006 17 % of Tax
Revenue came from the Construction Sector compared with 8 % in 2002 and 5.5 % in
1998.
Construction can be broken down roughly as :
New housing as private residences
Home improvement
Private non-residential
Public infrastructure
55 %
15 %
10 %
20 %
Role of FINANCIAL INSTITUTIONS in Credit Growth Period 1994 - 2007
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Ratio of Retail Bank deposits to loans declined from 1:1 to 1:2
Banks saw Market Share as their main target which resulted in very aggressive
lending practices such as 110 % mortgages & Buy to Let lending.
Main banks got far too exposed to property : 71 % and 60 % for the top two and
while the Financial Regulator cannot but must have noticed this development did
not act to stop it.
Some lenders lost the run of themselves : One Building Society’s (traditional
home lenders) loan book is made up of only 25 % home loans. The balance is
commercial property/property development loans and it is reported that this
financial institution has 51 joint ventures with property developers.
People became obsessed with property with many individuals buying multiple
retail properties many of which are now worth less than cost and more worryingly
less than the borrowing outstanding against them.
This property frenzy was further encouraged by Estate Agents, the Media,
especially TV programmes promoting attractive properties both home and abroad.
Naturally property prices galloped away uncontrollably : A hotel site in
Ballsbridge near the RDS in South Dublin sold for Eur 51 mill/acre in 2006. A
terraced house in Ailesbury rd. in the same area sold in 1991 for Eur 250 K and
resold in 2006 for Eur 9.5 mill. !
Lending between 2001 and 2008 rose by Eur 100 billion !
And to SUMMARISE the situation today at Irish Financial Institutions :
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Speculative lending to Development and Commercial Property stands at Eur 39
billion out of a total lending of Eur 112 bill. according the the Financial Regulator
as reported to a Pariamentary Committee this month.
Bank loan books in Q2 2008 Bank of Ireland 71 % property (includes home
mortgages, commercial property) AIB 60 % property, Anglo Irish Bank 80 %
property and National Irish Bank 85 % property.
In Ireland the Ratio of Debt to Disposable Income stands today at 175 % compared to 77
% in 2001. Interest on total house hold debt this year will be Eur 8.4 bill., 25 % of all
disposable income.
The Irish Stock Market has come down by more than 60 % this year to date – worst year
ever. In 1974 – 47 % during oil crisis.
GOVERNMENT INTERVENTION
In the face of this extremely alarming situation the Irish Government has had to step in
with the main measure being :
Government is guaranteeing Eur 485 billion at 11 financial institutions (6 Irish, 5 foreign
owned) insuring deposits and banks’ own debts.
The cost to the banks is Eur 500 mill/year = Eur 1 billion over 2 years which represents a
min. of 10 % of their annual profits. Not all foreign banks are likely to opt for this as
there will have been direct capital injection into their Parent banks by foreign
governments.
It is estimated that the banks’ capital need lies between Eur 10 and 13 billion.
Both Government and the banks are in favour of raising this capital privately but there is
a distinct possibility that the Government will have to inject some capital.
Against the Guarantee the Government is entitled to appoint a representative to the
banks’ boards as well as to various committees.
At the time of writing it is now very likely that we will see a fundamental restructuring of
the Irish banking system with mergers and even some level of foreign control taking
place.
BUDGET
Presented in October one and a half month earlier than normally.
Extra income tax in the form of income levy 1-2 %, possibly 3 % for high earners.
Increase in excise duties, VAT and property taxes.
Cut backs in healthcare, education etc.
Corporation tax stays at 12.5 %
Supplementary Mini Budget later on.
Economy is expected to contract by 1-2 % in 2008 and forecasts for 2009 vary from 0 %
to – 4.5 %
Watever the outcome the next couple of years are going to be tough with belt tightening
for all.
Thank you.