I r e l a n d
The Irish Economy Charting the course to Irish economic and financial stability
May 2009
Head of Research: Eamonn Hughes Tel: +353 1 641 9442 Email: [email protected] A Collective Response
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• Non-partisan call by three of Ireland’s largest stockbrokers
• Scale of crisis requires a collective responsibility
• Lessons from previous crises – Sweden, Finland for example – reveal that social and political cohesion are pre-requisites for addressing the problems
• Another lesson is that with some tough medicine, countries can get through these crises
• Scale of issues is multi-faceted 2 Restoring Confidence in Ireland Inc
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• Resolving the fiscal crisis – Consolidation measures of 6% of GDP have already been introduced. Five-year strategy has been laid out
• Resolving the banking crisis – NAMA is a welcome step along that path, although full details have yet to emerge, but are imminent
• Economic recovery – Still some way off, but improving competitiveness will ensure participation in an international recovery
3 Outline
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1. General environment
2. The Public Finances & Sovereign Debt
3. Competitiveness & the Economy
4. The Banking Sector
4 Wrong Place, Wrong Time
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Construction-led recession in Ireland - Investment as a % of GNP 33%
31%
29%
27%
25% 23% % of GNP % of 21% 19%
17%
15% f 6 0 8 2 9 9 994 998 010 1970 1972 1974 1976 197 1980 198 1984 198 1988 1 1992 1 1996 1 2000 2002 2004 2006 2008f 2
5 Housing-Led
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Irish housing output in 2009 set to be the lowest in 16 years 100,000 90,000 80,000
s 70,000 60,000 50,000 40,000
number of unit of number 30,000 20,000 10,000 - f 2 7 9 2 4 7 9f 0 95 98 00 05 99 994 9 99 9 99 0 00 00 0 006 00 00 1991 1 1993 1 1 1996 1 1 1 2 2001 2 2003 2 2 2 2 2008 2 201 Source: DoELG, Goodbody estimates
6 Second-hand Houses For Sale (as a % of housing stock) I r e l a n d
Roscommon 5.9% Cavan 5.9% 2.5% Waterford 5.4% Leitrim 4.8% Carlow 4.7% Kerry 4.5% Offaly 4.4% 3.9% 2.4% Wexford 4.5% 4.8% Mayo 4.0% 4.0% 5.9% 2.8% Sligo 3.9% 5.9% Longford 3.9% Galway 3.8% 3.9% 2.4% 3.5% Westmeath 3.5% 3.8% Laois 3.5% 4.4% 1.2% Tipperary 3.1% 2.1% Clare 3.1% Louth 2.8% 3.1% 3.5% 2.4% Cork 2.7% 4.7% Donegal 2.5% 3.1% Limerick 2.4% 2.4% 2.3% 4.5% Monaghan 2.4% Wicklow 2.4% 4.5% 5.4% Meath 2.4% 2.7% Kilkenny 2.3% Kildare 2.1% Dublin 1.2% 7 Ireland’s Indebted Households
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Household debt as a % of disposable income
200% 180% 160% 140% 120%
rsonal Disp Income 100% 80% 60% 40% 20%
Household Debt / Pe 0%
9 8 93 95 97 04 06 000 002 009 19 1994 19 1996 19 1998 199 2 2001 2 2003 20 2005 20 2007 200 2 2010 Source: Central Bank of Ireland, Goodbody estimates
8 Ireland’s Indebted Households
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Household Debt / Disp income ratios - Ireland is moving up the league table % increase in ratio 1995 2005 -08 Year 1995-2008 1 Denmark 188 1 Denmark 260 2005 38% 2 Japan 130 2 Netherlands 246 2005 118% 3 Norway 119 3 Norway 195 2006 64% 4 Netherlands 113 4 Ireland 176 2008 267% 5 UK 106 5 UK 173 2008 63% 6 Canada 103 6 Australia 171 2006 106% 7 Germany 97 7 New Zealand 160 2007 67% 8 New Zealand 96 8 Sweden 139 2006 54% 9US 93 9US 138 2007 48% 10 Sweden 90 10 Canada 130 2008 26% 11 Australia 83 11 Spain 130 2008 120% 12 France 66 12 Portugal 120 2005 123% 13 Finland 64 13 Japan 109 2007 -16% 14 Spain 59 14 Finland 102 2006 59% 15 Belgium 57 15 Germany 100 2006 3% 16 Portugal 54 16 Austria 88 2006 159% 17 Ireland 48 17 Belgium 75 2006 32% 18 Austria 34 18 France 72 2008 9% 19 Italy 31 19 Italy 66 2006 113% Source: OECD, various central banks, Goodbody estimates
9 Borrowing From Abroad
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Loan to Deposit ratio for Irish residents
260%
240% Sep-08
220%
200%
180% LDR
160%
140%
120%
100% Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07
Source: Central Bank of Ireland
10 Consumer Retrenchment
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Consumers in clear retrenchment mode
15%
10% Core sales (ie. excl. 5% motor trades)
0%
-5%
-10%
YoY (3-monthYoY average) All Businesses -15%
-20%
-25% Aug- Jan- Jun- Nov- Apr- Sep- Feb- Jul- Dec- May- Oct- Mar- Aug- Jan- 03 04 04 04 05 05 06 06 06 07 07 08 08 09 Source: CSO
11 Deterioration Becoming More Widespread I r e l a n d
Meteoric rise in Live Register continues
100%
80%
60%
40%
% YoY 20%
0%
-20%
-40% Apr- Mar- Feb- Jan- Dec- Nov- Oct- Sep- Aug- Jul- Jun- May- Apr- Mar- 71 74 77 80 82 85 88 91 94 97 00 03 06 09
Source: CSO
12 The Forecast
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Growth Components 2006 2007 2008 2009F 2010F
Consumption 7.1% 6.3% -0.8% -9.0% -6.5% Government 4.8% 6.0% 2.1% 0.0% 0.0% Investment 4.0% 1.2% -19.9% -33.8% -18.7% Domestic Demand 5.8% 4.7% -6.0% -13.4% -7.4% Exports 5.7% 6.8% -0.4% -4.5% -1.2% Imports 6.3% 4.1% -4.4% -9.9% -4.0% GDP 5.7% 6.0% -2.3% -8.8% -4.3% GNP 6.3% 4.1% -3.1% -9.5% -4.9% Source: Goodbody
13 I r e l a n d
The Public Finances
14 Tax Collapse
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Current a/c balance to blame for ballooning deficit 8% 6% 4% 2% 0% -2%
% of GDP % of -4% -6% -8% -10% -12% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009f 2010f
Source: DoF Current Capital
15 Tax Collapse
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Tax performance % of total 2002-2007 2007-2009 Ta x h ea d in g 2009e (€m) 2002 2007 2009 €m % €m % C&E 4,128 15.6% 12.9% 12.6% 1,525 33.3% -1972 -32.3% CGT 501 2.1% 6.6% 1.5% 2,517 400.7% -2644 -84.1% CAT 265 0.5% 0.8% 0.8% 233 155.0% -118 -30.7% S tamp 660 4.0% 6.8% 2.0% 2,028 173.9% -2535 -79.3% IT 13,054 31.0% 28.7% 39.9% 4,530 49.9% -551 -4.0% CT 3,040 16.4% 13.4% 9.3% 1,546 32.2% -3309 -52.1% VAT 11,100 30.3% 30.7% 33.9% 5,660 63.7% -3445 -23.7% Total 32,749 100.0% 100.0% 100.0% 18,031 61.6% -14576 -30.8% Source: DoF
16 A Liquidity Problem, Not a Solvency One I r e l a n d
Deficits expected in short term- Exchequer balance as % of GDP 4% 2% 0% -2% -4% -6% -8% % of GDP % of -10% -12% -14% -16%
0 3 f 88 91 96 4 7 994 997 99 02 1986 1987 19 1989 199 19 1992 199 1 1995 19 1 1998 19 005 008 2000 2001 20 2003 200 2 2006 200 2 2009
Source: Department of Finance
17 A Liquidity Problem, Not a Solvency One I r e l a n d
Government debt levels as % of GDP 120%
100%
80% National/Exchequer debt General 60% Government debt
% of GDP 40%
20%
0%
3 1982198 1984 91 1985198619871988 4 Source: Department of Finance 1989199019 1992 1993199 19951996 999 02 199719981 2000 200120 20032004 9f 0f 2005200620072008 200 201 18 Spending Adjustment Required
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Spending and tax jaws opening up
40% Voted Expenditure growth 30%
20%
10%
% ytd 0%
-10%
-20% Tax Revenue growth -30% Oct- Apr- Oct- Apr- Oct- Apr- Oct- Apr- Oct- Apr- Oct- Apr- Oct- Apr- 02 03 03 04 04 05 05 06 06 07 07 08 08 09 Source: Department of Finance
19 Spending Adjustment Required
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Government spending (as a % of GNP) back to 1980s' levels
70%
60%
50%
40%
30% % of GNP
20%
10%
0%
1 3 4 5 6 8 0 2 4 6 7 8 9 1 3 5 7 f 8 8 8 8 8 9 9 9 9 9 0 0 0 0 10 9 9 9 9 987 9 9 9 9 9 9 000 0 0 0 0 0 1 19821 198 1 1 1 1 19891 19911 19931 19951 199 1 199 2 2 20022 20042 20062 20082009f2
Source: DoF Gross Current Exchequer Capital
20 Shaky Foundations
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Housing-related taxes* in Ireland
8000 18%
7000 16% 14% 6000 12% 5000 10% 4000 €m 8%
3000 tax total % of 6% 2000 4%
1000 2%
0 0% 1995 1997 1999 2001 2003 2005 2007 2009e Source: DoF, Goodbody estimates *combines housing estimates for CGT, Stamp & VAT Amount (LHS) Share of total (RHS)
21 Where Is The Money Spent?
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Summary of Voted Supply Services* - Capital & Current - Top 10 spending areas Budget 2009 % of Dept. Exp. 2009 Estimate - % of % of Pa y as a % of Vote. Total % of Total Total % of Total Dept. No. Spending Total Current Current Capital Capital Current Capital Pay Bill pay bill expenditure 40 Health Services Executive 15,256 24% 14,791 26% 465 6% 97% 3% 8,155 41% 53% 38 Social & Family Affairs 10,545 16% 10,554 19% 12 0% 100% 0% 225 1% 2% 26 Education and Science 9,628 15% 8,739 16% 889 11% 91% 9% 6,679 33% 69% 38 Social Insurance Fund 9,025 14% 9,025 16% - 0% 100% - 0% 0% 32 Transport 3,613 6% 725 1% 2,888 35% 20% 80% 68 0% 2% 25 Environment, Heritage and Local Government 3,114 5% 969 2% 2,146 26% 31% 69% 118 1% 4% 31 Agriculture 1,803 3% 1,402 3% 402 5% 78% 22% 364 2% 20% 20 Garda 1,589 2% 1,540 3% 49 1% 97% 3% 1,377 7% 87% 34 Enterprise, Trade & Employment 1,569 2% 1,074 2% 495 6% 68% 32% 351 2% 22% 36 Defence 852 1% 827 1% 25 0% 97% 3% 589 3% 69% Top ten spending departments 56,996 89% 49,646 89% 7,370 90% 87% 13% 17,927 89% 31% Total 64,029 100% 55,818 100% 8,231 100% 87% 13% 20,042 100% 31% Expenditure receipts and balances 13,999 13,553 466 Net voted total 50,030 42,265 7,765 Note: Spending would also include a non-voted element which would include EU contributions, interest servicing, on which there is no real control over
22 A Gauge of Progress
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5-yr Irish CDS Spread 450
400
350
300
250
bps 200
150
100
50
0 May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- 07 07 07 07 08 08 08 08 08 08 09 09 09 Source: Datastream
23 No Longer Top of The Class?
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Sovereign Debt Rankings S&P GGD as % of GDP GGB as % of GDP Bond Country rating 2007 2008 2009f 2010f 2007 2008 2009f 2010f spread* Austria AAA 59.5 59.4 62.3 64.7 -0.4 -0.6 -3.0 -3.6 64.0 Finland AAA 35.1 32.8 34.5 36.1 5.3 4.5 2.0 0.5 51.5 France AAA 63.9 67.1 72.4 76.0 -2.7 -3.2 -5.4 -5.0 36.3 Germany AAA 65.1 65.6 69.6 72.3 -0.2 -0.1 -2.9 -4.2 0.0 Luxembourg AAA 7.0 14.4 15.0 15.1 3.2 3.0 0.4 -1.4 n/a Netherlands AAA 45.7 57.3 53.2 55.2 0.3 1.1 -1.4 -2.7 42.1
Ireland AA+ 24.8 40.8 54.8 68.2 0.2 -6.3 -11.0 -13.0 165.3 Belgium AA+ 83.9 88.3 91.2 94.0 -0.3 -0.9 -3.0 -4.3 55.8 Spain AA+ 36.2 39.8 46.9 53.0 2.2 -3.4 -6.2 -5.7 60.9
Slovenia AA 23.4 22.1 24.8 25.8 0.5 -0.9 -3.2 -2.8 n/a
Portugal A+ 63.6 64.6 68.2 71.7 -2.6 -2.2 -4.6 -4.4 80.1 Cyprus A+ 59.5 48.1 46.7 45.7 3.4 1.0 -0.6 -1.0 n/a Italy A+ 104.1 105.7 109.3 110.3 -1.6 -2.8 -3.8 -3.7 80.0 Slovakia A+ 29.4 28.6 30.0 31.9 -1.9 -2.2 -2.8 -3.6 n/a
Malta A 62.2 63.3 64.0 64.2 -1.8 -3.5 -2.6 -2.5 n/a
Greece A- 94.8 94.0 96.2 98.4 -3.5 -3.4 -3.7 -4.2 162.4
Eurozone avg. 66.1 68.7 72.7 75.8 -0.6 -1.7 -4.0 -4.4 Source: Bloomberg, European Commission *Current 10-year bond yield spread with German bunds 24 Main Issues
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• Setting out a plan to reduce deficit and stick to it
• This plan must be credible and transparent – recent road shows are a step in the right direction
• Recent budget concentrated too much on taxes – successful fiscal consolidations are focused on reductions to current spending
• Tax base must also be broadened – Commission for Taxation report is imminent
• Solvency risks are exaggerated, liquidity risks less so
• Domestic savings are on the increase 25 I r e l a n d
The Economy
26 Back to Basics on The Economy
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• Fiscal stimulus is out of our hands – must piggy-back on European and US measures
• Past experience suggests that an improvement in competitiveness acts as a trigger to economic recovery
• Wage costs are dropping fast in the private sector and will see largest fall in consumer prices in 2009 since 1933
• Commitment to 12.5% corporation tax must remain a key plank of industrial policy here
• Choosing winning sectors – Green energy? 27 Being Ready For An International Recovery I r e l a n d
Trade weighted index highlights decline in competitiveness
140
130
120
110 Index
100 40% real appreciation highlights decline in competitiveness 90
80 Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Central Bank
28 Being Ready For An International Recovery I r e l a n d
Deflation to be a reality in Ireland in 2009
25%
20%
15%
10% YoY 5%
0%
-5% Biggest decline in the CPI since
-10% 1923 1929 1935 1941 1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007
Source: CSO
29 I r e l a n d
The Banking Sector
30 Cost of banking crisis I
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Systemic Banking Crises in Developed Economies since 1970 Systemic Banking Share of NPLs at Fiscal Cost Crisis (starting peak (gross, as % of Output loss (IMF) Minimum real GDP Country date) (in %) GDP) (as % of GDP) growth rate (in %) Czech Republic 1996 18.0 6.8 -0.8 Finland 1991 13.0 12.8 59.1 -6.2 Hungary 1991 23.0 10.0 -11.9 Japan 1997 35.0 24.0 17.6 -2.0 Korea 1997 35.0 31.2 50.1 -6.9 Norway 1991 16.4 2.7 2.8 Slovak Republic 1998 35.0 Spain 1977 5.6 0.2 Sweden 1991 13.0 3.6 30.6 -1.2 United States 1988 4.1 3.7 4.1 -0.2 Average 21.4 11.2 32.3 -2.9 Source: Laeven and Valencia, 2008. "Systemic Banking Crises: A New Database", IMF Working Paper.
31 Cost of banking crisis I
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Debt of banks guaranteed by Irish Government (€m)* AIB BOI Anglo IL&P EBS Irish NW Total As of Jun-08 Sep-08 Sep-08 Jun-08 Jun-08 Dec-07 Customer loans 132,814 144,289 72,151 41,005 16,595 12,332 419,186 Shareholder's equity 9,555 6,382 4,125 2,639 612 1,510 24,823 Shareholder's equity + undated subord 11,340 9,591 7,263 2,639 862 1,510 33,205 Total debt 74,636 82,927 39,543 28,501 9,073 7,242 241,921 Total debt ex liquid assets 34,531 45,051 15,328 22,013 5,999 3,878 126,800 Total debt + deposits 161,619 173,592 91,042 43,098 18,976 14,492 502,819 Total debt + deposits ex liquid assets 121,514 135,716 66,827 36,610 15,903 11,128 387,698 Source: Company reports *Postbank Ireland also insured, but no figures available
32 Cost of The Banking Crisis II
I r e l a n d
Bad bank writedown assumptions
AIB BOI Anglo Others Total
Loans transferred at book value (€m) Commercial investment 6,239 6,961 10,822 24,022 Residential investment 1,221 1,289 980 3,490 Commerical development 7,164 4,512 7,246 18,922 Residential development 14,012 8,710 8,361 31,083 Contractors 1,049 0 0 1,049 Total 29,685 21,471 27,410 6,423 84,989
Write down (%) 17.0 14.7 17.4 16.5 16.5 Commercial investment 8.1 10.3 13.3 11.1 Residential investment 8.0 9.5 6.9 8.2 Commerical development 21.7 19.3 22.8 21.5 Residential development 20.5 16.7 19.0 19.1 Total 17.0 14.7 17.4 16.5 16.5 Source: Goodbody estimates
33 The NAMA-Effect
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Post NAMA - Capital, Dilution & NAV - Base Forecasts AIB BOI 2009f 2010f 2011f 2010f 2011f 2012f Equity tier 1 (with no equity recap & €3.5 3,432 2,609 1,993 2,659 1,170 -167 RWA 97,678 97,794 95,791 72,547 68,208 69,418 Equity to RWA (ex equity injection) 3.5 2.7 2.1 3.7 1.7 -0.2 Tangible NAV(with no equity recap & €3. 4,154 2,959 2,343 2,320 333 -1,004
Dilution 4% 36.8 60.0 66.3 19.1 58.5 71.3 5% 64.2 72.3 75.0 48.4 66.9 75.4 6% 75.0 78.9 80.1 62.2 72.5 78.5
Tangible NAV per share 4% 3.31 1.93 1.60 2.07 0.78 0.55 5% 2.27 1.64 1.46 1.69 0.85 0.64 6% 1.87 1.49 1.38 1.51 0.89 0.71
Source: Goodbody estimates
34 Conclusions
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• A hard reality with no quick fix
• No economic recovery without stable public finances and a functioning banking sector
• A test of politics as well as economics
• A collective effort is required
• Pain in the short-term will lead to gain in the medium-term once imbalances in the economy are worked through
35 I r e l a n d
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