Inside the world of business

Some analysts see signs of hope in GDP figures

IF YOU fall into the glass half empty category, the research note on Ireland released by Bank of America Merrill Lynch this week headlined “Ireland: Is GDP misleadingly high?” probably set off a few alarm bells.

However, the BofA Merrill Lynch analysts hadn’t discovered another NTMA/Department of Finance €3.6 billion, or worse still suggested the Irish economy’s books were being cooked à la Greece. Instead they turned their attention to a question that has long occupied Irish economists: is gross domestic product (GDP), which includes the input of the booming export-oriented multinationals located here, or gross national product (GNP), which measures the output of Irish-owned enterprises, the more relevant measure of the output of the economy.

GDP has been broadly steady post the 2008 economic crash and is around 9 per cent below where it was four years ago. In contrast GNP is much weaker and is 17 per cent below the early 2008 level, having fallen by 7 per cent last year alone.

The BofA Merrill Lynch report suggests this shows the risks to the Irish economy of any drop in multinational investment and output, and the importance of maintaining our “relatively favourable” corporation tax regime.

The contribution of corporation tax to the Irish fiscal position should not be overestimated – the report states it is just 7 per cent of total tax receipts.

The report notes that multinationals here are more productive and profitable than indigenous firms, but this does not imply that GNP should be the preferred measure of the local economy.

“Even though a lot of the accompanying profits accrue to foreign-owned companies, the exports were still produced in Ireland, they still required Irish-based capital and labour to produce, and thus still represent output of the economy.”

The report notes that despite the poor performance of GNP last year, the Government’s fiscal position actually improved somwehat – suggesting GDP is the more important measure.

When it comes to Ireland, BofA Merrill Lynch’s glass would seem to be half-full.

Irish debt still seen  as a risky proposition

WHILE THE Government talks up Ireland’s return to the bond markets next year, the riskiness with which Irish debt continues to be perceived by international investors is evident in new statistics from data provider CMA.

Ranking the top 10 “most risky sovereign credits” for the first quarter of the year, Ireland has once more made the grade, keeping company with the likes of Pakistan, Portugal and Argentina. The ranking is based on the spread of credit default swaps (CDS), which insure against default.

While it has improved somewhat – falling back one place to seventh position in the overall league table – Ireland’s presence, ahead of countries such as Egypt, as one of the riskiest countries to invest in, is unlikely to be included on the NTMA’s marketing material anytime soon.

But, while it may be more of the same for Ireland, the real concern is the entry of Spain into the top 10. Given the ongoing uncertainty in the country, and the resulting widening of spreads on its government debt, it has made the top 10 for the first time. The sovereign also achieved the dubious honour of the worst quarterly performance.

Moreover, concerns remain that Portugal could follow a similar path to Greece and look to restructure its debt, given the cost of protection peaked to nearly 1,800 basis points during the first quarter, before settling back.

Following its recent debt restructuring, Greece is no longer included in the table. Instead, it has been replaced by Cyprus, which has been catapulted into pole position in the table.

At the other end of the spectrum, while the rating agencies may have stripped the US of its AAA status last year, the markets see no difference. Based on CDS spreads, it remains the second least risky country in the world, behind Norway.

While it is seen as a safe haven by many, Germany brings up the rear on the top 10 “least risky sovereign credits”. It is in 10th position, reflecting “continuing concerns over the cost of protection in Portugal remaining high and Spain entering the top 10 most risky”.

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NEXT WEEK

Officials from the IMF, ECB and EU arrive in Dublin for what is expected to be a 10-day review of Ireland’s bailout programme