Good morning everyone,
I’m delighted to have an opportunity to address you at this event hosted by our friends in Bloomberg. I very much welcome the chance to discuss Ireland, Europe and other issues with a group such as this from British, Irish and foreign media.
Uncertainty in Eurozone
The last time I spoke here was in December 2011. Ireland and Europe were in a different place then. Markets were considerably more nervous, one crisis seemed to follow hot on the heels of another, and there was even talk that the eurozone might break up. As an open economy Ireland was particularly vulnerable to this uncertainty. The fact that we were just 12 months into an EU/IMF programme significantly enhanced this vulnerability. No company or investor was willing to invest in the Eurozone and many deals were put on hold or even pulled.
We have made enormous progress since then. Frequent, intense talks at EU level and in the eurozone, coupled with the policies of the ECB, and in particular its President’s unambiguous declaration not to let the euro fail, have restored much of the lost faith in our European project and have served to settle nerves. There is still much to do, and I will return to this briefly in a little while.
Irish Life – An example of the negative impact of this uncertainty
The deal agreed just this week between the Irish Government and Great-West Lifeco for the sale of Irish Life Assurance Company for €1.3 billion really epitomises the progress that has been made. Great-West Lifeco was close to concluding a deal for Irish Life back in November 2011. However, as they set out at the time and once again highlighted by their CEO this week in Dublin, the uncertainty in the Eurozone made it impossible for the company to invest in Europe just then. I am sure that this is just one example of a board decision to defer or pull investment in the Eurozone at that time.
For those of you who are not familiar with this transaction, following Great-West Lifeco’s decision not to proceed in November 2011, the State paid €1.3 billion in cash to purchase 100% of the share capital in Irish Life – a profitable life assurance, pension and investment company - in June last year.
Fast-Forward 15 months and the sale has concluded with the State recouping 100% of the taxpayers money invested in the company – with a small profit on the investment. This was a historic transaction as it represented the first time that a company in which we have invested during this crisis has been returned fully to private ownership. The restoration of stability and confidence in Europe was a key factor in the investment decision.
Developments in Ireland
It is not just developments in Europe that are making investors look again at Ireland. The Irish economy is entering its third consecutive year of growth, our deficit is on a downward trajectory and we are beginning to attract the levels of investment required to create jobs and to make a full return to the markets
Ireland’s public finances have gone through an exceptional period. As recently as 2007, our debt-to-GDP ratio was just 25 per cent. Last year, it was 118 per cent of GDP. Stabilising that ratio through a reduction in our annual deficits and our borrowing requirement is the backdrop that frames our fiscal policy at the present moment in time.
Fiscal Consolidation
The fiscal consolidation process has been underway since mid-2008 and, all told, measures designed to yield approximately €29 billion or close to 18 per cent of GDP have so far been implemented. The adjustments have been wide ranging and have been implemented across the board, with an impact on all corners of society.
In the most recent Budget in December I introduced a set of adjustment measures aimed at reducing the deficit further this year, in line with our commitments, while at the same time seeking to minimise the impact of consolidation on the economy.
The majority of the adjustment was implemented on the expenditure side of the account, while the focus of the revenue-raising measures for 2013 is on property and indirect taxes, rather than income or labour taxes. One of the key objectives of our economic policy is to get people back to work, and, as you know, indirect taxes are considered to have a less adverse impact on economic activity and employment.
Reducing the Gap – Deficit below 8% and ahead of target
On the fiscal side, we are seeing some positive results with the public finances certainly moving in the right direction. An underlying General Government deficit – that is excluding the direct impact of State support to the banking system – estimated at just under 8 per cent of GDP was recorded in 2012. Importantly, the estimated deficit for 2012is well within the limit set as part of the EU/IMF Programme.
This projected deficit was helped by a better-than-expected tax outturn for 2012, with taxes on a headline basis up 7.7 per cent year-on-year. The most recent fiscal data we have covers just the first month of the year. While it is clear that you cannot read too much into this, the figures were reasonably satisfactory, up 5.6 per cent on an underlying basis, with the performance of income tax (up 10 per cent) particularly noteworthy.
The gap between what we take in as a Government and what we are spending is narrowing. Crucially, as I have said already the economy is growing again – not as fast as we would like, but even as our key trading partners lag, our economy has still seen GDP growth of 1.4% in 2011, by a projected 0.9% for 2012 and will grow by 1.5% in 2013. Against the background of a sluggish global economy and falling Eurozone GDP, this highlights the flexibility of the Irish economy and suggests that we are well on the road to recovery.
Exports Leading the Way
Exports are leading the recovery and in recent years our exporting sector has remained vibrant, competitive and robust. The level of exports is now well above that of the pre-crisis period, having increased by 3.2% over the first three quarters of 2012 to stand at 106% of GDP. The services sector is playing an increasingly significant role in export growth, having grown by 9.4% over the first three quarters in 2012, and now exceed the level of goods exports by just over a billion euro. This owes much to the significant price and cost adjustments that have taken place in recent years. That strong export performance means that Ireland’s balance of payments with the rest of the world is set to record a surplus for the third year in a row in 2012. The current account of the balance of payments recorded a surplus of €3,049m in the third quarter of 2012. This continued the positive trend of Q2 when a record surplus of €3,235m was recorded.
Increased competitiveness and strong Foreign Direct Investment pipeline
We are still seen around the world as a country worth investing in and doing business in. Ireland’s competitiveness compared to our trading partners in Europe has improved by over 20% since 2009. We are ranked by independent studies as the 2nd most attractive country globally for FDI. We are ranked 1st in the eurozone for ease of doing business, 1st for the availability of skilled labour and in the top 10 in the EU for R&D spend.
The pipeline of foreign direct investment remains promising, but obstacles such as the challenging global economic situation and increasing FDI competition are always present. Despite these hurdles, the IDA secured 145 individual investments last year with over 40 per cent from companies coming to Ireland for the first time and 6,750 net jobs created, the highest level in a decade.
So, despite our difficulties, we have much to be proud of. Irish companies are among the most innovative in the world – our creativity and our ambition have not been diminished by crisis.
Domestic economy
We are still facing many challenges. Domestic demand remains weak and is expected to contract again in 2012. Households, firms and the government sector are still working through the imbalances built up during the boom. Our unemployment rate – 14.6% in December - is still unacceptably high, with long-term unemployment now a prominent feature of the labour market. It may take a little time before things return to normal, but I have no doubt that we are on the right track.
Getting people back to work is key priority of the Government and in my recent Budget I targeted a dozen supports at the SME sector. Ireland has a strong entrepreneurial culture with the SME sector employing 70% of workers in the state. These measures are designed to attract investment, to enhance cash flow and to support our SME’s to grow into new products and sectors.
Returning to the Markets
The Irish Government remains committed to achieving the agreed measures under the EU/IMF programme, including the fiscal targets, and most importantly to emerging from the Programme this year. We have completed over 190 measures and drawn down around 83% of the funding. However, the real success of this programme will be Ireland making a full return to the markets.
And in this regard we are making significant progress. Only two years ago Ireland was locked out of the capital markets. However in 2012 Ireland issued conventional bonds in an amount of €4.2bn, Irish Amortising Bonds in an amount of €1bn, short term treasury bills in an amount of €1bn and bond switches in an amount of €4.5bn.
Making progress on the banking front
The Irish covered banks over the past few months are taking maximum advantage of improved market funding conditions. They are diversifying their funding base and reducing monetary authority funding. Covered banks in Ireland have reduced their ECB borrowings by 19 billion euro in 2012 year-on-year, and have raised 3.9 billion euro in additional market funding in recent months. Deposits at Irish banks have increased by 7.1 billion euro or 4.8 per cent year-on-year to the end of January 2013, and by 14.3 billion euro or 10.2 per cent since the recapitalisation of the banks was completed in 2011. Deleveraging targets of the PCAR banks have also exceeded targets in 2012 and remain on track in 2013. Deleveraging of 55 billion euro has been achieved by AIB, Bank of Ireland and PTSB from 31 December 2010 to 30 November 2012.
All three covered banks; AIB; BOI and PTSB have re-accessed the markets in recent months as have a number of our Semi-State companies. All told €10 billion has been invested or committed in the past six months, mainly by international investors, in transactions managed by the State or entities controlled/owned by the State.
Return on our investment in the Banks
I have already alluded to the €1.3 billion investment in Irish Life. All in all the State invested €64 billion of taxpayers money in the Irish banks – equivalent to 40% of our GDP. This can be broken down almost 50:50 between the promissory note and investment in viable institutions. The Irish Life sale provided a return of €1.3 billion of the investment in viable institutions and this follows the successful sale of the Bank of Ireland Coco’s for €1 billion in January which also reduced the total.
The State is holding very attractive investments in the Irish banks in addition to our ordinary share holding. The Government’s policy position is to sell these assets if the price matches our valuation and provides a full return to the Irish taxpayer.
In addition to attracting private sector investment the State is also working to implement the 29th of June agreement to break the links between the banks and the Sovereign. This is now the stated policy position of Europe and we will continue to work with our European partners to ensure Ireland is in a position to avail of the new recapitalisation tools that are being developed.
Promissory Note
The second half of our banking debt relates to the now replaced Promissory note. As I am sure you can imagine, I very much welcome the recent positive developments in this area!. The promissory notes in Anglo Irish Bank and Irish Nationwide served as a millstone around the neck of the Irish taxpayer. This burden had eroded confidence and limited the economy’s ability to grow. Ireland has now succeeded in alleviating this burden and placing the state in a position where the debt is more manageable and the state is provided with the space and time to recover and grow.
Impact of the deal
The deal puts in place stable funding and, thereby, greatly enhances Ireland’s ability to return to the international financial markets. The agreement will deliver a cash-flow benefit of €20 billion over the next 10 years, and also reduces the deficit by €1 billion per annum over the coming years.
Again, this is not insignificant. Immediately after the deal had been done, the ratings agency S&P revised Ireland’s outlook from "negative" to "stable", the second rating agency to do so. This will help in convincing the markets that Ireland is firmly back in business.
CONCLUSION
I want to allow some time for Questions & Answers so I might conclude now. Before I do, let me just sum up what I wanted to say to you today.
Overall we are determined, as a nation, to grow our way out of the current situation. The Irish economy has grown in the last two years after three consecutive years of decline.
Ireland’s future is very much tied to that of the EU. At the same time, we are very strongly attached to the excellent relationship and cooperation we have with the UK. We have similar views on many issues, in particular as regards the single market and EU trade with external partners.
The UK has made, and continues to make, a very valuable contribution to the development of the EU. We would like to see a strong EU with a vibrant UK playing a central role. In our view, the EU needs the UK and, like Ireland, the UK needs the EU.
We are doing what’s needed at home. The challenge for European leaders is to put in place the policies we urgently need to restore confidence in the euro and put all member states, large and small, on a stable trajectory towards growth and prosperity. It is an opportunity we must now grasp and I intend that Ireland will give Europe its first success story as the recessionary cycle moves back in the right direction.
Thank you.