Ireland’s economy resilient in face of adversity

21 Jul Ireland’s economy resilient in face of adversity

Conor O’Kelly, CEO, National Treasury Management Agency, discusses Ireland’s historical pathway to economic success and the impact of the agency’s investment on Ireland’s economy and foreign relations

What are the benefits of Ireland’s current fiscal scheme in light of the recent crisis?

Ireland had one of the best performing economies in Europe in 2020. Growth of our gross domestic product (GDP) did not fall. Although Ireland is a small economy, it is a complicated economy. Our GDP numbers are not equivalent to other countries because of the impact of multinational corporations and their activities. We have a twin-engine economy. Our indigenous economy was completely on the floor and was being led by our international economy consisting of large multinationals and exporting companies whose market and consumers are outside of Ireland. These entities account for about 50% of the economy.

This setup was deliberate for us to have exposure and protect our small economy. Economies need diversity in revenues and activities to survive. Ireland developed a policy in the 1950s to build an international-type economy and became very effective at attracting foreign direct investment. Now some of the biggest technology and pharmaceutical companies in the world have their European headquarters in Ireland. When we have a domestic crisis, these parts of the economy keep us going, stop us from falling too far and help us lift ourselves back up while the domestic economy gets repaired.

We have recently seen the benefits of this type of framework. When the pandemic first hit, our predictions were quite different from what we see today. Around 80-85% of people have retained their jobs in specific sectors. Tech and pharma companies not only survived, but thrived. It is important to point out that this is looking at macro numbers and not diminish the severity of the pandemic on certain sectors. Travel, transport, tourism and retail sectors were majorly impacted, but count for only 15% of the overall economy. Our income tax was up 14.5% in the first four months of 2021 compared to the same range in 2019. Both corporation tax and disposable income after tax are higher than in 2019. Credit and debit card spending in Ireland in 2020 was only 5% lower than the previous year. We have not yet understood just how much we have shifted our behavior due to the pandemic; we are not spending as much.

As we move out of lockdown the government will give more and more support to specific industries. Because the entire economy does not require assistance, things will rebound quickly in Ireland. We have savings and are expected to start spending. This will have a huge economic impact. A third of all excess savings around the world were spent causing two percentage points in global economic growth for two years in a row. We have the ability to spend and we are going to spend. However, rebounds and recoveries are not the same thing. A recovery is more sustainable. Whether we will see a firm recovery is up for debate and depends on policymakers.

What are the reasons Ireland has continued to grow its GDP despite challenges caused by the COVID-19 pandemic?

We experienced a once-in-a-century global financial crisis and ten years later we faced a global pandemic. Our ability to withstand our current crisis is very much informed by what happened in the previous economic downturn, and similarly what we learn now will inform the next. Although government policy informs decisions, it is more important how businesses react and adapt to crises on the ground. Any small and individual businesses still intact after these two events are resilient. Businesses that did not survive the financial crisis probably had too much leverage. Previously, there were a lot of very good businesses with a lot of very bad balance sheets. Ireland was like that at both a national and individual business level. Ireland essentially went into liquidation and had to be bailed out by the International Monetary Fund after the economic crisis. Businesses and the Irish government had to rebuild balance sheets in a very careful way to get themselves back on track and regain investment confidence.

We went from having a sub-investment grade in 2014 to being rated AA by Moody’s and S&P. We received support from the European Central Bank and had a couple of years of delivering budget surpluses. We entered the pandemic in completely different conditions to how we entered the 2008 financial crisis. This has allowed us to take the actions that we have taken. Monetary policy was how we climbed out of the last financial crisis and monetary policy was used again during the pandemic. Having the room to pull the fiscal lever if the country, economy and citizens need it is essential. It has been hugely effective.

What major trends do you think will drive economic growth in the post-COVID world?

Ireland is quite well positioned. There are two great secular themes taking place: digitization and sustainability. Governments and businesses are spending huge amounts on both of these themes. From a digitization point of view, Ireland has strong technology credentials. It has a proven adaptable and flexible workforce. Digitization is only just beginning. During the pandemic every business sought to introduce and work on their digital response. Medium and large-sized businesses recognize the need. Investments in digitization will be enormous. It will be one of the big economic drivers as we come out of the pandemic. In terms of our sustainability credentials and agenda, we still have a lot to prove. There are huge opportunities. We need to be more ambitious, aggressive and committed to sustainability. We are not in front of the trend in the way we could be, whether in energy, sustainable finance or other opportunities that exist in the sustainability agenda.

Can you give us an overview of what the National Treasury Management Agency (NTMA) does and its role during the pandemic?

We manage the balance sheet of the state. We are distinct from politicians and ministers who are charged with setting policies. Our role is to execute these policies at the highest standards. We are at a junction between sovereign, financial, legal and private areas. Ireland’s economy is less than 1% of Europe’s GDP. For that reason we get bumped around and our economic cycle is more volatile than more stable economies like the United States. We have to continually adapt our policies and be flexible in our ability to execute them.

Core competencies of a well-functioning agency are reacting quickly and managing upcoming challenges. In response to the pandemic the government asked us to do a number of things, including borrowing large amounts of money on the marketplace. We were able to do this quickly and effectively. They also asked us to put together and invest in the Pandemic Stabilization and Recovery Fund or PSRF. We made $2.4 billion available to invest in the capital structure of companies. This was not lending so much as investing equity, which is quite innovative. Because we had these funds in place, we were able to reach companies on the market immediately. Without the foundation of specific institutions coupled with expertise, infrastructure, technology and good governance, doing what we did would be impossible. Ireland has excellent institutions that it uses very effectively.

Tourism, travel and retail sectors will need significant help. These industries employ large numbers of people and tend to be the lower-paid part of the economy. However, we have a progressive income tax system where 20% of the populace pays about 80% of the income tax. These individuals remain employed and our income tax has been less affected. The need for support will depend on the extent of the rebound. The government will be careful in taking back support for sectors that do well. Our stabilization and recovery fund is looking hard at the hotel sector and looking for solutions.

Can you give us an overview of NTMA’s Ireland Strategic Investment Fund?

The Ireland Strategic Investment Fund is an unusual sovereign wealth fund. Legislation dictates that the fund must have the two following things: commercial return and economic impact on Ireland. We are required to meet this double bottom line. Most sovereign wealth funds are solely for commercial return. It has been very successful in terms of impact in its more than 100 investments across all sectors and regions of the Irish economy. We are already seeing returns from successful investments we made five or six years ago. We get money back and recycle that money into other areas as the economy changes. We have added about $2 billion to the value of the fund through investment returns since we began.

Regular private equity investors have a relatively short-term time horizon; investors generally want their money back as quickly as they can. We describe our capital as patient capital and take a 10-to-25-year stance. We worked on the pandemic stabilization and recovery effort through the fund; we invested about $470 million this year in companies that needed help. Many companies managed to get money from current investors or the marketplace. Knowing we were there as a last-resort investor allowed them to achieve what they needed to achieve.

What significant investments has NTMA made through the Ireland Strategic Investment Fund since its inception?

We have made some interesting investments. We invested in a fund called Activate Capital in 2015. We invested $590 million in a partnership with KKR & Co. for house builders in Ireland. At the time, banks had almost stopped lending money in this area due to overexposure to the property and housing market. The fund lent capital to more than 25 separate house building firms and saw construction of 14,000 homes.

Another example of positive investment was in our relations with Stripe, an international payments company set up by two Irish brothers from Limerick based in Palo Alto, California. The company has been successful and is now valued at $95 billion. It is now the most valuable private company to come out of Silicon Valley. In response to our investment, they agreed to create over 1,000 jobs in Ireland, make Dublin a dual headquarter and commit to a number of Irish initiatives. This is a great example of how our fund can create long-term value for our citizens.

What impact has Brexit had on Ireland’s economy?

While individual companies – such as ones exporting to the UK in the food sector – have been impacted by Brexit, the larger impact of the split on Ireland is modest. It was good that trade continued through a trade deal. There are some frictions that will take some time to work through, but considering the enormity of the decision, Ireland escaped being badly affected. Things have changed. In the past, 50% of Ireland’s exports went to the UK. Today, only 10% of Ireland’s exports go to the UK. Our dependency on the UK as a market for exports has continued to decline as we move more towards Europe and other global markets, including the US, our biggest trading partner outside of Europe.

Maintaining the Irish border with the UK was one of the key diplomatic achievements in the EU’s negotiations with the UK. Ireland’s concerns were addressed and were critical to the whole process. It showed support from our European colleagues from a diplomatic and foreign policy point of view. We could have easily been left in a very weak and difficult position economically. We are proud to be Europeans and see ourselves as Europeans.

Given Ireland’s small economy of almost 5 million people, it is important to find bigger markets to do business with. To do that you need to deal with international regulations and restrictions and consumer patterns and behaviours in new markets. You have to be flexible and invest more in diversifying target markets and deemphasize dependence on one market, such as the UK. This has accelerated a little bit as we prepared for Brexit. Companies that retain a great relationship with UK counterparts have found ways to deal with the break. There is far less friction than anticipated.

How significant are relations between Ireland and the U.S. and how will changes in tax laws for multinationals affect your relationship?

We have been close to America for a very long time; we were inextricably linked culturally and socially through a hundred years of shared history. We are now often referred to as the 51st state. The US is a massively important trading partner. Corporate tax is an issue that has replaced Brexit as the number one discussion we have with investors. Our twin-engine economy is built on a low tax rate. Obviously Ireland has other advantages such as a young and educated English-speaking workforce and our place in the European market. Our belief is that multinationals should pay their fair share of taxes in the right place. The Organisation for Economic Co-operation and Development and similar bodies are currently trying to square the circle and get global taxes back in line. Ultimately, the impact on Ireland is not known. Our low tax rate was an initial factor in attracting multinationals when Ireland did not have a reputation. Things are different from when we first started.

We have talked to a lot of U.S. companies to attract them to the Irish market through investment, in particular in the agritech sector. Agricultural technology will be critical for Ireland’s transition to a green and sustainable economy. We backed a company called Finistere, an American specialist in agritech. They set up a fund and offices to link with companies and share expertise and investment opportunities. In turn, they invested in a company called ApisProtect. The co-founder and CEO of ApisProtect created a technology that monitors the health of beehives digitally. We try to set up similar relations in bio sciences, biotechnology, sustainable finance and green initiatives. We do not measure the value of these relationships only in jobs created; there is intangible expertise brought into our ecosystem that helps us develop areas important to Ireland’s economy.