Ireland steers with a steady hand

Ireland returned to growth last year for the first time since 2007, setting it apart from its fellow eurozone countries. But as the European crisis begins to wreak havoc with Ireland’s economy, the country has to prove itself once again, writes Laura Benitez.


Things were looking up for Ireland in 2011; the country’s GDP grew by 0.7% and its exports rose by 4%. Ireland has also succeeded in meeting all of its fiscal targets under the EU and IMF’s bail-out programme, earning itself the name of ‘the poster child for austerity’.

However, despite the rise in consumer spending and investments in 2011, by the close of the year the eurozone’s ongoing turbulence and eventual recession began to take its toll.

In the fourth quarter of 2011, Ireland’s exports dropped by 1.1% and the economy saw a downturn of 0.2%. Ireland’s dependency on European bank funding is not helping matters either, and while the eurozone crisis continues to roll on, the country’s road to economic recovery hangs in the balance.

According to the latest report by the Irish Exporters Association (IEA), European governments and businesses will continue to reduce their debt burdens through a process of deleveraging and fiscal consolidation – steps that are expected to take years.

In the meantime, the IEA believes that Ireland may have to resign itself to a long period of slower than- average growth in international trade. However, there are actions that Ireland can take, and has been taking, to grow its economy.

Alternative methods

The eurozone turmoil has inevitably deterred European banks from financing Ireland’s trade transactions. As a consequence, Irish exporters and local banks are turning to the more basic forms of trade financing, such as invoice discounting and letters of credit to boost export volumes.

According to a report released by Asset Based Finance Association (ABFA) in May, the popularity of asset-based finance for Irish and UK firms is set to rise by 7%, and a total of 44,412 exporters are expected to use these methods in 2012.

Phillip Kerle, chief executive officer at financial consultant Demica, which also published research on the same topic in May, says that local banks are actively pursuing more efficient methods of financing for their customers, due to the higher capital adequacy regulations.

The use of invoice discounting in particular is helping to cover the gaps in working capital reductions and provides exporters with quicker access to funding.

Letters of credit (LCs) are also becoming a more popular option for financing trade, mainly due to Europe’s increased credit risk, John Whelan, chief executive at the IEA says. However, he warns that the reliance on LCs could cause complications in the future, due to the volatile price imbalance between the different risk-associated banks.

“We’re finding that high risk banks are charging more for LCs and the whole field has become a lot more complicated from an exporters’ point of view. People are shopping around and getting LCs raised around the country as a cost saving arrangement.”

Research undertaken by the IEA and Bibby Financial Services also indicates that 70% of Irish exporting businesses are trading on an open account basis, 54% are primarily financing deals with their own funds and many are using credit cards and bank overdrafts to fund their export deals.

It is clear that local banks and Irish exporters are attempting to grow their trade with or without the help of international banks. Ireland’s government is also playing its part in helping Ireland’s falling exports and will soon be launching a €150mn loan guarantee scheme.

The three-year scheme, which was approved in April this year, is pending approval from the nominated banks, which according to IEA’s Whelan are Bank of Ireland and Allied Irish Bank.

UK government-Capital for Enterprise has been awarded the contract to manage the scheme, due to its experience in managing similar UK government-run programmes. The scheme is set to benefit SMEs and high-risk new exporting ventures − which banks in the current climate would not touch, Whelan says.

Philip Smith, head of trade finance at Bank of Ireland explains that the programme will be an incentive to try and increase lending to the economy, while creating a level playing field for Irish exporters.

“The reason that the government is introducing more loan and trade guarantee schemes could be because Ireland doesn’t have an ECA, unlike so many other countries, so these new programmes could fi ll that gap in the Irish market.”

This scheme is certainly a helping hand for Irish exporters, but it will take more than this to help Ireland get back to full growth and escape the impact of a recession-ridden Europe.

Changing strategies

Ireland’s decline in exports, which is considered to be one of the main driving forces behind the country’s growth, could signal danger for the future economy.

A problem that is compounded by Ireland’s dependency on the eurozone countries as its main export markets; its export goods to Europe currently count for 39%, and export services 35%. In particular, Ireland’s biggest problem lies with Spain, Ireland’s seventh largest export market.

Spain’s growing debt crisis and rising borrowing costs are threatening to curtail exports to one of Ireland’s major markets, according to IEA’s Whelan.

The rising interest rates on Spain’s 10-year government bonds, which are creeping up to 7.08%, are expected to impact Ireland’s credit insurance cover on Spanish exports.

If this happens, Ireland could potentially lose a substantial portion of its exports sales in the same way it did with Greece when trade cover was cut at the start of the sovereign debt crisis in 2007.

“We are concerned that the same will now happen in the case of credit insurance cover for exports to Spain, where Irish exports have been maintained at an even level of €5.6bn over the four years of the crisis.

Failure to react early and plan a supporting government-backed insurance scheme will most likely result in a fall of 25% in Irish exports to Spain over the next 12 months,’’

Whelan says. It seems clear that Ireland needs to realign its trade partnerships. While Irish exporters have been focused on their financially troubled neighbours, recent statistics show they have been missing out on far more lucrative opportunities in the Brics countries.

Ireland’s exports to three of the Brics countries grew in the first quarter of 2012, and according to the latest report by the IEA, exports to Brazil and Russia grew by 32%, and India by 14%.

However, despite the wealth of potential in these fast-growing export markets, only 4% of Irish exporters are currently targeting the Brics. Irish exports to the Brics countries total €7.6bn of goods and services. IEA’s Whelan states:

“Any further slowdown in the eurozone economies will immediately impact on Irish export sales. Hence, the need for more attention to international trade policy and specifically trade promotion, to enable alternative markets in emerging rapidly growing economies to be developed.”

Meanwhile, BOI’s Smith explains that the bank is targeting export markets in Eastern Europe, Asia and North Africa. He adds that the bank is holding a “substantial portion of funding for trade finance purposes, with financial

capacity to support Irish and UK exporters in particular”. BOI’s drive will be in the commodities, agricultural, pharmaceutical and technology sectors.

Chemicals and pharmaceuticals account for around 60% of BOI’s financed exports, while exports of services are becoming increasingly important, accounting for approximately 50%.

The bank reveals that it is looking to finance a lot of commodities in the coming year, particularly steel and agricultural-associated products.

Remaining hopeful

Although it is facing tough times, BOI says it will do all it can to support Ireland’s export business.

“The cost of borrowing has gone up, along with funding over Libor, but we’re continuing to lend and to fund transactions in exactly the same way as we did before the crisis took hold.

We would like to grow much faster and that’s our next step, and at the minute it’s really a steady hand steering over quite troubled waters, but we’re very optimistic that we’ll get through this and grow much more significantly,” Smith adds.

BOI forecasts a 2.5% growth in the exports of goods and services and expects this to be sufficient to offset another, although smaller, decline in domestic spending. The bank predicts Ireland’s GDP to rise by 0.6% this year.

Meanwhile, the IEA’s 2012 forecast is also fairly optimistic predicting a small growth of just over 1% in goods exports, and 6% growth in services exports, giving a full year export growth of 3% in total.

The government is forecasting a GDP growth of around 0.7% this year, and the IMF is predicting 0.5%. Exports will certainly play an important part in Ireland’s economic recovery, which will be crucial if the government plans to return to the international debt markets.

BOI’s Smith says: “In terms of Ireland re-entering the international debt markets, the government would like to do so in 2013, but at the moment it’s just too early to say if it will be able to. It will all depend on the external environment.

But looking ahead at the future of the Irish economy, I believe exports will beat the problem, there’s no doubt about it.” GTR