The headline figures on the Irish economy are positive. But there’s a fear that everything – exports included – is moving at two speeds. Finbarr Bermingham reports.
On December 15 2013, Ireland became the first country to exit the EU/IMF bailout programme. Taoiseach Enda Kenny’s government was quick to herald a new era, free from the “shackles” of the Troika – the tripartite committee of the European Commission, European Central Bank and the IMF that organised €85bn worth of loans for the country, as it did for Greece, Portugal and Cyprus – in return for scything public spending cuts.
By 2012, up to 75,000 Irish people were leaving a country of just 4.5 million each year in search of work, and the official rate of unemployment had topped 15%. The austerity and subsequent poverty became so panoptic that Michael Noonan, Ireland’s finance minister, labelled the past five years as “the biggest crisis since the Irish potato famine” – no mean feat for a country that’s been subject to inbound tyranny and internal conflict in the 170 years since.
Now though, Ireland would be free to return to the international markets, and celebrated in January by raising a €3.75bn 10-year sovereign bond. Demand was so great, Ireland could have raised €14bn. In the same month, Moody’s upgraded Ireland’s sovereign rating to investment grade, while it was one of only three European countries to have its risk outlook upgraded by Coface, the French insurer (along with Austria and Germany). Ireland, the poster-boy for austerity, is the toast of Europe.
But the caveat that lurks beneath the bunting is stark: this isn’t over yet. Driving down the coast of rugged Donegal, the scars of recession are peppered on the landscape – unfinished housing developments, unoccupied holiday homes, boarded-up pubs. Ireland is in danger of becoming a two-speed economy. The property markets have rebounded in some cities, chiefly Dublin, with unemployment falling too. Smaller towns and traditionally poorer cities such as Limerick, though, struggle to get to grips with mass emigration and loss of industry.
This two-speed theory is granular. It can be applied within the business community, where those focusing on domestic consumption have been left feeding off scraps. A report authored by Bain & Company, a management consultancy, along with the Institute of International Finance found that from 2008 up to Q3 2013, domestic demand fell by 25% in Ireland; almost double that of Portugal and Italy. “Exporting is a matter of survival,” one anonymous banker told the authors. It’s hard to disagree.
Much has been made of the influx of foreign multinationals, lured by Ireland’s 12.5% corporation tax (anathema to the likes of Germany, where the rate is 30%), the highly-educated workforce (despite the brain-drain) and the top-class transport infrastructure. But indigenous companies have been excelling, particularly in the areas of food and drink, agriculture and technology.
Some have even combined the three. Dairymaster of County Kerry has enjoyed great success everywhere from Russia to Japan to New Zealand. Its flagship product, the MooMonitor, is an automated feeding system that identifies each cow in the herd via microchip technology, placed in the cow’s ear. Its readings are delivered into a feeder system that provides custom feeding to the animal during the dry period. The outcome is a cow that gets milked one minute faster, delivering 5% more yield. In dairy-intensive markets, the product has been hailed as revolutionary.
And then there’s Glanbia, the Kilkenny-based dairy and nutritional company which in 2008 established its first plant in China, 20 years after first exporting to the country. Kerry Group, the food and ingredients giant, has manufacturing facilities in China, Thailand, Indonesia, the Philippines, New Zealand and Australia. Ireland’s food and agri output would likely feed China for no more than a week. But by selling knowhow and opening plants close to the source, the quantity can be upscaled enormously.
“Bigger companies and exporters are doing better than those focusing on the domestic market. Mainly because they’re selling abroad, but also because they can raise finance outside of Ireland. The smaller guys who are dependent on funding from Irish banks are finding it more difficult though,” Simon McKeever, the CEO of the Irish Exporters Association (IEA), tells GTR.
The banking sector
The big ticket export deals fall within the scope of an Irish banking sector that is still licking its wounds. Bank of Scotland, Danske Bank and Rabobank have all either scaled-back or halted their trade finance business in Ireland, leaving only AIB, Bank of Ireland and Ulster Bank in a massively slimmed-down sector.
AIB and Bank of Ireland both received government bailouts and as such, are hitched to the sovereign credit rating. “We’ve gone back to more traditional trade finance instruments, such as letters of credit (LCs) and bills of exchange, since credit became tougher,” says Phil Smith, head of trade finance at Bank of Ireland. When he says “tougher”, he means that it became harder for the bank to gain approval for direct lending for trade and export finance, meaning risk-mitigating products have been more commonly-used.
“The impact [of the crisis] was that our rating went down,” he says. “Up until 2007, we enjoyed very good ratings from all three agencies. Then we got downgraded, which meant that we found it harder to confirm incoming LCs. An overseas bank or exporter would say: ‘Are we getting any benefit here from having an LC confirmed by Bank of Ireland, or any other Irish bank?’ We’ve had to navigate around it. It hasn’t made a huge amount of difference, but we’ve been less active in places like China, where some of the local banks are better rated than us.”
The bank has downsized, cutting staff at home and offices abroad, to create what Smith describes as a more “focused, trade-orientated business”.
Ulster Bank has perhaps more flexibility. Being owned by RBS gives it access to the UK’s sovereign rating, which is much healthier than Ireland’s. It also gives it access to the RBS name abroad, which can act in its favour when trying to win business. As such, Ulster Bank is in a position to cherry-pick the clients it services, according to information shared with GTR by people outside the bank.
“Two years ago we were deleveraging,” says Gerry Ennis, the bank’s head of trade finance. “We needed deposits in. But in the last year we’ve seen a change and we’ve now got €1.2bn in new funding to get out the door, for corporate and business lending. We’ll see a big increase in activity.”
The money is just resting in my account
But most of the banks will admit – privately at least – that while they may be on track to hit official, government-set targets for lending, small businesses, exporters included, find it much harder to get funding. The optimism over bank lending isn’t shared by many in Ireland outside of the sector itself. When it comes to accessing bank finance, the exports sector is also progressing at two speeds.
The report by Bain says that to June 2013, “new bank lending to SMEs (using loans of less than €1mn as a proxy), is down 82% in Ireland”, from its peak level. This statistic is reflected in the Export Ireland Survey, conducted by the IEA and Grant Thornton, which says that “almost 62% of companies report that access to finance has not improved since last year”.
This figure is falling year-on-year, meaning that for some, the situation is improving, but banks are accused of failing to service companies looking to do a first export or which have been stung during the crisis. “Banks are trying to pick up good business,” says Tom Early, a senior investment advisor at Enterprise Ireland, the government’s export support body. “But there are a lot of businesses that just need help getting off the line.” Early cites performance bonds as an area in which companies need assistance. An exporter will often have to float a performance bond worth a portion of its contract in order to secure business. The problem is, banks are now asking for the issuer to hold 100% of the value of the bond in reserve if they’re to provide it. The result is that some companies have millions of euro resting in their accounts which could otherwise
be used for working capital, or to fund exports… or for anything.
The IEA attributes the challenges in obtaining finance to a lack of “competence and confidence”. 20.1% of respondents to its survey say that banks reject loan applications because they [the banks] don’t understand their business.” The problem, it asserts, is indicative of a change in culture in the Irish banking system, in which lending isn’t the ‘natural’ thing to do.
“Banks say they’re approving huge amount of credit applications,” says McKeever. “But you need to ask them how many are new customers, how much is brand-new lending and not replacing existing facilities. Also, if there’s an amount of gate-keeping going on at a local level and a lot of the applications aren’t getting to a credit committee.
“The banks’ frontline staff has lost confidence to lend to business. For four years there hasn’t been any lending and now managers are perhaps wondering what it [lending] will do to their career. The caution comes from the very top,” he adds.
Credit where it’s due
The IEA is keen to work with the banking sector to improve the situation, but the general consensus is that something more authoritative is needed. The issue of SMEs struggling to get loans is not indigenous to Ireland. But the lack of an export credit agency (ECA) is a very Irish problem indeed.
In its Quarterly Bulletin for Q4 2013, the Central Bank of Ireland listed the financial support measures of selected OECD countries. Of the 19 listed, only Ireland and Chile lacked an export finance support mechanism, meaning neither has a government body to guarantee commercial loans or issue direct loans to overseas companies for the purchase of local goods. The report reads: “The policy areas in which Ireland is not active are export financing, credit register, bank funding schemes, securitisation support, peer-to-peer lending support and retail bond markets.”
The requirement for an ECA is something that everyone GTR spoke with in researching this article agrees on. In the situation of issuing performance bonds, the capital requirements of banks could be easily absorbed by the sovereign purse.
Banks are also accused of looking solely to the past; ignoring full order books, looking only at balance sheets. A state lender, then, would step into this gap in the market, helping small and new exporters fulfil orders, bringing jobs and wealth to the Irish economy.
There is much conjecture as to why Ireland has yet to establish an ECA. One suggestion is that the Troika would have frowned upon, and possibly not permitted, a heavily-indebted Irish government taking on more liabilities, even if the long game is pumping money back into the economy.
The other is that members of the government recall the finger-burning it suffered with the collapse of the Insurance Corporation of Ireland in 1985. The thinking is that this experience, coupled with the chastening past five years, has left members of the government wary of opening an ECA.
The alternative funding options available – Bibby’s new €60mn factoring fund, P2P lending from LinkedFinance, services from Microfinance Ireland – are welcome, but a drop in the ocean that’s required. With the wider economy in nominal recovery, there’s the hope that an improvement in the sovereign rating, as well as those of Bank of Ireland and AIB, may help loosen the purse strings. Until then, the need for the government to galvanise commercial lending will continue to be painfully obvious.