In the current environment, if there’s one area within Ireland that needs support at the moment, then the country’s ability to trade has got to be right at the top of the list,” says Tom Turney, head of trade finance at Bank of Ireland.
The Irish economy has been hammered by the global financial crisis and the collapse of a domestic property bubble. One bank, Anglo Irish, the country’s third largest, has been nationalised, and the government is negotiating bail-outs for two more.
The Irish government has sought to support its exporters by unveiling an employment subsidy scheme as well as a €100mn stabilisation fund. But both initiatives have been criticised for not benefiting the maximum number of struggling exporters. The government has still not made a decision regarding the implementation of a reportedly much-needed export credit insurance scheme – the proposal for which was made in January last year.
According to the Irish Exporters Association (IEA), Irish exporting companies returned to growth in the first six months of 2009. Exports grew by just under 2%, a figure the IEA has described as “remarkable”.
But if the country’s ability to export is going to be the driving force behind a recovery of any magnitude it seems that more support for its all-important exporters is surely going to be needed.
Exports return to growth
The IEA is forecasting that merchandise exports will increase by 2% this year, with service exports falling by 1%. Taken together, this would see total Irish exports rising by 1% to €155bn for 2009.
What’s more, at the end of September, Enterprise Ireland – the government agency that supports Irish exporting companies – reported a significant increase in the number of clients investigating new export markets this year.
According to the IEA, these figures, despite being encouraging in the present economic climate, mask a major problem that is affecting Ireland’s traditional export sector, which is primarily owned and invested in by the indigenous industry.
The association says exports have been boosted by largely multinational companies in the life sciences sector – such as pharmaceuticals and chemicals – which accounted for 56% of total merchandise exports. But concerns for serious damage being done to employment to the indigenous traditional export sector continue to mount. The IEA has forecast that a further 35,000 jobs in the manufacturing sector could be lost by the end of 2010 with the bulk of jobs being lost in traditional sectors.
“We’re concerned that the indigenous sector will come out of the recession quite damaged. This is where focused stimulus is essential,” says John Whelan, chief executive of the IEA.
Niall O’Donnellan, head of investment services at Enterprise Ireland, states that there is a good spread of multinationals in Ireland, who are very focused on exporting, as well as a strong indigenous exporting sector.
Enterprise Ireland is particularly focused on the second category to ensure that “good exporters can be sustained during the downturn, so that when the world economy starts to recover, those companies – even though they may have lost a bit of ground – are still able to recover and grow in a sustained way”.
“But we also want to make full use of multinationals, to ensure they continue to locate here,” he adds.
Effects on trade finance
With exporting industries in need of heightened financial support, it should follow that demand for trade and export finance facilities should increase accordingly.
However, many local Irish banks are not reporting dramatic differences in their trade business activities.
Linda Quinn, product manager at Ireland’s AIB, reports that volumes have remained relatively static. “There have been no significant movements in volumes across our trade finance product range,” she says, though adds that the fourth quarter of 2009 may bring to light more changes in volumes as businesses continue to work down the stocks held and hold off further imports until consumer demand increases.
She notes that due to the squeeze on export credit insurance, it would be expected that customers would demand more traditional trade finance products to support their international business.
“In a wider context, requests from exporters for export letters of credit or documentary collections in the absence of export credit insurance may result in volume increases,” she says.
Bank of Ireland’s Turney observes that: “Import volumes are down – though this is not surprising.
“We’re 6% up on exports LCs, which make up the greater part of our business, and 30% down on import LCs, in terms of volume, not value.”
Bank of Ireland’s senior trade finance manager in Dublin, Billy Slyne adds: “Bank of Ireland has been supporting Irish trade for many years and until recently had, like many other banks, seen evidence of a shift away from letters of credit towards open account trading. However, the current international volatility has resulted in a lot more LC enquiries coming over our desks. We are seeing clients who have never worked on LCs asking questions and new LC confirmation requests coming in from our regular clients for existing and new markets.”
According to Turney, customers are widening their net: “Times are not easy. They are probably throwing one or two more new markets into the equation to try to compensate for fall off in some traditional markets.”
Freeing up credit
To free up more credit for exporters, the IEA has called for the Irish government to accelerate the release of the €100mn enterprise stabilisation fund launched at the beginning of April this year.
The fund was unveiled as part of an emergency budget introduced to stabilise Ireland’s public finances and repair its banking system. The fund, which will be allocated over two years, will provide direct financial support to internationally trading enterprises.
“The stabilisation fund is typically considered by industry to be the fastest and best scheme applied so far, in that it instantaneously enabled cash to get into a company because it was done by way of preference shares with a 3% coupon on it,” Whelan tells GTR. As many banks are charging interest rates of 6% or more on business loans, the government loan seems like a good move.
“But we’ve been calling for the government to upfront the whole of the €100mn in the current year,” he adds. “We’ve seen in other economies where the injection goes in early – more of them survive, more jobs are protected, and they come out of the recession stronger.”
The IEA is also encouraging the government to modify the terms of its new employment subsidy scheme. The €250mn scheme was set up in August this year to protect up to 27,400 vulnerable jobs in the export sector. But by the closing date for applications, just one month later, reportedly only 25% of the targeted companies had been able to apply.
When the deadline expired, exporters urged Tanaiste Mary Coughlin to extend the closing date and make it easier for firms to prove they are eligible. Criticism for the scheme is likely to escalate as unions and business groups claim the €250mn fund is simply not enough.
“There was lack of clarity on whether there would be multiple openings or one,” says Whelan. “The indications were that they would just do one and see what the applications were and then reconsider. At this stage, we’re pressing them to confirm what the applications were. From our own evidence it was quite low. We would like to re-enter discussions, and see it re-open it up with the applications rules changed.”
Export credit insurance
“The big push for the internationalisation of the Irish market in the 80s and 90s was very successful,” says Bank of Ireland’s Turney. “The government tried to create the right environment – and that’s what drew the companies in,” he adds. “But there’s been no direct support via an export credit system.”
Typically, around €22bn of Ireland’s €88bn of exports are insured. However, due to the current economic uncertainty, more and more exporters are facing difficulties securing export credit insurance, making it difficult for them to trade. Some companies are also complaining that foreign customers are seeking extended credit terms.
Ireland had a full ECA arrangement many years ago. But the Insurance Corporation of Ireland – as it was known – was abolished in the late 80s. “I think they found that they weren’t acting like a traditional ECA, because you don’t have a lot of chunky capital equipment coming out of Ireland,” says Turney.
According to Whelan, the IEA has made the case for an export credit insurance scheme to the government several times. “But they needed to have a ‘forensic analysis’ to ensure that the state wasn’t overexposed,” Whelan says, adding that on a previous occasion some years ago, when the government operated a scheme, they lost heavily on the guaranteeing of exports to Libya, when Libyan leader Muammar Gaddafi closed the door on trade. “But we are recommending a different scheme this time, with adequate security for the state,” he states.
The IEA is proposing that the Irish government enters into a credit insurance support mechanism with the three major underwriters – Euler Hermes, Atradius and Coface. “As such, the government would be entering into a partial underwriting arrangement, and not set up a parallel scheme,” says Whelan. “That’s our preferred model. With catastrophic changes in the risk profiles, it’s a preferential arrangement.”
“Exactly how much they would value their contribution to re-entry to the market remains to be seen,” says Whelan. The IEA continues to press the case that a stronger flow of stimulus is needed for the export industry – in particular the industries that are heavily dependent on the UK.
Whelan explains: “Our view is that the recession has taken its toll in many respects, but it’s been exacerbated in terms of trade between Ireland and the UK, by the depreciation of the sterling.”
“The Bank of England’s ‘quantitative easing’ is effectively keeping the pound sterling at a very low level, which is making it very difficult for us to export into the UK, particularly in the recession time where prices were falling in any event. And we’re looking at the order of a 20-25% loss over where we were 18 months ago in terms of the exchange rate.”
According to Enterprise Ireland’s O’Donnellan, the Irish government has hired professional consultants to investigate the proposal for a short-term export credit insurance scheme. “They’re in the process of completing their report on what would it cost and the upside and downside of introducing such a scheme here,” he explains.