Ireland’s Debt Dynamics turn more benign

Irish government debt stood at €47bn in 2007, just 24% of  GDP, one of the lowest ratios in the euro area. Debt then ballooned, rising to over €215bn by 2013, reflecting capital injections to the banking system, the impact of the recession on the underlying budgetary position, and latterly, the inclusion of IBRC’s liabilities. The impact on the debt ratio was compounded by the trend in the denominator, nominal GDP, which fell by some €32bn or 16% from 2007 to 2010, with only a modest pace of recovery evident up to 2013.  As a result the debt ratio ended  the latter year at 123.2% of GDP, one of the highest debt burdens across the single currency area, and one some felt was not sustainable. That ratio now appears to have peaked, however; the CSO  estimates that  the debt ratio fell to 109.7% in 2014, with the level of debt declining to €203.3bn, in part due to the sale of liquidation and sale of IBRC assets.

Ireland’s debt dynamics are now turning positive and , based on current expectations, the debt ratio should now fall steadily, with the caveat that events can and do throw up consequences which render previous expectations redundant. That aside, the factors which determine the debt ratio are all moving in a more benign direction for Ireland.

Take nominal GDP.  That rose by 6.1% in 2014, to over €185bn,and the Government is currently projecting a  5.3% increase this year, with a similar rate of growth forecast out to 2018. The 2015 figure is based on real growth of 3.9% , which some feel is now too low, and an upward revision is possible when the next set of official projections appear (they are due later this month).

The other key drivers in terms of debt dynamics are the average interest rate on the debt and fiscal position excluding interest payments , or primary balance. The former is projected to average 3.5% this year( which appears too high now in the light of QE) but in any case is well below the growth rate of GDP, a  reverse of the malign  dynamics operating between 2008 and 2013 and one that will now put downward pressure, albeit modest, on the debt ratio.  The official forecast envisages a marginally upward path  in the interest rate  over the next few years. although still below the projected growth in GDP, which implies a further continuation of that more benign trend.

In addition, Ireland is now running a primary surplus (i.e. revenue exceeds non-debt expenditure) which is required to ensure a more rapid decline in the debt burden. In 2015, for example, the primary surplus is currently projected at 1.1% of GDP, rising to  4% by 2018. The debt ratio is also influenced by one-off adjustments ( e.g. the NTMA  running down cash balances, revenue from asset sales)  and leaving those aside the above interaction of  nominal GDP,  the interest rate and the primary surplus results in Ireland’s debt ratio falling to 107.5% this year before declining to under 100% in 2017 and 94% by 2018.

That projection is also  based on the current forecasts for the fiscal balance, which envisages a steady decline in the overall  deficit, from 2.7 % of  GDP this year to 0.9% in 2017 and a marginal surplus in 2018. That now also looks conservative, given the strength of tax receipts in the year to date, and so a stronger primary surplus path may emerge, albeit one  that takes no account of the political cycle, although any Irish government will be constrained by EU rules on government spending, even if some leeway is given in terms of interpretation. A noted above,  economic shocks may  emerge but in their absence the Irish debt ratio does look to be on a downward path to a more sustainable level, if at a steadier pace than experienced during its upward trajectory.