Danske Research Emerging Markets Team
Danske Bank A/S
Irish services PMI released this morning climbed higher to 62.6 in June from 61.7, the highest reading since February 2007. The composite figure increased to 59.7 from 59.4 and new orders surged to 61.4, the highest level since August 2000.
Ireland released budget figures for H1 yesterday and it looks like the country will beat its fiscal target for the fourth year in a row. The budget deficit was set to drop from 7.3% of GDP in 2013 to 4.8% of GDP this year but yesterday’s release suggests a deficit of around 4.2% of GDP this year. The primary balance will be in positive territory beating the -0.1% of GDP target. Ireland is definitely under way to reach next year’s deficit target of 3% of GDP and exit the Excessive Deficit Procedure.
The Irish debt sustainability is improving with gross debt having peaked in 2013 at 123.7% of GDP. Last year’s net debt figure was just below 100% of GDP due to Ireland’s large cash balance. Ireland has so far conducted 92% of the fiscal belt tightening that was agreed with the Troika and only EUR2bn remains according to the Irish Ministry of Finance.
A stronger-than-expected recovery with positive spill-over effect on public debt could result in a sharper drop in public debt than was envisioned in the 2014 Stability Programme. According to the Irish 2014 Stability Programme gross debt is set to drop to 98% of GDP by 2020. A scenario with 1% higher nominal growth every year and a 0.5% better primary balance (standard multiplier) would result in public debt dropping to 81% of GDP by 2020. Irish public debt could also be lowered if/when the Irish government starts a re-privatisation of the banking sector, which was taken over by the government in 2010. It is difficult to estimate how much the proceeds would be. If the Irish government were to sell assets amounting to EUR4bn each year from 2015-2019, this would result in a further reduction of the debt to 73% of GDP by 2020.
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