Bonds worthy of 'Celtic Tiger'
Towards the end of 2005 both Moody’s and Standard and Poor’s (S &P), the rating agencies, reaffirmed Ireland’s AAA credit rating status, both citing the strength of government finances, favourable demographics and future pension liabilities.
The National Treasury Management Agency (NTMA), established in December 1990, is justifiably proud of Ireland’s top credit ranking. Oliver Whelan, a director of the NTMA and head of funding and debt management, says the government balance has been in surplus for eight out of the last nine years. “In 1990, Ireland’s general government debt as a percentage of GDP was up at 94%, while today it is only 27%, which compares very favourably against the Euro-zone average of just over 70%.”
Aiding the government in its fiscal prudence has been Ireland’s phenomenal GDP growth, averaging 9% annually between 1994 and 2000, earning Ireland the nickname ‘Celtic Tiger’. 2006 economic growth is forecast to come in at around a healthy 4.8%; the unemployment rate hovers around the 4.3% mark.
With such a strong balance sheet, the Irish government, via the NTMA has not been a big borrower recently. Indeed in 2005, and the year before that, there were only two gilt auctions. In 2006 there are no scheduled redemptions and borrowing requirements should be just under E3bn for the year, says Whelan.
Although a small market, with no immediate prospect of growing significantly in the near future, investors do not seem to have a problem with liquidity in Irish gilts. This is largely thanks to the activities of the NTMA in ‘tidying up’ and streamlining today’s small market. There are now six benchmark issues, regularly tapped by the NTMA and each over E5bn so acceptable on to the electronic trading platforms.
“Although we treat the Euro-zone as a homogenous area, we are a significant player in theIrish bond market and I would say that we have no material liquidity issues,” says Ronan O’Donoghue, fixed income director at BIAM. The NTMA has been very proactive in its approach, encouraging big issue sizes and operating buy-backs in illiquid issues.
“In an ideal world I would like to see the full maturity range of Irish bonds, but that is not a big issue for us. And yes, it would be nice to see some index-linked issuance, something which the NTMA has talked about in the past, but which have yet to appear,” says O’Donoghue.
Alongside the compliments for the state of government borrowing, the rating agencies also made reference to Ireland’s favourable demographic structure and future pension liabilities. As well as having a younger population than the European average, the Irish authorities are already taking direct steps to ensure they are well positioned to meet their future liabilities. In 2001 the National Pensions Reserve Fund was established, and represented a move away from complete reliance on PAYG to a part pre-funded public pension system.
Each year 1% of GNP is set aside and invested by the NPR, itself managed by theNTMA, providing partial funding of Ireland’s pension costs from 2025. This annual transfer of budget revenues is, according to Moody’s, represents an important factor for long-term sustainability of Ireland’s public finances.