Brexit-Proofing Ireland Means Locking In Record-Low Bond Yields

  • Finance minister prepares budget to withstand slower growth
  • Irish borrowing costs decline even as analysts warn of risks

With Britain putting immigration control over a trade deal as it heads toward the European Union exit door, Ireland is bracing for impact.

Based on trade, Ireland is the economy most vulnerable to Brexit and exporters are already feeling the pain as sterling plunges to a five-year low against the euro. Irish Finance Minister Michael Noonan will deliver his sixth budget on Tuesday, with economists trimming economic growth forecasts after U.K. Prime Minister Theresa May last week pushed access to the EU’s single market down the priority list in her vision for life outside the bloc.

Against that backdrop, Irish Prime Minister Enda Kenny last week pledged to “Brexit-proof” the budget in a bid to cement the recovery and lock in record-low borrowing costs. Noonan already warned last month that it’s unlikely taxpayers would be “throwing their hats in the air” after he delivers his spending and revenue plan.

“We think activity will slow down in the second half of 2016 due to Brexit-related uncertainty,” said Alan McQuaid, an economist at Merrion Capital, which cut its Irish growth forecast to 3.2 percent next year from 3.8 percent in response to Britain’s Brexit vote in June. “As long as the government doesn’t go on a mad spending splurge, then market funding costs should remain extremely low for the foreseeable future.”

With the support of the European Central Bank’s monthly bond-buying program, Irish borrowing costs have been contained since the U.K.’s vote to leave the EU. Ten-year Irish bonds yielded 0.51 percent on Monday, down 25 basis points before the referendum. The spread between benchmark Irish bonds and German securities of a similar maturity stood at 49 basis points compared with 95 points a week before the June 23 vote.

Ireland returns to the bond market this week, with a sale of 1 billion euros ($1.1 billion) of securities maturing in 2026.

BI Estimates of Brexit Impact on 2018 GDP by Country

Economists warn this isn’t the time to take risks.

“Our level of debt is high, both public and private,” Gabriel Fagan, chief economist at the Irish central bank, told reporters in Dublin last week. “We have a whole range of Brexit-related vulnerabilities. Prudent fiscal policy remains essential.”

There’s a second complication for Noonan too, as he pieces together his budget -- figuring out the nation’s debt situation. The Irish statistics office stunned economists in July by saying the economy grew 26 percent in 2015, reflecting a new method of collecting data to take into account the scale of multinational companies like Apple Inc. and Google Inc. operating in Ireland.

That figure overstates the size of the economy by 40 percent, London-based Fathom Consulting estimates. Rather than Ireland’s debt being 90 percent of gross domestic product based on the new size of its economy, really the ratio is 130 percent, it said. That puts it on a par with nations like Italy and Portugal, whose bonds are the worst performers in Europe this year.

“On that basis, Ireland’s public finances look far less secure,” Fathom said in its report.

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