Can we have business as usual in Ireland’s ruptured political landscape?
Will the potential for political instability affect investor and consumer confidence?
Taoiseach Enda Kenny and Fianna Fáil leader Micheál Martin during the last TV debate before the general election. Photograph: Tony Maxwell/PA Wire
A week on from the General Election, it is still unclear whether, or how, a government will be formed. But amid all the uncertainty are some key issues for the economy and businesses.
Central to these is whether the State is heading into a period of political instability that could affect confidence internationally and at home. In particular, businesses are beginning to focus on the risk of Brexit, wondering if it will cause major upheaval or be a kind of Y2K event, where initial warnings of doom peter out into nothing much at all.
The key issues for business and the economy are the following:
The hardest to define, but perhaps the most important. Businesses are relieved that the election did not see a major move towards parties that would be seen to have “business unfriendly” policies. Sinn Féin, whose tax policy is a source of concern for big businesses in particular, gained seats, but its vote share was less that earlier polls might have suggested. Elsewhere, Independents gained, but across a broad spectrum.
“The election has led to political uncertainty in the short-term, but not a significant radicalisation of politics, which would have been a major concern to the business community,” said IBEC director general Danny McCoy.
While not identifying any particular party combination, the confederation said in a statement that “it is now important that all mainstream parties support the creation a stable environment for policy making and key legislative initiatives, such as the budget”.
Privately, senior business figures do not have any sense of an immediate hiatus, or of businesses holding off on investment decisions or hiring. “What we are hearing is that people are weary of it all now and want the the political system to get on with it,” said one source with exposure to the small business sector.
For businesses, the key issues remain as they were before the election: the need for a stable political backdrop, no nasty surprises, and an administration that will invest in key infrastructure and other projects – from broadband to local roads and towns to, yes, water.
If someone does not get hold of this, there is some worry among businesses that the narrative during the election – that the recovery is in some way not “real” – could take hold. “We could start believing our own rhetoric,” as one senior business figure put it, “and, in turn, that could hit consumer confidence.”
A survey by Mazars, published on Thursday, indicated that business confidence was finely balanced. Since the election, 49 per cent of the 300 businesses surveyed had become less confident. Another 49 per cent showing no change and just 2 per cent had become more confident. Mazars managing partner Mark Kennedy warned that, if allowed to take hold, this uncertainty could damage investment and growth.
The other concern expressed by business leaders is that someone capable of making decisions be on the bridge if a storm does hit.
The most obvious risk is Brexit, a point now surfacing in discussions with people from across the business spectrum. If Britain does vote to leave, Ireland could face significant market and economic pressures, and major strategic decisions as Britain heads into a lengthy negotiations on the terms of its exit. Sterling could collapse if a Leave vote begins to look likely. This would put pressure on Irish exporters, particularly in the food sector.
We all learned to fear the markets during the financial crisis, but so far they have shrugged their shoulders at the election results. The two biggest parties both have what one analyst called “market friendly” approaches. In other words, Fine Gael and Fianna Fáil both propose to stick tightly to the plan of reducing the deficit and the national debt burden.
Ten-year Irish interest rates have continued to trade well below 1 per cent this week, and there has been no significant move of investors funds.
Two things would likely to upset the markets. The first would be a sign of a change in policy towards the public finances. This happened with the coming to power of a left-wing government in Portugal, where bond interest rates have risen sharply over the past couple of months. This looks unlikely in Ireland, given the consensus across most of the major parties to stay within EU rules.
The more likely threat would come from a fear of a prolonged period of political uncertainty, most likely allied with some specific event or threat. Here again, Brexit is the most obvious, risk, potentially causing funds to reassess their investment in the Irish bond market if an Leave vote was seen to threaten our economic prospects.
A less toxic threat, but real nonetheless, would be a failure of European growth to revive, affecting our prospects.
No Irish government would have a magic bullet to deal with these threats, but a stable administration would be more likely to to able to develop and communicate a clear Irish “policy” approach.
If, for example, Ireland was to head into a second election after Easter, there would be a real risk of no new government being in place in the run-up to the Brexit vote.
Though there is no sign in the market of any stress on Irish bonds, there is some gossip emanating from London about potential vulnerability as the Brexit vote draws near and the danger of the Irish market facing some speculative pressure.
Against this, of course, stands the huge buying programme of the European Central Bank, as well as the global environment of low interest rates. It remains to be seen whether anyone would chose to take these forces on.
No matter who forms it, the next government will be severely constrained by budget guidelines laid down in domestic and European law. These rules dictate that money for new spending or tax cuts cannot be made available until stringent annual targets are met to cut budget deficits and the national debt.
“Fiscal space” calculations from the Department of Finance suggest the finances will be pretty tight in 2017, with resources only gradually increasing in following years. Estimated net “fiscal space” in 2017 is €500 million; €1.1 billion is set for 2018, €1.3 billion for 2019, €2.8 billion in 2020, and €2.9 billion in 2021.
Such estimates, set in Budget 2016 documents last October, flow from growth forecasts made at that time. These forecasts will be updated next month, when the department sends a formal report to Brussels on the current state of Ireland’s economy and the outlook for it.
Right now, however, the figures indicate that fiscal wriggle room in the next government’s first budget will be very limited. This serves to magnify the looming political challenge over Budget 2017, already a tall order in light of the exceedingly tight Dáil arithmetic and the likelihood of another election.
There is more. In the first instance, the assumption that a “fiscal space” will indeed be available is predicated both on the attainment of deficit and debt targets and on continued economic growth. This, in turn, depends on performance of the domestic and global economies.
At issue when the department comes to revise its growth forecast is whether the outlook is clouded at all by worries over China and other emerging markets and any backdraft to Europe and the US.
The Brexit referendum in June heralds yet more anxiety. Not only does the vote itself presents uncertainty in a major Irish trading partner, it is a racing certainty that repudiation of the EU in the vote would bring economic disruption in its wake.
Ireland’s impressive growth in the past couple of years was fanned by a clutch of international factors beyond the control of the Dublin authorities. These include US and British growth; low oil prices; and European Central Bank policies that spur low interest rates, low sovereign borrowing costs, and weakness in the euro’s value vis-a-vis sterling and the dollar.
Although favourable external trends are to Ireland’s benefit, it follows that any deterioration in the global scene would have the opposite impact. That, in turn, would limit the emergence of “fiscal space”.
Predictably, a key issue after the election is the future of water charges and of Irish Water itself. Fine Gael wants to maintain the current structure (though you would wonder how attached they would be to it in negotiations) while Fianna Fáil wants to replace Irish Water with a smaller national water directorate and have no domestic water charges for at least five years.
A compromise may be hammered out that would be enough to, for example, allow Fianna Fáil to support a minority Fine Gael government, at least for a period.
Fianna Fáil has conceded that water charges might be reintroduced at some point. And reform of Irish Water would be possible, though trying to unwind its legal and operational structure would be a huge job with potentially costly consequences.
Undoing Irish Water would cost a couple of hundred million, the utility estimates. But there is also the €1.6 billion due to be collected up to 2021 in charges and the same amount due to come through in savings.
The problem, as business figures are pointing out, is that the need for investment in water remains as vital as ever. Talk of dismantling water charges or closing down Irish Water raises the question about how this will be funded.
The original plan was for a separate entity with its own secure income stream, able to plan long-term investment. Other models have been suggested. The Green party, for example, suggests that Irish Water be changed from a commercial entity into a state-owned “authority”, underpinned by a referendum to guarantee public ownership.
Ireland also has international commitments under the EU Water Directive, which obliges countries to introduce a charging conservation model. How exactly this might be applied, or what the penalty might be for non-observance, is a matter for debate.
Chambers Ireland, which represents chambers of commerce across the country, warned this week that removing water charges “would lead to underinvestment in one of our most important resources and put further pressure on the national finances through an unacceptable narrowing of the tax base”.
Chief executive Ian Talbot said Ireland needs a single utility to plan, invest in and manage our water infrastructure.
“It is very disappointing that attempts to gain political advantage prior to the formation of a new government have led to such a vital resource being treated as a political football.”
Whither AIB’s IPO this year in light of the election result? At a press briefing yesterday following publication of its full-year results, chief executive Bernard Byrne said the bank was ready to IPO – subject to market conditions and the State deciding to press the button.
AIB reorganised its capital structure last year and has returned to sustainable underlying profitability. Those are the factors the company can control.
After that, it’s a matter of the health of the Irish economy, stocks market conditions, and a decision by the Government, which owns 99.9 per cent of the bank’s shares.
While the Irish economy continues to grow strongly, uncertainty surrounds the other two matters.
Bank shares are down more than 20 per cent this year amid concerns about global demand, negative interest rates and concerns around the health of certain European financial institutions.
Minister for Finance Michael Noonan indicated late last year that he would look to IPO AIB shares in 2016 if returned to office, with his preference for an autumn listing. But the election result and the substantial seat losses incurred by the outgoing Government parties has put this in doubt.
Where does Fianna Fáil stand on an IPO of AIB?
In principle, the party has no objection to a flotation of AIB shares and believes it could happen this year if market conditions are favourable. However, before the election, Fianna Fáil said it would look at the feasibility of stripping EBS out of AIB to become a standalone mortgage provider under State ownership.
It is understood that Fianna Fáil would want this to be considered as part of any negotiation on a government arrangement.
Byrne said it wasn’t a “big issue” if the mooted IPO in the third quarter “slipped by three months or six months”.
“Obviously we would like Q3 because it takes away uncertainty and allows you to actually progress towards it but it’s not the big thing in terms of when it happens,” he said. “Resolving the political issue . . . will be important, but Ireland tends to come up with solutions around these things.
“It is important longer term that we have [political] stability . . . but that will play out over the next while.”
Last November, the National Asset Management Agency unveiled plans to build 20,000 housing units over five years, at a cost of €5.6 billion. This had been flagged by the Minister for Finance in his October budget speech.
The measure is designed to kick-start house building in Ireland, which is currently running at about one-third the level required to meet demand and changing demographics.
Nama’s plan involves providing the financing for the homes, which would be largely located in the greater Dublin area. The focus is on starter homes for first-time buyers, with about 10 per cent for social housing.
In December, a group of Irish property developers put a spanner in the works by lodging a complaint with the European Commission, alleging state aid.
Speaking to The Irish Times Business Podcast this week, Cork property developer Michael O’Flynn, who is one of the complainants, said he expected a decision from the commission on whether it would proceed to a full investigation within the next week or two.
Their claim is that Nama has access to substantially cheaper funding, given that it effectively operates under a State guarantee.
The builders say this distorts the residential building market, effectively taking them off the pitch, at least in those areas where Nama is funding housing schemes.
Would Nama be able to carry on building in the event the commission decided there was a case to be answered? The State agency is of the view that it could proceed with its plan, but this remains to be seen.
It is understood that Fianna Fáil is supportive of Nama’s plan, although it would want the social housing element to account for up to 50 per cent of the new homes under any arrangement for government.