The National Treasury Management Agency (NTMA) raised €6 billion through the syndicated sale of a new 7-year benchmark Treasury Bond maturing in May 2027, with Cantor Fitzgerald Ireland acting as a joint lead manager on the deal. The funds were raised at a yield of 0.242%. There was strong demand from a broad and diversified investor base for the transaction. The total order book of over €33 billion included in excess of 250 individual accounts. In terms of geographic distribution, 84% of the final allocation was taken up by overseas investors, including the U.K. (25%), Nordics (13%), France (12%), Germany (7%), US (6%), Spain (6%), Italy (5%), and Other Europe (8%), with the rest spread across other regions. The main investor categories were asset managers (36%) and banks & intermediaries (36%), followed by pension & insurance (10%), central banks and official institutions (10%) and hedge funds (8%).
The larger than normal issue size was clearly linked to the impact of Covid-19 on the economy, however, Ireland is still well positioned to meet additional borrowing needs later in the year. Ireland started the year in a very healthy fiscal position. The stated borrowing range by the NTMA was €10-14 billion, which was significantly less than the previous number of years despite almost €20 billion in debt redemptions in 2020, which includes single redemptions of maturing bonds of €10.6 billion in April 2020 and €6.5 billion in October 2020. The reason for the lower funding target was the intention to run down around 50% of Ireland’s cash balances during 2020, with the opening cash balances in excess of €15 billion. The global health pandemic has materially changed all the original base case scenarios for all countries.
For 2020 a surplus of 0.7% of GDP was originally expected (approximately €2.5 billion). This was mainly due to funds that were set aside in Budget 2020 to be used in any disorderly Brexit scenario, that were not going to be needed during the course of the year following the successful conclusion of the Brexit withdrawal agreement. The starting point or the minimum deficit now expected is at least 4.3%. However, the department of Finance last week said that the economic cost of the coronavirus crisis through fiscal supports and deferred tax revenue will likely be over €16 billion. The Central Bank of Ireland has estimated under certain assumptions for 2020, that the deficit will be over 6%. The bank also added that in this scenario Ireland’s Debt to GDP ratio would increase from 58% at the start of the year to 66% by year end.
Turning to growth, and while Irish growth is notoriously difficult to model in normal times due to the openness of the economy, the Central Bank of Ireland, has pointed to a highly conditional estimate for GDP to decline by 8.3 per cent. This is based on strong growth in the first two months of the year, a sharp decline in the second quarter, followed by a gradual recovery in the third quarter which gathers more momentum in the final quarter of the year.
On a positive note for Ireland, an OECD report suggested the crisis hit to Ireland’s real GDP would be smaller than any other member. Because Ireland’s economy is structurally different to many of its OECD peers.
- It is less reliant on tourism
- Its domestic economy is smaller as share of output
- Its multinational sector – the engine of the economy – is largely made up of three defensive sectors: IT/social media, pharmaceuticals and medical devices
The potential Brexit cliff at the end of the year (when the transition period was set to expire) will now almost certainly be extended. Countries negotiating at times of economic weakness across the board are far more likely to come to a mutually acceptable agreement than in times of economic strength. This negates, what was at the start of the year, the major economic risk on the Irish horizon.
The NTMA has now raised €11 billion so far this year and has two regular auctions scheduled in Q2, May and June. The impact of the virus has made the original funding target for the State of €10-€14 billion somewhat redundant. The final borrowing amount for 2020 remains a function of the impact of the economic shock on the exchequer with the NTMA to assess funding needs on a quarterly basis.
Ryan McGrath is Head of Fixed Income Strategy and Sales at Cantor Fitzgerald Ireland.
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