Monday, November 18, 2019

The exploding balance sheet of the Irish-owned non-financial corporate sector

The previous post looked at the current and capital accounts of the domestic non-financial corporate (NFC) sector and painted a positive picture of rising output, employee compensation, profits, corporation tax, investment and savings. 

Here we look at the financial balance sheet of the Irish-owned NFCs (excluding redomiciled PLCs) from table 2.9 of the release.  Before getting to the detail here is a summary chart.

Domestic NFC ISA Financial Balance Sheet 2012-2018 Chart

The data go back to 2012, and though there has been some volatility in between, the bottom line, financial net worth, is pretty much the same in 2018 as it was in 2012.  The financial net worth of the sector was –€108 billion in 2012 and was –€104 billion in 2018.  To get overall net worth we would need the value of non-financial assets such as fixed capital and land which is not provided but there is value in looking just at the financial balance sheet.

Although, the bottom line is essentially unchanged the size of the balance sheet of the Irish-0wned NFC sector has exploded in the last six years – and particularly in 2015 and 2016.  For example, total financial assets increased from €167 billion in 2012 to €428 billion in 2018.  This is equivalent to increase from 132 per cent of GNI* in 2012 to 217 per cent of GNI* in 2018.

So, lets see what the detail shows (click to enlarge):

Domestic NFC ISA Financial Balance Sheet 2012-2018

Unfortunately, there are some categories where suppressed values means we can’t complete the above table.  All values are included in the balance sheet for the overall NFC sector so we can see roughly where the residual amounts would show.

For financial assets, we can see actually where most of the increase arose: loans and equity.  Loan assets rose from €54 billion to €121 billion and equity assets rose from €56 billion to €177 billion.  There was also an increase in ‘other accounts receivable’ from €39 billion to €99 billion.  These increases account for almost all of the €260 billion increase and again it should be noted that they took place in just six years, with €170 billion of the increase accounted for by 2015 and 2016 alone.

On the liability side the increase is from €275 billion in 2012 to €532 billion last year.  The available figures show some increase in loan liabilities but most of the increase is accounted or by equity liabilities.  There was also about a €60 billion increase in financial liabilities accounted for by the suppressed categories with most of this due to ‘other accounts payable’. 

For this, note that for overall NFC sector (Irish-owned, foreign-owned and redomiciled PLCs), the amount of debt securities rose from €10 billion to €18 billion while there are relatively minor overall amounts in the other suppressed category above: financial derivatives and employee stock options.

It’s well and good going through the increases by category but the overall increase is immense.  Usually, we can point to the activities of US MNCs when trying to pick through the distortions in Ireland’s national accounts but the above shows that Irish-owned firms might be throwing a distortion or two of their own into the mix.

The Irish economy has been performing well in recent years but nothing that would seem to justify a quarter of a trillion expansion in the financial balance sheet of the Irish-owned non-financial corporate sector.  The concurrent rise in financial assets and liabilities could point to circular transactions of some kind. 

However, at this stage, it is hard to tell what impact this expansion of the financial balance sheet has had on output, income and other flows in the national accounts.  That is likely where the real story lies.

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