Friday, November 5, 2021

The Domestic Non-Financial Corporate Sector in 2020

The distortions in Ireland’s national accounts means that the contribution of some sectors can be overlooked as it cannot be disentangled from huge flows in the overall data due to the presence of US MNCs here.  One such sector is the domestic business sector which is lumped in with the MNCs in most national accounts releases.

The annual institutional sector accounts remedy this as they provide a very useful sectoral breakdown with one of these being for a “domestic non-financial corporate sector”.  We have previously examined the contribution of this sector to pre-pandemic growth and, while there have been some revisions to the figures for earlier years, here we will focus on the 2020 changes. First, the current account.

Domestic NFC ISA Current Account 2016-2020

Summary: pretty much everything went down.  In 2020, output was down, wages paid was down, profit was down. Pretty much the only thing that went up was subsidies received, without which the drop in wages paid would have been even greater.

But the above breakdown misses some of the significant differences by economic sector. Here is a breakdown by economic sector the of compensation of employees paid by the domestic corporates (with domestic financial corporates (NACE K) also included).

Domestic Corporate COE Paid 2016-2020

The stand-out figure is the 60 per cent drop in COE paid by the Accommodation and Food Services sector.  This contrasts with the three best-performing sectors in the above table which saw their COE expenditure increase by more than five per cent last year.

If also worth noting that the domestic NFC sector includes publicly-owned non-financial corporations.  These include semi-states such as the ESB, An Post, Coillte, Bord na Mona, Rehab, Gas Networks Ireland, RTE, the Dublin Airport Authority, Dublin Bus, Bus Eireann and others. Included in others are the seven universities as they are classified in the non-financial corporate sector and are likely a significant contributor to the COE from the Education sector shown in the above table.

The impact of the pandemic on the capital account of the domestic NFC sector seems to have been a bit more muted and as with the current account there have also been revisions to earlier years.

Domestic NFC ISA Capital Account 2016-2020

All told, the bottom line of the non-financial accounts is that the domestic NFC sector has been a consistent net lender in recent years.  The pandemic seems to have had only a modest impact on this.

The next step would be to move to the financial accounts to see what the sector is doing with this net lending.  We don’t have a financial transactions account so we move beyond that to the financial balance sheet.  We will show all years for which data is available. Click to enlarge.

Domestic NFC ISA Financial Balance Sheet 2012-2020

As noted before the financial balance sheet for Irish-owned NFCs has been exploding in recent years.  Total financial assets went from €167 billion at the end of 2012 to €529 billion at the end of 2020.  That far outstrips anything that could be explained by the net lending shown in the capital account or any revaluation effects.

At the same the total liabilities of the sector rose from €275 billion to €705 billion with the most significant changes on both sides of the balance sheet being for equity items. And, as can be seen with the bottom line, the financial net worth of the domestic NFC sector has significantly deteriorated in recent years. Financial net worth excludes real assets so this is not an indication that the sector is insolvent.

At the end of 2012, financial net worth was minus €108 billion.  By the end of 2020, this had deteriorated to minus €175 billion.  Again, this is in contrast to the net lending position shown in the non-financial accounts.  It be could that there activities of a small number of large Irish NFCs are distorting the financial balance sheet of the domestic NFC sector – not dissimilar to the type of thing we see with US MNCs on other parts of the national accounts.

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