Friday, September 9, 2011

Debt projections edge downward

This week has seen the release of three separate outlooks on the Irish economy.

The nominal GDP forecasts until 2015 are largely consistent.

Nominal GDP Forecasts 2011-2015

The forecasts of the Primary Balance (the government balance excluding interest costs) are also fairly consistent.  It should be noted that these forecasts are all dependent on substantial budgetary adjustments (expenditure cuts and tax rises) being introduced over the next few years continuing with Budget 2012 in December.

Primary Balance 2011-2015

Apart from the IMF’s forecast for 2015 there is little to separate them.  We have looked at the IMF 2015 forecast in more detail before.  The cumulative primary deficits to 2014 are €15 billion for the ESRI, €16.6 billion for the IMF and €15.5 billion for the EC.

The remaining part of the General Government Deficit is the annual interest cost incurred by the State.  It is here that a divergence begins to emerge.

Interest Costs 2011-2015

Both the IMF forecast that the cumulative interest bill over the next five years will be around €47 billion.  The total from the ESRI is €39 billion.  The ESRI’s forecast is based on a 2% interest rate reduction on all €45 billion of our borrowing from the EU as part of the rescue programme.  The IMF and EC have not factored in savings on the full amount.

In fact when compared to the last IMF Review in May, they have increased their forecast of the interest bill for the next five years from €45.7 billion to €47.4 billion.  The EC has also increased it’s forecast of the cumulative interest expenditure from €45.2 billion to €46.7 billion since it’s last review also in May.

All indications are that our interest bill will be reduced but the assumptions used by the IMF and EC and the fact that they have yet to account for the July 21 interest rate changes has resulted in their forecasts of this expenditure item increasing.  We can expect this to fall in subsequent reviews.

Here are the General Government Debt forecasts. First in nominal terms.

General Government Debt 2011-2015

And as a percent of GDP

General Government Debt 2011-2015 (2)

All show the debt stabilising by 2013 though it is worth repeating that this is based on the implementation of continued budgetary cuts over the coming years.  All of the projections are that the debt to GDP ratio will stay below 120%.  Previously the IMF has been forecasting that the debt would peak at 125% of GDP.  This peak forecast has been, and continues to be, revised down as this graph in the IMF review shows.

IMF Debt Projections

When the EU/IMF programme was initiated the IMF were projecting that Ireland’s 2015 GGD would be around 122% of GDP and a very gradual rate of decline.  Using preliminary estimates of the impact of the lower EU interest rate is now forecast to be around 114% of GDP which a slightly accelerated rate of decline.

This is still a huge debt level but if we were still projected to follow the full blue line above it is difficult to see how our debt would ever become sustainable.  The green dotted line shows that the debt ratio is now projected to peak at a lower level and fall slightly faster. 


  1. I noted that last graph from the report as well and think it is one of the most promising representations of our improving fortunes over the last few months.

    We still some major head winds but we are definitely heading in the right direction.

    Still not convinced that GDP is the correct measure :)

  2. Neither am I D_E, neither am I!

    Anyway. Could the divergence on interest rate costs also be based on outlooks for bond market rates? I understand there is some sort of pegging of the rate we get; it is not a fixed rate, but floats up to the time we receive the loan?

  3. Of course the debt burden is computed from the projected growth in nominal GDP. While I appreciate that it is likely that we will see only slow growth in nominal GDP as the private sector deleverages and the government implements the last €9 billion in austerity measures of the EU/IMF programme, it is possible that nominal GDP could surprise on the upside. We have a massive output gap, our labour force is flexible and now much more competitive (unit labour costs have fallen by about 10%) and we are among the most open economies in the world. Garret FitzGerald said in an article in 2009 IIRC that Ireland could experience a few years of 5% growth in GDP in the first half of the 2010s. Given that the Irish economy grew strongly in the 70s, 90s and 00s it is possible that the 10s could be another decade of strong growth. This strong growth would then erode the massive debt burden and significantly reduce the overhang on the economy of the deficits generated in the past 4 years.

  4. Hopefully with the larger than expected reduction in interest rates the next line should be lower again.

  5. Very interesting update on Ireland's total debt levels"

  6. The restructuring of the promissory note could be even more significant than the interest rate savings

  7. Yes, D_E, it will be interesting to see how this plays out. It will only be any interest rate reductions that effects our debt though. The full €30.9 billion amount was added to the General Government Debt when the notes were issued. Each year beginning next year the interest on the notes will be added to the debt so a reduction in a the interest rates will slow down the increase (and hopefully accelerate the decrease) of the debt to GDP ratio. The IMF will have to get another line!

    On an ongoing basis, the term extension would reduce our medium term cash requirements which would ease the pressure a bit by reducing the amount we would have to raise when we eventually get back to bond markets. This will be good if it happens. Any indication when we can expect it?