Friday, July 22, 2016

Revisions to Ireland’s International Investment Data

Back in March we looked at the FY2015 International Investment Data with a post showing that Ireland’s net external debt was zero at the end of 2015.  Although most of the attention over the past ten days has been on the revisions to GDP and related measures there were also massive revisions to the international investment and external debt data which were published on the same day. 

Most of the changes are linked to the take-out chart from the CSO presentation on the national accounts revisions.

Gross Capital Stock

This shows that Ireland’s gross capital stock increased by an incredible €300 billion in 2015.  GFCF was a little more than €50 billion so there must be a lot of reclassifications going on.

At the headline level it now appears that saying that Ireland’s net external debt was zero was out by the little matter of €200 billion or so.

External Debt

It’s pretty clear when all of the action happened – Q1 2015 when Ireland’s gross and external debt rose by around €300 billion.

The sector that this additional borrowing resulted from is fairly easy to identify.

Gross External Debt by Sector

All of the increase was associated with direct investment.  This is debt associated with the assets transferred to Ireland in 2015.  The Irish-resident entity which now holds the assets owes a debt liability to an external entity based on the value of those assets. 

This would suggest that most of the asset transfers are not linked to inversions because in that instance there would not be an external debt as the asset would be owned by the now Irish-resident parent of the company.  And the fact that the shift happened in Q1 raises issues about the number of firms involved.  If it was a large number of firms would they all have been in a position to make the transfer at roughly the same time?

Inversions and redomiciled PLCs are part of the overall story but do not seem to have been significant in the massive level-shift seen in Q1 2015.  If we look at external assets in debt instruments (i.e. money owed to Irish-residents) we see the following:

External Assets in Debt by Sector

There is a rise in external debt assets related to direct investment but that began in the middle of 2013 and has continued at a relatively steady pace since then.  The number of inversions of US companies to Ireland has been relatively small and there was just one in 2015 (Medtronic and Covidien).

What this means is that the scale of the figures for the NFC (non-financial corporate) sector is now approaching the realm of the IFSC as we will have to begin counting them in trillions.  However, one significant different to the IFSC is that the overall net position is not close to zero.  Here are the total foreign assets and liabilities of Irish-resident NFCs.

Foreign Assets and Liabilities of NFCs

We can see the massive gap that opened up in 2015.  The gap is largely explained by the huge amount of intangible assets that Irish-resident entities now hold domestically which obviously don’t appear in international investment figures.

So where does this leave us in trying to determine the underlying net international investment position of the Irish economy?  Well, here are the net external debt positions by individual sector.

Net External Debt by Sector

The stand-out figure is obviously for direct investment which shows a bizarre pattern.  The net position associated with direct investment became more negative (debt assets exceeding debt liabilities) from the middle of 2013 through to the end of 2014.  There was than a massive level-shift of €200 billion in Q1 2015 after which the previous downward trend resumed.

The two effects can be better seen here which gives the external debt liabilities and assets associated with direct investment.  The net position is as shown in the previous graph.

Liabilities and Assets of Direct Investment

We can see that gross external debt for direct investment is relatively stable save for the massive level-shift in Q1 2015.   This is linked to the transfer of intangible assets to Ireland.

External debt assets associated with direct investment begin rising in mid-2013 and has continued at a relatively steady pace since.  This is related to inversions and redomiciled PLCs.

It is pretty clear that these don’t really reflect the underlying position of the economy so it would be better exclude direct investment from the total economy figures (while excluding the IFSC at all times!).

External Debt ie

These outcomes can be compared to those shown in the second chart above and better reflect the improvement in Ireland’s underlying external debt position.

And we include all financial assets and not just debt instruments we get this final picture for our overall net international investment position.

Net International Investment Position

The total economy figures are polluted by the direct investment effects outlined above.  The underlying position is better identified if we exclude NFCs and we see that Ireland has a small positive NIIP (excluding NFCs).  The government sector’s external debt of €150 billion is roughly offset by financial intermediaries (mainly Irish pension funds) external assets of a similar amount.

So what do all the revisions tell us?  It is hard to  know but it does seem that asset transfers played a greater role to what happened in 2015 than corporate inversions.

Why did the assets transfers happen?  A key factor seems to have been the BEPS project which has the underlying objective of linking profit to substance and increased transparency through country-by-country reporting.  We know that lots of US MNCs already have substance here but that doesn’t really explain why the assets were transferred here rather than through outright purchases (which would appear in GFCF).  Another factor is that it is possible that the assets were held by Irish-registered but non-resident entities.  Making these entities Irish-resident would bring the assets with them. 

So companies may be continuing to avail of the ‘double-irish’ but now actually have the two companies in Ireland (as opposed to having both registered here but one managed and controlled in the Caribbean). How will Uncle Sam feel now that we are taking a 12.5% chunk out of these profits?

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