Inspired fiscal policies help the Irish economy to accelerate quickly after crises

Inspired fiscal policies help the Irish economy to accelerate quickly after crises

Conor O’Kelly, CEO, National Treasury Management Agency, explains why investors are showing so much confidence in Irish bonds and the resilient adaptability of the country’s businesses


The National Treasury Management Agency (NTMA) was initially established in 1990 to borrow for the Central Fund and manage national debt. Since then, the organization has expanded and diversified its core roles and functions. To start, can you please give us an introduction to the NTMA and its historical role managing Ireland’s national debt?

NTMA is an unusual organization because it has a whole collection of mandates, but essentially the entity manages the assets and liabilities of the state. Our top priority, certainly now, is to continue to support the Minister for Finance and policymakers with the extraordinary measures that they’ve put in place in relation to the shock of the pandemic over the last year. We do that through different channels linked to our mandates.


2020 has been a year like no other before it. The Irish state saw the “first real counter-cyclical fiscal response in its history,” as you have said. Last year, the NTMA reached its target of €24 billion in borrowing for 2020 with the sale of two long-term bonds at negative interest rates. What specific tools were used and what programs were implemented by NTMA to counteract the recent economic shock?

The Irish state is just over 100 years old and that’s the first time we’ve ever implemented that kind of policy. During the last financial crisis in 2008, Ireland was putting its foot on the brakes when the banking crisis hit, whereas this time it’s more like it is putting its foot on the accelerator. This is a very different response, which has been repeated right across the world. For us, we had to borrow very heavily as other countries have done, but we were able to do that—and we’re very comfortable that we can sustain that borrowing—for three reasons. Number one, the strong position we were in coming into the crisis. Number two, our total current interest bill. Number three, the European Central Bank (ECB). Those three factors meant that we were very comfortable taking on the very substantial additional borrowing that we needed to.

Where Ireland was positioned coming into the crisis is largely due to the actions of the Minister for Finance and other policymakers over the last four to five years. Ireland was one of the most heavily impacted countries in the world after the 2008 financial crisis. We were essentially unable to borrow. We were closed out of financial markets and asked to be bailed out by the International Monetary Fund. We’ve gone from being rated by Moody’s as recently as 2014 as sub-investment grade, to today’s AA- ratings from both Moody’s and Standard & Poor’s. The market considers us to be a semi-core European credit, whereas back in the last financial crisis, we were very much a peripheral European credit. That’s been quite a transformation in quite a short period of time. We’ve gone from recording very heavy budget deficits during that period, to recording a primary surplus—we closed that gap a couple of years ago. In 2019, we were in budget surplus again for the second year in a row.

Coming into the pandemic, our household budget was very much in order and in good shape. And we were in very good standing with the credit community. I think that’s really important because, the better your position the more room you have to maneuver if you do have to pull hard on the fiscal levers, which we did have to do. Borrowing increased by about 25 percent in total.


In what ways is NTMA leveraging the low interest rate environment established by the ECB to further its own goals?

The average interest rate on the total stock of Ireland’s debt has fallen from over 4 percent to down below 2 percent now. It’s actually going to fall to around 1.6 percent, which will be the average interest rate on our total stock of debt. If I think about the interest bill in Ireland in money terms, it’s twice what it was in the mid-1980s, but our government’s revenue is 10 times what it was in the mid-1980s. That’s a good reflection of your debt sustainability, and the ability to be able to add borrowing and be able to sustain those additional levels of debt.

It’s all made possible by the ECB, because the deficits in Europe in total will be about a trillion euros in 2020, probably close to a trillion again in 2021. The ECB bond programs are essentially buying as many bonds as are being issued. They’re buying one for one and nearly matching the total new issuance from all European sovereigns. That means that the additional demand required in the marketplace from investors is almost nonexistent. That’s why yields have remained so low. That’s what’s allowed countries like us to do such a significant amount of borrowing at such attractive rates.


After 47 years, the U.K. has formally parted from the European Union (EU). Ireland, as its closest neighbor, will undoubtedly feel the effects of this Brexit transition. What has the state put in place to counter any potential friction to come?

The state has put in place many different programs since the U.K. voted to leave in 2016. Ireland was the country that was going to be the most collaterally damaged by that decision, as the U.K. is our biggest trading partner. We’re on the same island as Northern Ireland. For many indigenous and particularly small businesses, it’s such a vital market.

We were probably much more alert to the dangers, the risks and the worries of a hard Brexit particularly, which thankfully we didn’t get. While you can’t prepare perfectly for something like that, the various programs rolled out by Irish agencies, export agencies, Enterprise Ireland and the government have meant that businesses have been very well educated on what was likely to be the various outcomes, on the things they needed to do to prepare. I’m not saying everybody has done their homework and is perfectly prepared, of course they’re not, but the vast majority of businesses are ready for dealing with the U.K. in its new capacity. But also, they’ve got ready over three or four years, enabling them to think about the long-term strategy of being dependent on the U.K. and the risk now associated with that. Many of them have diversified their strategy and their products as a result.

Ireland is a small market of 5 million people and a tiny little island, less than 1 percent of European gross domestic product (GDP): Irish companies that wanted to grow needed to start exporting oversees to the U.K., Europe and elsewhere in the world. When you’re exporting, any medium- or large-sized Irish companies exporting around the world are used to changes in regulations, changes in market conditions, changes in product demand. I think intrinsically you have to be adaptable if you’re that kind of business. In your DNA, as an Irish company that’s dealing in multiple markets, you’re quite used to having to change and being more flexible and adaptable. That’s what we’ve probably seen—we’ve seen those that need to stay in the U.K. market and deal with the U.K. in the long term have found ways to adapt. That might be setting up inside the U.K.; it might be finding new ways to do that. It might be getting all your paperwork in order and then putting some new resources into that. Or it might be switching markets and changing your product, so that it’s more focused on the rest of Europe, rather than the U.K., and so reducing your dependency.

Our dependency on the U.K. has fallen very dramatically over the decades and will continue to fall. I think Irish businesses are very adaptable anyway, and the government has been very supportive. In practical terms, there have been very few weeks that have gone by since 2016 when there hasn’t been a Brexit breakfast being hosted somewhere in Ireland by some bank or institution to educate their customers about what they need to do.


Despite the current difficulties, hope is on the horizon with the vaccine program rollout, the Brexit deal and also the coming to power of a new administration in the U.S. Overall, how would you assess Ireland’s level of risk going into this new year? How has the shock been cushioned by the structure of economy and the significant fiscal response?

Investors in the bond market who invest in our credit are commenting on a couple of things. They continue to buy our bonds at very low yield levels. What they’re saying to us is that they see a country that’s been remarkably resilient, despite the crisis, and that’s for a couple of reasons. Ireland has a twin-engine economy with, on the one hand, the multinationals that make up 50 percent of the economy and, on the other hand, indigenous companies, which are very much export led. Big multinationals have brought in foreign direct investment (FDI), many leading tech and pharma companies have set up their headquarters here in Ireland. 

What happened after the 2008 financial crisis—and what we are seeing this time again—is that the multinational sector helped to keep the economy alive while the indigenous domestic sector was really decimated. That allowed us, ultimately, to recover so quickly over the last four to six years. This time, again, the resilience of the economy is partly due to the fact that there have been many companies that have progressed and accelerated their progression here during the pandemic, because of changing behaviors and digitalization. Ireland’s exposure to pharma and tech in particular, and the multinational area, has meant that we’ve been very resilient in terms of employment and in terms of tax revenues.

The indigenous businesses have also been quite resilient, but also our income tax has held up very well because our tax system is quite progressive. That’s been a bit of a surprise to investors and I think they’ve been pointing to that resilience in terms of what they’ve seen. While our economic growth has been hit in 2020, we’ve been one of the least affected, in the European league, in terms of declining growth rates and deficits.


The Irish Strategic Investment Fund (ISIF) falls under the NTMA. The fund is mandated to invest on a commercial basis in a manner designed to support economic activity and employment in Ireland. Could you please give us a summary of the investment strategies implemented by the fund leading up to the Project Ireland 2040 objectives? 

The ISIF is an unusual beast: it’s a unique fund with a unique double bottom line. The mandate that was given by legislation when it was set up was that it must invest for commercial return and it must invest for economic impact for Ireland. That’s what we call the double bottom line. So it’s very unusual and it’s a policy inspired by the last crisis. Prior to the pandemic, it was focused on key themes such as regional development, climate change and housing.

There is lots of capital available, but what differentiates our capital from all the capital available to invest in good companies is our long-term horizon. Our capital is really patient capital and we are prepared to take a much longer-term view than the average investor in the future of all of these companies. So, in terms of regional development, I could give you a couple of examples: we invested in a business called ATA, which is a precision engineering company based in the middle of Ireland. Our investment allowed them to acquire a German company in the precision engineering business. Can you imagine an Irish company from the middle of the country in precision engineering buying their German competitor! I think that says a lot about how far Ireland has come during the past decade. We’ve invested also in more traditional businesses, like a distillery in West Cork that now produces a great whiskey, employs 150 people and exports to 60 or 70 different countries.

In addition to these kinds of investments, the fund is also investing in climate change, renewable energy and new technology. We’re investing in housing platforms but also enabling infrastructure—some of the less glamorous parts of investing in water pipes, sewerage and roads to allow houses to be built on sites and allow these sites to be developed. That was the purpose of the fund, up until the pandemic, and then when the pandemic hit, the Minister asked us to quickly change our focus. So we set up what we call the Pandemic Stabilisation and Recovery Fund, and we started to look at companies that were affected by the pandemic. Policymakers wanted to make sure that there were no medium-sized or large companies in Ireland that didn’t have the capital support, equity support or whatever part of the capital structure that they needed. We’ve made some very significant investments in Irish companies to help them get through the pandemic.

A point to make here about Ireland is that, because this fund was established, because of what it was doing before, it was very easily able to pivot, change focus and adapt to getting money out into the marketplace. Having the plumbing already in place for these institutions is what allows you to react very quickly when you have a crisis. I think that’s where Ireland has probably improved its position compared to maybe a decade ago, or certainly two decades ago.


Ireland is poised to become a leading international fund domicile for managers looking to invest in “real assets”, such as real estate, private equity, energy, infrastructure and sustainable finance. This is following Ireland’s introduction of its Investment Limited Partnerships Amendment Bill 2020. Can you please explain how this bill favors asset managers and the potential for job creation that is expected following its implementation? 

For quite some time, Ireland has set out to be an attractive financial center. At the heart is the approach of more traditional FDI and multinationals coming in. Ireland believes that attracting the best international companies to have a footprint here not only brings potential direct employment and tax revenue, but it’s as much about the ecosystem that gets built around that, the skill set, the feed and integration into universities over the long term. If you look at the tech companies that have been here for decades now, under the surface and around those companies a huge ecosystem has built up.

In terms of venture capital and private equity, what the NTMA has been very involved in for the last decade is, for example, investing in a venture capital (VC) fund through our ISIF fund or in private equity international firms, some of the leaders in the world. In exchange for us investing in their fund, we ask them to do a number of things: put boots on the ground in Ireland—either open a small office or commit to being here on the ground. We ask them to commit to investing a portion of their portfolio, normally equivalent to the amount that we’re going to invest in the fund. We ask them to commit to investing that amount in Irish companies. As a result of that, we get access to their performance, which is good for us financially, but we get their expertise and domain knowledge, and they commit to coming here, setting up shop, investing and connecting with Irish companies. That helps build our ecosystem. If we didn’t do that, as a tiny country, all of these companies would be flying over Ireland at 30,000 feet and they wouldn’t be touching down here. We have to be more innovative to attract expertise and knowledge, and that’s what we’re trying to do in the financial services industry in the VC industry and in the private equity industry.

I think it’s been pretty successful. We’ve invested in a number of VC funds and they’ve all committed to invest in Ireland. That kind of ecosystem and partnership has been really critical. I think that’s going to be a big part of the long-term infrastructure that’s being put in place, which is going to be very beneficial.

Looking toward the future, what were the major lessons learned and opportunities brought by the COVID crisis, in your opinion?

There has been so much change for everybody. The way we look at it here is that technological change has always been fast and behavioral change has always been slow. I think the COVID catalyst hasn’t been technology change, it has been behavioral change. The technology has always been there. Our human behavior hasn’t matched the technology and that’s what’s happened now. That’s the COVID catalyst. We’ve time traveled to 2030 or maybe 2040, and we like what we see. We’re not going back. There are so many things that we’re going to take with us because we’ve seen the future, we know what it looks like and we’re going to take all the benefits that we’ve seen. I think that’s why in 2021 and post this pandemic, in the way we work and the way we interact with each other, we’re going to take with us all the best things we’ve learned and all the worst things we’re going to leave behind. That’s going to leave us much better position for the future.


What sort of permanent transformations will shape the Irish business and investment landscape going forward?Ireland has a good model. I think it has a diverse economy that’s now been proven through two very significant shocks. We’ve learned a lot: if you’re a medium-sized company and you’ve come through the great financial crisis in Ireland and you’ve come through this pandemic shock, you’re probably in pretty good shape, you’re probably pretty resilient, you’ve probably got a pretty good balance sheet, you’ve probably got some very good customers and a very good business. Those that survive will be in much better shape. Of course, they probably digitized their businesses as well because they’ve had to and they’ve had to adapt. There’s a resilience there that’s been underestimated in terms of some Irish companies and how they perform. As an economy, we’ve got one of the youngest populations in Europe that is digitally adept. We’ve got diversity across the economy and, post Brexit, we’re the only predominantly English speaking country in the EU. So I think in the long term, Ireland’s future is actually very bright.

What would be your final message for the readers of Newsweek?

Ireland has companies that have been through an awful lot in both of these crises. Their survival, resilience and business plans are extremely robust and I think that puts them in very, very good shape. What we’ve learned from investing in our ecosystem and in the institutions that have been established since the last crisis, is that Ireland is a good learner as a country, in terms of institutions. We’ve reacted and adapted through the policies that have been introduced. Setting up the ISIF in the first place was an inspired bit of policymaking that allows the country to switch, react and adapt. Policymakers have done an incredibly good job at learning from the problems that we’ve had in the past and the country has been quite a good learner itself.

That open mindset that we have, which you probably get when you’re a small country because you have no choice, that mindset carries through to the policymakers. It carries through to the way companies behave, interact and innovate. The fact that companies managed to navigate and change is appreciated by investors. They like that kind of track record, because that gives them the confidence that this country, from a policy point of view, and these companies will be able to adapt to whatever the future brings.

It’s not a question of will there be another shock—the question is what sort of shape will you be in when the next shock happens. When you’re small like Ireland is, you get knocked about by all sorts of things that happen around the world. I think we’re aware of that and conscious of that. That makes us want to continually improve, prepare and be ready for the next time. I think it’s about a mindset and an attitude. That’s what the Irish policymakers have implemented, and they deserve a lot of credit for that.

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