As we look towards 2016 the Government’s finances are extremely healthy.
The performance of tax receipts this year has been a source of major surprise with both Vat and particularly corporation tax running well ahead of profile.
The 2015 budget deficit is forecast to drop to at least 1.5% of GDP from 3.9% in 2014 and the level of domestic gross debt is set to fall to close to 96% of GDP.
Ireland looks set to retain its position at the top of the eurozone growth league in 2015.
It’s also expected to grow faster than China. International investors continue to buy Irish debt which yields a premium over that of other European economies.
The cost of funding for the Irish government remains at historically low levels.
At the start of the year, the yield on the Irish 10-year bond was 1.25%, having been as high as 14% during the European debt crisis. In 2015, the Irish Government issued debt with seven, 15 and 30-year maturities.
The Government is expected to return to bond markets in early January 2016, this time seeking 10-year funding.
The last time Ireland issued a 10 year bond was on October 9, 2014 and the rate was 1.63%.
In the fourth quarter of 2015, the average yield on the Irish 10 year was just 1.10%.
And funding pressure on the Irish Government remains very light for 2016 and 2017.
The Exchequer Borrowing Requirement is constantly narrowing and is projected to drop to just over €1bn next year.
The 2016 budget forecast was for €1.7bn, however, this number is set to be revised lower due to the continued out-performance of domestic taxation.
The total funding requirement for the State in 2016 will be approximately €10bn and the Government needs to repay €8.1bn to investors when it redeems the current Irish 4.6% April 2016 issue, as well as funding the borrowing requirement.
The NTMA has released a €6bn to €10bn funding target for 2016.
The range is lower than expected but allows flexibility to limit issuance if tax receipts and other revenues continue to come in ahead of expectations.
Although funding requirements remain light, the need to maintain market visibility and also to inject additional liquidity into the market, as the ECB buys Irish debt on a weekly basis, will ensure the NTMA maintains a market presence.
If it’s not broken don’t fix it is the mantra.
The NTMA for the last three years raised money directly after the start of the new year. On January 8, 2013, the NTMA tapped the existing 2017 issue.
On January 7, 2014, via a syndicated issue, it raised 10 year money and on January 7 2015, the agency issued a new Irish seven year bond.
There is no reason for the NTMA to change the formula, so expect a new €4bn Irish 10-year syndicated issue in early January.
The added complication of the looming general election is another reason why the NTMA should not delay its first engagement with the markets in 2016.
The Irish government in all probability will have close to 40% of its annual funding completed by mid- January.
The Government has amassed a significant cash war chest which will be approximately €11bn to €12bn at the end of 2015. In the event of an unforeseen shock to global bond markets, the country can now afford to disengage from bond markets for over 12 months.
In this ultra-low yield environment should the NTMA not significantly prefund future commitments? This is a valid question.
However, funding requirements for both 2017 and 2018 are relatively light — estimated to be just €8.3bn and €9.3bn.
In later years, the funding environment is set to become more challenging with large government bond redemptions in 2019 of €14.5bn and in 2020 of €20.9bn to be refinanced.
With deposit rates currently low, the costs attributed to raising funds against the return generated from leaving the money on deposit for a prolonged period of time argues against large scale prefunding.
The European interest rate backdrop remains relatively benign. The ECB is expected to keep interest rates at record low levels until at least 2018.
The ECB has committed to buying European sovereign bonds until March 2017. It is expected funding rates will remain attractive for the medium term, so the Government should be in no rush to accelerate its funding programme.
Ryan Mc Grath is head of fixed income strategy at Cantor Fitzgerald Ireland
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