Business Week: Curtain is pulled back on Brexit damage

Economists have been feeling around in the dark for weeks now as to exactly what damage will be wrought on the Republic by the UK’s exit from the European Union, but the curtain was this week slightly pulled back.

Both the International Monetary Fund (IMF) and the Central Bank issued concrete warnings in relation to the Irish economy, with both regulatory bodies cutting forecasts.

The IMF warned banks would be hit as Brexit weighs on UK operations and prospects for companies, employment and investment. It predicted Irish gross domestic product will expand by 3.2 per cent next year, having previously estimated 3.6 per cent. Despite the “exceptional rebound” of the economy, the UK vote to leave the EU “amplifies downside risks”.

‘Particular exposure’

The Central Bank, for its part, cited the Republic’s “particular exposure” to the fallout from Brexit. The bank now expects GDP growth of 4.9 per cent this year, down 0.2 percentage points on its previous forecast and 3.6 per cent next year, down 0.6 per cent.

"The severity of this impact is difficult to gauge," said Central Bank chief economist Gabriel Fagan. "The impact on the Irish economy could be larger than what we have pencilled into the forecast."

As a result, the “best path” for the Government to adopt on budget policy is a cautious and prudent one, he said, so that the economy is in the best shape possible to withstand future shocks.

A report by Bank of Ireland showed Irish consumer and business sentiment plunged after the vote to quit the EU. The Bank of Ireland Economic Pulse fell by 10.3 points in July, to 91.2, its lowest reading so far this year.

Loretta O’Sullivan, chief economist at the bank, said there had been “a notable step-up” over the past year in the number of service, retail and construction firms citing uncertainty as a key factor limiting their business.

Indeed, the Dalata Hotel Group has put its UK expansion plans on hold due to the vote, according to its chief executive, Pat McCann. "We had plans to develop in the UK and we still feel that will happen, but it would be unwise to make any decisions until we get some indication what'll happen," he said.

Ryanair

Ryanair was also out this week, saying it could cut back on flights between Ireland and London as it bids to combat the uncertainty created by the vote. It said it was planning to cut capacity and frequency on routes out of London Stansted this winter in an immediate step towards moving growth from the UK to Europe.

Ryanair chief executive Michael O’Leary, whose remuneration package jumped 33 per cent to €3.2 million in the 12 months to March 31st this year due to the doubling of his share-based compensation, said the outlook was bleak.

“In the near term we expect that Brexit uncertainty will lead to weaker sterling, slower growth in the UK and EU economies and downward pressure on fares until the end of 2017 at least,” he said.

The State’s exchequer returns have been flying recently, mainly due to the swelling corporate tax purse, but the Central Bank’s call for a prudential budgetary policy was echoed by Fianna Fáil finance spokesman Michael McGrath.

Corporation tax

After the Department of Finance revealed that corporation tax paid by the 10 largest multinational companies in the Republic had doubled in the last five years, McGrath warned against depending on such a small concentration of sources of revenue.

The top-10 companies as measured by tax paid, thought to include names such as Microsoft, Dell, Google and Oracle, paid more than €2.8 billion in corporation tax last year. That represents an almost 100 per cent increase since 2011.

“While we all hope these receipts are a recurring feature of our taxation system, it would be very unwise to build up permanent spending commitments on the back of it,” McGrath said.

Special-purpose vehicles

While the State has been raking in all that corporation tax, Dublin has become a hotbed for special-purpose vehicles (SPVs). These entities are set up by banks and private-equity firms – typically structured under the ownership of a charitable trust to keep them off balance sheet – in order to facilitate tax avoidance.

The Charities Regulator said this week it was examining “several” charities with links to the murky world of SPVs. While it is standard practice within the financial sector and allowed under law, a senior Revenue Commissioners official, Áine Hollingsworth, has asked the Department of Finance whether the charity regulator should “allow that sort of set-up”.

The Revenue Commissioners has said “interventions are currently under way” in respect of a number of such companies. “Selection for audit or investigations, and any consequence publication, is dependent on the outcome of any intervention,” it said.

If any abuse of Section 110 of the Taxes Consolidation Act 1997 – which has allowed the setting up of these structures – is identified, it will be brought to the attention of the Department of Finance, which will decide if legislative changes may be required.

Minister for Finance Michael Noonan said tax-avoidance schemes and abuse "erode the tax base and cause reputational issues for the State", and, if any are uncovered, appropriate action will be taken.

AIB

It was an eventful week for AIB, which paid the State back €1.76 billion to redeem loan notes issued to it in July 2011 as part of its bailout from taxpayers.

The bank reported a pretax profit of €1 billion in the first six months of the year, although the figure was €200 million lower than in the same period of 2015. The bank said its profit was driven by a strong business performance, net provision write-backs of €211 million and one-off benefits including the sale of its share in Visa Europe.

Plans to start discussions with the Department of Finance and its regulators about establishing a dividend policy were also revealed by chief executive Bernard Byrne.

He said the bank needed “to establish a dividend policy” with Minister for Finance Michael Noonan and regulators (the Single Supervisory Mechanism in Frankfurt and the Central Bank).

The bank has not paid a dividend to shareholders since September 26th, 2008, just days before the government issued the blanket bank guarantee. Long-standing plans to float 25 per cent of the bank’s shares on the stock markets in Dublin and London are on hold having been besieged by volatile markets and Britain’s vote to leave the EU.

In less sparkling news for the bank, it was forced to apologise for failing to ensure that all of its tracker mortgage customers were on the correct interest rate. It indicated that it would compensate affected customers for the error. Some 3,000 AIB loans accounts are believed to be affected.

iPhone sales

There was also a raft of company announcements this week. Apple iPhone sales fell for the second straight quarter, although the 15 per cent drop was less than feared. The company’s total revenue dropped 14.6 per cent in the third quarter ended June 25th.

Net profit fell 27 per cent to $7.8 billion (€7.10 billion) in the quarter. Total revenue fell almost 15 per cent to $42.36 billion (€38.55 billion), beating analyst expectations.

Twitter reported its slowest growth in quarterly revenue since going public in 2013 as the company faces intensifying competition from fast-growing competitors such as Snapchat and Instagram.

PTSB

PTSB made an after-tax profit of €80 million in the first six months of 2016, a major turnaround on a year earlier when it recorded a loss of €410 million. This was the first group profit recorded by the bank since 2007, the year before the global financial crash.

It is also generating capital again for the first time in nine years. Permanent TSB chief executive Jeremy Masding said it was now time for the bank to "grow" after years of dealing with pre-crash legacy issues that threatened its viability.

In health, State-owned insurer VHI recorded an after-tax surplus of €45.5 million in 2015, a reduction of €9 million on the previous year. It closed the year with an improved reserves position of €521 million, up 12 per cent on 2014, while its membership increased for the first time in eight years to 1,068,000.