#1Ireland: Growing amid external risks Underlying growth remains healthy, but Brexit and other external risks pose challenges June 2017 Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency#2Index Page 3: Summary Page 8: Macro Page 31: Fiscal & NTMA funding Page 46: Brexit Page 54: Long-term fundamentals Page 62: Property Page 69: Other Areas Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency 2#3Summary Ireland's headline GDP is distorted; yet underlying growth remains healthy Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency#4Ireland's headline numbers distorted; underlying growth strong but Brexit will slow pace in next 12-18 months • • GDP and GNP are exaggerated by the activity of multinational companies; behind the headline numbers Ireland is growing more slowly than before but still beats most of the euro area The National Accounts are distorted by the assets of several companies and some entire firms being reclassified as resident in Ireland. GDP and GNP series are suboptimal as a result. All other metrics show the economy is growing. Our underlying metric suggest the economy grew by 4.5%+ y-o-y in 2016. At the same time, employment is expanding; unemployment was down to 6.4% in May - a cyclical low. Consumer spending and investment have recovered. Consumption grew by 3% in 2016. There is pent up demand for investment e.g. housing supply is lagging demand, leading to soaring rents. Brexit will slow Irish growth in 2017 ■ The UK may enter recession after its vote to leave the EU: for every 1% drop in UK GDP Ireland's output may fall by anywhere between 0.3-0.8%. We are likely to see some impact this year; it was imperceptible in 2016. Government debt and deficit metrics are also distorted by GDP revisions; analysis should include other measures of Ireland's debt serviceability Government debt-to-GDP fell to 75.4% in 2016; and the GG deficit to 0.6%. The inflated GDP denominator means other metrics of debt serviceability are required to complement debt as a ratio of GDP. Debt-to-GG Revenue (274%), interest cost as a share of revenue (8.5%) and the average interest rate on Ireland's debt (3.1%) are superior measures for comparison with other sovereigns (2016 figures). Excluding the distortions, Ireland's fiscal picture is improving. Ireland is in primary surplus, revenue data in recent quarters has been steady and spending is relatively restrained. Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency#5Funding in 2017: more than €9bn of €9-13 billion complete . ■ Funding in 2017 - €9-13billion of long-term bonds planned NTMA has issued €8.75bn in benchmark bonds so far: January: The NTMA raised €4 billion through the syndicated sale of a new 20-year benchmark Treasury Bond maturing in May 2037. The funds were raised at a yield of 1.734%. February: €1.25bn issued in a dual auction of the 2022s and 2026s (yields of 0.09% and 1.03% resp.). March: A dual-auction of the 2026s and 2045s raised €1.25bn (yields of 1.046% and 2.187%). April: A dual-auction of the 2023s and 2026s raised €1.25bn (yields of 0.202% and 0.936%). June: A dual-auction of the 2026s and 2045s raised €1bn (yields of 0.72% and 1.915%). In April, the NTMA issued its first inflation-linked bond: €610m 23-year tenor, 0.25% coupon + Irish HICP excluding tobacco. The investor base continues to expand: International investors bought 97% of the bonds on offer in January, led by Germany/Austria (31%), the UK (25%), and the Nordics (10%). Among investor categories, the bias of the deal was to real money: asset/fund managers took 36%, banks bought 28% and pension funds/ insurance companies purchased 16%. The NTMA has also raised funds through a private placement and non-competitive auction phases 100-year paper issued in 2016 In 2016, the NTMA issued its first 100-year note by private placement. The €100m sold yielded 2.35%. Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency 5#6Ireland's bond market performance has been underpinned by prudent domestic policy and ECB action Yield (%) 24 EU/IMF Programme Entry 19 1 6 Rising ELA Moodys Downgrade EU/IMF loan rate reduction OMT NTMA issuance recommences EU/IMF Programme Exit NTMA resumes bond auctions ECB QE Ireland's 1st 100-year note Brexit Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 -1 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 10 Year 2 Year Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta Source: Bloomberg (weekly data) National Treasury Management Agency 6#7Ireland: "A"grade from all major credit rating agencies Rating Agency Long-term Short-term Outlook/Trend Date of last change Standard & Poor's A+ A-1 Stable June 2015 Fitch Ratings A F1 Stable Feb. 2016 Moody's A3 P-2 Positive May 2016 DBRS A(high) R-1 (middle) Stable Mar. 2016 R&I Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency A a-1 Stable Jan. 2017 7#8Section 1: Macro GDP/GNP is misleading; Employment and consumption best reflect reality Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency#9% Distortions to GDP/GNP make them poor indicators of economic performance 30 25 20 20 15 Substantial activity from multinationals in 2015/16 distorted the national accounts - makes GDP a sub-optimal measure of economic activity (see pg 27-30) 10 5 0 -5 -10 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 I Domestic Demand Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Net Exports I Change in Inventories Source: CSO; Department of Finance GDP Change Forecast 9#10Better measures of economic activity are necessary - we present "Underlying Domestic Demand*" 20% The measure is constructed to strip out the distorting effects of MNCs. 15% Underlying domestic demand (UDD) includes: 10% private consumption government consumption. 5% ■ building investment^ 0% This measure pegs nominal growth closer to 5.6% at Q4 2016 (y-o-y). UDD grew by 4.6% y-o-y in real terms in Q4 2016. -5% -10% ☐ The CSO will release its own adjusted metric "GNI*" in the summer. -15% Source: CSO, NTMA calculations -20% Annual Growth 2000 2002 2004 2006 2008 2010 2012 2014 2016 Real Nominal Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency ^note previous versions of UDD included machinery and equipment investment ex. planes. However confidentiality issues mean data on this is now restricted and so it is removed from our UDD metric. 10#11Consumption is now a large contributor to economic growth - and is unaffected by MNC distortions Private consumption grew at 3.0% y-o-y in 2016 "Core"* retail sales up 3.3% y-o-y in value in Q1 (peak-100) 100 95 95 90 90 85 80 60 75 15 70 70 65 60 10% 115 8% 110 6% 105 Gap = price discounting; continues to widen 4% 100 2% 95 0% 00 90 -2% 85 -4% 80 -6% 75 2005 2007 2009 2011 2013 2015 2017 2002 2004 2006 2008 2010 2012 2014 2016 Consumption Growth Y-o-Y (RHS) Annualised Consumption (€bn) Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: CSO, CSO (retail sales) 3m average Volume Index -Value Index 11#12High frequency indicators also show Ireland's recovery is broad based Ireland composite PMI is expanding - manufacturing hurt in mid-2016 by Brexit Recovery is broad based (PMI chg. as cumulative index level, June 2000=100) 70 70 65 60 350 300 250 55 M 200 50 45 45 40 40 35 30 2000 2002 2004 2006 2008 2010 2012 2014 2016 Services Manufacturing Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Composite 150 100 50 0 Growth of services is much stronger than rest 2000 2002 2004 2006 2008 2010 2012 2014 2016 PMI Manufacturing PMI Services PMI Construction Source: Markit; Bloomberg; Investec ; NTMA workings 12#13Comparison of economic activity metrics Measures Growth rate 2016 GDP (real) 5.2% EA average 2016 1.7% GG Revenue 3.5% 2.2% UDD 5.6% (nominal) UDD (real) 4.6% Consumption (real) 3.0% Employment 2.9% 1.9% 1.6%* Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: CSO, Eurostat, NTMA calculations (where appropriate four-quarter sum annual growth rates 13 used)#14Labour market has rebounded since 2012; unemployment continues to fall with over two million now employed Unemployment rate: 6.4% in May 2017 Employment up 12.6% from cyclical low (2008 peak = 100) 16% 14% 12% 10% 8% 6% 4% 2% 0% Unemployment has more than halved in 5 years 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: CSO 105 100 95 00 90 85 80 75 70 0 65 Non-Construction Employment above 2008 peak for first time 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Non-Construction Employment Total Employment 14#15Employment growth is broad based by sector and region Nearly all sectors have seen employment 25 25 growth in year to Q1 2017 (000s) 20 20 15 10 100 5 0 -5 Employment growing across all regions in Ireland - faster now in ex-GDA* 10.0% since 2016 Q1 I since 2015 Q1 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Info & comm Health Prof, science & tech Wholesale & retail Transport/storage Education Public admin Other Agri, forestry, fish Fin, insurance & RE -8.0% -10.0% Construction Accom and food Industry Admin & support Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: CSO * 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Greater Dublin Area* Ex-GDA O Greater Dublin Area = Dublin, Meath, Wicklow and Kildare 15#16Labour participation has not yet recovered - similar to US; Wages only now rising, pointing to slack in the market Participation rate hovering around 60% Wages and hours worked beginning to recover, although pockets of excess capacity remain 32.4 65% 64% 63% 62% 61% 60% 59% 58% 57% 56% 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: CSO, CSO (Earnings) 37,250 32.2 32.0 31.8 31.6 S 37,000 36,750 36,500 36,250 31.4 36,000 31.2 35,750 31.0 35,500 Q4 Q4 2009 Q4 Q4 Q4 2010 2011 2012 2013 2014 2015 2016 Q4 Q4 Q4 Hours Worked (Annualised) Annualised Earnings (annualised, €, RHS) 16#17Wide disparity in wages across sectors 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% -14% Info & Comm Wholesale/Retail Admin & Support Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Industry Transport/Storage Accom & Food Prof, science & tech 1% difference in 4Q average hourly earnings vs 2008-2010 peak Source: CSO, NTMA analysis Construction 60,000 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Arts & Rec Fin, Insurance & RE Public admin 2017 Q1 average annual earnings (€, RHS) Health Education 17#18Unemployment falling across Europe; falling faster here Q4 2013 % Q4 2014 % Q4 2015 % Q4 2016 % Q1 2017 % Germany 5.1 4.9 4.5 3.9 3.9 Netherlands 7.6 7.1 6.7 5.5 5.2 Sweden 8.0 7.8 7.1 6.9 6.7 Ireland 12.2 10.4 9.1 7.0 6.8 Belgium 8.5 8.5 8.6 7.2 7.0 EU 28 10.7 9.9 9.0 8.3 8.1 Euro area 11.9 11.4 10.5 9.7 9.5 France 10.2 10.4 10.2 10.0 10.1 Portugal 15.4 13.5 12.3 10.4 9.9 Italy 12.4 12.7 11.5 11.8 11.7 Spain 25.8 23.7 20.9 18.6 18.2 Greece 27.6 25.9 24.3 23.4 22.9 Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: Eurostat 18#19Rising employment and house price rises lift confidence; stagnating consumer prices underpin real income... 140 Consumer confidence had recovered, though Brexit may have impacted 4 Inflation in Ireland lower the EA due to sterling weakness Brexit Vote 120 100 80 60 60 60 40 40 3 2 1 0 -1 -2 -3 -4 20 1996 1999 2002 2005 2008 2011 2014 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017 Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: KBC, ESRI, CSO; Eurostat HICP Ireland HICP Euro Area 19#20... while household deleveraging continues; rising house prices bolster household balance sheets Household net worth (€bn) improved since 2012 underpinning consumer spending 1,000 Interest burden down to only 4% of disposable income from peak of 11% 14% 750 500 250 -250 2002 2004 2006 2008 2010 2012 2014 2016 Financial Assets Liabilities Net Worth Housing Assets Source: CBI, NTMA Calculations Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency % of disposable Income 12% 10% 8% 6% 4% 2% 0% 2003 2005 2007 2009 2011 2013 2015 Ireland Germany Italy UK Source: CBI, Eurostat NTMA calculations EA-19 Spain Netherlands Note: Non-trackers bare 90% of the interest burden 20 20#21230 210 190 Private debt levels are high but improving Household debt down €55bn from peak 300% 250% 200% 170 150 150% 130 At 10-year low 100% 110 2250 90 50% 70 2003 2005 2007 2009 2011 2013 2015 Household Debt (€bn) 0% Sweden Ireland Netherlands Debt to after-tax income* improving (154%) but among highest in Europe Finland Portugal UK Spain Household Disposable Income (€bn, annualised) Source: CBI Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Household Debt (% of Disposable income) Source: Eurostat *Measure includes both loans and other liabilities. Excluding other liabilities, debt-to-income ratio is 142% Belgium Euro area France Austria Germany 21#22Recovery has not been driven by credit Lending for House Purchase positive for first time since 2009 (Єbn net transactions) Billions € 8.0 7.0 6.0 New credit to Businesses only now outweighing deleveraging efforts (y-o-y) 50% 40% 30% 5.0 Econ. growth 4.0 positive in 20% 2013-16 3.0 10% 2.0 0% 1.0 -10% 0.0 -20% -1.0 2006 2008 2010 2012 2014 2016 -2.0 2006 2008 2010 2012 2014 2016 Principal Dwelling Buy-to-Let Total Total Annual Growth Total ex Financial Intermediation Total ex Financial Intermediation and Property Source: CBI Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency 22 22#23Gross household saving rate is close to the EU average 16 14 14 12 10 10 % of Disposable Income (4Q MA) 00 6 4 2 0 2002 2004 2006 2008 2010 2012 2014 2016 -Ireland EU-28 EA-18 UK Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: Eurostat, CSO 23#24Service exports have been very strong post-crisis; goods exports excluding contract manufacturing slower Cumulative post-crisis exports (4Q sum to end-2008 100, current prices) Ireland has tripled its share of global service exports in the last 15 years 210 3.0% 200 Large increase in exports 190 exaggerated by contract 2.5% 180 manufacturing* 170 2.0% 160 150 1.5% 140 130 1.0% 120 110 0.5% 100 Patent Cliff 90 0.0% 2009 2010 2011 2012 2013 2014 2015 2016 1980 1984 1988 1992 1996 2000 2004 2008 2012 Contract Manufacturing* Goods ex. CM Services Exports Irish Services Export (% of Global Share, RHS) Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: CSO, NTMA calculations, * Contract manufacturing proxy used see pg 30; WTO 24#25• Ireland's goods exports respond vigorously to euro movements - in both directions A 1% depreciation of the euro increases Irish goods exports to the US by 1% • The equivalent response for exports to the UK is 1.1% and to the rest of world is 0.8%. Brexit has the opposite effect on Irish exports. • The EUR/USD exchange rate has a positive effect (elasticity of 0.4) on Irish goods exports to the euro area, due to Ireland-based multinational companies' exports to EA for onward sale to the rest of the world The elasticity of total goods exports excluding pharma to the exchange rate >1 Response (% chg.) of Irish goods exports to 1% depreciation of the euro 1.2 1.0 0.8 0.6 1.11 1.00 0.4 0.41 0.83 1.08 0.2 Source: CSO; NTMA empirical analysis Note: All coefficients significant at 99% level; not affected by contract manufacturing. Time period is 1998 to 2016 Q2. For longer time periods, the 0.0 UK elasticity is smaller (closer to 0.4-0.5 for 1981 onwards). Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency US St UK EA ROW EXP EXL PHA 25#26Ireland's openness has been critical to Irish success; Brexit hinders export-led growth Ireland benefits from export diversification by destination Breakdown of Irish trading partners % of total % of total goods exports 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Goods Services Total 2016 Exp. Imp. 2015 Exp. Imp. Exp. Imp. US 25.0% 12.6% US 10.0% 21.0% 16.0% 18.4% UK 12.8% 23.4% UK 19.4% 8.0% 16.7% 13.6% EA 33.5% 27.9% EA 29.3% 26.4% 32.1% 26.8% China 3.1% 5.9% China 2.8% 0.3% 2.4% 2.2% Other 25.6% 30.2% Other 38.5% 44.4% 32.8% 39.0% 1995 1998 2001 2004 2007 2010 2013 2016 US Euro area UK Other Source: CSO Source: CSO, NTMA calculations; Data not affected by contract manufacturing Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency 26#27Reclassification of several companies and "onshoring" of IP led to step change in GDP & capital stock in 2015 300 250 200 150 100 50 32.4% (c.€63bn) increase in nominal GDP in 2015 € Billions 1200 1000 800 600 400 200 1997 1999 2008 2003 2005 2007 2009 2011 2013 2015 2014 Nominal GDP I Nominal GNP 0 1985 1990 1995 Trans. equip. and R&D* Transport equipment All fixed assets Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: CSO; Department of Finance *due to confidentiality some sector data for 2015 has been restricted 2000 2005 2010 2015 Research and Development Other Assets 27 27#28The change in capital stock resulted in large increase in net exports The capital stock expanded in 2015 by c. €300bn or c. 40%. This is due to: Re-domiciling/inversions of several multinational companies 280 240 - The "onshoring" of IP assets into Ireland by multinationals 200 The movement of aircraft leasing assets in Ireland (smaller impact). 160 120 The transfer of whole entities and assets of this size is not something seen before in Ireland. Goods produced by the additional capital 80 were mainly exported. Complicating matters, the goods were produced through "contract manufacturing" (explained in detail overleaf). 40 Little or no employment in Ireland results from this contract manufacturing. Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: CSO 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 I Domestic Demand Net Exports GDP 28#29Contract manufacturing (CM) overstates the extent of goods export growth in the last two years CM occurs where a company in Ireland engages another abroad to manufacture products on its behalf. Crucially, the foreign contract manufacturer supplies a manufacturing service to the Irish entity but the overseas contractor never takes ownership of the product. When the product is sold abroad, a change of economic ownership takes place between Ireland and the country where the product is sold. This export is recorded in Ireland's statistics even though it was never produced in Ireland. Previously, contract manufacturing did not have a significant net impact on GDP as the company. would send royalties back to where the intellectual property (IP) was "owned" — it was a royalty import. Now that the IP is here, Ireland's GDP is artificially inflated. 200 180 Contract manufacturing 160 proxy* C. €70 bn 140 120 100 80 60 40 40 20 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Trade data exports National accounts exports Source: CSO, NTMA Calculations Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency *Contract manufacturing proxy is calculated by taking the difference between the monthly International trade exports statistics and the National Accounts/BOP measure for goods exports. The monthly data is based on the actual volume of goods flowing through Ireland's various ports/airports whereas the national accounts/BOP makes adjustments for, among other items, contract manufacturing. 29#30Investment distorted by multinationals importing IP into Ireland Investment (4Q sum, €bns) • • Investment is now above the pre-crisis level due to MNCs importing intangibles in Ireland. Ireland has become an ICT hub in recent years with this investment impacting the real economy. However the recent sharp increase in intangibles investment overstates Ireland's position and should be discounted accordingly. Building investment grew by 11.2% in 2016. highlighting pent up demand for housing. However, building investment is a much smaller part of overall investment - in 2016 Q4 it was c.57% of the unsustainable 2007 level. 90 2800 00 80 70 60 50 40 30 20 10 0 Building investment in 2016 c. 57% of 2007 level 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Machinery/Equipment & Intangibles* Intangibles Machinery & Equipment Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Building Investment Source: CSO, NTMA analysis *due to confidentiality some data for Q4 2016 has been restricted 30#31Section 2: Fiscal & NTMA Funding Fiscal accounts are robust; GDP revisions mean we need to look beyond usual debt ratios Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency#32Irrespective of GDP moves, Ireland has had five straight years of fiscal outperformance General Government Balance Deficit forecast to be fully closed in euro terms by 2019 (€bn) 0.0 90 -0.6 -2.0 80 -2.0 -3.7. 70 -5.5 -2.9 60 -4.0 -8.0 10.3 50 -5.1 -6.0 40 30 -8.0 -7.5 -8.6 20 -10.0 -10.6 -12.0 2011 10 0 1995 1999 2003 2007 2011 2015 2019f 2012 2013 2014 2015 2016 I GGB (% of GDP) Outturn GGB (% of GDP) EU target under EDP (Dec 2010) Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta Source: Department of Finance, CSO National Treasury Management Agency Gen. Govt. Expenditure (ex-banking recap) Gen. Govt. Revenue 32#33Ireland has confirmed debt sustainability: debt is falling naturally through "snowball" effect 10 €bns 5 0 -5 -10 -15 -20 -25 1995 1997 1999 Underlying Primary Balance €4.8bn primary surplus in 2016 2001 2003 2005 2007 2009 2011 Interest GGB underlying Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: CSO; Eurostat; IMF 2013 2015 10% 5% 0% -5% -10% -15% -20% -25% 2017 f Structural Balance (% potential GDP, RHS) 33#34Gross Government debt fell to 75.4% of GDP by the end of 2016 inflated GDP distorts metric 119.5 119.5 120 109.6 105.3 33.2 30.1 100 18.9 86.3 31.6 78.7 60 75.4 80 20.1 61.7 72.9 71.2 69.5 11.5 9.4 9.2 140 60 60 40 40 20 20 25.2 86.3 89.4 86.3 78.0 66.2 67.2 66.0 63.7 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F Net Debt Cash Balances/EDP assets GG Debt 36.5 Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: CSO; Department of Finance 34#35Alternative debt service metrics must also be used for Ireland e.g. General Government debt to GG Revenue 400% 350% 300% 250% 200% 150% 100% 50% 0% 2002 2004 2006 2008 -Ireland ►Spain 2010 2012 2014 2016 2018F 2020F Italy -Belgium -EA-19 Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: CSO; Department of Finance 35 55#36Better to use broad range of debt serviceability metrics 2016 GG debt to GDP % GG debt to GG revenue % GG interest to GG rev % Greece 179.0 360.0 6.5 Portugal 130.4 302.8 9.8 Italy 132.6 281.3 8.4 Cyprus 107.8 274.9 6.6 Ireland 75.4 274.6 8.5 Spain 99.4 262.5 7.4 UK 85.2 217.3 6.3 Belgium 106.0 208.7 5.6 EA19 89.3 193.0 4.8 EU28 83.6 186.1 4.8 Slovenia 79.7 182.6 7.3 France 96.5 181.8 3.6 Austria 84.6 170.9 4.2 Germany 68.3 151.7 3.1 Netherlands 62.3 141.4 2.5 Slovakia Finland 51.9 130.0 4.1 63.6 117.2 2.0 Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: Eurostat, NTMA calculations 36#37Over 50% of Irish debt stock held by "sticky" sources Billions € 250 200 150 100 50 2006 2008 2010 2012 2014 2016 IGBS* Retail Eurosystem Holdings Other Debt** Total Debt Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: CSO, ECB, NTMA Analysis *excludes those held by Eurosystem. Euro system holdings include SMP, PSPP and CBI holdings of FRNs. Figures do not include ANFA holdings which are likely to further increase the Eurosystem's holdings. ** Includes IMF, EFSF, EFSM, Bilateral as well as IBRC-related liabilities. Retail includes State Savings and other currency and deposits. The CSO series has been altered to exclude the impact of IBRC on the data. 37#38EU fiscal rules set the "tramlines" for Ireland's fiscal policy 2016-2019 Preventive Arm Objective: Balanced budget in structural terms 1. 2. Requirements of Preventive Arm Ireland must improve its structural balance by 0.6% of GDP in 2017 and meet its medium- term objective of -0.5% of potential GDP structural balance by 2018. Ireland must comply with the Expenditure Benchmark. The Benchmark explicitly sets the rate at which public expenditure can grow in the absence of revenue-raising measures. Adherence to these rules will be judged ex-post. The revised GDP data may hamper the judgement of Ireland's performance under the SGP Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency 38#39Maturity profile - modest refinancing in 2017 and 2018 Billions € 25 20 20 15 10 5 0 2046-50 2051-53 2017 2018 2019 2020 2021 2022 2023 Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Note: EFSM loans are subject to a 7-year extension that will bring their weighted-average maturity from 12.5 years to 19.5 years. It is not expected that Ireland will refinance any of its EFSM loans before 2027. As such we have placed the EFSM loan maturity dates in the 2027-31 range although these may be subject to change. Bond (Fixed & ILB) IMF EFSM ☐ EFSF Bond (Floating Rate) Bilateral Source: NTMA 2024 2025 uli 2026 2027 2028 2029 2030 2031-35 2036-40 2041-45 39#40We improved our 2017-2020 maturity profile significantly in recent years Various operations since 2013 have led to an extension of maturity... ...Ireland compares favourably to other European countries € Billions 30 25 20 312 15 10 5 0 T 2017 2019 2021 2023 2025 2027 2029 Γ 2031-35 Years 12 10 8 10.8 4 2041-45 Γ 2051-53 2 Debt Profile ☐ Recent reductions Long-term extensions End 2013 Debt Profile 9.0 8.5 8.2 8.0 7.4 7.2 6.9 6.8 6.3 6.3 5.9 7.4 7.2 6.9 6.8 6.3 0 IR BG AT DK GR NL FR ES IT PT FN BD I Govt Debt Securities - Weighted Maturity EA Govt Debt Securities - Avg. Weighted Maturity Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: NTMA; ECB *excludes programme loans. Ireland's maturity including these loans is still c.11 years. 40#41NTMA funded approximately three to four quarters in advance; 2017 issuance to be larger than 2016 With only two major redemptions in 2016/17 issuance was lower in 2016 than in recent years. €14 €12 Other €10 Our next bond redemption will be €3.7 in October 2017 - €6.2bn. Long €8 term NTMA expects to issue €9-13bn Bond Paper €9.1 worth of long term bonds in 2017. By €6 €9-13 Bond €9.6 Q2, the NTMA issued €9.35bn. €8.6 €6.2 Cash €4 Cash Exchequer cash balance at end 2016. was €8.6bn. €2 Source: NTMA EBR STP €2.1 EBR €2.2 €1.6 €- Y/E 2016 Outflow Funding (€9-13bn) Y/E 2017 2018 Outflow EBR is the Exchequer Borrowing Requirement (Department of Finance estimate) Cash balances excludes non-liquid asset classes such as Housing Finance Agency (HFA) Guaranteed Notes. • Other Outflows includes contingencies, including for potential bond purchases. ° Other Funding includes Retail (State Savings). Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta • Rounding may occur. 41 National Treasury Management Agency#42ECB action has helped Ireland's bond performance 86 7 6 OMT and QE (PSPP) have both helped Ireland and other EA sovereigns Purchases of IGBs under PSPP will slow in 2017 to c.€6bn but still significant 5 4 3 2 1 0 -1 OMT QE Billions € 200 160 120 80 60 40 40 GG Debt Estimated Universe Estimated Eurosystem Holdings Eurosystem Holdings Total PSPP-Eligible 01/12 07/12 01/13 10 Year 07/13 01/14 07/14 01/15 07/15 01/16 07/16 15 Year 7 Year 30 year 01/17 Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: DataStream, Bloomberg; ECB, NTMA Analysis Note: As of end-Q1 2017 42#43Investor base for Government bonds is wide and varied Investor breakdown: Average over last 8 syndications 17% 25% 10% ■Fund/Asset Manager Pensions/Insurance Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency 48% Country breakdown: Average over last 8 syndications 12% Cont. Europe, 30% 10% Ireland, 13% 8% UK, 27% Ireland ■ UK ■Banks/Central Banks US and Canada ■Continental Europe ■ Other Nordics ■ Other Source: NTMA 43#44Central Bank of Ireland holdings increase domestic share of Irish Government bonds (IGBs) through PSPP € Billion End quarter 1. Resident (as % of total) Dec 2014 Dec 2015 Dec 2016 Mar 2017 50.8 50.8 54.6 55.4 (43.7%) (40.6%) (44.9%) (43.5%) - Credit Institutions and Central Bank* 45.9 46.9 51.1 52.1 - General Government - Non-bank financial - Households (and NFCs) 2. Rest of world (as % of total) Total MLT debt 1.6 0.8 0.5 0.4 2.9 2.8 2.7 2.6 0.4 0.3 0.3 0.3 65.5 74.2 67.1 71.9 (56.3%) (59.4%) (55.1%) (56.5%) 116.3 125.1 121.6 127.2 Source: CBI Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency 44#45Breakdown of Ireland's General Government debt € Billion 2011 2012 2013 2014 2015 2016 Currency and deposits 58.4 62.1 31.4 20.9 20.7 21.3 (mainly retail debt) Securities other than shares, exc. financial 94.0 87.3 112.7 119.1 125.6 124.0 derivatives - Short-term (T-Bills, CP etc) 3.8 2.5 2.4 3.8 1.2 2.3 - Long-term (MLT bonds) 90.2 84.8 110.3 115.3 124.4 121.8 Loans 37.3 60.6 71.3 63.3 54.9 55.2 - Short-term 0.6 1.9 1.4 1.3 1.1 0.7 - Long-term (official funding and 36.8 58.7 69.8 62.0 53.8 54.5 prom notes 2009-12) General Government Debt 189.8 210.0 215.3 203.3 201.1 200.6 EDP debt instrument 55.2 58.7 54.6 36.8 29.6 25.1 assets Net Government debt 134.5 151.3 160.7 166.5 171.5 175.5 Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: CSO (2016) 45#46Section 3: Brexit Brexit is likely net negative for Ireland but opportunities may arise Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency 1 Laketle#47Negative for the Irish economy: each 1% drop in UK GDP may lower Ireland's GDP by between 0.3-0.8% Cons Pros • Trade Lower demand from UK/ tariffs FX: £ lower v€ (1% annual avg. move = = 1% hit to Irish exports to the UK) British market as test-bed less feasible Higher import prices possible in long-term: tariffs may outweigh FX benefit EU political situation may deteriorate Banking sector likely to suffer because of its UK operations Political economy (border?, ally on direction of EU economic policy) • Regions suffer (agriculture, tourism), while Dublin may benefit (via FDI that leaves Britain) . • Increased FDI, as multinationals avoid turmoil Financial services (passporting) Other multinationals - especially IT and business services Commercial property occupancy could rise; there may also be an influx of well paid workers ECB and fiscal response in Europe Some trade offsets Irish companies may steal EU market share from British ones Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency 47#48Trade channel is likely to be negatively impacted Ireland's main trading partners 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Exports Imports Exports Goods Services US UK EA Other Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Imports Irish/UK trade linkages will suffer following Brexit The UK is the second largest single-country export destination for Ireland's goods and the largest for its services At the same time, Ireland imports 25-30% of its goods from the UK. Consumer goods, capital equipment and inputs into the export process will become cheaper thanks to FX. There is significant employment related to Ireland's trade with the UK The UK might only account for 17% of Ireland's total exports, but Ireland is more dependent than that, when you consider the employment related to those exports SMEs (particularly agri-food and tourism) likely to be more affected than larger companies by the introduction of tariffs and barriers to trade Source: CSO (2015) 48#49There could be significant trade impacts on Ireland in drastic "hard" Brexit scenario Lawless and Morgenroth (2016) have conducted analysis of the trade effects of applying the WTO tariffs for external EU trade to UK trade - i.e. a significant "hard" Brexit scenario. By matching over 5200 products to the WTO tariff applicable to external EU, the authors find that such an outcome would result in significantly different impacts on trade across countries. Ireland would be the hardest hit. Also given the heterogeneity of tariff levels, some sectors in Ireland would be disproportionately affected: food and textiles especially. This scenario analysis may overstate the eventual outcome on Irish/UK trade from Brexit, but it is not implausible were negotiations to end in deadlock. Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: ESRI Research 2016 Estimated Trade Reductions in "WTO rules Hard Brexit" Scenario % of exports % of total % of UK % of total exports lost UK Exports lost with exports with EU lost UK lost partner Ireland 30.6 4.2 27.6 1.5 Belgium 35.1 3.1 25.7 1.0 Spain 38.6 2.9 25.6 0.7 Germany 34.1 2.5 19.4 2.0 Denmark 39.8 2.5 24.4 0.2 Portugal 33.0 2.2 27.7 0.1 EU Total 30.5 2.1 22.3 9.8 Poland 30.6 2.1 20.8 0.3 NL 22.1 2.0 15.6 0.9 Italy 29.9 1.7 26.9 0.8 France 24.9 1.6 20.9 1.2 Greece 28.4 1.2 27.2 0.1 49#50Effects of Brexit already visible from currency impact IE/UK goods trade has slowed since early 2016 on back of currency moves... ...as has UK visitor numbers (note time lag) 50% 20% 30% 20% 40% 16% 15% 30% 12% 20% 10% 20% 8% 10% 10% 4% 5% 0% 0% 0% 0% -10% -4% -20% -8% -5% -10% -30% -12% -10% -40% -16% -20% -15% -50% -20% 2000 2003 2006 2009 2012 2015 -30% -20% Euro/Sterling (y-o-y change, RHS) 2000 2003 Imports Growth (y-o-y change in 6 mth flows) Exports Growth (y-o-y change in 6 mth flows) 2006 2009 2012 2015 Euro/Sterling (y-o-y) Lagged 3Qs Visitors to IE from UK Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: CSO; DataStream; CSO 50#51Foreign firms in the UK might consider relocation following Brexit FDI: Ireland may benefit Why choose Ireland ☐ Ireland could be a beneficiary from displaced FDI. The chief areas of interest are Financial services Business services IT/ new media. Dublin is likely to compete with Frankfurt, Paris and Amsterdam for financial services, if the UK (City of London) loses EU passporting rights on exit. There may be opportunities too in the clearing of trades in €. ■Ireland's FDI opportunity will depend on the outcome of post-exit trade negotiations. Research has shown that FDI decisions are based on a wide range of factors: EU Membership Common language (important for US companies) Law system (Ireland and UK both have common law structure) Pro-business environment Corporate tax Educated workforce Cost competitiveness Regulatory environment (financial sector) Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency 51#520 2 4 6 12 10 8 FDI: Dublin in particular could benefit Office space is not an issue for attracting firms to Dublin Luxembourg Dublin London Madrid Berlin Frankfurt Paris Brussels Amsterdam 12-Year Development Pipeline as % of Total Office Stock Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Residential property may be a bottle-neck in Greater Dublin Area in the short-term (000s) 35 30 50 25 20 15 10 50 S 2005 Projected need does not include any specific Brexit-related demand 2006 2007 2008 2009 2010 2011 2012 2013 Completions GDA Source: CBRE; CSO, NTMA analysis * GDA = Greater Dublin Area = Dublin, Meath, Wicklow and Kildare 2014 2015 2016f 2017f 2018f 2019f 2020f Projected need per annum 62 52#53Irish banks have exposure to UK market: challenging environment following Brexit Bol UK exposure AIB UK exposure End-2016 % of Group Total % of Group End-2016 Total Total Income €600m 19.3% Total Income €310m 11.8% Credit Credit €33.4bn 40.0% €9.3bn 14.3% Outstanding Outstanding Operating Profit €188m 15.6% Operating Profit €171m 13.6% Impairment charge (€99m) 55.6% Impairment writeback €37m 12.6% Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: Published bank accounts 53#54Section 4: Long term fundamentals Ireland's long run future looks bright. Key is retaining competitiveness by keeping wages and, hence, costs down Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency#55Much rebalancing has taken place; NNI per capita surpassed 2005 levels in 2015 Net National Income at market prices (1995 = 100) 300 250 "Celtic Tiger" 200 1994-2001 150 100 50 0 1995 2000 Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: CSO Credit/Property Bubble Bubble Burst Recovery 2005 2010 2015 55 55#56Ireland's current account in surplus but heavily affected by MNC activity and re-domiciled PLCs 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% Historically-high current account surplus (% of GDP) is flattered by re-domiciled PLCs and intangible assets -20.0% 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Published Current Account 4 Quarter Average Source: CSO Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency * For discussion on the undistributed profits of redomiciled PLCs see Fitzgerald, J. (2013), 'The Effect of Redomiciled PLCs on GNP and the Irish Balance of Payments' 56#572.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 Portugal Spain Poland Greece Slovakia Hungary 50 45 40 35 30 25 20 15 10 5 0 World Italy Cyprus China Favourable population characteristics underpin debt sustainability over longer term Old age dependency ratio (65+ ages 15-64) compares well against OECD countries Slovakia Ireland Luxembourg Poland United States OECD Romania T Hungary Slovenia Czech Rep UK Netherlands Fertility rates in Ireland are above typical international replacement rates Germany Romania Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: World Bank WDI (2015 for OAD ratio, 2014 for Fertility) Austria Belgium Lithuania Spain Latvia Denmark France Euro Area Sweden Portugal Germany Finland Greece Italy Japan Japan Austria 7 Czech Rep Cyprus Latvia Slovenia Euro Area Luxembourg China Lithuania Denmark Netherlands OECD 7 Finland Belgium UK ՏՈ Sweden 7 Ireland France World - 57 52#58>1 yr 5 10 15 20 2.0% 100 1.8% % of population in age cohort 80 1.6% 60 1.4% 60 1.2% 40 40 1.0% 20 20 0.8% 0 0.6% 0.4% 48.7% of Ireland's below versus 41% for EU population aged 35 or -20 0.2% -40 0.0% Ireland ⚫EU28 Source: Eurostat (2016) CSO; CSO 65 70 75 90 95 100+ 61-66 Ireland's population jumped to 4.76m in 2016 - up 175,000 on the 2011 Census Ireland's population profile healthier than the EU average Net migration negative (000s) in recent years but improving alongside economy Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Preliminary Census 2016 data suggest net migration might have been much lower than previously thought. 66-71 ዘካ 71-81 81-86 86-91 91-96 96-02 Natural Increase Population Change Net Migration 58 02-06 06-11 11-16#59Workforce is young and educated - especially so in IT Ireland has one of the largest % of 25-34 years old with a third-level degree... ...and the highest % of population working in IT with a third-level degree Cyprus Luxembourg Lithuania Ireland Norway Switzerland Sweden UK France Belgium Netherlands Poland Denmark Spain Iceland Finland Greece Austria Slovenia EU28 Euro area Portugal Czech Rep Slovakia Germany Ireland Norway UK Finland Iceland Sweden Switzerland Luxembourg Denmark Belgium Spain Netherlands Austria Czech Rep France Cyprus EU28 Slovenia Bulgaria Euro area Poland Slovakia Lithuania Germany Portugal Greece Italy Italy 0% 10% 20% 30% 40% 50% 0.0% 0.3% 0.6% 0.9% 1.2% 1.5% Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: Eurostat 59#60Ireland continues to attract foreign investment: educated workforce one key reason Average PISA score for selected countries across maths, reading and science Singapore Hong Kong (China) Average FDI inflows p.a % of GDP, 2011 - 2015 Japan Estonia Canada Finland Korea Ireland Germany Netherlands Belgium United Kingdom Portugal Sweden France OECD Average Spain US Italy Iceland 460 480 500 520 540 560 80 70 60 50 40 30 20 10 0 -10 -20 Cyprus Greece Germany Italy France Denmark Slovakia Slovenia Lithuania Austria Source: OECD; Unctad (UN) database * Malta excluded for presentation purposes - average FDI inflow of 143% of GDP over period. Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Norway Romania እበ Spain Sweden Poland Finland Portugal Latvia zerland Switzerland Iceland Iceland Belgium Netherlands Ireland Luxembourg 60#61Ireland really competitive now, so we need to avoid repeat of mid-2000s Nominal Labour Cost Ratio - IE vs Euro Area Wage growth a natural consequence of improving labour conditions (1999-2021) 110 105 100 95 90 00 T Most competitive since early 2000s Nominal wage growth per head 10.0% Wage Growth = -0.62* (UR) + 0.086 R² = 0.73 8.0% 6.0% 4.0% 2.0% 0.0% 2.0% 5.0% 8.0% 11.0% 14.0% 17.0% -2.0% -4.0% 85 -6.0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: Eurostat, NTMA analysis *Ratio = IE Nom. Labour Costs/EA Nom. Labour Costs Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Unemployment Rate Source: CSO, NTMA analysis *red dots are SPU2017 forecasts (2017- 2021); Non-Agriculture employment/wage data 61#62Section 5: Property Property prices are rising thanks to lack of supply and strong capital inflows Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency#63Demand has picked up again having cooled in 2015; amendments to CBI rules have spurred further demand Mortgage drawdowns rise from deep trough (000s) Demand increased after period of restraint following CBI rules 140 120 100 80 60 420 5 Supply tightening and demand lower below 3.0 and vice-versa 4.5 3.5 4 3 W Чтобы 1.5 2004 2006 2008 2010 Supply Source: ECB and CBI (Bank lending survey) 2012 Demand 2014 2016 T 2.5 0 2006 2008 2010 2012 2014 2016 2 Residential Investment Letting Mover purchaser First Time Buyers Source: BPFI *4 quarter sum used Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency 63#64Property prices have rebounded since 2012 (peak = 100 for all indices) House prices rising but some way off peak (y-o-y % change, RHS peak = 100) Office leads commercial property 30% 20% 10% 0% -10% -20% 120 120.0 100 100.0 80 80 80.0 60 60 40 40 20 20 60.0 40.0 20.0 0 0.0 -30% 2006 2008 2010 2012 2014 2016 1996 National (Y-o-Y %) Ex Dublin (Y-o-Y %) Dublin (Y-o-Y %) National Index (RHS) 1998 2000 Retail 2002 2004 2006 Office 2008 Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: CSO (averaging of price index used for annual figures); IPD 2010 2012 2014 2016 Industrial 64#65Residential market continues to be boosted by non- mortgage purchasers although impact has lessened Housing Completions above 14,000 in 2016 but low historically (000s) 100 90 80 70 60 50 40 30 20 10 Non-mortgage transactions still important but falling below 40% of transactions 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 A 80% 70% 60% 50% 40% 30% 20% 10% 0% 1970 1978 1986 1994 2002 2010 Nationally Dublin ex. Dublin Q4 2010 Q2 2011 Q4 2011 Q2 2012 Q4 2012 Q2 2013 Q4 2013 Q2 2014 Q4 2014 Q2 2015 Q4 2015 Q2 2016 Q4 2016 སྦྱ ཀྑུ སྦུ སྦྱ སྦུ I Non-mortgage transactions Mortgage drawdowns for house Non-mortgage transactions % of total (RHS) purchase Source: DoHPCLG, BPFI; Property Services Regulatory Authority Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Note: Non-mortgage transactions are implied by difference between total transactions on property price register and BPFI mortgage data 65 55#66CBI's macro-prudential rules increase resilience of banking and household sector CBI's amended macro-prudential rules Transactions have slowed since macro- First time buyers (FTBS) can borrow 90% of the value of a home (10% minimum deposit). Five per cent of the total new lending to FTBS will be allowed above the 90% LTV limit. prudential rules introduced 60,000 Introduction in 2015 50,000 40,000 For second and subsequent buyers (SSBS), banks must restrict lending for primary 30,000 dwelling purchase above 80 per cent LTV to no more than 20 per cent of new lending to SSBs. 20,000 10,000 Bank must restrict lending for primary dwelling purchase above 3.5 times LTI to not more than 20 per cent of that aggregate value Banks must limit Buy-to-Let loans (BTL) above 70 per cent LTV to 10 per cent of all BTL loans. Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency 0 Source: Residential Property Price Register Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Q3 2014 14Q Sum of Transactions IINI Q1 2015 Q3 2015 Q1 2016 Q3 2016 Q1 2017 Y-o-Y Change (RHS) 50% 40% 30% 20% 10% 0% -10% 66#67Irish house price valuation is still attractive relative to other European countries Deviation from average price-to-income ratio 60% 40% 20% 0% -20% SD BG NW UK OE DN FR NL LX ES EA IR IT FN BD GR PT Deviation from average price-to-rent ratio 75% 60% 45% 30% 15% 0% -15% -30% SD NW BG UK DN FR LX FN OE IE ES NL DE EA IT GR PT Source: OECD, NTMA Workings Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Note: Measured as % over or under valuation relative to long term averages since 1980. All data updated to Q3 2016 67#68Real commercial property prices down 40% from peak (index 1983 = 100) 250 200 150 100 50 Real office property price moves together with Equivalent Rental Value (rents). Price is driven by real demand in the long-run Bubble period 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Jones Lang LaSalle Real Office Estimated Rent Value (ERV) IPD Real Office Property Price Index Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Source: IPD; NTMA 68#69Section 6: Other Areas Previous contingent liabilities have become "contingent assets" for the State Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Bircoad Ulster Bank#70Ireland could be viewed to have "contingent assets" but not Apple • • • Banking Banks are now profitable; Income, Cost and Balance sheet metrics are much improved. Interest rates on mortgages and to SMEs still high compared to EU. An IPO of AIB stock (28.8%) was completed in June. This returned c. €3.4bn to the Irish Exchequer. NAMA IBRC NAMA has repaid 98% of its senior debt; it forecasts a profit of €3bn subject to market conditions. Liquidation of the IBRC could return c. €0.8 - €1.1bn to the Irish Exchequer in the coming years. In 2016, €280m was returned to the Exchequer as interim dividend. Apple Aside from these "contingent assets" Ireland is charged with recouping €13bn plus interest from Apple after the EC state-aid ruling. Ireland is appealing the decision as is Apple and does not expect to use these monies. The ruling does not change the State's fiscal position or the NTMA's funding plans. Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency#71All three pillar banks in profit for at least 24 months ♡ N 71% owned* Allied Irish Bank 3 2 1 0 0 -1 -2 -3 State Ownership 14% owned Bank of Ireland -1 -2 -3 3 N L о -1 75% owned Permanent TSB -2 ון -3 -4 -4 -4 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Pre-Provisions Post-Provisions Source: Annual reports of banks - BOI, AIB, PTSB • Post IPO 71#72Banks fundamentally rebuild their profitability Net interest margins recover % 4.5 144% 4.0 Cost income ratios improve dramatically 150% 123% 125% 100% 88% 3.5 3.0 2.5 65% 75% 2.0 58% 52% 1.5 50% 25% 0% AIB BOI PTSB 2010 2011 2012 2013 2014 ■2015 2016 Source: Annual reports of Irish domestic banks 1.0 0.5 0.0 2003 2005 2007 2009 2011 2013 2015 Outstanding Business 2017 New Business Source: CBI, NTMA Calculations Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Note: Margins are derived from weighted average interest rates on loans and deposits to and from households and non-financial corporations 22 72#73Profitability aided by higher interest rates than EA peers Ireland's interest rates on lending for house purchase the highest in euro area 8 7 5 4 3 2 1 2008 2010 2012 2014 2016 ....Max ....Min Ireland Euro Area Source: ECB Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Rates on SME loans* over euro area average 9 7 6 LO 5 4 3 2 1 0 2008 2010 2012 2014 2016 ....Max ....Min Ireland Euro Area *SME loans proxy of loans <1year and <€1m to Non-Financial Corporates 73#74Capital ratios strengthened as banks slimmed down and consolidated CET 1 Capital Ratios (Dec-16) Loan-to-Deposit Ratios have fallen significantly as loan books have been slimmed down 20% 200 18% 180 160 16% 140 14% 120 12% 100 10% 80 19.0% 17.2% 8% 60 15.3% 14.2% 14.9% 40 6% 12.3% 20 4% 2% 0% CET1% (Transitional) CET1% (Fully Loaded) AIB BOI PTSB Source: Published bank accounts Loan-to- Deposit % Loans (€bn) Loan-to- Deposit % Loans (€bn) AIB BOI ■Dec-10 Dec-16 Source: Published bank accounts Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency Note: "Transitional" refers to the transitional Basel III required for CET1 ratios which came into effect 1 January 2014. "Fully loaded" refers to the actual Basel III basis for CET1 ratios. * The fully loaded CET1 ratios exclude the 2009 preference shares. 74#75Asset quality continues to improve; impaired loans and provisions fall in 2016 All 3 PCAR Banks (€bn) Dec-14 Dec-15 Dec-16 Total Loans 197.1 186.5 168.9 Impaired 43.1 BOI 29.0 21.0 Irish Residential Mortgages UK Residential Mortgages (Impaired as % of Total) 21.9% 15.5% 12.4% Provisions 23.5 14.7 10.4 Irish SMEs UK SMES Impaired Loans % (Coverage %) 1 by Bank and Asset Dec-14 Dec-15 Dec-16 12.6(46) 9.3(52) 6.9(54) 2.0(23) 1.6(22) 1.4(23) 25.6(51) 21.9(52) 17.0(54) Book (€bn) 24.3 23.9 8.8 (Provisions as % of book) 12.0% 7.9% Corporate 6.2% CRE Investment 16.9(44) 11.1(51) 7.6(53) 5.6(54) 4.6(59) 43.5(63) 37.2(46) 28.5(53) 22.7(57) 1.9 9.3 9.3 (Provisions as % of Impaired) 54.5% 50.6% 49.5% - CRE Land/Development 89.5(74) 84.8(76) 69.6(73) 1.0 Consumer Loans 6.4(98) Loan Asset Mix (three banks Dec 16) 4.1(105) 2.7(94) 3.6 18.2(50) 11.6(56) 8.4(56) 82.4 AIB Irish Residential Mortgages 22.6(40) Corporate/S ME 22% Mortgage UK Residential Mortgages SMES/Corporate CRE Consumer Loans 16.6(38) 13.1(44) 11.6(59) 10.8(50) 10.8(46) 21.4(68) 11.5(63) 8.0(60) 56.9(62) 37.4(61) 29.0(53) 27.2(69) 19.9(70) 13.9(58) 33.4 1.8 17.5 9.4 3.1 Consumer 4% 29.2(51) 18.6(47) 14.0(44) 65.2 62% 12% CRE PTSB Irish Residential Mortgages UK Residential Mortgages Commercial Consumer Loans 25.5(46) 23.6(49) 23.4(49) 1.5(60) 3.9(39) 0.0(0) 74.0(60) 35.8(69) 29.6(113) 29.7(94) 27.0(93) 22.3(88) 24.5(51) 21.1(49) 23.1(51) 20.7 0 0.2 0.3 21.3 Source: Published bank accounts Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency 1 Total impairment provisions are used for coverage ratios (in parentheses) 75#76Irish residential mortgage arrears are improving across all duration categories; environment still dysfunctional Mortgage Arrears (90+ days) 120 PDH Arrears (by thousands) Total Restructurings Reduced Payment, 7.0% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 09 10 11 12 13 14 15 16 17 PDH + BTL (by number) PDH + BTL (by balance) Source: CBI 100 80 60 40 20 20 Split Mortgage, 22.6% Term Extension, 12.5% Capitalised 0 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 09 10 11 12 13 14 15 16 17 Other*, 22.3% arrears, 31% Over 90 days >720 days ■361-720 days 181-360 days ■90-180 days Interest Only, PDH mortgage arrears have fallen steadily since 2013. The smaller BTL market (c. 25% of total) has higher arrears but also saw declines in the same period. 121K PDH mortgage accounts were classified as restructured at end Q1 2017. Of these restructured accounts, over 85% were meeting the terms of the restructured arrangement. Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency * 'Other' comprises accounts offered temporary Interest rate reductions, payment moratoriums and long-term solutions pending six months completion of payments. 76#77NAMA: 98% of its original senior debt has been repaid: only €500m left NAMA's operating performance is strong ■ Acquired 12,000 loans (over 60,000 saleable property units) related to €74bn par of loans of 780 debtors for €32bn NAMA continues to generate net profit after impairment charges. It has repaid €29.7bn (98%) of €30.2bn of original senior debt NAMA is meeting and exceeding its senior debt redemption targets well ahead of schedule. It remains on course, subject to market conditions, to redeem all senior debt (€30.2 billion) by end-2017 and its subordinated debt (€1.6 billion) by 2020. NAMA remains on course to deliver a surplus for Irish taxpayers which is currently estimated at €3bn, according to its management team - if current market conditions remain favourable. In October 2015, NAMA announced a new initiative to develop up to 20,000 housing units by 2020 - subject to commercial viability. Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency More NAMA information available on www.nama.ie 77 13#78NAMA's residential development funding programme In reaction to the lack of housing supply, NAMA hopes to fund 20,000 housing units to the market by 2020 subject to commercial viability The focus will be on starter homes and will be concentrated in the Greater Dublin Area ▸75% of units will be houses, 25% apartments ▸ 93% of units in Greater Dublin Area (Dublin, Wicklow, Kildare & Meath) Progress of its building programme has been strong so far ▸ 4,840 units completed since the start of 2014 to March 2017; ▸ Another 2,064 under construction; 1,114 soon to be commenced*; ▸ Planning permission have been granted for another 7,475; ▸ Planning applications lodged or will be lodged in 2017 for a further 10,500 units Existing NAMA commitments are unaffected by this new programme Plans for all senior debt to be repaid by end 2017 and subordinated debt repaid by March 2020 are still in train. *The units in this category are a combination of residential projects for which funding has been approved and preparations are under way to commence construction in Spring 2017. It also includes funding for developments where the next phase of residential construction will start once an earlier phase is completed. Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta More NAMA information available on www.nama.ie National Treasury Management Agency 78#79• The European Commission's ruling on Apple's tax affairs does not change the NTMA's funding plans The EC has ruled that Ireland illegally provided State aid of up to €13bn, plus interest to Apple. This figure is based on the tax foregone as a result of a historic provision in Ireland's tax code that allowed stateless companies to book sales and production in this State. This provision was closed on December 31st 2014. Although the ruling centres on tax guidance dating back as far back as 1991, Apple will only pay the taxes forgone for the period 2003-14 inclusive: EC law means the ruling only applies. to the ten years preceding its first enquiry (2013) into Apple's tax affairs. Apple is appealing the ruling as will the Irish Government. We expect this process to be lengthy. Pending the outcome of the appeal, Apple is expected to pay approximately €13bn plus interest to the Irish Government, which is expected to sit in escrow. This case has nothing to do with Ireland's corporate tax rate. It relates to advice regarding one element of the corporate tax code which has since been eliminated. In its press release the EC stated: "This decision does not call into question Ireland's general tax system or its corporate tax rate". The NTMA has made no allowance for these funds. In any case, if the appeal is unsuccessful it is possible that other EU countries where Apple makes sales would seek a share of back tax. Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency 79#80Disclaimer The information in this presentation is issued by the National Treasury Management Agency (NTMA) for informational purposes. The contents of the presentation do not constitute investment advice and should not be read as such. The presentation does not constitute and is not an invitation or offer to buy or sell securities. The NTMA makes no warranty, express or implied, nor assumes any liability or responsibility for the accuracy, correctness, completeness, availability, fitness for purpose or use of any information that is available in this presentation nor represents that its use would not infringe other proprietary rights. The information contained in this presentation speaks only as of the particular date or dates included in the accompanying slides. The NTMA undertakes no obligation to, and disclaims any duty to, update any of the information provided. Nothing contained in this presentation is, or may be relied on as a promise or representation (past or future) of the Irish State or the NTMA. The contents of this presentation should not be construed as legal, business or tax advice. Gníomhaireacht Bainistíochta an Chisteáin Náisiúnta National Treasury Management Agency 80