BSc Finance student Senan Skalkos offers his insight and on opinion on the new economic plan In advance of the Governmental Budget 2024.
Due to increased competition from abroad, a changing global tax system, and other factors, questions surrounding Ireland’s future ability to draw in foreign direct investment have become more topical than ever.
We are not at a crisis point, however, we need to begin to act now to reinforce our current standard of living and keep opportunities available for future generations. If the day comes that Ireland is no longer the poster child for investment from multinational businesses we need to be ready. In a post Celtic Tiger context we need to remember that nothing lasts forever - especially when the good times are fuelled by receipts, of which many can be classified as windfall taxes.
Ireland, Norway, and Saudi Arabia are more similar than many may believe them to be. The three nations experienced outstanding economic development thanks to a single cash cow.
In Norway and Saudi Arabia, it is oil, in Ireland, it is foreign direct investment.
Climate policies around the world mean our Scandinavian and Gulf State counterparts are facing a more defined countdown to when they will have to fundamentally change their economies. Their acts of preparation and change create an interesting model for Ireland to build on.
Both Saudi Arabia and Norway have grown colossal sovereign wealth funds through the prudent investment of their oil profits. These are essentially large state owned investment funds which invest state surpluses on behalf of the nation.
According to a 2023 Reuters article the Norwegian state fund owns on average 1.5% of all listed stocks worldwide. The Saudi state fund is buying up brands and companies in sports ranging from football to MMA. Saudi Arabia is known to have developed large stakes in many different areas from financial services with a stake in Citigroup; to entertainment with a sizable investment in major players such as Live Nation Entertainment, who are part of the joint venture which brings you Electric Picnic.
These funds play important roles for their nations. The Norwegian sovereign wealth fund earned a whopping $143 billion attributable to the artificial intelligence driven tech stock rally this year. These profits act as additional sources of state revenue which can be used to fund domestic investment, welfare, ease the financial burden of the taxpayer, or be used in just about any other category of public expenditure.
They additionally act as valuable tools for spearheading economic diversification. Saudi Arabia is in the process of mastering this act. As previously mentioned the Saudi Arabian public investment fund (PIF) is investing heavily in sports.
The gulf kingdom has spent billions of dollars in projects such as acquiring British Premier League team Newcastle United F.C. as well as investing in large stakes in domestic Saudi teams such as Al-Nassr.. The team were given the resources to acquire star player Cristiano Ronaldo.
This and other strategic investments in entertainment, sport, and leisure makes Saudi Arabia a more viable tourist destination than it ever has been.
Despite controversy surrounding allegations of “sportswashing” by human rights groups in the backdrop of the death of journalist Jamal Khashoggi, strategic investments from the Saudi PIF in tourism has led to notable growth.
Naif Al-Ghaith the chief economist at Riyad Bank said regarding the matter, "The kingdom’s non-oil private sector remained on a steeply upward growth trajectory by the end of the second quarter, as inflows of new business accelerated, particularly in construction and tourism activities,". This shows progress for the nation regarding economic diversification which has been a major objective of the Saudi PIF.
Furthermore, these funds are very efficient entities due to their makeup, particularly in periods of turbulence for the market. They are able to securely hold capital with a long term vision with significantly reduced fears of investor withdrawals, allowing them to wait for the perfect time and deal.
The absence of private investors, with the state that is only likely to make sizable withdrawals during major crises, creates these conditions. This makes sovereign wealth funds particularly attractive investors in private deals and in getting first-option offers from underwriters of sought after initial public offerings.
In regard to being able to secure sought after renewable energy deals more competitively in the uncertain economic backdrop of January 2023 the Norwegian fund's chief real assets officer Mie Holstad said "When we have entered these uncertain times, we, as investors, now have an advantage considering we already have capital," and that "It makes us (Norway) a very reliable bidder, and I believe that is currently highly valued”.
In an Irish context, the aforementioned three factors could create a very useful tool to deal with any incoming crises. It could help to reduce the risks associated with how uniquely important foreign direct investment is to Ireland.
An example of this is the ageing population crisis which has caused ratings agencies S&P, Moody’s, and Fitch to all warn that changing demographics are already affecting governments’ credit ratings around the world, hitting many nations that aren’t open to the external risks that Ireland faces.
Additionally a strong and efficient sovereign wealth fund can act as another lever for guided growth and investment in Ireland by creating an additional source of finance. For example, an Irish sovereign wealth fund, run in the national interest, can be used to bolster clean energy initiatives and housing development through venture capital and other private equity operations.
Recently, Finance Minister Michael McGrath has announced a sovereign wealth fund which will be used to cover the costs of an ageing population. According to Bloomberg the fund is set to receive €34 billion by 2030.
When compared, Ireland and Norway are very similar. 2023 statistics from the IMF show Ireland to have a GDP of $594.1 and gross government debt at 39.9% of GDP, according to the same source Norway has a GDP of $554 billion with gross government debt at 38.8% of GDP. Additionally, according to 2021 statistics Ireland and Norway are very close in terms of population, 5.033 million and 5.408 million respectively.
Notwithstanding Norway being of a similar size to Ireland, their sovereign wealth fund is worth $1.4 trillion. With benefits seen abroad and Irish corporation tax revenues expected to reach €27 billion by 2026 it raises the question, can we do better than €34 billion by 2030?
Senan is a current Bsc in Finance student. To learn more about the programme visit