## IRELAND: STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION (cr17171) ## Source details **Canonical URL:** [IRELAND: STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION (cr17171)](https://www.imf.org/-/media/files/publications/cr/2017/cr17171.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17171.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17171.pdf.json) --- ### Recent economic performance - Real GDP expanded by 5.2 percent in 2016, supported by a healthy expansion of private consumption and buoyant investment, including construction. - Unemployment fell to 6.4 percent in May, its lowest level in a decade. - Inflation remained low as the recent pickup in energy prices and upward pressure from services were partly offset by the impact of the Sterling weakness. - Fiscal outcome: 2016 fiscal deficit declined to 0.6 percent of GDP, below the target of 0.9 percent of GDP, supported by higher-than-projected revenues, particularly corporate income tax receipts. - Public debt continued to moderate as a result of the improved fiscal position. - Banking sector: Banks have strengthened their balance sheet further and remain profitable; non-performing loans have declined but remain high. - Credit: Large redemptions continue to drive overall credit down, albeit at a slowing pace, while new lending has picked up in both corporate and household segments. - Housing: Improved labor market conditions, rising incomes, and recent policy measures contributed to increased pressures on house prices and rents amid a lagged supply response following the deep property-driven crisis. ### Outlook and risks - Short-run projection: - Real GDP is projected to grow at 3.9 percent in 2017. - Medium-term projection: - Growth is projected to decelerate and converge towards potential of about 3 percent, narrowing the positive output gap gradually. - Inflation path: - Inflation is set to stabilize at just below 2 percent. - Public finances: - Projected to improve further, allowing the government to attain its Medium-Term Objective of a structural deficit of ½ percent of GDP next year. - External position: - Healthy export growth will keep the current account surplus broadly unchanged. - Main downside risks: - Substantial, mainly externally-driven risks—chiefly from Brexit and potential international corporate tax reforms—could affect MNE operations, underlying output, employment, and public finances. ### Executive Board assessment and broad policy guidance - Key message: - Directors commended Ireland’s strong performance but identified lingering crisis legacies, rising housing market pressures, and externally-driven uncertainties (mainly Brexit) as challenges. - Broad policy guidance: - Rebuild fiscal buffers and strengthen economic resilience. - Guard against a re-emergence of boom-bust dynamics in the property market. - Foster sustainable, inclusive growth. ### Fiscal policy recommendations and priorities - Pursue growth-friendly fiscal consolidation to further reduce the public debt-to-GDP ratio and build buffers against shocks. - Broaden the tax base and save temporary revenue windfalls, including from volatile corporate taxes. - Maintain room for social expenditures and growth-enhancing capital spending within the envisaged deficit-reduction strategy. - Welcome for technical assistance: - Fund technical assistance for public investment management assessment and ongoing expenditure reviews to enhance capital planning and expenditure prioritization. - Key tax and fiscal reform suggestions: - Consider merging the USC into a more comprehensive PIT with a broader base and lower rates for below-median wage earners, potentially through a third income bracket. - Potential revenue losses from PIT reform could be compensated by decreasing VAT exemptions and by aligning self-assessed property values to market values for local property tax calculations. - Review the system of tax expenditures: tax expenditures rose to about 12 percent of GDP in 2014 from less than 8 percent of GDP in 2004. - Avoid using potentially temporary revenue gains to fund permanent measures; save tax windfalls, especially given CIT volatility. ### Financial sector and housing policy recommendations - Banking sector recommendations: - Emphasize the importance of the macro-prudential framework, given the recent pick up in lending. - Accelerate arrears resolution through intensified supervisory oversight, greater creditor-borrower engagement, and improved efficiency of legal proceedings. - Ensure adequate provisions (including ahead of IFRS9) and continued implementation of the Distressed Credit Strategy. - Central Bank plan to review mortgage lending limits periodically; consider converting the loan-to-income limit to a debt-to-income limit after Central Credit Register operations commence. - Housing market recommendations: - Closely monitor strong momentum in the housing market; persistent pressures may lead to imbalances. - Expand housing supply and assist the homeless. - Reduce building costs, free up land for development, and accelerate loan restructuring for distressed but viable construction firms to help unlock housing supply. - Ensure measures to improve housing affordability are well-targeted and do not amplify property market pressures. - Implement measures in the Action Plan for Housing and Homelessness and introduce a well-structured vacant site levy in 2019 to reduce land hoarding. - Review recent administrative measures to stabilize rents; monitor the potential negative implications of rent controls on supply. - Better target the Help-to-Buy (HTB) scheme (FTB tax rebate until 2019). ### Structural policy recommendations - Strengthen human capital and reinforce competitiveness, particularly for domestic enterprises, to support sustained growth and reduce income and regional disparities. - Continue efforts to upgrade labor force skills and raise female labor force participation (including strengthening childcare support). - Enhance competitiveness via greater support for SME innovation (direct public support for R&D and knowledge transfer) and improved infrastructure. ### Statistical and MNE-related issues (GDP* and related indicators) - Problem statement: - MNE investment in intangible and internationally mobile capital assets and “offshore” contract manufacturing have a large statistical impact not in line with their relevance to underlying domestic activity. - Headline national accounts statistics provide an inflated and excessively volatile picture of Ireland’s economic performance. - Response (staged): - CSO to begin publishing new metrics beginning in July, based on a working group recommendation: - GNI*, adjusting national income for effects of retained earnings of MNEs domiciled in Ireland and depreciation of foreign-owned IP assets. Corresponding BOP/NIIP presentations are also envisaged. Central bank analysis suggests 2015 nominal GNI* is about 30 percent below nominal GDP. - Additional structural and cyclical indicators to be published and developed, including separate reporting of IP investment, GVA, and income of all MNE activities. - Ongoing analysis of productivity measures and consideration of a capital-stock adjustment for IP assets to aid analysis of potential output and the cyclical position. - Remaining data challenges: - Absence of a breakdown of royalty flows prevents removal of IP effects on net exports in the expenditure approach. - In the production approach, MNE GVA does not separate domestic and offshore IP-related activities. - Understanding BOP trends requires more granular trade data on financial services and royalties, MNE income (on- versus off-shore) and portfolio flows, and related-party financial flows; NIIP calculations call for breakdown of IP assets and liabilities and associated dividends and profits. ### Key numerical indicators (selected) - 2016 headline outcomes: - Real GDP: 5.2 percent - Unemployment rate (May): 6.4 percent - Fiscal deficit (2016): 0.6 percent of GDP (target: 0.9 percent of GDP) - Projections (selected): - Real GDP: 3.9 percent (2017); 3.3 percent (2018); 3.0 percent (2019) - Potential Growth: 3.5 percent (2017) - Output Gap: 1.0 (2017) - Inflation (HICP): 0.9 (2017); 1.5 (2018); 1.7 (2019) - Unemployment rate: 6.2 (2017); 5.7 (2018); 5.5 (2019) - Overall balance (percent of GDP): -0.6 (2016); -0.5 (2017); -0.2 (2018); 0.0 (2019) - Structural balance (percent of potential GDP): -1.1 (2016); -0.9 (2017); -0.5 (2018); -0.3 (2019) - General government gross debt: 75.6 (2016); 73.7 (2017); 72.3 (2018); 70.8 (2019) - Current account balance (percent of GDP): 4.7 (2016); 4.9 (2017); 4.8 (2018); 4.7 (2019) - Gross national savings: 33.6 (2016); 35.7 (2017) - Gross capital formation: 28.9 (2016); 30.8 (2017) - Nominal GDP (€ billions): 265.4 (2016); 278.0 (2017); 291.0 (2018) ### Growth, demand, labor market, and inflation (staff analysis) - Activity expanded by a headline 5.2 percent in 2016. - Staff estimate: growth contribution of underlying core demand increased to 4 percent in 2016 from 3½ percent in 2015. - Unemployment reduced to 6.4 percent in May 2017 from about 9 percent at end-2015. - Labor force participation remains around 60 percent. - Wage increases remained moderate across most sectors in 2016. - Inflation remained low; recent pickup in energy prices and upward pressure from services were partly offset by the impact of Sterling weakness. ### Housing and property market (Box 4 and related findings) - Residential construction is gradually recovering but housing completions remain insufficient to meet demand. - Housing prices increased by about 10½ percent y/y in April (year not restated in source). - Rents have been pushed above pre-crisis levels due to tight market conditions and increased rental demand. - Box 4 model assessments (treated with caution): - Non-parametric: house price-to-income and price-to-rent ratios in 2016Q3 were close to their long-term average (1990–2016); these ratios were 40 percent below their peaks. - Parametric models: one model estimates prices remain undervalued by about 10 percent following a 30 percent undervaluation in 2013; another model suggests prices in mid-2016 were close to equilibrium, with sensitivity to specification and base year. - Policy implications from Box 4: - Durable expansion of housing supply is needed. - Additional measures to unlock supply: reducing building costs; streamlining planning; freeing up land; accelerating loan restructuring of distressed but viable construction firms. - Monitor administrative caps on rent increases given potential negative implications for rental market supply. ### Financial sector health, vulnerabilities, and metrics - Mortgage arrears declined to 13.4 percent of total mortgages at end-2016 from 14.7 percent at end-2015. - Deep arrears (over 720 days) account for about 70 percent of total mortgage arrears; proportion of mortgage arrears in total NPLs reached 55 percent in 2016Q4 from 38 percent in 2013Q4. - Main domestic banks aggregated (Q4 comparisons): - Total assets: €248.9 bn (2015Q4); €227.0 bn (2016Q4) - Deposits: €161.4 bn (2015Q4); €154.3 bn (2016Q4) - Net loans: €171.3 bn (2015Q4); €158.3 bn (2016Q4) - Gross loans: €186.5 bn (2015Q4); €169.0 bn (2016Q4) - Loan loss provisions: €15.5 bn (2015Q4); €11.0 bn (2016Q4) - Gross NPLs: €30.1 bn (2015Q4); €21.8 bn (2016Q4) - Return on equity: 8.0 (2015Q4); 7.9 (2016Q4) - CT1: 18.5 (2015Q4); 18.8 (2016Q4) - CT1 to RWA (%): 14.9 (2015Q4); 16.3 (2016Q4) - CT1 to total assets = leverage ratio (%): 7.4 (2015Q4); 8.3 (2016Q4) - Irish Banks: Key Financial Indicators (series 2012–2016): - Credit growth: -7.0, -7.0, -5.4, -5.3, -9.4 - Return on assets: -2.0, -0.8, 0.5, 0.7, 0.8 - Pre-provision profits 2/: -0.5, 0.4, 0.6, 0.9, 1.1 - Net interest margin: 0.8, 1.2, 1.3, 1.8, 2.0 - Cost-to-income ratio: 166.0, 72.8, 64.1, 63.2, 60.2 - NPL ratio 3/: 24.8, 27.1, 23.9, 18.7, 15.7 - Coverage ratio 3/: 48.4, 51.4, 42.6, 38.4, 35.6 - CT1 ratio: 14.7, 13.3, 15.5, 14.9, 16.3 - Net loan to deposit: 124.0, 110.7, 108.2, 105.9, 102.4 - 2/ Excluding nonrecurrent items, as a share of average total assets. - 3/ Figures for 2014 onwards are based on the EBA definition and are not comparable with earlier years. ### Public debt, sustainability analysis, and stress scenarios - Debt dynamics and projections (selected IMF staff projections 2016–2022): - Public debt: 75.6 (2016); 73.7 (2017); 72.3 (2018); 70.8 (2019); 66.7 (2020); 64.4 (2021) - Gross public debt projected to decline to close to 60 percent of GDP (56 percent of GDP in net terms) by 2022 from about 76 percent (70 percent in net terms) in 2016 and 120 (105 percent in net terms) in 2012. - Public Debt Sustainability Analysis (Annex VII highlights): - EMBIG (bp): 46 - 5Y CDS (bp): 43 - Nominal gross public debt (selected): 2015: 76.9; 2016: 78.7; 2017: 75.6; 2018: 73.7; 2019: 72.3; 2020: 70.8; 2021: 66.7; 2022: 64.4 - Public gross financing needs (selected): 2015: 12.7; 2016: 9.0; 2017: 6.8; 2018: 5.5; 2019: 5.7; 2020: 7.6; 2021: 8.8; 2022: 2.5 - Stress-test and scenario outcomes: - Customized shock (permanent decline in CIT revenue by 20 percent and headline GDP severe one-time drop about 12 percent): debt-to-GDP would temporarily exceed 85 percent, reaching almost 90 percent. - Contingent financial liability shock (growth shock + one-time public expenditure equal to 10 percent of banks’ assets): debt-to-GDP would temporarily exceed 85 percent, spike GFNs to almost 16 percent of GDP in the shock year, and leave debt about 20 percentage points higher than baseline by 2022. - Growth, combined macro, and customized shocks: debt burden would return roughly to pre-shock levels but remain 15 percentage points above the baseline. - Gross financing needs: - GFNs estimated to average about 5½ percent of GDP over the period considered, with a peak at just below 9 percent of GDP in 2020. - Mitigating factors: - Most public debt at fixed rates and with medium/long maturities; Exchequer cash balances provide buffer to cover 6–10 months of GFNs. - Privatization proceeds and potential funds related to EC ruling settlements (not incorporated into projections) may provide additional resources. ### External debt sustainability (Annex III highlights) - Baseline Non-IFSC external debt (percent of GDP) by year: - 2015: 315.0; 2016: 277.4; 2017: 256.6; 2018: 236.9; 2019: 218.5; 2020: 201.0; 2021: 184.2; 2022: 168.3 - Scenario outcomes (Annex III figure): - Combined shock: 226 - Combined shock with 30 percent real depreciation: 258 - Real depreciation shock (historical): 230 - Current account shock: 200 - Interest-rate shock: 196 - Growth shock: 237 - Debt-stabilizing non-interest current account: -2.8 (percent of GDP) for 2022. - Key DSA drivers (selected components, 2012–2022 series included above) highlight large swings driven by MNE-related flows and residuals. ### External sector and competitiveness - Current account balance (percent of GDP): 10.2 (2015); 4.7 (2016); 4.9 (2017); 4.8 (2018); 4.7 (2019) - Exports (percent of GDP): 34.5 (2015); 2.4 (2016); 4.4 (2017) — note table mixes levels and growth rates in source tables; see source tables for full series. - Real Effective Exchange Rate (REER): broadly stable over the last two years but depreciated significantly versus the pre-crisis period, driven by MNE-driven productivity gains. - Gross external debt (excl. IFC, percent of GDP): 315.0 (2015); 277.4 (2016); projected 256.6 (2017); 168.3 (2022) - Net international investment position (percent of GDP): -207.9 (2015); -198.2 (2016); -184.8 (2017); -128.5 (2022) ### Risks related to Brexit and financial linkages - Brexit risks: - Authorities estimate impact could be as high as 3.8 percentage points of GDP after 10 years, with largest effect on traditional sectors and regions. - Possible slowdown in the UK and sustained Sterling weakness would affect Ireland through labor, trade and financial channels. - Potential relocation of UK-based companies to Ireland could mitigate some effects. - Financial sector exposure: - Irish banks have a high portion of loans to UK-based clients (about 30 percent). - Direct impact on bank profitability could arise from a UK slowdown; indirect impact through exporters dependent on the UK. - Authorities’ contingency plans: - Prudent fiscal policies, investment in infrastructure, direct working capital and bridge financing support, tax measures for affected businesses, and reinforcement of ALMPs and training. - Central Bank monitors exposure and conducts stress tests focusing on UK risks. ### Income inequality, regional disparities, and labor market - Market-income inequality in Ireland is high compared to EU peers; tax-benefit system reduces inequality substantially. - 2007–15: welfare system reduced inequality by almost 25 points (difference between market and disposable income Gini coefficients). - Per capita disposable income: 19,309 euros (2014/2015). - Consistent poverty rate (2015): 8.7 percent. - Regional concentration: - About 40 percent of the population and 50 percent of gross value added concentrated in Dublin and the South-West. - Regional productivity variance: - Productivity gap (real GVA per employed person) between Midland (lowest) and Dublin (highest) increased by almost 60 percent between 2004 and 2014. - Policy responses: - Active labor market and skills policies, Regional Action Plans for Jobs (eight plans between June 2015 and January 2016), and a Rural Development Action Plan. - Reforms to PIT and enhanced childcare and in-work benefits to support labor transitions. ### FSAP recommendations: status summary (Annex VIII) - Central bank independence and transparency: Ongoing; communications and accountability actions implemented. - Personnel policies to attract staff: Ongoing; organization review concluded with actions underway. - Stress testing and UK risk focus: Ongoing; top-down stress test models being operationalized; supervisory stress testing focused on the UK. - Data gaps on cross-border exposures, nonbank sector, CRE: Ongoing; substantial progress and agreement for commercial property statistical system. - Central Credit Register (CCR): Ongoing; CCR scheduled to commence consumer loan data collection from 30 June 2017; non-consumer lending collection in 2018. - Macroprudential measures (LTV/LTI): Done; annual review process established (first review announced November, 2016). - MMF and fund sector monitoring and reporting: Ongoing; surveys and data procurements in process; EU MMF Regulation agreed November 2016 with transition timelines. *International Monetary Fund staff report for the 2017 Article IV consultation on Ireland (cr17171).* ### 5.2 percent in 2016, supported by a healthy expansion of private consumption and buoyant ### IRELAND: STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION ### Recent economic performance - Real GDP expanded by 5.2 percent in 2016, supported by a healthy expansion of private consumption and buoyant investment, including construction. - Unemployment fell to 6.4 percent in May, its lowest level in a decade. - Inflation remained low as the recent pickup in energy prices and upward pressure from services were partly offset by the impact of the Sterling weakness. - Fiscal outcome: 2016 fiscal deficit declined to 0.6 percent of GDP, below the target of 0.9 percent of GDP, supported by higher-than-projected revenues, particularly corporate income tax receipts. - Public debt continued to moderate as a result of the improved fiscal position. - Banking sector: Banks have strengthened their balance sheet further and remain profitable; non-performing loans have declined but remain high. - Credit: Large redemptions continue to drive overall credit down, albeit at a slowing pace, while new lending has picked up in both corporate and household segments. - Housing: Improved labor market conditions, rising incomes, and recent policy measures contributed to increased pressures on house prices and rents amid a lagged supply response following the deep property-driven crisis. ### Outlook and risks - Short-run projection: Real GDP is projected to grow at 3.9 percent in 2017, propelled by strong domestic demand. - Medium-term projection: Growth is projected to decelerate and converge towards potential of about 3 percent, narrowing the positive output gap gradually. - Inflation path: Inflation is set to stabilize at just below 2 percent. - Public finances: Projected to improve further, allowing the government to attain its Medium-Term Objective of a structural deficit of ½ percent of GDP next year. - External position: Healthy export growth will keep the current account surplus broadly unchanged. - Main downside risks: Substantial, mainly externally-driven risks—chiefly from Brexit and potential international corporate tax reforms—could affect MNE operations, underlying output, employment, and public finances. ### Executive Board assessment and policy priorities - Key message: Directors commended Ireland’s strong performance but identified lingering crisis legacies, rising housing market pressures, and externally-driven uncertainties (mainly Brexit) as challenges. - Broad policy guidance: - Rebuild fiscal buffers and strengthen economic resilience. - Guard against a re-emergence of boom-bust dynamics in the property market. - Foster sustainable, inclusive growth. ### Fiscal policy recommendations - Pursue growth-friendly fiscal consolidation to further reduce the public debt-to-GDP ratio and build buffers against shocks. - Broaden the tax base and save temporary revenue windfalls, including from volatile corporate taxes. - Maintain room for social expenditures and growth-enhancing capital spending within the envisaged deficit-reduction strategy. - Welcome for technical assistance: Fund technical assistance for public investment management assessment and ongoing expenditure reviews to enhance capital planning and expenditure prioritization. ### Financial sector and housing policy recommendations - Banking sector: - Emphasize the importance of the macro-prudential framework, given the recent pick up in lending. - Accelerate arrears resolution through intensified supervisory oversight, greater creditor-borrower engagement, and improved efficiency of legal proceedings. - Housing market: - Closely monitor strong momentum in the housing market; persistent pressures may lead to imbalances. - Expand housing supply and assist the homeless. - Reduce building costs, free up land for development, and accelerate loan restructuring for distressed but viable construction firms to help unlock housing supply. - Ensure measures to improve housing affordability are well-targeted and do not amplify property market pressures. ### Structural policy recommendations - Strengthen human capital and reinforce competitiveness, particularly for domestic enterprises, to support sustained growth and reduce income and regional disparities. - Continue efforts to upgrade labor force skills and raise female labor force participation (including strengthening childcare support). - Enhance competitiveness via greater support for SME innovation (direct public support for R&D and knowledge transfer) and improved infrastructure. ### Statistical and MNE-related issues - While Ireland’s economic statistics conform to international norms, Directors underscored the need for indicators of underlying economic activity that suitably account for the operations of foreign-owned multinationals to allow a more accurate assessment of economic developments and policymaking. - Authorities’ plan to publish new indicators was welcomed. ### Key numerical indicators (selected) - 2016 headline outcomes: - Real GDP: 5.2 percent - Unemployment rate (May): 6.4 percent - Fiscal deficit (2016): 0.6 percent of GDP (target: 0.9 percent of GDP) - Projections (selected): - Real GDP: 3.9 percent (2017); 3.3 percent (2018); 3.0 percent (2019) - Potential Growth: 3.5 percent (2017) - Output Gap: 1.0 (2017) - Inflation (HICP): 0.9 (2017); 1.5 (2018); 1.7 (2019) - Unemployment rate: 6.2 (2017); 5.7 (2018); 5.5 (2019) - Overall balance (percent of GDP): -0.6 (2016); -0.5 (2017); -0.2 (2018); 0.0 (2019) - Structural balance (percent of potential GDP): -1.1 (2016); -0.9 (2017); -0.5 (2018); -0.3 (2019) - General government gross debt: 75.6 (2016); 73.7 (2017); 72.3 (2018); 70.8 (2019) - Current account balance (percent of GDP): 4.7 (2016); 4.9 (2017); 4.8 (2018); 4.7 (2019) - Gross national savings: 33.6 (2016); 35.7 (2017) - Gross capital formation: 28.9 (2016); 30.8 (2017) - Nominal GDP (€ billions): 265.4 (2016); 278.0 (2017); 291.0 (2018) *International Monetary Fund staff report for the 2017 Article IV consultation on Ireland.* ### 4. The Irish economy has grown rapidly, ### 4. The Irish economy has grown rapidly, ### Growth and domestic demand - Activity expanded by a headline 5.2 percent in 2016. - Strong performance propelled by healthy expansion of private consumption and buoyant investment, including in construction. - The contribution of net exports was negative in 2016. - Staff estimate: growth contribution of underlying core demand increased to 4 percent in 2016 from 3½ percent in 2015. - High frequency indicators suggest strong momentum has continued into 2017. ### Labor market and inflation - Broad-based job creation reduced unemployment to 6.4 percent in May 2017 from about 9 percent at end-2015, despite positive recent net migration. - Labor force participation remains around 60 percent. - Wage increases remained moderate across most sectors in 2016. - Inflation remained low; recent pickup in energy prices and upward pressure from services were partly offset by the impact of the Sterling weakness. ### Statistical challenges related to MNE activity (Box 2) - The issue: - MNEs invest in substantial physical production and provide significant employment, but sizable investment in (or relocation of) intangible and internationally mobile capital assets (including aircraft leasing) and “offshore” contract manufacturing have a large statistical impact not in line with their relevance to underlying domestic activity. - Headline national accounts statistics provide an inflated and excessively volatile picture of Ireland’s economic performance. - Importance: - MNE activities can mask trends in underlying growth, trade and investment developments, complicating assessment of cyclical position and appropriate policy setting. - Headline data can distort analysis of labor productivity, economic well-being, fiscal sustainability, and external competitiveness. - The challenge: - Deriving a “GDP*” and related-component data requires additional data separating MNE offshore/IP-related activities; expenditure or production approaches are particularly difficult. - Response (staged): - CSO to begin publishing new metrics beginning in July, based on a working group recommendation: - GNI*, adjusting national income for effects of retained earnings of MNEs domiciled in Ireland and depreciation of foreign-owned IP assets. Corresponding BOP/NIIP presentations are also envisaged. GNI* will provide a more stable and prudent measure for public finances and external sustainability, but strips out MNE operations relevant to underlying activity (a lower bound). Central bank analysis suggests 2015 nominal GNI* is about 30 percent below nominal GDP. - Additional structural and cyclical indicators to be published and developed, including separate reporting of IP investment, GVA, and income of all MNE activities, allowing separate analysis of MNE-based activities and the rest of the economy. - Ongoing analysis of productivity measures and consideration of a capital-stock adjustment for IP assets to aid analysis of potential output and the cyclical position. - Remaining challenges: - Absence of a breakdown of royalty flows prevents removal of IP effects on net exports in the expenditure approach. - In the production approach, MNE GVA does not separate domestic and offshore IP-related activities. - Understanding BOP trends requires more granular trade data on financial services and royalties, MNE income (on- versus off-shore) and portfolio flows, and related-party financial flows; NIIP calculations call for breakdown of IP assets and liabilities and associated dividends and profits. ### Financial sector and private-sector balance sheets - Mortgage arrears declined to 13.4 percent of total mortgages at end-2016 from 14.7 percent at end-2015. - New lending for house purchases has risen from low levels; strong income growth and repayments resulted in a further reduction in household debt-to-disposable income. - Financial position of SMEs improved across sectors; the default rate halved to 14.3 percent in 2016Q4 since its 2013 peak. - New lending trending upwards, mainly to firms in real estate and manufacturing, while large redemptions continue to drive overall credit down. ### Housing and commercial real estate (CRE) - Residential construction is gradually recovering but housing completions remain insufficient to meet demand. - Housing prices increased by about 10½ percent y/y in April (year not restated in source). - Rents have been pushed above pre-crisis levels due to tight market conditions and increased rental demand. - CRE demand remains strong; office vacancy rates are at record lows. - Government measures: July 2016 Action Plan for Housing and Homelessness; legislation capped annual rent increases at 4 percent for three years in designated Rent Pressure Zones covering more than half of Irish tenancies. ### Fiscal position - Headline fiscal deficit narrowed to 0.6 percent of GDP in 2016 versus a target of 0.9 percent of GDP, mainly reflecting one-off revenues of about 0.2 percent of GDP. - Higher-than-projected revenues, particularly corporate income tax (CIT) receipts, offset in-year expenditure increases, particularly in health. - In structural terms, the deficit remained broadly unchanged. - 2017 budget aims: - Structural deficit budgeted to decline to 1.2 percent of GDP in 2017 (0.4 percent in headline terms). - Reach MTO of a 0.5 percent structural deficit in 2018. - Rise steadily to a 1 percent structural surplus by 2021. - Government targeting reduction of debt-to-GDP to 45 percent within the decade. - “Rainy day” fund to be established in 2019 following achievement of the MTO. - Staff view: fiscal objectives appropriate and within reach, but revenue developments need monitoring given tax underperformance in early 2017; measures will be needed if path deviates significantly. ### External position - Current account surplus declined to below 5 percent of GDP in 2016 from about 10 percent of GDP in 2015; volatility partly reflects contract manufacturing and IP-related imports. - 2016 current account composition: large positive goods trade balance more than offsetting large deficits in services and income. - Real effective exchange rate broadly stable in the last two years but depreciated significantly versus the pre-crisis period, driven by significant MNE-driven productivity gains. - External balance assessment (complicated by MNEs) does not suggest deviation from fundamentals. ### Outlook and projections (staff) - Real GDP projected to grow at 3.9 percent in 2017. - Over the medium-term, growth projected to decelerate and converge towards potential of 3 percent. - Inflation stabilizing at just below 2 percent as output gap narrows and labor market tightens. - Private sector balance sheet improvement expected to support steady expansion of private consumption and investment. - Baseline assumes continued strong export performance in line with trading partners and some import moderation. - Current account surplus projected to remain roughly unchanged. - Ireland: Macroeconomic Projections, 2015–22 (percentage change unless indicated) - Real GDP: 2015: 26.3; 2016: 5.2; 2017: 3.9; 2018: 3.3; 2019: 3.0; 2020: 2.9; 2021: 2.8; 2022: 2.8 - Final domestic demand: 2015: 11.3; 2016: 15.1; 2017: 4.7; 2018: 3.6; 2019: 3.2; 2020: 3.0; 2021: 2.8; 2022: 2.8 - Private consumption: 2015: 4.5; 2016: 2.9; 2017: 3.2; 2018: 3.0; 2019: 2.7; 2020: 2.5; 2021: 2.2; 2022: 2.2 - Public consumption: 2015: 1.1; 2016: 5.3; 2017: 2.3; 2018: 2.1; 2019: 1.8; 2020: 1.7; 2021: 1.6; 2022: 1.5 - Fixed investment: 2015: 33.7; 2016: 37.6; 2017: 7.8; 2018: 4.8; 2019: 4.4; 2020: 4.1; 2021: 4.0; 2022: 4.0 - Change in stocks (contribution to growth): 2015: -0.9; 2016: 0.4; 2017–2022: 0.0 - Net exports (contribution to growth): 2015: 18.3; 2016: -6.6; 2017: 0.3; 2018: 0.6; 2019: 0.6; 2020: 0.6; 2021: 0.7; 2022: 0.7 - Exports: 2015: 34.5; 2016: 2.4; 2017: 4.4; 2018: 4.3; 2019: 4.3; 2020: 4.3; 2021: 4.1; 2022: 4.1 - Imports: 2015: 21.7; 2016: 10.4; 2017: 5.1; 2018: 4.7; 2019: 4.7; 2020: 4.6; 2021: 4.4; 2022: 4.3 - Current account (percent of GDP): 2015: 10.2; 2016: 4.7; 2017: 4.9; 2018: 4.8; 2019: 4.7; 2020: 4.7; 2021: 4.6; 2022: 4.5 - Unemployment rate (percent): 2015: 9.4; 2016: 7.9; 2017: 6.2; 2018: 5.7; 2019: 5.5; 2020: 5.5; 2021: 5.5; 2022: 5.5 - Output gap: 2015: -0.4; 2016: 0.7; 2017: 1.0; 2018: 0.9; 2019: 0.7; 2020: 0.4; 2021: 0.2; 2022: 0.1 - Consumer prices (HICP): 2015: 0.0; 2016: -0.2; 2017: 0.9; 2018: 1.5; 2019: 1.7; 2020: 1.8; 2021: 1.9; 2022: 1.9 - Sources: Central Statistics Office and IMF staff projections. ### Risks - Externally-driven risks dominate for this small, open economy. - Brexit: - Expected negative and significant impact on Ireland, with large uncertainties. - A possible slowdown in the UK and sustained weakness in Sterling would affect Ireland through labor, trade and financial channels. - Authorities estimate impact could be as high as 3.8 percentage points of GDP after 10 years, with largest effect on traditional sectors and regions. - Possible relocation of UK-based companies to Ireland could mitigate some effects. - International tax changes: - Uncertainty around possible corporate tax reforms in the US and EU may affect MNE operations in Ireland, with potentially adverse repercussions for output, employment and the fiscal position. - Other risks: - Increase in inward-looking policies by trading partners could reduce trade and growth. - Domestically, faster-than-expected repair of private sector balance sheets and stronger-than-anticipated job creation could lift growth above the baseline. - Housing supply/demand imbalances could harm well-being and increase financial stability risks unless well managed. - MNE-related activities represent two-sided risk, with potential upside to measured GDP from recent and potential MNE operations. ### Authorities’ views - Authorities broadly agreed with staff on the outlook; stressed importance of upcoming publication of alternative national accounts metrics. - On Brexit: preparations ongoing since before June 2016 vote; commitment in 2017 Budget to build fiscal buffers and introduce Brexit-related measures targeting SMEs, agri-food sector, and other exporters. - Committed to publish further paper on economic challenges of Brexit following a May 2 government position paper. - Recognized uncertainty around international tax discussions but noted attractions for investment: access to EU single market, competitive business environment, strong workforce, and flexible labor market. - Domestic priorities: address concentration risk in corporate tax base, remaining crisis legacies, and unlock supply to mitigate housing pressures. ### Policy guidance: Enhancing resilience while fostering sustainable and inclusive growth - Policy priorities with recovery established: - Address remaining crisis legacies. - Monitor and manage housing pressures. - Enhance resilience to future shocks, including Brexit and potential international tax changes. - Continue rebuilding fiscal buffers and strengthen private sector balance sheets. - Reinforce policies to strengthen competitiveness and support inclusive growth. *International Monetary Fund staff summary of "The Irish economy has grown rapidly" (cr17171).* ### 16. Prudent fiscal policy is needed to reduce debt to safe levels and guard against risks: ### 16. Prudent fiscal policy is needed to reduce debt to safe levels and guard against risks: ### Fiscal stance, debt dynamics, and risks - Debt remains high when measured on a per capita basis or in terms of government revenues and is sensitive to macro-fiscal shocks (Annex VII). - The rapid rise in MNE operations contributed to an increase in CIT from 7 to 10 percent of total revenue in 2014-16. - Adverse profit developments or a reversal of inward investment could lead to a revenue shock and GDP level shift that would drive a sharp one-off debt increase followed by a slower decline. - Staff estimates the structural deficit at 0.9 in 2017, due to different estimates for the output gap. - Department of Finance projections (2016–2021): - Growth: 5.2, 4.3, 3.7, 3.1, 2.7, 2.5 (for 2016, 2017, 2018, 2019, 2020, 2021 respectively) - Output gap: 1.2, 1.4, 0.8, 0.5, 0.3, 0.0 - Overall balance: -0.6, -0.4, -0.1, 0.1, 0.6, 1.0 - Structural balance (percent of potential GDP): -1.4, -1.2, -0.5, -0.2, 0.4, 1.0 - Public debt 1/: 75.4, 72.9, 71.2, 69.5, 65.2, 62.9 - IMF staff projections (2016–2021): - Growth: 5.2, 3.9, 3.3, 3.0, 2.9, 2.8 - Output gap: 0.7, 1.0, 0.9, 0.7, 0.4, 0.2 - Overall balance: -0.6, -0.5, -0.2, 0.0, 0.2, 0.6 - Structural balance (percent of potential GDP): -1.1, -0.9, -0.5, -0.3, 0.1, 0.5 - Structural effort (pp): 0.1, 0.2, 0.4, 0.2, 0.4, 0.4 - Public debt 1/: 75.6, 73.7, 72.3, 70.8, 66.7, 64.4 - Note: 1/ Taking into account the accumulation of a Rainy Day Fund of €1 billion starting in 2019. ### Expenditure pressures and fiscal space - Public sector unions seek rapid restoration of wages to pre-crisis levels under a new wage and benefits agreement. - Public sector wages have not risen substantially post-crisis, but remain, on average, above private sector levels; after controlling for employee and employer characteristics, public-private earnings differentials have closed though a premium remains at the lower end of the earnings distribution (Public Service Pay Commission). - The overall wage bill remains comparatively high as a share of both revenues and expenditures. - May 2017: government initiated negotiations on a new pay agreement ahead of 2018 budget preparations. - Demographic changes are estimated to entail a considerable increase in total aging-related expenditure over the long-term, although recovery-driven immigration should mitigate these pressures. - Additional space is required to support further investment in infrastructure and human capital. - The April 2017 draft Stability Program Update highlights potentially large expenditures from purchases of emissions allowances to meet greenhouse gas emission reductions by 2020. ### Key fiscal priorities and tax policy recommendations (from paragraph 17) - Broadening the tax base: - The personal income tax (PIT) base remains narrow and complex; consider merging the USC into a more comprehensive PIT with a broader base and lower rates for below-median wage earners, potentially through a third income bracket (as suggested by the OECD). - Potential revenue losses from PIT reform could be compensated by decreasing VAT exemptions and by aligning self-assessed property values to market values for local property tax calculations. - Concerns about regressivity could be mitigated by means-tested allowances. - Review the system of tax expenditures: tax expenditures rose to about 12 percent of GDP in 2014 from less than 8 percent of GDP in 2004. - The 2017 budget introduced measures including a rebate for first-time buyers (FTB) of new properties; a large share of income tax allowances are enjoyed by top income groups (OECD). - Avoid using potentially temporary revenue gains to fund permanent measures: - Volatility of MNE operations makes it difficult to distinguish temporary from permanent CIT developments; crucial to avoid using temporary revenue gains to fund permanent budget measures and to save tax windfalls. - Enforce budgeted expenditure levels while allowing priority social spending and growth-enhancing capital expenditure: - Periodic revisions of expenditure targets to accommodate overruns undermine credibility and incentives for efficiency gains; the current expenditure review is welcome. - Steady progress in health sector reforms would generate spending efficiency gains; further savings through better pricing arrangements with pharmaceutical industry and increased provision of primary care (IMF, 2016). - Any increases in the wage bill should be compensated with reductions in other current expenditures. - Continue active engagement in international tax cooperation initiatives (see Box 3). Government launched an independent review of its tax code, expected to prompt recommendations by mid-2017. ### Authorities’ views - Authorities reaffirmed commitment to implement a prudent fiscal policy and restore buffers, recognizing significant risks to the outlook. - For 2017 they emphasized monitoring revenue developments, noted difficulty in early assessment of tax performance due to tax volatility, and indicated expenditures have been contained within the monthly profile. - They acknowledged importance of preserving a broad tax base and will continue to consider framework adequacy within the budget process. - Authorities recognized need for expenditure prioritization given substantial spending pressures and highlighted addressing emerging infrastructure bottlenecks after crisis-related underinvestment. - A three-year 'rolling' system of selective reviews is underway to support expenditure effectiveness and efficiency; an evaluation of the Capital Plan will inform capital allocations up to 2021 to be finalized in Budget 2018. - They stressed the recently published Public Service Pay Commission report provides a strong foundation for fair, balanced and sustainable outcomes in upcoming pay discussions. ### International taxation engagement (Box 3) - Ireland is actively participating in international initiatives against aggressive and harmful international taxation planning, notably BEPS. - Country-by-country reporting for Irish-parented MNEs enacted with the Finance Act 2015; Ireland’s transfer pricing legislation effectively endorses the OECD Transfer Pricing Guidelines. - Ireland is committed to transpose the EU’s Anti-Tax Avoidance Directive according to the agreed schedule. - Ireland is one of the 22 jurisdictions out of 113 assessed “fully compliant” with the agreed international standards on Transparency and Exchange of Information for Tax Purposes. - In 2015 Ireland introduced a Knowledge Development Box offering a 6.25 percent rate on qualifying income. ### Financial sector: banking health and vulnerabilities - Domestic bank capital and liquidity positions strengthened further in 2016; profitability is now above the average of EU peers. - Nonperforming loans (NPLs) remain high but have declined as a share of total loans. - Recent stress tests showed significant decline in capital ratios under adverse shocks as elevated NPLs and deferred tax assets weigh on loss-absorption capacity. - Vulnerabilities include uncertain Brexit impact, future international regulatory changes, continued cost pressures, and public pressure to reduce variable mortgage rates. - Mortgage arrears resolution remains sluggish: - Share of deep mortgage arrears (over 720 days) increased to about 70 percent of total mortgage arrears. - Proportion of mortgage arrears in total NPLs reached 55 percent in 2016Q4 from 38 percent in 2013Q4. - Continued implementation of the Distressed Credit Strategy and ensuring adequate provisions (including ahead of IFRS9) and more efficient legal proceedings are important. - The “Abhaile” scheme provides distressed borrowers access to free legal and financial advice and has shown increasing participation. - Prudent lending should be maintained as credit demand picks up: - Central Bank plan to review mortgage lending limits periodically is appropriate. - Consider converting the loan-to-income limit to a debt-to-income limit after Central Credit Register operations commence. - Increasing share of household loans held by non-bank financial institutions requires close monitoring. - Irish Banks: Key Financial Indicators (Q4 data for three main domestic banks): - Credit growth: -7.0, -7.0, -5.4, -5.3, -9.4 (years 2012–2016) - Return on assets: -2.0, -0.8, 0.5, 0.7, 0.8 - Pre-provision profits 2/: -0.5, 0.4, 0.6, 0.9, 1.1 - Net interest margin: 0.8, 1.2, 1.3, 1.8, 2.0 - Cost-to-income ratio: 166.0, 72.8, 64.1, 63.2, 60.2 - NPL ratio 3/: 24.8, 27.1, 23.9, 18.7, 15.7 - Coverage ratio 3/: 48.4, 51.4, 42.6, 38.4, 35.6 - CT1 ratio: 14.7, 13.3, 15.5, 14.9, 16.3 - Net loan to deposit: 124.0, 110.7, 108.2, 105.9, 102.4 - 2/ Excluding nonrecurrent items, as a share of average total assets. - 3/ Figures for 2014 onwards are based on the EBA definition and are not comparable with earlier years. ### Banking system exits and contingent liabilities - Preparations for AIB’s IPO are ongoing; government announced sale of 25 percent of AIB shares (about €3 billion, equivalent to one percent of GDP) by end-June. - Staff supported continued disposal of state shareholding to further reduce public debt and contain contingent liabilities. ### Housing market: momentum, risks, and policy recommendations - Strong momentum in the housing market requires close monitoring: increase in price expectations and surge in mortgage approvals; staff analysis finds no clear evidence of a significant price misalignment (subject to uncertainty), but persistent pressures could lead to imbalances given the lagged supply response. - Policy recommendations: - Address housing supply constraints: implement measures in the Action Plan for Housing and Homelessness and introduce a well-structured vacant site levy in 2019 to reduce land hoarding. - Reduce administrative costs and streamline the planning process. - Speed up loan restructuring of distressed but viable firms in the construction sector to improve supply responsiveness. - Review recent administrative measures to stabilize rents: rent controls may deter new construction and could be ineffective as landlords may pass on costs through other fees. - Better target the Help-to-Buy (HTB) scheme (FTB tax rebate until 2019): while limited in scope and time-bound, the relatively high property value threshold suggests it also benefits FTBs that do not need government support. *International Monetary Fund staff summary of Chapter 16 from cr17171.* ### Box 4. Residential Property Prices ### Box 4. Residential Property Prices ### Recovery and risks - Residential real estate prices have recovered from the trough in early 2013. - While prices remained well below pre-crisis levels, their rapid increase has raised questions about possible emergence of imbalances. - High volatility of the Irish property market in recent years and structural factors—integration into the euro area, increased access to cheap funding, and the economy’s structural transformation leading to significantly increased household financial wealth—complicate valuation assessments. ### Non-parametric assessment (price ratios) - Ireland’s house price-to-income and price-to-rent ratios in 2016Q3 were close to their long-term average (1990–2016). - These ratios were 40 percent below their peaks, thus not suggesting current misalignment. - Strong house price appreciation over the last two years was broadly in line with income growth and rent increases. ### Parametric assessment (models and results) - Two models used: - A reduced form model including demand-side factors such as population at the household formation age (25–44), real mortgage rates, and employment. - An Error Correction Model (ECM) based on a cross-country sample reflecting both supply and demand factors. - Model limitations: - First model: difficulty capturing supply-side dynamics important in the Irish context. - Second model: limitations due to Ireland-specific dynamics in a cross-country sample. - Findings (treated with caution): - First model estimates that, following a significant undervaluation (around 30 percent in 2013), prices remain undervalued by about 10 percent. - Second model suggests prices in mid-2016 were close to their equilibrium level, though results differ significantly based on model specification (with or without credit growth) and base year for which the estimated growth rates are applied. ### Authorities’ views (housing-related) - Authorities affirmed commitment to advance bank balance sheet repair and safeguard against financial stability risks. - They were alert to strong pressures on prices and rents but noted that financial stability risks appear to be contained at this stage. - Authorities highlighted supply constraints as central and noted initial progress under the Action Plan for Housing and Homelessness. - They recognized the need to continue supporting vulnerable groups and expand housing supply. - Authorities noted plans to review the Help-to-Buy scheme in the period ahead to ensure its effectiveness. - They will continue to monitor the rental market for the potential impact of recently introduced rent controls on supply. ### Policy implications and recommended actions (housing supply and market functioning) - Durable expansion of housing supply is needed to reduce imbalances and improve affordability. - Additional measures that would help unlock housing supply include: - Reducing building costs. - Streamlining the planning process. - Freeing up land for development. - Accelerating loan restructuring of distressed, but viable, firms in the construction sector. - The planned review of the Help-to-Buy scheme to ensure it is well-targeted is welcome. - Administrative caps on rent increases should be monitored, given the potentially negative implications for the rental market. *Source: IMF staff analysis in Box 4. Residential Property Prices, cr17171.* ### 38. Staff proposes that the next Article IV consultation with Ireland take place on the ### Staff proposes that the next Article IV consultation with Ireland take place on the standard 12-month cycle. ### Real sector and inflation indicators - GDP grew by 5.2 percent in 2016. - Growth drivers: - Growth was mainly driven by service sectors. - Activity in both manufacturing and services recovered strongly from the immediate effects of the Brexit vote. - Domestic demand and components (Table 1, selected): - Domestic demand: 2015 = 10.0; 2016 = 15.9; 2017 = 4.7; 2018 = 3.5; 2019 = 3.2; 2020 = 3.0; 2021 = 2.8; 2022 = 2.8. - Private consumption: 2015 = 4.5; 2016 = 2.9; 2017 = 3.2; 2018 = 3.0; 2019 = 2.7; 2020 = 2.5; 2021 = 2.2; 2022 = 2.2. - Gross fixed capital formation: 2015 = 33.7; 2016 = 37.6; 2017 = 7.8; 2018 = 4.8; 2019 = 4.4; 2020 = 4.1; 2021 = 4.0; 2022 = 4.0. - Contributions to growth (Table 1, selected): - Net exports: 2015 = 18.3; 2016 = -6.6; 2017 = 0.3; 2018 = 0.6; 2019 = 0.6; 2020 = 0.6; 2021 = 0.7; 2022 = 0.7. - Inflation indicators: - Inflation (HICP): 2015 = 0.0; 2016 = -0.2; 2017 = 0.9; 2018 = 1.5; 2019 = 1.7; 2020 = 1.8; 2021 = 1.9; 2022 = 1.9. - Inflation (HICP, end of period): 2015 = 0.3; 2016 = -0.2; 2017 = 1.4; 2018 = 1.6; 2019 = 1.7; 2020 = 1.8; 2021 = 1.9; 2022 = 1.9. - GDP deflator: 2015 = 4.9; 2016 = -1.3; 2017 = 0.8; 2018 = 1.4; 2019 = 1.5; 2020 = 1.6; 2021 = 1.7; 2022 = 1.7. ### Household finance and property market developments - Household balance sheets: - Household debt and interest payment continued to fall. - Debt burden and interest burden (percent of gross disposable income) series shown in figures (2005Q1–2016Q2). - Mortgages and arrears (figures and Table 4 series): - Mortgages in arrears: arrears, 90–720 days and arrears over 720 days series show decline but sluggish reduction in deep arrears. - Gross NPLs to gross loans: 2015Q4 = 16.1 percent; 2016Q4 = 12.9 percent. - Provisions to gross NPLs: 2015Q4 = 51.6 percent; 2016Q4 = 50.3 percent. - Residential property market: - Residential property prices revived, particularly in Dublin. - Residential property prices (Index, 2005M1=100): Transactions, 12m total (rhs) increased (figure series through Jan-2017). - Housing completions, permits for new houses, and investment in construction show uptick from low levels (series through Jan-2017). ### Credit developments and banking sector - Deposits and credit: - Deposits continued to increase reflecting strong non-financial corporate profitability (figures). - Credit growth contracted due to non-financial corporate and household deleveraging. - Mortgage market: - New lending for house purchases is picking up from a low level while strong redemptions continue to drive outstanding mortgage loans down. - Number and value of residential mortgage loans series: e.g., Value and Number (thousands) series in figures (Sep-09 to Sep-16). - Interest margins and bank profitability: - Low deposit rates and broadly stable lending rates boost banks’ interest margins and profitability (figures show net interest margin and return on assets). - Main domestic banks aggregated (Table 5, selected, 2015Q4 vs 2016Q4): - Total assets: 2015Q4 = €248.9 bn; 2016Q4 = €227.0 bn. - Deposits: 2015Q4 = €161.4 bn; 2016Q4 = €154.3 bn. - Net loans: 2015Q4 = €171.3 bn; 2016Q4 = €158.3 bn. - Gross loans: 2015Q4 = €186.5 bn; 2016Q4 = €169.0 bn. - Loan loss provisions: 2015Q4 = €15.5 bn; 2016Q4 = €11.0 bn. - Gross NPLs: 2015Q4 = €30.1 bn; 2016Q4 = €21.8 bn. - Return on equity: 2015Q4 = 8.0; 2016Q4 = 7.9. - Core tier 1 capital (CT1): 2015Q4 = 18.5; 2016Q4 = 18.8. - CT1 to RWA (%): 2015Q4 = 14.9; 2016Q4 = 16.3. - CT1 to total assets = leverage ratio (%): 2015Q4 = 7.4; 2016Q4 = 8.3. ### Fiscal developments, projections, and public debt - Consolidation and fiscal balances (Table 2b and 2a, selected): - Revenue (percent of GDP): 2015 = 27.6; 2016 = 27.5; 2017 = 27.0; 2018 = 26.8; 2019 = 26.4; 2020 = 26.2; 2021 = 26.1; 2022 = 26.1. - Expenditure (percent of GDP): 2015 = 29.6; 2016 = 28.1; 2017 = 27.6; 2018 = 26.9; 2019 = 26.4; 2020 = 26.0; 2021 = 25.5; 2022 = 25.1. - Overall balance (percent of GDP): 2015 = -2.0; 2016 = -0.6; 2017 = -0.5; 2018 = -0.2; 2019 = 0.0; 2020 = 0.2; 2021 = 0.6; 2022 = 1.0. - Primary balance (percent of GDP): 2015 = 0.7; 2016 = 1.8; 2017 = 1.7; 2018 = 1.9; 2019 = 1.9; 2020 = 2.1; 2021 = 2.4; 2022 = 2.7. - Structural balance (percent of potential GDP): 2015 = -1.2; 2016 = -1.1; 2017 = -0.9; 2018 = -0.5; 2019 = -0.3; 2020 = 0.1; 2021 = 0.5; 2022 = 0.9. - Public debt levels (Table 2b and 2a, selected): - General government gross debt (percent of GDP): 2015 = 78.8; 2016 = 75.6; 2017 = 73.7; 2018 = 72.3; 2019 = 70.8; 2020 = 66.7; 2021 = 64.4; 2022 = 60.9. - General government net debt (percent of GDP): 2015 = 72.1; 2016 = 69.6; 2017 = 67.7; 2018 = 65.7; 2019 = 63.6; 2020 = 61.7; 2021 = 59.4; 2022 = 55.8. - Gross public debt in billions (Table 2a, selected): 2015 = €201.4 bn; 2016 = €200.6 bn; 2017 = €204.9 bn; 2018 = €210.4 bn; 2019 = €215.4 bn; 2020 = €212.1 bn; 2021 = €214.5 bn; 2022 = €212.2 bn. - Financing needs: - General Government Gross Financing Needs (figure): simulated gross financing needs and composition (rising through 2022 in figure series). - Interest in percent of Revenue (Table 2b): 2015 = 9.7; 2016 = 8.5; 2017 = 8.3; 2018 = 7.6; 2019 = 7.3; 2020 = 7.0; 2021 = 7.0; 2022 = 6.8. ### External sector and competitiveness - Exports and trade: - Exports of goods and services (percent of GDP, Table 1): 2015 = 34.5; 2016 = 2.4; 2017 = 4.4; 2018 = 4.3; 2019 = 4.3; 2020 = 4.3; 2021 = 4.1; 2022 = 4.1. - Goods exports (billions of euros, Table 3): 2015 = 195.6; 2016 = 186.3; 2017 = 203.2; 2018 = 215.3; 2019 = 226.8; 2020 = 238.3; 2021 = 250.9; 2022 = 263.8. - Imports of goods (billions of euros, Table 3): 2015 = 85.0; 2016 = 83.3; 2017 = 95.5; 2018 = 101.4; 2019 = 106.9; 2020 = 112.7; 2021 = 119.2; 2022 = 126.1. - Current account and balances (Table 3): - Current account balance (billions of euros): 2015 = 26.2; 2016 = 12.5; 2017 = 13.6; 2018 = 14.0; 2019 = 14.4; 2020 = 14.9; 2021 = 15.3; 2022 = 15.5. - Current account balance (percent of GDP): 2015 = 10.2; 2016 = 4.7; 2017 = 4.9; 2018 = 4.8; 2019 = 4.7; 2020 = 4.7; 2021 = 4.6; 2022 = 4.5. - Balance of goods and services (percent of GDP): 2015 = 31.8; 2016 = 23.2; 2017 = 22.5; 2018 = 22.3; 2019 = 22.3; 2020 = 22.0; 2021 = 22.0; 2022 = 21.9. - Competitiveness and productivity: - Real Effective Exchange Rate (Index, 2005=100) series shown; REER remained broadly stable over the last two years (figure). - Real labor productivity (Index, 2001Q1=100): Ireland outpaced the euro zone in productivity growth, concentrated in higher value-added sectors (figure). - External debt and NIIP (Table 3, memorandum): - Gross external debt (excl. IFC, percent of GDP): 2015 = 315.0; 2016 = 277.4; 2017 = 256.6; 2018 = 236.9; 2019 = 218.5; 2020 = 201.0; 2021 = 184.2; 2022 = 168.3. - Net international investment position (percent of GDP): 2015 = -207.9; 2016 = -198.2; 2017 = -184.8; 2018 = -172.2; 2019 = -160.5; 2020 = -149.3; 2021 = -138.6; 2022 = -128.5. - Export composition: - Services and goods export shares increased; contract manufacturing and services contributed to export performance (figures). ### Labor market and inequality - Employment and unemployment (Table 1, selected): - Employment (ILO definition, percent change y/y): 2015 = 2.6; 2016 = 2.9; 2017 = 2.8; 2018 = 1.6; 2019 = 1.2; 2020 = 1.1; 2021 = 1.0; 2022 = 1.0. - Unemployment rate (percent): 2015 = 9.4; 2016 = 7.9; 2017 = 6.2; 2018 = 5.7; 2019 = 5.5; 2020 = 5.5; 2021 = 5.5; 2022 = 5.5. - Youth and long-term unemployment remain elevated despite substantial overall unemployment decline (figures). - Labor force participation and demographics (figures): - Labor force participation is slightly below euro area average, particularly in the 25–54 age group. - Job creation driven by both service and industry sectors; net migration turned positive for first time since 2009 (figure series). - Inequality: - Market inequality remains high; following taxes and transfers inequality is in line with the euro area’s average (Gini coefficient and At Risk of Poverty figures). - At-risk-of-poverty rate (2015, memorandum): 16.3 percent. ### Selected macroeconomic indicators and projections (Table 1, highlights) - Real GDP (annual percentage change): - 2015 = 26.3; 2016 = 5.2; 2017 = 3.9; 2018 = 3.3; 2019 = 3.0; 2020 = 2.9; 2021 = 2.8; 2022 = 2.8. - Potential growth: - 2015 = 2.4; 2016 = 4.1; 2017 = 3.5; 2018 = 3.4; 2019 = 3.3; 2020 = 3.1; 2021 = 3.0; 2022 = 3.0. - Public finance headline projections (percent of GDP): - Revenue: 2015 = 27.6; 2016 = 27.5; 2017 = 27.0; 2018 = 26.8; 2019 = 26.4; 2020 = 26.2; 2021 = 26.1; 2022 = 26.1. - Expenditure: 2015 = 29.6; 2016 = 28.1; 2017 = 27.6; 2018 = 26.9; 2019 = 26.4; 2020 = 26.0; 2021 = 25.5; 2022 = 25.1. - Balance of payments projections (Table 3, selected): - Current account balance (percent of GDP): 2015 = 10.2; 2016 = 4.7; 2017 = 4.9; 2018 = 4.8; 2019 = 4.7; 2020 = 4.7; 2021 = 4.6; 2022 = 4.5. *Source: IMF staff report figures and tables as provided in the content unit.* ### Annex I. Income Inequality and Regional Disparities ### Annex I. Income Inequality and Regional Disparities ### Income inequality and redistribution - Market-income inequality in Ireland is high compared to EU peers. - The tax-benefit system is effective in redistributing income: - In 2007–15, the welfare system reduced inequality, measured by the difference between market and disposable income Gini coefficients, by almost 25 points. - About one-fourth of the improvement is due to direct taxation. - Most of the improvement is carried out through social benefits, a relatively-high 30 percent of which is means-tested. - Pensions play a more limited role than in other EU countries because the Irish system emphasizes privately managed occupational pensions. ### Social assistance, vulnerability, and material deprivation - The number of social assistance recipients, while declining, remains elevated. - Social transfers make up about 70 percent of income for those in the bottom two deciles. - An intergenerational divide, evident in material deprivation rates, grew sharply during the crisis and, though declining, remains prominent. - Key national indicators (2014/2015): - Per capita disposable income: 19,309 euros. - Consistent poverty rate (2015): 8.7 percent. ### Regional concentration and sectoral structure - Population and output concentration: - About 40 percent of the population and 50 percent of gross value added is concentrated in Dublin (a service hub) and the South-West (a manufacturing center). - Agriculture is key in the South-West, South-East and Border region. - Labor market and demographics: - Only Dublin and the Mid-East consistently record employment and labor-force participation rates above average. - The Border region has a tradition of working-age people migrating to work. - Ireland: Selected indicators, 2014: - Gross value added, € million: 171,607. - Population, thousands: 4,615. - Unemployment rate: 11.3. - Ireland: Selected indicators, 2016: - Unemployment rate: 7.9. - Participation rate: 60.3. ### Labor market dynamics and regional disparities - Unemployment dynamics: - During the crisis, unemployment peaked at 18–19 percent in the Midland and South-East. - Unemployment declined to around 10 percent in 2016 (national recovery) but regional differences persist above pre-crisis levels. - Regions with higher unemployment at the onset of the crisis have continued to be affected by high joblessness, suggesting underlying structural differences. - Labor market frictions: - Job vacancies are low where unemployment is high (South-East, Midland, and West), suggesting structural frictions such as infrastructure, housing constraints, and skills that stymie the cross-regional flow of capital and labor. - Dispersion measures: - Standard measures of dispersion indicate the labor market recovery has been uneven across regions. ### Productivity and regional divergence - Regional productivity variance has widened: - The productivity gap, as measured by the real Gross Value Added per employed person, between the lowest (Midland) and highest (Dublin) regions increased by almost 60 percent between 2004 and 2014. - These figures should be considered with caution given the impact of MNEs’ operations on Ireland’s national accounts. - Between the pre- and post-crisis periods: - The per-capita primary income gap between the lowest and highest regions rose 30 percent. - The disposable income gap remained broadly stable. ### Regional well-being and comparative performance - Irish regions compare relatively well to OECD averages across a broad range of well-being indicators: - Irish regions rank among the top 20 percent in civic engagement and governance (community) as well as environment. - Ireland’s regions enjoy the lowest life expectancy gap among regions in the OECD. - Regional income redistribution: - Recent national improvement in consistent poverty was accompanied by narrowing disparities among regions. ### Policy responses and initiatives - Active labor market and skills policies: - Substantial investment was made in active labor market policies during the crisis, with mixed success; authorities have recognized the need for continued review to reinforce effectiveness. - The government’s skills strategy seeks to better align education paths with market needs while providing equal opportunities for disadvantaged children. - Reforms to the PIT and enhancement of child-care and in-work benefits can support incentives for transition to work. - Regional Action Plans and rural development: - Between June 2015 and January 2016, the Department of Jobs, Enterprise, and Innovation published eight Regional Action Plans for Jobs, aimed at supporting regional growth, insulating against risks (including Brexit), and reducing unemployment in each region to within one percent of the Irish average by 2020. - Key elements of the strategy: fostering start-ups and scaling-up enterprises; promoting trade diversification and innovation; ensuring finance to SMEs; strengthening delivery of needed skills. - Each plan will be overseen by a Regional Implementation Committee, with semi-annual progress reports. - A recently launched Rural Development Action Plan aims at coordinating and implementing initiatives across Government to improve economic and social conditions in rural Ireland. *Source: Euromod; Eurostat; and IMF staff.* ### Annex III. Figure 2. Ireland: External Debt Sustainability: Bound Tests 1/ 2/ ### Annex III. Figure 2. Ireland: External Debt Sustainability: Bound Tests 1/ 2/ ### Figure findings and scenario outcomes - Baseline external debt (Non-IFSC external debt in percent of GDP): 168. - Combined shock scenario outcomes: - Combined shock: 226. - Combined shock with 30 percent real depreciation (note 3/ and 4/): 258. - Real depreciation shock: - Historical: 230. - Baseline: 168. - Current account (CA) shock: - CA shock: 200. - Baseline: 168. - Non-interest current account shock: - Baseline: 168. - Historical/Scenario summary numbers shown: 14.9, 10.9, 15. (as labeled: Baseline:, Scenario:, Historical:) - Interest-rate shock: - Shock outcome: 196. - Baseline: 168. - Baseline/Scenario/Historical: 2.7, 4.1, 5.7 (in percent; labeled as Baseline:, Scenario:, Historical:) - Growth shock: - Shock outcome: 237. - Baseline: 168. - Baseline/Scenario/Historical growth rates (in percent per year): 3.0, -1.5, 3.7. Notes on shocks from figure captions: - Shaded areas represent actual data. - Individual shocks are permanent one-half standard deviation shocks. - Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown. - For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead. - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. - One-time real depreciation of 30 percent occurs in 2018. ### Key statistics from Annex III. Table 1 (Non-IFSC External Debt Sustainability Framework, 2012–22) - Baseline: External debt (percent of GDP) by year: - 2012: 295.4 - 2013: 275.6 - 2014: 270.2 - 2015: 315.0 - 2016: 277.4 - 2017: 256.6 - 2018: 236.9 - 2019: 218.5 - 2020: 201.0 - 2021: 184.2 - 2022: 168.3 - Debt-stabilizing non-interest current account (note 6/): -2.8 (percent of GDP) for 2022. - Change in external debt (percent of GDP) by year: - 2012: -7.9 - 2013: -19.8 - 2014: -5.4 - 2015: 44.8 - 2016: -37.6 - 2017: -20.8 - 2018: -19.6 - 2019: -18.4 - 2020: -17.5 - 2021: -16.7 - 2022: -15.9 - Identified external debt-creating flows (sum of components) (percent of GDP) by year: - 2012: 21.2 - 2013: -13.1 - 2014: -9.3 - 2015: -30.0 - 2016: -17.1 - 2017: -21.5 - 2018: -19.1 - 2019: -17.7 - 2020: -16.7 - 2021: -15.9 - 2022: -15.3 - Current account deficit, excluding interest payments (percent of GDP) by year: - 2012: -12.0 - 2013: -14.6 - 2014: -24.0 - 2015: -20.2 - 2016: -20.4 - 2017: -18.0 - 2018: -16.2 - 2019: -14.7 - 2020: -14.5 - 2021: -14.5 - 2022: -14.4 - Deficit in balance of goods and services (percent of GDP) by year: - 2012: -11.8 - 2013: -13.0 - 2014: -11.7 - 2015: -25.7 - 2016: -24.6 - 2017: -24.0 - 2018: -23.9 - 2019: -23.8 - 2020: -23.8 - 2021: -23.7 - 2022: -23.7 - Exports (percent of GDP) by year: - 2012: 93.4 - 2013: 92.7 - 2014: 99.6 - 2015: 111.3 - 2016: 108.9 - 2017: 110.9 - 2018: 111.7 - 2019: 112.5 - 2020: 113.2 - 2021: 114.1 - 2022: 115.0 - Imports (percent of GDP) by year: - 2012: 81.6 - 2013: 79.7 - 2014: 88.0 - 2015: 85.6 - 2016: 84.3 - 2017: 86.8 - 2018: 87.8 - 2019: 88.7 - 2020: 89.5 - 2021: 90.4 - 2022: 91.3 - Net non-debt creating capital inflows (negative) (percent of GDP) by year: - 2012: -5.4 - 2013: 1.3 - 2014: 6.9 - 2015: -0.7 - 2016: 3.8 - 2017: -1.5 - 2018: -1.4 - 2019: -1.4 - 2020: -1.3 - 2021: -1.3 - 2022: -1.2 - Automatic debt dynamics (note 1/) (percent of GDP) by year: - 2012: 38.6 - 2013: 0.2 - 2014: 7.9 - 2015: -9.1 - 2016: -0.5 - 2017: -2.0 - 2018: -1.4 - 2019: -1.6 - 2020: -0.9 - 2021: -0.2 - 2022: 0.4 - Contribution from nominal interest rate (percent of GDP) by year: - 2012: 18.6 - 2013: 16.6 - 2014: 26.4 - 2015: 16.9 - 2016: 10.4 - 2017: 8.2 - 2018: 6.6 - 2019: 5.3 - 2020: 5.2 - 2021: 5.3 - 2022: 5.4 - Contribution from real GDP growth (percent of GDP) by year: - 2012: 3.5 - 2013: -3.0 - 2014: -21.7 - 2015: -64.1 - 2016: -15.9 - 2017: -10.2 - 2018: -8.0 - 2019: -6.9 - 2020: -6.1 - 2021: -5.4 - 2022: -5.0 - Contribution from price and exchange rate changes (note 2/) by year (selected entries shown): - 2012: 16.5 - 2013: -13.4 - 2014: 3.2 - 2015: 38.2 - 2016: 5.0 - subsequent years: (dots indicating values not shown in excerpt) - Residual, including change in gross foreign assets (2-3) (percent of GDP) by year: - 2012: -29.1 - 2013: -6.7 - 2014: 3.9 - 2015: 74.8 - 2016: -20.5 - 2017: 0.7 - 2018: -0.6 - 2019: -0.7 - 2020: -0.8 - 2021: -0.8 - 2022: -0.6 - External debt-to-exports ratio (percent) by year: - 2012: 316.3 - 2013: 297.4 - 2014: 271.1 - 2015: 283.0 - 2016: 254.7 - 2017: 231.4 - 2018: 212.1 - 2019: 194.2 - 2020: 177.5 - 2021: 161.4 - 2022: 146.3 - Gross external financing need (in billions of US dollars) by year: - 2012: 247.9 - 2013: 244.5 - 2014: 227.5 - 2015: 238.0 - 2016: 191.3 - 2017: 184.5 - 2018: 178.9 - 2019: 173.2 - 2020: 167.2 - 2021: 161.0 - 2022: 154.7 - Gross external financing need (percent of GDP) by year (selected entries and decade averages): - 2012: 141.1 - 2013: 135.8 - 2014: 117.9 - 2015: 93.2 - 2016: 72.1 - 10-Year averages shown: 66.4, 61.5, 56.9, 52.5, 48.4, 44.4 (context in table indicates 10-Year windows) - Scenario with key variables at their historical averages (external debt percent of GDP) (note 5/): - 2012: 268.0 - 2013: 260.9 - 2014: 253.6 - 2015: 246.1 - 2016: 238.4 - 2017: 230.5 - 2018 onwards: 5.0 (table excerpt shows "5.0" likely an excerpt artifact; full series not provided in excerpt) ### Key macroeconomic assumptions underlying baseline (selected) - Real GDP growth (in percent) by year (historical, average, deviation columns presented): - Historical and projections sequence: -1.1, 1.1, 8.4, 26.3, 5.2, 3.7, 8.9, 3.9, 3.3, 3.0, 2.9, 2.8, 2.8 (as shown in table row) - GDP deflator in US dollars (change in percent) by year: - -5.2, 4.8, -1.1, -12.4, -1.6, 0.4, 3.3, -3.2, 1.1, 1.5, 1.7, 1.4, 1.2 (as shown) - Nominal external interest rate (in percent) by year: - 5.7, 5.9, 10.3, 6.9, 3.4, 5.7, 2.8, 3.1, 2.7, 2.3, 2.5, 2.8, 3.1 (as shown) - Growth of exports (US dollar terms, in percent) by year: - 2.3, 1.7, 15.2, 48.0, 1.6, 9.9, 14.2, 6.7, 5.5, 5.3, 5.3, 5.4 (as shown) - Growth of imports (US dollar terms, in percent) by year: - 11.4, 0.1, 18.3, 28.9, 2.3, 7.8, 9.9, 7.9, 5.8, 5.7, 5.5, 5.7 (as shown) - Current account balance, excluding interest payments (percent of GDP) by year: - 12.0, 14.6, 24.0, 20.2, 20.4, 15.7, 7.9, 18.0, 16.2, 14.7, 14.5, 14.5, 14.4 - Net non-debt creating capital inflows (percent of GDP) by year: - 5.4, -1.3, -6.9, 0.7, -3.8, -1.3, 3.6, 1.5, 1.4, 1.4, 1.3, 1.3, 1.2 ### Automatic dynamics and definitional notes - Automatic debt dynamics formula (note 1/): Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms; g = real GDP growth rate; e = nominal appreciation (increase in dollar value of domestic currency); and a = share of domestic-currency denominated debt in total external debt. - Contribution from price and exchange rate changes defined (note 2/): [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator). - Gross external financing need definition (note 4/): Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period. - Scenario key variables (note 5/): The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP. - Debt-stabilizing non-interest current account (note 6/): Long-run, constant balance that stabilizes the debt ratio assuming that key variables remain at their levels of the last projection year. *Source: cr17171 - Annex III. Figure 2. Ireland: External Debt Sustainability: Bound Tests 1/ 2/* ### 8. The financial sector may also be negatively affected. The UK slowdown could adversely ### 8. The financial sector may also be negatively affected. The UK slowdown could adversely ### Financial sector exposure and channels of impact - Irish banks have a high portion of loans to UK-based clients (about 30 percent). - Direct impact on bank profitability could arise from UK slowdown. - Indirect impact through Irish exporters dependent on the UK market. - While fully hedged, UK consumer loans of some Irish banks decreased in 2016 due to FX movements; in a few cases, new retail and corporate lending to the UK has flattened.5 - Authorization-related queries have continued to increase.7 ### Foreign direct investment (FDI) considerations - Brexit may boost already strong FDI flows to Ireland. - The UK and Ireland have both seen strong and sustained inward FDI. - Davies and others (2016) suggest Ireland as a natural alternative to the UK for investors seeking to maintain EU access, given the common language and similarities in the legal context and business environment.6 - Issues related to passporting and equivalence will have implications for reallocation and expansion of financial services. ### Authorities’ contingency plans and policy measures - Authorities have regularly updated contingency plans; a key element is prudent fiscal policies to reinforce buffers against negative outcomes. - Plans include measures to reinforce domestic competitiveness: - investment in infrastructure, - direct working capital and bridge financing support, - tax measures for businesses affected by Brexit, - measures to reinforce ALMPs and broader training. - The Taoiseach indicated Ireland could also seek support from European institutions for these efforts. - The Central Bank of Ireland monitors exposure of Irish banks to the UK (including specific stress tests). - The Central Bank has stressed the importance of an efficient, open and rigorous process and the common European framework for regulation and supervision, and has been closely involved in the work of the SSM and European supervisory authorities on authorization issues such as substantive presence, back-to-back booking, intra group exposures, or outsourcing. ### Progress against 2016 Article IV recommendations (selected) - Continued public debt reduction to rebuild room for countercyclical fiscal policies, improve spending efficiency, widen the tax base, and rebalance the tax mix away from direct taxes: - Public debt further declined in 2016, and the 2017 budget aims for further consolidation. - Government undertaking comprehensive expenditure review to improve spending efficiency (to be completed ahead of the 2018 Budget preparations). - The 2017 budget includes tax expenditure measures which, together with planned phasing out of the Universal Social Charge (USC), are likely to reduce the tax base. - Further reduce nonperforming loans: - Nonperforming loans continued to moderate supported by intensified supervisory efforts and measures to enhance borrower-creditor engagement. - Repossessions remain low and legal proceedings are lengthy. - Maintain macroprudential measures on mortgage lending, periodically assess effectiveness, and alleviate housing supply shortages: - First comprehensive review of macroprudential measures completed in November 2016. - Government introduced the Action Plan for Housing and Homelessness. - Broadening financing options for SMEs, enhance labor activation policies and technical and vocational programs, and strengthen female labor force participation: - Strategic Banking Corporation of Ireland (SBCI) further expanded its balance sheet. - Labor activation programs rolled out; measures to increase female labor participation, including making childcare more affordable, have been introduced. ### Public Debt Sustainability Analysis — Summary findings - Ireland’s public debt sustainability has continued to improve from crisis-driven highs, but vulnerabilities remain. - Traditional headline debt metrics are distorted by the impact on nominal GDP of certain MNE-operations that are disconnected from underlying economic activity. - When assessed based on alternative yardsticks, such as general government revenue, public debt and interest payments have declined but remain elevated compared to EU peers. - Factors supporting debt sustainability: - Gross financing needs projected to be limited, reflecting prudent fiscal stance and relatively long maturity of public debt. - Bond and CDS spreads are low, owing to the ECB’s policy of quantitative easing. - Contingent risks associated with the banking sector are receding; National Asset Management Agency has redeemed over 98 percent of the senior debt originally issued. - Vulnerabilities: - Debt dynamics are vulnerable to macro-fiscal and contingent liability shocks, although debt metrics remain within tolerance limits. - Impact of an interest rate shock is limited as most public debt is at fixed rates and with medium-term tenure. - Relatively high share of debt held by non-residents poses potential vulnerabilities; a sudden-stop scenario represents a tail risk since non-resident holders are mainly real-money investors with long-term investment plans. ### Baseline projections (medium term) - Gross public debt projected to decline to close to 60 percent of GDP (56 percent of GDP in net terms) by 2022 from about 76 percent (70 percent in net terms) in 2016 and 120 (105 percent in net terms) in 2012. - Conventional debt metrics provide a distorted picture due to headline GDP issues. - Expressed in terms of general government revenue, the improvement path would be smoother; debt burden projected to remain on a downward path but continue to compare unfavorably with EU peers. - Privatization proceeds and potential funds related to a settlement of the EC ruling on Apple Inc., not incorporated into current projections, may provide additional resources for debt reduction. ### Gross financing needs (GFNs) - GFNs are estimated to average about 5½ percent of GDP over the period considered, with a peak at just below 9 percent of GDP in 2020. - About one-fourth of the estimated GFNs (equivalent to 1½ percent of GDP) is represented by stable liabilities which have historically been fully renewed, reducing market funding needs. ### Main assumptions used in the DSA - Share of debt denominated in foreign currency is small (less than 5 percent) and fully hedged; treated as if denominated in euros. - About 10 percent of public debt represented by the State Savings Scheme; for GFNs it is assumed that 20 percent of the stock of these liabilities falls due each year and is fully rolled-over with medium-term maturity. A similar assumption for another small portion (2 percent). These components are kept constant at their 2016 level. - With phasing out of ECB’s QE, 10-year bond spread between Ireland and Germany projected to widen to 150 basis points from the current 40–50 basis points; real interest rate on new issuances closer to real output growth. ### Risk assessment and stress scenarios - Growth shock calibration: - Standard approach adjusted due to 2015 revision; standard deviation calculated over 2004–13. - Resulting shock: growth contracting by around 1 percent in 2018–19 (could represent a very disruptive Brexit scenario). - Primary balance shock: - Recalculated excluding financial support to the banking sector; implies primary balance shifts from a surplus of almost 2 percent of GDP to a deficit of around 0.3 percent in 2018–19. - Interest rate shock: - Scaled down to 200bp (from implied over 800bp by standard method); would imply issuing government bonds at an interest rate almost three times the current one. - Combined macro-fiscal shock combines the above shocks. - Contingent financial liability shock (CFL): - Combines growth shock with a one-time increase in public expenditure equal to 10 percent of banks’ assets. - Customized shock: - Permanent decline in CIT revenue by 20 percent, equivalent to about two-thirds of the difference between actual and expected CIT revenue in 2015 and about half of the CIT proceeds from the ten largest companies. - In the scenario, headline GDP has a severe one-time drop calculated to be about 12 percent. - Non-CIT revenues and public expenditure kept unchanged in nominal terms compared to baseline. ### Scenario outcomes — key metrics - In customized and CFL shock scenarios, debt-to-GDP would temporarily exceed the 85 percent threshold, reaching almost the 90 percent level. - In the customized shock, breach driven mainly by one-time downward shift in output. - In the CFL shock, breach driven mainly by deterioration in the primary balance from increased expenditure equal to 10 percent of bank assets. - In the CFL scenarios, debt ratio would return to a downward path but remain close to 80 percent of GDP by 2022; 20 percentage points higher than baseline and five percentage points above the starting point. - In customized, growth, and combined macro shocks, the debt burden would return approximately to the same level at the beginning of the scenario analysis but remain about 15 percentage points above the baseline. - Government’s goal of achieving a debt ratio of 45 percent of GDP within the next decade would require substantial additional fiscal measures under these shocks. - GFNs as percent of GDP remain well below the 20 percent ceiling in all scenarios; only in the CFL shock would GFN spike to almost 16 percent of GDP in the year the shock materializes. - Interest rate and primary balance shocks have modest impact on debt dynamics due to long maturity of public debt and limited GFNs; primary balance shock impact smaller if increased spending translates into higher growth. ### Mitigating factors and authorities’ views - Non-resident holders are mainly real-money investors with long-term investment plans; sudden stop considered a tail risk. - Exchequer’s cash balances provide buffer to cover 6–10 months of GFNs.7 - Substantial external financing requirements mostly reflect intra-company and intra-group operations of large MNEs, which also hold large financial assets. - Authorities broadly agreed with staff analysis: - Headline GDP overstates underlying activity; beneficial to consider metrics beyond traditional debt-to-GDP. - Importance of considering net debt given pre-funding policy. - Mitigating factors: debt maturity extended to more than 11 years; most debt at fixed rates; wide and varied investor base; strong liquidity position; reduced contingent liabilities (National Asset Management Agency redeemed over 98 percent of senior bonds originally issued). *Source: IMF staff report excerpt (cr17171).* ### Annex VII. Figure 1. Ireland: Public Sustainability Analysis (DSA) – Baseline Scenario ### Annex VII. Figure 1. Ireland: Public Sustainability Analysis (DSA) – Baseline Scenario ### Key Macro-Fiscal and Market Indicators (Baseline, percent of GDP unless noted) - Sovereign spreads: - EMBIG (bp): 46 - 5Y CDS (bp): 43 - Nominal gross public debt: - 2015: 76.9 - 2016: 78.7 - 2017: 75.6 - 2018: 73.7 - 2019: 72.3 - 2020: 70.8 - 2021: 66.7 - 2022: 64.4 - cumulative (2022): 60.9 - Public gross financing needs: - 2015: 12.7 - 2016: 9.0 - 2017: 6.8 - 2018: 5.5 - 2019: 5.7 - 2020: 7.6 - 2021: 8.8 - 2022: 2.5 - cumulative (2022): 3.3 - Real GDP growth (in percent): - 2015: 1.2 - 2016: 26.3 - 2017: 5.2 - 2018: 3.9 - 2019: 3.3 - 2020: 3.0 - 2021: 2.9 - 2022: 2.8 - cumulative (2022): 2.8 - Inflation (GDP deflator, in percent): - 2015: 0.3 - 2016: 4.9 - 2017: -1.3 - 2018: 0.8 - 2019: 1.4 - 2020: 1.5 - 2021: 1.6 - 2022: 1.7 - cumulative (2022): 1.7 - Nominal GDP growth (in percent): - 2015: 1.6 - 2016: 32.5 - 2017: 3.9 - 2018: 4.7 - 2019: 4.7 - 2020: 4.6 - 2021: 4.6 - 2022: 4.6 - cumulative (2022): 4.6 - Effective interest rate (in percent) 4/: - 2015: 4.2 - 2016: 3.4 - 2017: 3.1 - 2018: 3.3 - 2019: 3.0 - 2020: 2.9 - 2021: 2.8 - 2022: 2.7 - cumulative (2022): 2.7 - Ratings (2015/2016): - Moody's: A3 / A3 - S&Ps: A+ / A+ - Fitch: A / A ### Debt Dynamics and Identified Debt-Creating Flows (percent of GDP) - Change in gross public sector debt (yearly): - 2015: 8.8 - 2016: -26.6 - 2017: -3.2 - 2018: -1.9 - 2019: -1.4 - 2020: -1.5 - 2021: -4.1 - 2022: -2.2 - cumulative (2022): -3.5 - cumulative total: -14.6 - Identified debt-creating flows (yearly): - 2015: 7.2 - 2016: -22.7 - 2017: -3.8 - 2018: -1.8 - 2019: -1.4 - 2020: -1.5 - 2021: -4.1 - 2022: -2.2 - cumulative (2022): -3.6 - cumulative total: -14.5 - Primary deficit (percent of GDP): - 2015: 6.8 - 2016: -0.4 - 2017: -1.7 - 2018: -1.6 - 2019: -1.8 - 2020: -1.8 - 2021: -2.0 - 2022: -2.4 - cumulative (2022): -2.7 - cumulative total: -12.4 - Primary (noninterest) revenue and grants (percent of GDP), cumulative through 2022: 158.3 - Yearly: 2015: 33.8; 2016: 27.3; 2017: 27.4; 2018: 26.9; 2019: 26.7; 2020: 26.4; 2021: 26.2; 2022: 26.1 - Primary (noninterest) expenditure (percent of GDP), cumulative through 2022: 145.9 - Yearly: 2015: 40.6; 2016: 26.9; 2017: 25.8; 2018: 25.3; 2019: 24.9; 2020: 24.5; 2021: 24.1; 2022: 23.7 ### Automatic Debt Dynamics and Components (percent of GDP) - Automatic debt dynamics 5/ (yearly; cumulative (2022): -6.9): - 2015: 1.3 - 2016: -23.2 - 2017: -0.6 - 2018: -1.0 - 2019: -1.2 - 2020: -1.1 - 2021: -1.2 - 2022: -1.2 - Interest rate/growth differential 6/ (same as automatic debt dynamics): - 2015: 1.3 - 2016: -23.2 - 2017: -0.6 - 2018: -1.0 - 2019: -1.2 - 2020: -1.1 - 2021: -1.2 - 2022: -1.2 - cumulative (2022): -6.9 - Of which: real interest rate (percent): - 2015: 2.3 - 2016: -2.3 - 2017: 3.4 - 2018: 1.7 - 2019: 1.1 - 2020: 1.0 - 2021: 0.8 - 2022: 0.6 - cumulative (2022): 0.6 - cumulative total: 5.9 - Of which: real GDP growth (percent): - 2015: -1.1 - 2016: -20.9 - 2017: -4.0 - 2018: -2.8 - 2019: -2.3 - 2020: -2.1 - 2021: -2.0 - 2022: -1.8 - cumulative (2022): -1.8 - cumulative total: -12.7 - Exchange rate depreciation 7/: 0.0 for 2015–2017 and ellipses thereafter as presented. ### Other Identified Flows, Stock/Flow Adjustments, Residuals (percent of GDP) - Other identified debt-creating flows (yearly; cumulative (2022): 0.3; cumulative total: 4.7): - 2015: -0.9 - 2016: 0.9 - 2017: -1.6 - 2018: 0.9 - 2019: 1.6 - 2020: 1.5 - 2021: -0.9 - 2022: 1.3 - Privatization/Drawdown of Deposits (+ reduces financing need) (negative) (yearly; cumulative (2022): 0.3; cumulative total: -0.6): - 2015: -0.9 - 2016: 0.9 - 2017: -1.6 - 2018: -0.1 - 2019: 0.7 - 2020: 0.5 - 2021: -2.1 - 2022: 0.1 - Contingent liabilities: 0.0 for 2015–2022 - Stock/flow adjustment: - 2015: 0.0 - 2016: 0.0 - 2017: 0.0 - 2018: 1.0 - 2019: 0.9 - 2020: 1.0 - 2021: 1.2 - 2022: 1.2 - cumulative total: 5.3 - Residual, including asset changes 8/: - 2015: 1.6 - 2016: -3.9 - 2017: 0.6 - 2018: -0.1 - 2019: -0.1 - 2020: 0.0 - 2021: 0.0 - 2022: 0.0 - cumulative (2022): 0.0 - cumulative total: -0.1 ### Balance and Stabilizing Primary Balance - Balance 9/: -0.9 - Debt-stabilizing primary (2006-2014 actual / projections shown in graphic; numeric specifics in figure text) ### Composition of Public Debt and Alternative Scenarios (selected underlying assumptions) - Baseline underlying assumptions (in percent): - Real GDP growth: 2017: 3.9; 2018: 3.3; 2019: 3.0; 2020: 2.9; 2021: 2.8; 2022: 2.8 - Inflation: 2017: 0.8; 2018: 1.4; 2019: 1.5; 2020: 1.6; 2021: 1.7; 2022: 1.7 - Primary Balance: 2017: 1.6; 2018: 1.8; 2019: 1.8; 2020: 2.0; 2021: 2.4; 2022: 2.7 - Effective interest rate: 2017: 3.3; 2018: 3.0; 2019: 2.9; 2020: 2.8; 2021: 2.8; 2022: 2.8 - Historical scenario assumptions: - Real GDP growth: 2017: 3.9; 2018–2022: 1.5 each year - Inflation: same as baseline - Primary Balance: 2017: 1.6; 2018–2022: -3.5 each year - Effective interest rate: 2017: 3.3; 2018: 3.0; 2019: 3.2; 2020: 3.5; 2021: 3.8; 2022: 4.1 - Constant Primary Balance scenario: - Primary Balance held at 1.6 for 2017–2022 - Other assumptions same as baseline ### Composition charts (as presented) - Gross Nominal Public Debt (in percent of GDP) shown for 2015–2022 with projections. - Public Gross Financing Needs (in percent of GDP) shown for 2015–2022 with projections. - By Maturity: medium and long-term vs short-term (in percent of GDP) for 2006–2022. - By Currency: local currency-denominated vs foreign currency-denominated (in percent of GDP) for 2006–2022. ### Realism of Baseline Assumptions and Forecast Track Record - Forecast errors (Ireland median forecast error, 2007–2015) and percentile ranks: - Real GDP growth forecast error: -0.51 (Ireland has a percentile rank of 49%) - Primary balance forecast error: -0.46 (Ireland has a percentile rank of 53%) - Inflation (deflator) forecast error: -1.28 (Ireland has a percentile rank of 11%) - Boom-Bust Analysis: - Not applicable for Ireland, as it meets neither the positive output gap criterion nor the private credit growth criterion. - Distributional analyses and percentile plots for forecast errors and CAPB adjustments presented in figures (percentile ranks cited: 44% for some CAPB distributions). ### Stress Tests (scenarios and key assumption changes) - Primary Balance Shock (Primary balance path shown 2017–2022): - Primary balance: 2017: 1.6; 2018: -0.3; 2019: -0.3; 2020: 2.0; 2021: 2.4; 2022: 2.7 - Real GDP growth and inflation follow specified paths in table. - Effective interest rate path: 3.3, 3.0, 3.0, 2.9, 2.9, 2.9 - Real GDP Growth Shock: - Real GDP growth: 2017: 3.9; 2018: -0.8; 2019: -1.1; 2020: 2.9; 2021: 2.8; 2022: 2.8 - Inflation and other variables shown in table. - Real Interest Rate Shock: - Effective interest rate increases to 3.3, 3.0, 3.1, 3.2, 3.4, 3.5 across 2017–2022 - Real Exchange Rate Shock: - Inflation in 2018 shown as 1.7; effective interest rate path remains close to baseline - Combined Shock and Contingent Liability Shock: - Combined shock: Real GDP growth and inflation follow the Real GDP Growth Shock; primary balance path includes a deterioration to -0.8 in 2019 under Combined Shock - Contingent liability shock: Primary balance shows a shock to -7.3 in 2018 with effective interest rate rising to 3.6 in 2022 - Customized shock 1: - Real GDP growth in 2018: -11.7; primary balance and effective interest rate paths shown in table - Stress-test outputs include: - Gross Nominal Public Debt (in percent of GDP and in percent of revenue) under baseline and stress scenarios for 2017–2022. - Public Gross Financing Needs (in percent of GDP) under baseline and stress scenarios for 2017–2022. ### Risk Assessment and Vulnerabilities (2016 indicators and heat-map elements) - Market perception and debt-profile indicator values (2016): - Bond spread (Long-term bond spread over German bonds, average 17-Jan-17 through 17-Apr-17): 66 bp - External Financing Requirement (in percent of GDP): 12 - Benchmarks cited: lower and upper risk-assessment benchmarks — 400 and 600 basis points for bond spreads; 17 and 25 percent of GDP for external financing requirement; 1 and 1.5 percent for change in the share of short-term debt; 30 and 45 percent for public debt held by non-residents. - Public Debt Held by Non-Residents (in percent of total): 208% shown in table context (presented within risk-assessment figure) - Visuals present: - Evolution of predictive densities of gross nominal public debt (percentile bands for 2015–2022) - Distributional analyses under symmetric and restricted (asymmetric) distributions with specified restrictions on shocks - Heat map indicating whether benchmarks are exceeded under baseline or specific shocks (color rules described in notes) *Source: IMF staff.* ### Annex VIII: Status of FSAP Recommendations ### Annex VIII: Status of FSAP Recommendations ### Cross-cutting - Support independence of the central bank by continuing to demonstrate accountability to the Oireachtas (Parliament) and enhancing public transparency - Time: On-going - Status: Ongoing. “Communications and Accountability” was identified as a strategic enabler in the Central Bank of Ireland’s 2016-18 Strategic Plan, and actions to increase transparency have been taken, including the publication of the discussions and decisions of the Central Bank Commission and the Macroprudential Measures Committee on the central bank website; committee appearances at the Oireachtas; and publication of the Annual Performance Statement, which provides granular detail on the performance of the statutory regulatory functions. - Revise personnel policies to attract and retain experienced staff - Time: NT - Status: Ongoing. The organization review has concluded with actions taken to restructure divisions, size, roles, etc. Several actions have either concluded or are underway to enhance the central bank as a place to work. ### Stability Analysis - Further develop bank stress testing, including risks in UK operations - Time: NT - Status: Ongoing. Loan-loss forecasting models are being recalibrated and top-down stress test models will be operationalized. Supervisory Stress Testing at the end of 2016 and 2017 have focused on the UK. - Close data gaps on cross-border exposures, the nonbank financial sector, the commercial real estate market, and the non-financial corporate sector - Time: NT - Status: Ongoing. Data quality issues are being addressed, with substantial progress made. Balance sheet data and P&L information for Irish non-financial corporate sector was obtained. Agreement between the central bank, NAMA, and the CSO on establishment of commercial property statistical system will support the analysis of the potential vulnerabilities in this area. - Build internal capacity that allows for regular stress testing of MMFs - Time: NT - Status: Ongoing. High quality third party data for debt securities was procured, and survey of the investment funds activity has been received and being processed in the coming months. Risk model and stress testing framework for investment and money market funds are being developed. - Improve data coverage and monitoring of all special purpose vehicles - Time: NT - Status: Done. Non-securitization data was improved and significant reclassifications undertaken within securitization data on foot of data quality checks carried out with reference to company accounts. - Develop better understanding of the use of investment fund portfolio leverage - Time: NT - Status: Ongoing. Next Macro Financial Review to include an analysis of financial leverage of investment funds, MMFs, FVCs and SPVs. Off-balance sheet leverage measures to be developed following improvements in EMIR data base. ### Macroprudential Policy - Maintain, and in due course review, LTV and LTI limits - Time: NT - Status: Done. The results of the first annual review of the mortgage measures was announced in November, 2016. The commitment for an annual review was reiterated at the announcement of the results of the review. - Operationalize the Central Credit Register as soon as possible, and, once operational, transform the LTI limit into a more comprehensive DTI limit - Time: MT - Status: Ongoing. The CCR is scheduled to commence the collection of loan data in relation to consumer lending from 30 June 2017. Lenders have a six-month window from that date in which initial submissions should be made. The CCR is expected to commence collection of non-consumer lending in the course of 2018. ### Financial Sector Oversight - Continue to streamline options under national discretion and regulations in bank supervision - Time: MT - Status: Ongoing. Supervisory discretions for SIs and LSIs are addressed by the ECB to the extent possible. Member States’ discretions as well as divergent national transpositions and national powers remain. - Further enhance the effectiveness and enforceability of the supervision of credit risk in banks with respect to loan classification and provisioning - Time: NT - Status: Ongoing. Implementation of the ECB guidance to banks on tackling non-performing loans is ongoing. - Remain vigilant that harmonization of the SSM supervisory processes is balanced by the application of the principle of proportionality - Time: NT - Status: Ongoing. - Enhance assessment of credit risk in insurers’ portfolios - Time: NT - Status: Ongoing. A point in time view on credit quality is now available. Work is underway to add a time series dimension to capture the evolution of credit quality. - Enhance analysis of unusual reinsurance transactions to ensure that any capital relief is warranted by true risk transfer - Time: NT - Status: Ongoing. Work is underway to formalize the analysis of unusual reinsurance transactions as part of supervisory review process. - Coordinate among insurance supervisors to ensure due scrutiny of license application and limit improper “jurisdiction shopping” - Time: NT - Status: Done. EIOPA revised the General Protocol now called EIOPA Decision on the collaboration of the insurance supervisory authorities. The new Decision specifically addresses this recommendation and is effective from 1 May 2017. - Require MMFs to report liquid assets and characteristics of the investor base - Time: NT - Status: Ongoing. Survey on the characteristics of the MMF investor base was received and is being processed. Key risk indicators related to funds liquidity are being developed. - Encourage existing MMFs to graduate away from the CNAV convention to one better reflecting the variability in underlying prices, and ensure appropriate risk management safeguards are in place; discourage CNAV valuation in new MMFs - Time: NT - Status: Ongoing. The EU Regulation on Money Market Funds was agreed in November 2016. Existing MMFs must transition to the new European regime for MMFs within 18 months after the date the EU MMF Regulation enters into force. ### Financial Safety Net - Continue to identify and address impediments to resolvability - Time: On-going - Status: Ongoing. Engagement with the banks on the removal of identified impediments to resolvability continues. - Streamline the process for court approval of resolution measures - Time: NT - Status: Not addressed. The authorities argued that imposition of a specific fixed timeframe on the Court to give its decision would risk imposing an unconstitutional fetter on judicial discretion and independence in dealing with an individual case contrary to the Irish constitutional right to fair procedures and judicial independence. The authorities also noted that, based on the experience from the crisis and since, resolution was not delayed by court approval. - Streamline the process of SRM decision making - Time: MT - Status: Recommendations addressed to the EU authorities. The Resolution Division will input into the discussions at the EU level regarding the process as appropriate. - Note: “NT-near-term” denotes up to 2 years; “MT-medium-term” denotes 2–5 years. *Source: cr17171 - Annex VIII: Status of FSAP Recommendations* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17171.pdf_