## 1irlea2023001 ## Source details **Canonical URL:** [1irlea2023001](https://www.imf.org/-/media/files/publications/cr/2023/english/1irlea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1irlea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1irlea2023001.pdf.json) --- ### Macroeconomic outlook, growth, and inflation - Real GNI* is projected to moderate to 2½ percent in 2023–24. - Real GDP growth projected at 1½ percent in 2023 and 2⅔ in 2024. - Real GNI* converges to potential estimated at 2¼ percent over the medium term. - Inflation: - Headline inflation decelerated to 3.6 percent (y-o-y) in October from 5.0 percent in September and peaked at 9.6 percent in mid-2022. - Core inflation ticked up to 4.6 percent (y-o-y) in October from 4.4 percent in September. - Core inflation (3mma saar) edged up to 2.5 percent in October from 1.1 percent in September. - Inflation is expected to further ease, reaching 2 percent toward late 2025. - Core inflation: estimated at 5.3 percent in 2023 (5.0 percent, e.o.p.), projected to decline to 3.4 percent in 2024 (2.4 percent, e.o.p.). - Labor market: - Unemployment rate increased to 4.8 percent in October from 4.1 percent earlier in the year; remains below pre-pandemic level of 5 percent. - Employment grew by 3.8 percent (y-o-y) in 2023:H1. - Hourly wages grew by 5.1 percent in Q2, compared with contemporaneous inflation of 5.5 percent. - Recent activity: - Modified Domestic Demand (MDD) expanded by 1 percent (q-o-q) in Q2; MDD rose by 1.8 percent (y-o-y) in 2023:H1. - Real GDP: 0.5 percent (q-o-q) in Q2 and 0.2 percent (y-o-y) in 2023:H1. - Flash estimates indicate GDP declined by 7.4 percent (SA, q-o-q annualized) or 4.7 percent (y-o-y) in 2023:Q3, driven by post-Covid normalizations in multinational-dominated sectors. - Risks to outlook: - External demand weakening, commodity price shocks, intensification of conflicts, tighter-than-expected global financial conditions, geoeconomic fragmentation, changes in international taxation, and domestic capacity constraints (notably construction). ### Fiscal stance, revenues, and savings funds - Fiscal outcomes: - General government recorded a surplus of 1.7 percent of GDP in 2022 (3.1 percent of GNI*). - Public debt reached 44 percent of GDP at end-2022; measured as a share of GNI*, it was 82 percent. - Tax revenues (excluding CIT) up by 6 percent (y-o-y) through October; monthly CIT collection down for a third consecutive month in October (3 percent below January–October 2022). - Cost-of-living support: - A total of €12 billion (about 4.4 percent and 2.4 percent of 2022 GNI* and GDP, respectively) provided since 2022, of which €9 billion was in 2023. - Half of support directed through transfers to households and energy credits. - 2024 budget specifics: - General government surplus projected at 1.6 percent of GDP in 2023; 2024 Budget targets slightly smaller surplus. - Budget package: €6.4 billion (around 1 percent of GDP) including €1.1 billion in taxation measures and €5.3 billion in permanent expenditure measures. - Additional: €2.7 billion of temporary tax measures and cost-of-living support; €4.7 billion set aside for Ukraine and limited Covid-19 provisions. - Staff view: a smaller and better targeted package would have been less costly; phase out one-off cost-of-living measures as inflation recedes; save fiscal overperformance. - Saving excess CIT revenues: - Staff estimate “excess CIT revenues” amounted to €12 billion in 2022 (about half of total CIT receipts and 2 percent of GDP). - Authorities propose: - Future Ireland Fund (FIF): 0.8 per cent of GDP invested each year from 2024 to 2035 (approximately €4.3 billion in 2024). - Infrastructure, Climate and Nature Fund (ICNF): €2 billion invested each year from 2024 to 2030, building up to €14 billion. - Staff supports saving excess CIT revenues and operating funds within a strong fiscal policy framework. ### Public investment, tax base, and structural reforms - Investment needs: - Large expansion implied by the National Development Plan (NDP) to address underinvestment, housing, climate, and digital transformation. - Manage investment ramp-up to contain domestic demand pressures and capacity constraints. - Prioritize public investment while safeguarding fiscal sustainability; strengthen execution and value-for-money. - Revenue broadening: - Scope to expand and diversify tax revenues: improve PIT system, reduce administrative costs, simplify VAT, consider additional PIT bands/rates. - Structural and housing reforms: - Policies recommended: increase housing density, replace rent caps with targeted support for vulnerable households, improve construction productivity, expedite planning permission and judicial review processes. - Remove rent controls and enhance housing supply highlighted as crucial by staff; authorities note political and affordability trade-offs. ### Financial sector resilience, banks, and household credit - Banking sector: - Domestic retail banks comprise about 40 percent of total bank assets. - Capital and liquidity indicators well above regulatory minima; long average maturity of debt portfolio: 7 years. - NPL ratios for households and NFCs have declined; share of Stage 2 loans marginally increased and remains above the EU average. - Solvency and liquidity stress tests confirm capacity to sustain large adverse macroeconomic and liquidity shocks. - Reduction in state shareholding in Allied Irish Banks (AIB) to below 50 percent is welcomed. - Credit conditions: - ECB monetary tightening impacted credit conditions, notably non-bank lending. - Bank lending rates increased less than EA peers; lending standards tightened. - Bank credit growth picked up in 2023:H2 driven by consumer credit and loans for house purchases; credit to NFCs turned negative. - Households remain resilient: debt-to-disposable income fell from >200 percent to about 90 percent between 2011 and 2022; about 20 percent of borrowers saw increases in debt payments of up to 50 percent. - Macroprudential bank tool: - CBI progressing to increase the counter-cyclical capital buffer (CCyB) to 1.5 percent effective from June 2024; buffer should be releasable to support credit flows if risks materialize. - Mortgage measure recalibrations effective January 1, 2023: - LTI limit for first-time buyers increased from 3.5 to 4 times income. - LTV limit for second and subsequent buyers raised from 80 to 90 percent. - Allowances for FTBs and SSBs limited to 15 percent of total. - Staff caution relaxation of LTV for SSBs is not advisable; monitor measures’ impact on affordability and lending standards. ### Market-based finance (MBF), property funds, and non-bank risks - MBF sector size and composition (exact figures preserved): - MBF more than 20 times GNI*. - MBF €6.3tn, 2307% of GNI*. - Funds €4.1tn, 1501% of GNI*. - OFIs €2.1tn, 769% of GNI*. - IFs €3.4tn, 1245% of GNI*. - MMFs €0.7tn, 256% of GNI*. - SPEs €1tn, 366% of GNI*. - OFIResidual €1.1tn, 403% of GNI*. - SPVs €0.5tn, 183% of GNI*. - FVCs €0.6tn, 220% of GNI*. - Property funds and CRE exposure: - A cohort of highly leveraged property funds holds some 35 percent of the investable Irish CRE market. - CRE capital values have already fallen considerably; CRE corrections can transmit via direct collateral loss and indirect impaired assets, wealth, and confidence effects. - Banks and funds have common exposures to CRE, creating potential contagion channels. - Data and interlinkages: - Significant data gaps in direct cross-border exposures to CRE and in the OFI residual sector impede full risk accounting; closing gaps requires international coordination. - OFI residual has significant linkages to domestic banks, households, and firms. - Policy and supervisory recommendations: - Introduce macroprudential measures for Irish-domiciled property funds and other non-banks to strengthen resilience to CRE shocks and leveraged non-bank linkages. - Continue working with regional and international institutions to develop macroprudential tools targeting risks from non-banks, including leakages and cross-border issues. - Intensify supervision of credit and liquidity risk for domestic retail banks and closely monitor international banks’ funding vulnerabilities. - Close data gaps in collaboration with other jurisdictions and conduct granular risk analysis of MBF subsegments. - CBI to develop guidance to funds on liquidity management tools and conduct deep dives on sub-segments; government review of funds sector to consider financial resilience and sustainability. ### Macroprudential framework for funds and measures already introduced - CBI measures (November 2022 and thereafter): - Leverage limit and liquidity management guidance on property funds. - Discussion Paper on an overarching macroprudential approach for investment funds. - Consultation paper on steady state resilience measures for Irish authorized GBP-denominated LDI funds. - Property funds leverage and liquidity specifics: - Leverage limit: total debt (total non-equity liabilities) to total assets ratio below 60 percent for Irish-authorized funds with 50 percent or more of assets in Irish property. - Existing property funds must comply within five years from announcement (by November 24, 2027). - New property funds authorized on or after November 24, 2022 will not be authorized with leverage above 60 percent. - Exemptions: funds investing at least 80 percent of AUM in social housing may be out of scope subject to criteria. - Liquidity guidance: property funds should provide for a liquidity timeframe of at least 12 months; existing funds to implement by May 24, 2024; new funds to adhere immediately. - Monitoring: leverage limit subject to regular monitoring and review; CBI can tighten or temporarily remove limit in specific conditions. - LDI funds: - November 2022 supervisory expectations set resilience to a 300–400 bps yield buffer for GBP LDI funds. - Resilience improved from 170 bps in October 2022 to approximately 440 bps in March 2023. - November 23, 2023 consultation on steady state measures for GBP-denominated LDI funds; consultation open until January 18, 2024; final measures expected in H1 2024. ### Discussion Paper principles for macroprudential policy for funds - Objectives and scope: - Strengthen funds sector resilience to stresses and reduce likelihood of amplifying adverse shocks; focus on fund cohorts rather than individual funds; avoid targeting asset prices. - Key principles: - Design resilience-enhancing measures at cohort/aggregate level. - Build resilience ex ante while retaining ex post tools. - Target both underlying vulnerabilities (e.g., leverage, liquidity mismatch) and interconnectedness to reduce contagion risk. - Maintain policy flexibility to adapt to evolving risks. - Balance costs and benefits; emphasize global coordination to avoid risk migration. - Operational implications: - Prioritize ex ante measures complemented by ex post tools. - Use cohort-level tools that address vulnerabilities and interconnectedness. - Coordinate internationally and monitor for risk leakage across jurisdictions. ### External sector and external debt dynamics - Current account and MNE distortions: - CA surplus: 10.8 percent of GDP in 2022; estimated 12 percent of GDP in H1 2023. - Modified CA excluding most MNE-related transactions was much smaller (4 percent of GDP in 2022). - Goods exports slowed in 2023 from 2022 highs; services exports remained strong driven by ICT and business services. - NIIP and external debt: - NIIP improved to -117 percent of GDP in 2022 from -131 percent in 2021 (peak -198 percent in 2015). - Non-IFSC gross external debt around 203 percent of GDP in 2022, down from 259 percent in 2021. - Selected 2022 external sector figures (percent of GDP): - NIIP: -117 - Gross Assets: 1407 - Res. Assets: 2 - Gross Liabilities: 1524 - Debt Liabilities: 577 - Non-IFSC External Debt Sustainability Framework projections (selected): - External debt (percent of GDP): 2022 = 203.2; 2023 = 184.5; 2024 = 168.7; 2025 = 156.6; 2026 = 147.0; 2027 = 139.0; 2028 = 132.3. - Exports (percent of GDP): 2022 = 124.6; 2023 = 109.9; 2024 = 110.0; 2025 = 110.2. - Gross external financing need (in billions of US dollars): 2022 = 240.7; 2023 = 259.2; 2024 = 256.0. - Staff assessment: external position in 2022 moderately stronger than implied by fundamentals and policies when abstracting MNE distortions. ### Sovereign debt outlook and public debt consolidation - Public debt (percent of GDP) baseline: - 2022: 44.4 - 2023: 40.4 - 2024: 37.4 - 2025: 34.9 - 2026: 33.0 - 2027: 31.4 - 2028: 30.2 - 2029: 29.1 - 2030: 27.9 - 2033: 24.5 - Primary deficit (percent of GDP): 2022 = -2.3; 2023 = -2.2; 2024 = -2.0; 2025 = -1.9. - Memo macro parameters: - Real GDP growth: 2023 = 1.5; 2024 = 2.7; 2025 = 2.5. - Inflation (GDP deflator): 2023 = 5.3; 2024 = 3.4; 2025 = 2.4. - Effective interest rate: 2023 = 1.5; 2024 = 1.7; 2025 = 1.8. - Staff view: public debt expected to remain on a firmly downward path; Ireland assessed at low overall risk of sovereign stress (medium-term: Low; long-term: Moderate). ### Key staff recommendations and policy priorities - Fiscal: - Maintain prudent fiscal policy to support disinflation and avoid adding to aggregate demand; build buffers for shocks. - Do not use excess CIT collections to fund permanent spending; save part of excess CIT revenues in savings funds operated within a strong fiscal framework. - Prioritize and improve public investment execution and efficiency; broaden the tax base. - Phase out one-off cost-of-living measures as inflation recedes; allow automatic stabilizers to work if downside risks materialize. - Financial stability and macroprudential: - Introduce and operationalize macroprudential measures for Irish-domiciled property funds and other non-banks to bolster resilience to CRE shocks and leveraged non-bank linkages. - Intensify supervision of credit and liquidity risk for domestic retail banks; closely monitor international banks’ funding vulnerabilities. - Continue developing a macroprudential framework for non-banks, including guidance on liquidity management tools and steady-state resilience measures for LDI funds. - Close data gaps and deepen cross-border cooperation to monitor MBF and OFI residual linkages to the domestic economy. - Structural reforms: - Increase housing density, remove rent caps and replace with targeted support for vulnerable households, raise construction productivity, address land availability and planning bottlenecks. - Facilitate SME linkages with MNEs, support SME digitalization and innovation. - Accelerate carbon emission reductions and consider broader carbon pricing coverage; protect vulnerable households using carbon tax revenues. _Italic: IRELAND — STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION (discussions held in Dublin during October 23–November 3, 2023); International Monetary Fund._ ### introduction of macroprudential measures for Irish-domiciled property funds are essential ### introduction of macroprudential measures for Irish-domiciled property funds are essential ### Key issues, outlook, and vulnerabilities - Context and outlook - Real GNI* is projected to moderate to 2½ percent in 2023–24. - Inflation is expected to further ease, reaching 2 percent toward late 2025. - The fiscal position has strengthened considerably on the back of strong tax revenues, but headline numbers mask underlying vulnerabilities. - The large and complex financial system has remained resilient so far and will continue to be tested by tighter financial conditions. - The positive economic outlook is clouded by considerable external risks. - High-level staff recommendations - Prudent fiscal policy to support disinflation and avoid adding to aggregate demand, and to build adequate buffers for future shocks, spending pressures, and potential revenue declines. - Excess CIT collections should not be used to fund permanent spending; the authorities’ decision to save part of excess CIT revenues in two savings funds is welcome and such funds should be operated within a strong fiscal policy framework. - Medium-term fiscal policy should continue to prioritize public investment while ensuring value for money and safeguarding fiscal sustainability. - Broaden the tax base, further strengthen public investment efficiency, and ensure timely execution of the capital budget. - Continued heightened vigilance of financial stability risks given tighter financial conditions, persistent inflation, and rising vulnerabilities in the CRE market with linkages to leveraged non-banks. - Intensified supervision of credit and liquidity risk for domestic retail banks and close surveillance of international banks’ vulnerabilities to funding stress. - Continue developing and operationalizing a macroprudential framework for non-banks and monitor growing linkages between the market-based finance sector and the domestic economy while closing data gaps in collaboration with other jurisdictions. - Policies to increase housing density, remove rent controls, and improve productivity in the construction sector to boost housing supply. - Facilitate domestic SMEs’ links with highly productive MNEs and support their digitalization and innovation to raise SMEs’ productivity. - Accelerate progress in reducing carbon emissions to meet Ireland’s ambitious climate commitments. ### Recent developments — macro and domestic demand - Growth and demand - After strong expansion in prior years, the domestic economy regained momentum in 2023:Q2 supported by private consumption. - Modified Domestic Demand (MDD) expanded by 1 percent (q-o-q) in Q2, after contracting in the previous three quarters. - Overall, MDD rose by 1.8 percent (y-o-y) in 2023:H1, with private consumption growing by 3.7 percent (y-o-y). - Real GDP registered positive growth of 0.5 percent (q-o-q) in Q2, after two consecutive quarters of decline, and increased by 0.2 percent (y-o-y) in 2023:H1. - Flash estimates indicate that GDP declined by 7.4 percent (SA, q-o-q annualized) or 4.7 percent (y-o-y) in 2023:Q3; the contraction was driven by post-Covid normalizations in the multinational dominated sectors. - Distortions and measurement - Real GNI* is an appropriate measure of the Irish economy; GNI* is only available annually and was about half the size of GDP in 2022. - MDD and GNI* are designed to remove MNEs’ globalized operations’ distortions from the national accounts and are highly correlated. ### Inflation, labor market, and wages - Inflation developments - Headline inflation decelerated to 3.6 percent (y-o-y) in October from 5.0 percent in September and peaked at 9.6 percent in mid-2022. - Core inflation ticked up slightly to 4.6 percent (y-o-y) in October from 4.4 percent in September. - Sequentially, core inflation edged up to 2.5 percent (3mma saar) in October from 1.1 percent in September. - Non-energy industrial goods inflation has slowed significantly, while processed food and leisure-related services continue to be the main drivers of core inflation. - Labor market - The unemployment rate increased to 4.8 percent in October from all-time lows of 4.1 percent in the first half of this year but remains below the pre-pandemic level of 5 percent. - Employment grew by 3.8 percent (y-o-y) in 2023:H1. - Hourly wages grew by 5.1 percent in the second quarter, compared with contemporaneous inflation of 5.5 percent. - Job vacancy and wage indicators signal labor market pressures continued to ease in 2023:Q3; there has been little sign of a wage-price spiral. ### Fiscal developments and policy stance - Fiscal outcomes and risks - The general government recorded a surplus of 1.7 percent of GDP in 2022 (3.1 percent of GNI*). - Public debt reached 44 percent of GDP at end-2022; measured as a share of GNI*, it remains at 82 percent. - Tax revenues (excluding CIT) were up by 6 percent (y-o-y) through October this year. - Monthly CIT collection was down for a third consecutive month in October (3 percent below the level of January–October 2022), highlighting inherent volatility. - Cost-of-living support - A total of €12 billion (about 4.4 percent and 2.4 percent of 2022 GNI* and GDP, respectively) has been provided since 2022, of which €9 billion was made available in 2023. - Half of the support provided so far was directed through transfers to households and energy credits. ### Financial sector, credit, and macroprudential priorities - Credit conditions and non-banks - The ECB’s monetary tightening has impacted credit conditions in Ireland, notably non-bank lending. - Bank lending rates have increased, though less than in other EA peers, and lending standards have tightened. - Bank credit growth picked up in 2023:H2, driven by consumer credit and loans for house purchases, while credit to NFCs turned negative. - Rapid growth in credit provided by non-bank lenders to domestic businesses decelerated considerably in 2022, reflecting higher sensitivity of non-bank funding to market conditions and refinancing challenges at higher interest rates. - The share of new lending provided by non-banks declined sharply in 2022:H2 from 39 to 32 percent of total. - Financial stability recommendations - Introduce macroprudential measures for Irish-domiciled property funds and other non-banks to strengthen resilience to CRE shocks and leveraged non-bank linkages. - Continue working with regional and international institutions and other countries to develop macroprudential tools targeting risks from non-banks. - Intensify supervision of credit and liquidity risk for domestic retail banks; closely monitor international banks’ funding vulnerabilities. - Close data gaps in collaboration with other jurisdictions to improve surveillance of market-based finance linkages to the domestic economy. ### Structural reforms and climate-related actions - Housing and construction - Policies to increase housing density, replace rent caps with targeted housing support for vulnerable households, and improve productivity in the construction sector are important to increase housing supply and support sustainable growth. - Removing rent controls and enhancing housing supply are highlighted as crucial. - MNE linkages and productivity - There is scope to further the MNE sector’s inward linkages to the Irish economy by promoting supply chain linkages, labor mobility, and innovation cooperation and supporting digitalization and innovation of domestic firms. - Climate commitments - Progress in carbon emission reductions needs to be accelerated to achieve Ireland’s ambitious climate commitments. *Source: IRELAND — STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION (discussions held in Dublin during October 23–November 3, 2023); International Monetary Fund.* ### 9. Prices in different segments of the real estate sector have started to ease, to varying ### 9. Prices in different segments of the real estate sector have started to ease, to varying degrees. ### Residential and commercial real estate: recent developments - Residential real estate (RRE) prices: - Growth of RRE prices turned negative in 2023:Q1 and Q2 but has picked up in Q3. - Residential rents continued growing by about 7 percent between 2023:Q1 and Q3, significantly above the EA average (1.2 percent). - Commercial real estate (CRE): - CRE capital values have already fallen considerably. - Decline reflects a combination of cyclical factors (tighter financial conditions and weakening outlook) and structural factors (change in working patterns and shift towards online shopping). - Credit and lending indicators (as presented): - Charts reported include HH House purchase, HH Consumer credit, HH Credit for other purposes, NFC Credit; credit growth (rhs) sourced from CBI. - Share of total lending to SMEs and share of real estate lending to SMEs shown from CBI and Central Credit Register. - Time-series charts for HH - for house purchases, Non-financial corporations, HH - consumer credit (rhs) from 2015Q1 to 2023Q1 (sources: CBI, and IMF staff calculations). - Survey of lending standards shows indices for Consumer Credit, Mortgages, Enterprises (1 = Tightened considerably ... 5 = Eased considerably) (Sources: Central Bank of Ireland and Haver Analytics). ### External sector and MNE influence on macro variables - Current account (CA) and MNEs: - CA surplus increased to an estimated 12 percent of GDP in the first half of 2023, from 10.8 percent of GDP in 2022. - The modified CA excluding most of MNEs-related transactions was much smaller (4 percent of GDP in 2022). - Goods exports slowed in 2023 from an extraordinarily high base in 2022 due to slowing global demand for pharmaceutical products and semiconductors and weakening contract manufacturing activities. - Goods imports grew only modestly owing to lower energy prices and decelerated MNE activities. - Exports and imports of services remained strong in 2023, driven by a robust ICT sector and business services activities. - Both inward and outward FDI declined in the first half of 2023; portfolio and other financial flows largely offset each other. - External position in 2022 assessed to be moderately stronger than implied by medium-term fundamentals and desirable policies (Annex IV). ### Outlook and projections (staff baseline) - Growth and inflation projections: - Real GNI* growth is projected to slow to 2½ percent in 2023–24, from a very high base, and to converge to its potential estimated at 2¼ percent over the medium term, with the currently large positive output gap gradually closing. - GDP growth is projected at 1½ percent in 2023 and 2⅔ in 2024 as activities continue to normalize. - Inflation is expected to further ease, reaching 2 percent toward late 2025. - Core inflation, estimated at 5.3 percent in 2023 (5.0 percent, e.o.p.), is projected to decline to 3.4 percent in 2024 (2.4 percent, e.o.p.). - Monetary and fiscal assumptions: - It is assumed that the ECB will keep its policy rates close to current levels into the second half of 2024, consistent with the October 2023 WEO. - The fiscal impulse in 2024 is slightly positive. - Risks to the outlook: - External risks include further weakening of external demand, a renewed surge in commodity prices, an intensification of Russia’s war in Ukraine or the conflict in Gaza and Israel, and tighter-than-expected global financial conditions. - Geoeconomic fragmentation and changes in international taxation could have substantial negative effects. - Domestic capacity constraints, particularly in the construction sector, could exacerbate housing shortages and slow public investment implementation. - The MNE sector is volatile and entails risks on both sides—a retrenchment (expansion) would lead to lower (higher) employment growth, tax receipts, and confidence. ### Fiscal policy assessment and recommendations - Overarching guidance: - Fiscal policy should continue to support disinflation and avoid adding to aggregate demand. - Well-targeted fiscal policy can support disinflation at a lower cost to growth and inequality while protecting the most vulnerable. - Prudent fiscal policy is warranted to build adequate buffers given Ireland’s large exposure to external shocks and future spending pressures. - 2024 budget stance: - The general government surplus is projected at 1.6 percent of GDP in 2023 and the government targets a slightly smaller surplus in the 2024 Budget. - The budget contains a package of €6.4 billion (around 1 percent of GDP), including about €1.1 billion in taxation measures and €5.3 billion in permanent expenditure measures. - In addition, €2.7 billion of temporary tax measures and cost-of-living support is provided and €4.7 billion is set aside to cover Ukraine related costs and more limited Covid-19 provisions. - The 2024 budget translates to an estimated small positive fiscal impulse and continues to breach slightly the government’s own spending rule. - Staff view: a smaller and better targeted package would have been less costly while still protecting the most vulnerable; one-off cost-of-living measures should be phased out as inflation recedes; if downside risks materialize, automatic stabilizers should be allowed to work fully; any additional discretionary support should be temporary and targeted; in case of upside risks, any fiscal overperformance should be saved. - Vulnerabilities and risks: - Public debt, albeit on a steady downward path, remains vulnerable to shocks and the headline fiscal position masks underlying vulnerabilities. - Growing reliance on highly concentrated CIT revenues leaves the fiscal position highly exposed to firm and sector level shocks. - Staff estimate “excess CIT revenues” amounted to €12 billion in 2022 (about half of the total CIT receipts and 2 percent of GDP). - Stripping out excess CIT suggests Ireland’s fiscal space would be more constrained. - Staff simulations assuming half of the profits from the top ten CIT contributors move away from Ireland indicate a significant deterioration in the fiscal position and public debt path. - International tax changes: - Ongoing international corporate taxation changes (OECD BEPS rules) will impact Ireland’s fiscal outlook; there is considerable uncertainty regarding final design and potential impact on tax receipts. - Given uncertain and volatile CIT revenues, excess CIT collections should not be used to fund permanent spending. ### Public investment, revenue broadening, and fiscal institutions - Investment needs and management: - Ireland has large and growing investment needs to compensate for post-GFC underinvestment, including in infrastructure and housing supply, and to address climate change and digital transformation. - The National Development Plan (NDP) implies an ambitious expansion of public investment well beyond historic trends. - Investment ramp-up should be managed carefully to contain domestic demand pressures and avoid exacerbating capacity constraints. - Prioritize public investment without worsening the overall fiscal stance. - Strengthen public investment efficiency, ensure timely execution of the capital budget, expedite the planning permission process, and streamline complex and slow judicial review processes. - Staff welcomes proposed reforms including the Planning and Development Bill pending parliament approval. - Broadening the tax base: - With a relatively low, narrow, and concentrated revenue base, there is scope to expand and diversify tax revenues, including by improving the PIT system, reducing its administrative cost, and simplifying the VAT system. - Introduction of additional tax bands and rates to the PIT and appropriately calibrating their tax rates would help preserve progressiveness while broadening the tax base and reducing disincentives to work more. - Saving excess CIT revenues: - Authorities propose saving a large share of estimated excess CIT revenues in two savings funds: - Future Ireland Fund (FIF) to contribute to future recognized expenditures including aging, climate, and digitalization. - Infrastructure, Climate and Nature Fund (ICNF) to protect infrastructure spending during downturns and contribute to achieving carbon budget targets through capital projects. - For each year from 2024 to 2035, 0.8 per cent of GDP will be invested in the FIF (approximately €4.3 billion in 2024). - It is intended that €2 billion will be invested in the ICNF each year from 2024 to 2030, building a fund of up to €14 billion. - Staff supports the decision to save excess CIT revenues to de-risk public finances and build buffers; funds should be operated within a strong fiscal policy framework and follow general principles and international best practices. - Medium-term fiscal stance and debt outlook: - Authorities envisage return to the 5 percent expenditure growth rule from 2025. - Staff projects average annual spending growth to slightly exceed the limit after planned ramp-up in infrastructure investment. - Public debt projected to decline to around 55 percent of GNI* (30 percent of GDP) and public investment rise to above 5 percent of GNI* by 2028. - Ireland is assessed to be at low risk of sovereign stress (Annex V). ### Authorities’ views (summarized) - The authorities broadly share staff’s views on the outlook and risks, noting: - Economy appears to have passed the peak of the cycle with some softening of activity but a tight labor market and strong PIT and VAT revenues indicate continued economic strength. - Acknowledge recent weaknesses in CIT collections and exports with external demand slowing. - Emphasize importance of maintaining stability and building buffers in a shock-prone world. - Note benefits from globalization and highlight risks from deepening geoeconomic fragmentation but stress Ireland’s strong fundamentals, sound policies, and dynamism to adapt. - Stress the importance of strengthening the EU’s single market, cooperation, and a rule-based global trade and investment system. - Support advancing structural reforms to strengthen resilience and competitiveness. - Agree with the need for fiscal prudence, phasing out temporary cost-of-living support as inflation recedes, and the strategic role of the two new savings funds. - Note the departure from the 5 percent spending rule is modest and will be temporary and highlight strong political consensus behind the savings funds. *Source: IMF staff report content provided.* ### 23. Tighter financial conditions, persistent inflation, and rising vulnerabilities in the CRE ### 23. Tighter financial conditions, persistent inflation, and rising vulnerabilities in the CRE ### Household resilience and corporate insolvencies - Households have remained resilient to higher interest rates and cost-of-living, with sizable excess savings. - About 20 percent of borrowers have seen increases in debt payments of up to 50 percent. - Deleveraging since the GFC, a high share of fixed rate mortgages of 2–5 years, a strong labor market, and measures to protect financially distressed households are important mitigating factors. - Debt-to-disposable income fell from more than 200 percent to about 90 percent between 2011 and 2022. - Profit margins of domestic businesses have remained stable or slightly improved, but insolvency rates have increased modestly, mostly in small highly indebted firms. ### Residential housing market - Residential housing markets remain vulnerable to further increases in interest rates. - The long-standing mismatch between housing supply and demand is expected to mitigate the impact of rate increases. - Construction activity picked up in 2022–23 with new home completions and commencements and new investment increasing substantially in 2022–23. - The gap between residential housing supply and demand remains large due to supply-side bottlenecks: low construction productivity, labor shortages, land availability, and a slow and complex judicial review framework. - As demand grows with economic growth, increasing immigration, and declining average household size, imbalances between housing supply and demand would likely become even more pressing. - Rents have risen amidst historically low supply and stringent rent caps, which have reduced profitability and residential investment. ### Commercial real estate (CRE) market and non-bank linkages - The CRE market has been under considerable pressure with capital values declining since 2022. - Corrections in CRE can spill over to the financial system via: - direct fall in collateral values, and - indirect channels through increased impaired assets and wealth and confidence effects. - A high share of foreign expenditure and funding of the CRE market raises sensitivity to external shocks. - Banks’ CRE exposures are smaller and less risky than before the GFC, but the share of CRE NPLs in total NPLs remains elevated. - Vulnerabilities in non-bank financial intermediaries (NBFI), notably property funds, could amplify effects of further CRE price declines, creating a potential adverse feedback loop between non-bank financing, the CRE market, and the real economy. - Data gaps in direct cross-border exposures to CRE prevent a complete accounting of potential risks and can only be closed through international coordination. ### Banking sector: structure, resilience, and vulnerabilities - Domestic retail banks comprise about 40 percent of total bank assets and continue to strengthen their balance sheets. - Banks’ profitability has benefited from rising net interest margins and a strong deposit base. - Capital and liquidity indicators are well above regulatory minima and strong in a European context. - NPL ratios for households and NFCs have declined steadily on the back of loan restructuring and sales as well as strong economic recovery. - Solvency and liquidity stress tests have confirmed banks have capacity to sustain potentially large adverse macroeconomic and liquidity shocks. - The share of Stage 2 loans has marginally increased over the last year and remains above the EU average, indicating potentially rising credit risks. - Balance sheets of vulnerable households and businesses may deteriorate amid higher borrowing costs. - Large international banks rely on wholesale funding and have large off-balance sheet liabilities with material inter-linkages with foreign NBFIs; their vulnerabilities to funding stress and shocks from nonbanks warrant continued close monitoring. - Reduction in the state’s shareholding in Allied Irish Banks (AIB) to below 50 percent is welcomed; efforts to further improve efficiency of domestic banks and divest government stakes should continue. ### Macroprudential policy, mortgage measures, and supervisory tools - Staff encourages continued close monitoring of credit conditions and financial stability risks to assess the need for future adjustment of macroprudential policy settings. - Mortgage measures should not be used to tackle housing affordability. - The CBI is progressing with the gradual increase in the counter-cyclical capital buffer (CCyB), to 1.5 percent effective from June 2024. - This is expected to improve banks’ loss-absorbing capacity without materially impacting credit conditions, given banks’ existing capital buffers and a positive profitability outlook. - The buffer should be released, partially or fully, to support credit flows in case of materialization of significant financial risks. - The dynamic macro-prudential stress testing framework is a valuable tool to assess banks’ resilience and inform CCyB calibration. - Recent targeted recalibration of mortgage measures (effective from January 1, 2023): - LTI limit for first-time buyers (FTBs) increased from 3.5 to 4 times income. - LTV limit for second and subsequent buyers (SSBs) raised from 80 to 90 percent. - Allowances for FTBs and SSBs limited to 15 percent of total. - The slight increase in LTI for FTBs remains quite restrictive and would unlikely lead to irresponsible borrowing. - Relaxation of LTV for SSBs is not advisable because SSBs are riskier than FTBs. - The change of allowance limits is expected to reduce the volume of allowances available. - These measures could be counterproductive for housing affordability if they increase housing demand and prices. - The CBI should carefully monitor the impact of changes to ensure they support sustainable lending standards in the mortgage market. - As recommended by the 2022 FSAP, authorities should continue using tools developed for intensified monitoring of credit losses during the pandemic. ### Market-based finance (MBF) sector and non-bank macroprudential framework - Ireland’s MBF sector remains mostly externally oriented but its linkages with the Irish economy have been growing and need close monitoring. - MBF sector size and composition: - MBF more than 20 times GNI*. - MBF €6.3tn, 2307% of GNI*. - Funds €4.1tn, 1501% of GNI*. - OFIs €2.1tn, 769% of GNI*. - IFs €3.4tn, 1245% of GNI*. - MMFs €0.7tn, 256% of GNI*. - SPEs €1tn, 366% of GNI*. - OFIResidual €1.1tn, 403% of GNI*. - SPVs €0.5tn, 183% of GNI*. - FVCs €0.6tn, 220% of GNI*. - A cohort of highly leveraged property funds holds some 35 percent of the investable Irish CRE market and represents a potential source of financial stability risks. - Significant interlinkages exist between funds and the MBF segments SPEs and OFI residual; the OFI residual has significant linkages to domestic banks, households, and firms. - Banks and funds have common exposures to the CRE market, forming potential contagion channels. - Work should continue to fully elucidate interlinkages between parts of the MBF sector and the rest of the financial system and with the domestic economy. - Closing significant data gaps in the OFI residual sector and conducting granular risk analysis remain priorities and will require intensified international collaboration. - The CBI is encouraged to develop guidance to the funds sector on using the full range of liquidity management tools and conduct more deep dives on sub-segments of the funds sector; the government’s ongoing extensive review of the funds sector will consider financial resilience and sustainability of the industry in Ireland. ### Developing macroprudential tools for non-banks - Ireland is at the forefront of developing and operationalizing a macroprudential framework for non-banks due to their size and growing domestic connections. - Measures introduced by the CBI (November 2022 and thereafter) include: - a leverage limit and liquidity management guidance on property funds, - a Discussion Paper laying out an overarching approach to macroprudential policy for investment funds, - a consultation paper on steady state resilience measures for Irish authorized GBP-denominated liability driven investment (LDI) funds. - The CBI should continue to monitor CRE market and property funds and recalibrate macroprudential measures as needed in case of material shifts, leakages, or unintended procyclical effects. - Continued international and regional cooperation is necessary to develop tools targeting risks from non-banks, including leakages and cross-border issues. ### Authorities’ views - Authorities emphasize active efforts to ensure Ireland’s regulatory framework and supervisory capacity keep pace with its large and complex financial sector. - They have intensified monitoring of financial stability risks, particularly regarding the CRE market, and are undertaking substantial work to fill data gaps and elucidate interlinkages. - International and regional collaboration is necessary given large cross-border flows and regulatory arbitrage. - Authorities consider themselves at the forefront in developing macroprudential frameworks and tools targeting systemic risks from NBFIs and have announced new macroprudential measures for Irish property funds. - They consider the macroprudential mortgage measures to strike an appropriate balance between stabilization/resilience benefits and economic costs; targeted changes in the 2022 framework review were deemed appropriate. - Authorities will continue divesting the government’s shares in domestic banks and expect to remove remuneration rules on those banks at an appropriate time. ### Structural policies: housing supply, density, and MNE linkages - Policy priorities to improve housing availability and affordability: - Increase housing density. - Remove rent caps and replace with more targeted housing support for poor households. - Improve construction productivity. - Address land availability constraints. - Accelerate and improve transparency and certainty of approval processes for developers. - Government’s Housing for All plan includes helpful policies but may not be sufficient to address supply-side bottlenecks and may add to near-term demand pressures if not narrowly targeted. - Complementary supply-side policies are imperative: increase urban density, improve use of land, and improve construction productivity. - Facilitating stronger inward linkages between MNEs and domestic SMEs could raise SME productivity via supply-chain linkages, labor mobility, innovation cooperation, support for digital transformation of SMEs, expansion of government support for SME-driven R&D, and infrastructure to foster industrial clusters. ### Climate commitments and carbon pricing - Government adopted ambitious emission reduction targets for 2030 and 2050, seeking net zero emissions by mid-century. - Ireland will likely fall short of the 2030 target; introduction of sectoral limits is welcome but compliance is proving challenging and almost all sectors are projected to exceed their ceilings. - Authorities have legislated an annual increase in carbon tax to 2030, with revenues committed to be fully recycled to address the cost of climate change. - To meet the 2030 target, options include: - removal of implicit fossil fuel subsidies, - expansion of the national carbon tax to sectors currently not covered by a form of carbon pricing (e.g., agriculture), - higher and unified carbon taxation, - introduction of sectoral feebates. - Vulnerable households should be protected using part of revenues from carbon taxation. *International Monetary Fund* ### 34. The authorities highlighted the positive impact of recent policies on housing supply, ### 1irlea2023001 - 34. The authorities highlighted the positive impact of recent policies on housing supply, ### Housing supply, construction, and rental market - Recent policies have positively impacted housing supply; delivery of new housing units in 2023-24 is expected to meet existing targets. - Authorities acknowledge the housing supply gap is likely growing and that targets are being revised. - Key constraints and policy considerations: - Ramping up supply is difficult given current capacity constraints in the industry. - Bringing vacant sites and properties to market is an important policy lever. - Raising construction productivity and increasing density are seen as key to boosting housing supply. - Weak viability of high-density housing remains an important obstacle for developers. - Removing rent caps would be challenging because of the impact on affordability. - Support measures have been adopted for small landlords to protect supply of rental housing. - Staff advice: - Mortgage measures should not be used to address broader housing affordability issues. - Policies to increase housing density, replace rent caps with targeted housing support for vulnerable households, and improve productivity in the construction sector are important for increasing housing supply and supporting sustainable growth. ### Multinational enterprise (MNE) sector linkages and domestic industry - Progress has been highlighted in fostering stronger linkages between the MNE sector and the indigenous economy. - Notable improvements in life sciences and digital technology where domestic sourcing of inputs has increased. - Ongoing initiatives to foster incubation centers and industry clustering. ### Climate policy, savings funds, and carbon tax - Authorities recognize additional efforts are needed to meet climate targets. - New savings funds are intended to play an important role in providing climate financing. - Significant progress: legislated annual increases of the carbon tax to 2030. - Work is ongoing to simulate the impact of additional policy options to achieve the targets. ### Macro outlook (Staff appraisal) - The Irish economy has displayed remarkable resilience and is well-positioned to achieve a soft landing. - Growth and inflation outlook: - Growth is expected to moderate to a still solid level in 2023-24 from a very high base, as tighter financial conditions, domestic capacity constraints, and weakening external demand weigh on the economy. - Inflation is anticipated to further trend down and reach the target by late 2025. - External position: - The external position in 2022 is assessed to be moderately stronger than the level implied by fundamentals and desirable policies. - Selected headline projections and indicators (from tables): - Real GDP: 2023 = 1.5, 2024 = 2.7, 2025 = 2.5 - Real GNI* (growth rate): 2023 = 2.5, 2024 = 2.5 - Inflation (HICP): 2023 = 5.3, 2024 = 3.2, 2025 = 2.4 - Inflation (HICP, core): 2023 = 5.3, 2024 = 3.4, 2025 = 2.4 - Unemployment rate (percent): 2023 = 4.5, 2024 = 4.4, 2025 = 4.4 - Overall balance (percent of GDP): 2023 = 1.6, 2024 = 1.4, 2025 = 1.3 - General government gross debt (percent of GDP): 2023 = 40.4, 2024 = 37.4, 2025 = 34.7 ### Fiscal policy recommendations and actions - Continued fiscal prudence is warranted to complement monetary tightening and build buffers. - Key recommendations: - Avoid adding to aggregate demand amid still elevated inflation; tax revenue overperformance should be saved. - Phase out one-off cost of living measures as inflation recedes. - Continue building buffers given uncertain and volatile CIT revenues and exposure to shocks. - Strengthen public investment efficiency and ensure timely execution of the capital budget to deliver on the National Development Plan. - Expedite the planning permission process, modernize regulations, and streamline the judicial review process. - Prioritize public investment within an appropriate fiscal stance. - Expand and diversify tax revenues, including by improving the PIT system and simplifying the VAT system. - Authorities’ actions: - Decision to save part of excess CIT revenues in two savings funds is welcomed. - Authorities should reflect on an appropriate anchor for a longer-term fiscal framework beyond the current spending rule for 2022-26 and integrate the operation of the new savings funds within this framework. ### Financial stability and macroprudential policy - Risks and vulnerabilities: - Tighter financial conditions, persistent inflation, and rising vulnerabilities in the CRE market with linkages to leveraged non-banks call for continued heightened vigilance. - Intensified supervision of credit and liquidity risks for domestic retail banks should continue. - Continued close surveillance of large international banks’ vulnerabilities to funding stress is warranted. - Policy responses and recommendations: - Continue close monitoring of credit conditions and financial stability risks to assess the need for future adjustment of macroprudential settings. - The CBI’s decision to gradually increase the CCyB to 1.5 percent is welcomed. - The authorities’ strengthening of oversight of Ireland’s large and complex MBF sector and work on a macroprudential framework for non-banks are commendable. - Closing significant data gaps on the MBF sector and conducting granular risk analysis remain priorities requiring intensified regional and international collaboration. - Introduction of macroprudential measures for Irish-domiciled property funds are essential steps to bolster resilience to CRE shocks. ### Structural reforms and growth enhancement - Recommended structural reforms: - Increase housing density and improve construction sector productivity. - Replace rent caps with targeted housing support for vulnerable households. - Promote inward linkages of the MNE sector through supply chain linkages, labor mobility, innovation cooperation, and support for digitalization and innovation of domestic firms. - Accelerate progress in carbon emission reductions to meet climate commitments. ### Governance of next steps - Staff proposes the next Article IV consultation with Ireland take place on the standard 12-month cycle. *Source: IMF staff report excerpts from 1irlea2023001 - 34. The authorities highlighted the positive impact of recent policies on housing supply,* ### Annex II. Implementation of FSAP Key R ecommendations ### Annex II. Implementation of FSAP Key Recommendations ### Oversight – Cross Cutting - Recommendation 1: Further strengthen de jure Central Bank independence by: - amending legislation such that the Minister for Finance may dismiss Central Bank Commission members only on specified grounds of serious misconduct, and - enshrining in legislation a written procedure for the submission by the Central Bank and approval by Minister for Finance of the supervisory levy. - Addressee: DoF, Oireachtas. Time: ST. - Comment: Currently under review and on track. Fulfilment of the 1st point will require amendment of s.25(3) of the Central Bank Act 1942 (as amended). Consultation with the CBI will be needed for the 2nd point. Identification of a suitable legislative vehicle is necessary. All legislative changes are subject to agreement by the Minister and Government. - Recommendation 2: Amend relevant legislation to provide for greater individual accountability and enhance supervisory powers of the Central Bank; finalize internal framework to operationalize upgraded accountability regime. - Addressee: DoF, Oireachtas, CBI. Time: ST. - Comment: Completed - The Central Bank (Individual Accountability Framework) Act 2023 was enacted on 9 March 2023. Two Commencement Orders were signed by the Minister for Finance to commence all sections of the Act in 2023: (1) 19th April (all provisions with the exception of those in (2)), and (2) 29th December (SEAR, Conduct Standards and Certification). Consultation paper issued in March 2023; consultation closed in June 2023; Central Bank reviewing responses with a view to finalising proposals in Q4 2023. A second consultation on ASP guidelines launched in June 2023 closed on 14 September; Central Bank considering responses with a view to finalising and publishing the ASP Guidelines in Q4 2023. - Recommendation 3: Adopt a sequenced action plan for banking and insurance supervision to manage climate-related financial risks in priority areas, with early emphasis on robust data and quality disclosure. - Addressee: CBI. Time: I. - Comment: On-track. A sequenced action plan is in place (3-year forward looking roadmaps). Work progresses through the climate change hub and spokes model led by the Central Bank's Climate Change Unit (workstreams 1 and 2); teams meet monthly. ### Macroprudential Policy - Recommendation 4: Work with European institutions to develop macroprudential tools targeting risks from non-banks, including for leakages and other cross border issues. - Addressee: CBI. Time: MT. - Comment: On-track. CBI engaged with ESRB, ESMA, FSB. In July, the CBI published a Discussion Paper on the macroprudential framework for investment funds highlighting policy tool issues, including liquidity mismatch and interconnectedness. CBI will undertake stakeholder engagement on the DP. - Recommendation 5: Expand monitoring of non-bank lenders beyond those engaged in mortgage activities. - Addressee: CBI. Time: ST. - Comment: On-track. Non-bank and bank lending patterns are regularly covered in the CBI’s Financial Stability Review. A draft Financial Stability Note on non-bank lenders to SMEs is forthcoming in Q42023. Research presented on non-bank lenders filling lending gaps left by Ulster Bank. Deep dive on non-bank lending to real estate and bank lending to large CRE exposures planned for Q3. - Recommendation 6: Strengthen resilience of property funds by introducing proposed macroprudential leverage limit and liquidity management guidance, adjusting the limit countercyclically. - Addressee: CBI. Time: I. - Comment: On-track. In November 2022 the CBI announced a leverage limit of 60 percent on property funds, to be gradually implemented over a five-year period for existing funds. Funds with leverage currently over 50 per cent must submit a plan to keep or reduce leverage below 60 percent prior to implementation deadline. Leverage limit subject to regular monitoring. New Guidance on liquidity mismatch introduced with an 18-month implementation period. Both measures apply immediately to newly authorised Irish property funds. ### Banking Sector - Recommendation 7: Maintain use of tools developed for intensified monitoring of banks’ credit losses introduced during the pandemic. - Addressee: CBI. Time: ST. - Comment: On-track. Pandemic-era tools continue to drive supervision of credit and debt risks. Data analysis is considered via Distressed Debt Working Group fora: Credit Network focuses on credit risk and priority actions; Debt Steering Group examines indicators of latent distress and access to credit. ### Insurance Sector - Recommendation 8: Continue strengthening insurance supervision focused on intra group transactions and concentrations, post-Brexit group structures, recovery planning, and liquidity risk management. - Addressee: CBI. Time: ST. - Comment: On-track. On 30 January 2023, CBI published Guidance for (Re)Insurance Undertakings on Intragroup Transactions & Exposures. Thematic review of recovery plans produced industry feedback in Q4 2022. Further engagement under PRISM, including regular risk assessments and annual reviews of recovery plans and ORSAs. ### MBF (Money and Bond Funds) Sector - Recommendation 9: Work with ESMA, ESRB, and EU Commission as part of the Commission’s review of the EU MMF Regulation to promote MMF resilience. - Addressees: CBI, DoF. Time: ST. - Comment: Completed. CBI engaged with the EC in Q4 2022 and set out views on MMF resilience. The EC’s assessment of the MMF Regulation was published on 20 July 2023; it proposes addressing certain shortcomings but includes no legislative proposal. Discussions continue internally at CBI; DoF continues stakeholder engagement. - Recommendation 10: Prioritize guidance to the funds sector on using the full range of liquidity management tools (LMTs), including those allocating transaction costs to subscribing or redeeming investors. - Addressee: CBI. Time: ST. - Comment: On-track. CBI co-leads FSB work on OEIFs and LMTs, particularly price-based LMTs, and is involved in IOSCO guidance. Proposed AIFMD and UCITS amendments will require funds to select appropriate LMTs from a set list; the Irish domestic framework already provides for the full range. CBI issued industry communication on use of side-pockets by UCITS in limited circumstances in 2022. - Recommendation 11: Intensify collaboration between CBI, CSO, and international regulators to better understand OFI residual entities and their domestic and foreign linkages; conduct granular risk analysis. - Addressees: CBI, CSO. Time: MT. - Comment: On-track. CBI and CSO engaged in H1 2023. CSO identified nature of OFI residual linkages to the domestic economy feeding into National Accounts and will examine instrument types associated with these links. Discussions at Eurosystem level have been deprioritised. - Recommendation 12: Conduct more deep dives to enhance monitoring of risks of subsegments of the funds sector. - Addressee: CBI. Time: ST. - Comment: Analysis of bond funds, LDIs, property funds (including Risk Assessment heat-maps and sensitivity analysis of bond funds to interest rates) is ongoing and on track. Planning (not confirmed) assumes examination of hedge funds and related funds in 2024. A new framework to enhance supervision of funds and associated risks has been implemented. ### Fintech Sector - Recommendation 13: Prepare to introduce domestic legislation if significant delay or material gaps in the MiCA framework occur. - Addressees: DoF, CBI. Time: ST. - Comment: De-prioritised. MiCAR entered into force in June 2023 with implementation in two phases, 12 and 18 months after entry into force. A project to implement MiCAR is underway at the Central Bank. EC has suggested a likely second MiCA regulation. - Recommendation 14: Advocate for inclusion of systemic Irish cloud service providers in the Union Oversight Framework under DORA; failing which, seek additional statutory powers to review and examine resilience of these entities. - Addressees: CBI, DoF. Time: MT. - Comment: On-track. DORA was published in the official journal in December 2022 and is being transposed. CBI is actively involved in shaping DORA, including oversight regime of critical ICT third-party providers (CTPP). CBI has SME representation in ESA drafting working groups. ### Insolvency and Creditor Rights - Recommendation 15: Further develop government strategy, coordinating across agencies, to provide targeted solutions to long-term mortgage arrears borrowers based on financial situation and debt servicing capacity. - Addressees: CBI, DoF, DOJ, ISI, consulting relevant agencies. Time: ST. - Comment: Inter-Departmental Group established to advance work on Long Term Mortgage Arrears, on track. First meeting scheduled in Q3 2023. Department of Justice to participate where within statutory remit. - Recommendation 16: Conduct a review of examinership given limited usage, the new EU Directive, and identified gaps vis à vis the Standard; consider introducing a new hybrid procedure aligned with the “spirit” of the EU Directive. - Addressees: DETE, CLRG. Time: I. - Comment: The EU Directive on Preventive Insolvency has been transposed, including amendments to examinership. A review of examinership in relation to optional protocols of the Directive is on the CLRG work programme and on track. ### Crisis Management - Recommendation 17: Develop policies and procedures for assessing prospective solvency of a bank entering into or undergoing resolution to determine eligibility for ELA. - Addressee: CBI. Time: ST. - Comment: On-track. A draft policy is being developed and will be tested in an exercise planned for Q4 2023. After the exercise, further work to finalize the policy will be agreed and completed within the recommendation timeframe. - Recommendation 18: Remedy weaknesses in the insolvency regime for insurers, including any required legislative amendments. - Addressees: DoF, CBI. Time: ST. - Comment: On-track. Establishing a resolution framework for (re)insurers is a medium-term objective for the Department. Focus is on influencing the Insurance Recovery and Resolution Directive (IRRD) at EU level; once completed, domestic implementation and remaining gaps will be considered. CBI has presented a proposal to DoF to update liquidation powers of the Central Bank for insurers. ### Financial Integrity - Recommendation 19: Adequately resource AML/CFT capacity, use advanced data analytical tools, and deepen understanding of ML/TF risks from non-resident and cross-border activity. - Addressee / Lead: Relevant AMLS C members; Lead: DoF. Time: ST. - Comment: On-track. AML Steering Committee undertook projects in 2022 and 2023 to deepen understanding of ML/TF risks and long-term risk assessment approach. FIU had a data analyst assigned in 2023. Garda National Economic Crime Bureau recruited detectives in 2023 with some to be assigned to the FIU. In 2022, the AML Compliance Unit of the Department of Justice was supplemented with a forensic accountant. Additional resources allocated to CBI to support risk assessment framework development. CBI teams used a gravity model framework and assumption-driven simulation to estimate Money Laundering (ML) broken down between domestic and international ML. In 2024, CBI will undertake a thematic review focused on international flows and firm management of associated risks. ### Risk Assessment Matrix – Selected Global and Domestic Risks - Notes: The RAM shows events that could materially alter the baseline path. Relative likelihood: “low” <10 percent, “medium” 10–30 percent, “high” 30–50 percent. Conjunctural shocks and scenario risks may materialize within 12 to 18 months; structural risks remain salient over a longer horizon. - Global Risks (selected items): - Intensification of regional conflict(s): - Likelihood: High. Expected Impact: Medium. - Impact: Disrupt trade, remittances, FDI, financial flows, payment systems; possible refugee flows raising fiscal and housing pressures; migrants may alleviate labor shortages long run. - Policy Response: - Provide targeted fiscal support to vulnerable segments. - Facilitate integration of refugees via additional spending on healthcare, housing, and education. - Accelerate high-quality public investment projects if growth falters. - Commodity price volatility: - Likelihood: High. Expected Impact: Medium. - Impact: As a commodity importer, higher energy prices could erode household purchasing power, increase firms’ costs, lower private consumption and investment. - Policy Response: - Provide targeted support to vulnerable households and viable firms. - Strengthen resilience of supply chain of critical commodities including by diversifying suppliers. - Abrupt global slowdown or recession: - Likelihood: Medium. Expected Impact: Medium. - Impact: Ireland’s integration in global value chains and large MNE sector means lower trading partner growth would slow export growth and weigh on employment, consumption, investment. - Policy Response: - Provide targeted fiscal support to vulnerable households and viable firms. Fiscal automatic stabilizers should be allowed to work fully. - Deepening geoeconomic fragmentation: - Likelihood: High. Expected Impact: High. - Impact: Ireland vulnerable due to integration in global value chains and concentration in pharmaceutical manufacturing and ICT; could benefit or lose depending on nature of fragmentation. - Policy Response: - Accelerate structural reforms to strengthen competitiveness and build resilience. - Redouble efforts with EU countries to deepen the single market and complete its architecture. - Strengthen resilience of supply chain of critical commodities including by diversifying suppliers. - Systemic financial instability and Monetary policy miscalibration are noted as Medium likelihood / Medium impact risks; proposed responses include intensifying monitoring of financial conditions, recalibrating fiscal policy to achieve disinflation, and recalibrating macroprudential measures. - Domestic Risks (selected items): - Capacity constraints (housing and labor markets): - Likelihood: Medium. Expected Impact: High. - Impact: Housing and infrastructure shortages limit ability to attract foreign workers, increase wage and price pressures, lower competitiveness and potential growth. - Policy Response: - Accelerate high-quality public investment in housing and infrastructure. - Strengthen education and active labor market policies that improve labor supply. - Volatile MNE activities: - Likelihood: Medium. Expected Impact: High. - Impact: MNE retrenchment would lower employment growth, tax receipts, and confidence. - Policy Response: - Save less windfall CIT revenues in the short run if MNE profits fall temporarily. If fall is permanent, recalibrate MT fiscal policy. - Continued uncertainty related to detailed implementation of post-Brexit arrangements: - Likelihood: Low. Expected Impact: Low. - Impact: Ireland vulnerable to remaining uncertainty and trade frictions with the U.K.; impact thus far has been low. - Policy Response: - Continue active EU–U.K. cooperation, support firms most exposed to Brexit, and facilitate SMEs’ trade diversification. *Italic: Based on Annex II. Implementation of FSAP Key Recommendations and the Risk Assessment Matrix as presented in the source content.* ### Annex IV . External Sector Assessment ### Annex IV . External Sector Assessment ### Overall assessment - The external position in 2022 was moderately stronger than the level implied by medium-term fundamentals and desirable policies. - The assessment abstracts from the large-scale operations of multinational enterprises (MNEs), which have limited links to the indigenous economy and distort the headline current account (CA). - The CA is expected to register a sizable albeit smaller surplus in 2023, with some moderation over the medium term. - Main near-term risks: further weakening of external demand, a renewed surge in commodity prices, and an intensification of the war in Ukraine. - Medium-term uncertainty: geoeconomic fragmentation and the MNE sector remain high. ### Policy responses - Short term: - Fiscal policy should balance risks of renewed inflationary pressures with the need for targeted support to the vulnerable and investment spending. - Medium term: - A productivity-enhancing fiscal policy with greater public sector investment in areas such as affordable housing, infrastructure, digitization, and green transition would help potential growth and boost corporate investment, thus reducing the current account balance. ### Foreign asset and liability position and trajectory Background: - Ireland’s large negative net international investment position (NIIP) reflects the globalized operations of MNEs including financial services firms operating in the International Financial Services Centre (IFSC). - The NIIP, after peaking at -198 percent of GDP in 2015, improved to -117 percent in 2022 from -131 percent in 2021. - Non-IFSC gross external debt was around 203 percent of GDP in 2022, down from 259 percent in 2021, and is downward trending, reflecting the current account surplus, real GDP growth, and non-debt-creating capital inflows. Assessment: - Ireland’s NIIP largely reflects the activities of MNEs and market-based finance entities with few linkages to the Irish economy. - Much of the cross-border liabilities from redomiciled MNEs have low rollover risk as they are financed through intra-company loans. - Staff estimate that controlling for volatilities associated with the MNE sector, including redomiciled firms, intellectual property, aircraft leasing, and adjusting for the international financial intermediation activities of investment funds and special purpose entities would result in a NIIP that is considerably less negative. Key 2022 figures (% GDP): - NIIP: -117 - Gross Assets: 1407 - Res. Assets: 2 - Gross Liabilities: 1524 - Debt Liabilities: 577 ### Current account Background: - Several factors—including contract manufacturing, the foreign profitability of redomiciled MNEs, and the depreciation of Irish-based, foreign-owned capital assets such as intellectual property and leased aircraft—distort the headline external balance and complicate interpretation. - The CA has been very volatile and subject to frequent and large revisions. - Ireland’s share of world exports has been increasing, driven by exports of pharmaceutical products, business and financial services, and computer services. - In 2022 the CA recorded a surplus of 10.8 percent of GDP from 13.7 percent in 2021, reflecting strong export performance of pharmaceuticals and IT sectors in the absence of large Intellectual Property (IP) imports. - From the saving-investment balance, households net-saving rate decreased in 2022 from the very high levels during the pandemic but remained somewhat above pre-pandemic levels. - Government savings increased as a large windfall of corporate income taxes were collected and pandemic-related fiscal stimulus was gradually unwound. - Medium-term expectation: CA surplus is expected to moderate at around 6 percent of GDP as government and household net saving decreases, but will remain sizable given structural housing and infrastructure gaps, export activities of MNEs, and the exit from the double-Irish leading to smaller services import by MNEs. Assessment and model adjustments: - The EBA CA model estimates: - cyclically adjusted CA of 12.3 percent of GDP - CA norm of −2.3 percent of GDP - standard error of 1.9 percent of GDP - Adjustments: - COVID-19 Adj.: 0.5 percent of GDP (to account for transitory pandemic-related factors) - Other Adj.: -13.8 pp of GDP (to remove the impact of MNEs operations) - Resulting balances: - 2022 CA: 10.8 percent of GDP - Cycl. Adj. CA: 12.3 percent of GDP - EBA Norm: -2.3 percent of GDP - EBA CA Gap: 14.6 percent of GDP - Staff CA Gap: 1.3 (±1.9) percent of GDP, which includes: - identified policy gaps of 1.7 percent of GDP - an unexplained residual of -0.4 percent of GDP ### Real exchange rate Background: - The ULC-based REER depreciated sharply following the GFC (2008), reflecting productivity gains and declining labor costs; productivity growth has been concentrated in MNEs. - During the pandemic the average CPI-based REER depreciated by 3.5 percent, while the ULC-based REER depreciated by 6.6 percent in 2022, relative to 2021 average. - Some of the REER depreciation has been reversed in 2023. Assessment: - Staff assess the REER gap to be in the range of -3.6 to 0.7 percent on average during 2022, with a midpoint of -1.5 percent (given an estimated elasticity of 0.88). - Results from the EBA REER index and level models were affected by large distortions and volatilities of the MNE sector, with the gaps almost entirely attributed to unexplained residuals in the models. ### Capital and financial accounts: flows and policy measures Background: - Ireland’s capital and financial accounts are characterized by significant volatility due to financing operations and investment activities of MNEs. - In 2022, net FDI outflows amounted to 33 billion euro (6.5 percent of GDP), driven by equity repayment and reinvested earnings of MNEs. - Total net financial account outflows in 2022 was around 10 percent of GDP. Assessment: - Inward FDI and foreign demand for Irish sovereign bonds have supported Ireland’s strong economic performance and investor-friendly business climate, including a favorable tax environment. ### FX intervention and reserves level Background: - The euro has the status of a global reserve currency. Assessment: - Reserves held by the euro area are typically low relative to standard metrics. - The currency floats freely. ### Technical background notes (selected) - Note 1: For more information about the impact of MNEs on Ireland’s NIIP, see “The Role of Foreign-owned Multinational Enterprises in Ireland,” IMF Country Report No. 17/172. - Note 2: See Galstyan, V., 2019, “Estimates of Foreign Assets and Liabilities for Ireland,” Central Bank of Ireland and Trinity College Dublin. - Note 3: See “Firm-level Productivity and its Determinants: The Irish Case,” IMF Country Report No. 16/257. ### Non-IFSC External Debt Sustainability Framework (selected projections and assumptions) Selected baseline and projection highlights (in percent of GDP unless otherwise indicated): - Baseline: External debt - 2018: 264.6 - 2019: 293.0 - 2020: 316.8 - 2021: 259.4 - 2022: 203.2 - 2023: 184.5 - 2024: 168.7 - 2025: 156.6 - 2026: 147.0 - 2027: 139.0 - 2028: 132.3 - Change in external debt (selected): - 2018: 4.1 - 2019: 28.5 - 2020: 23.8 - 2021: -57.4 - 2022: -56.2 - 2023: -18.7 - 2024: -15.8 - 2025: -12.1 - 2026: -9.5 - 2027: -8.1 - 2028: -6.7 - Identified external debt-creating flows (4+8+9): - 2018: -37.3 - 2019: -11.4 - 2020: -39.9 - 2021: -58.8 - 2022: -7.8 - 2023: -5.0 - 2024: -6.0 - 2025: -4.6 - 2026: -3.4 - 2027: -2.3 - 2028: -1.3 - Current account deficit, excluding interest payments: - 2018: -13.6 - 2019: 12.7 - 2020: -0.1 - 2021: -13.9 - 2022: -11.9 - 2023: -12.3 - 2024: -11.6 - 2025: -9.3 - 2026: -8.1 - 2027: -6.7 - 2028: -5.3 - Exports (percent of GDP): - 2018: 109.4 - 2019: 113.9 - 2020: 118.7 - 2021: 119.5 - 2022: 124.6 - 2023: 109.9 - 2024: 110.0 - 2025: 110.2 - 2026: 109.8 - 2027: 109.5 - 2028: 109.1 - Imports (percent of GDP): - 2018: 85.6 - 2019: 115.8 - 2020: 105.0 - 2021: 84.8 - 2022: 88.4 - 2023: 80.7 - 2024: 80.9 - 2025: 81.5 - 2026: 81.9 - 2027: 82.5 - 2028: 83.2 - Net non-debt creating capital inflows (negative): - 2018: -0.3 - 2019: -26.9 - 2020: -29.1 - 2021: 4.2 - 2022: 10.4 - 2023: 1.9 - 2024: 1.9 - 2025: 1.8 - 2026: 1.6 - 2027: 1.5 - 2028: 1.4 - Automatic debt dynamics (selected): - Contribution from nominal interest rate: - 2018: 10.1 - 2019: 10.8 - 2020: 9.3 - 2021: 3.6 - 2022: 3.4 - 2023: 8.3 - 2024: 8.5 - 2025: 7.0 - 2026: 6.9 - 2027: 6.5 - 2028: 6.1 - Contribution from real GDP growth: - 2018: -19.2 - 2019: -13.6 - 2020: -18.1 - 2021: -39.9 - 2022: -23.6 - 2023: -2.8 - 2024: -4.7 - 2025: -4.1 - 2026: -3.8 - 2027: -3.6 - 2028: -3.4 - Residual, incl. change in gross foreign assets (2-3): - 2018: 41.4 - 2019: 39.9 - 2020: 63.7 - 2021: 1.4 - 2022: -48.4 - 2023: -13.8 - 2024: -9.8 - 2025: -7.5 - 2026: -6.1 - 2027: -5.8 - 2028: -5.5 - External debt-to-exports ratio (percent): - 2018: 241.8 - 2019: 257.2 - 2020: 266.9 - 2021: 217.0 - 2022: 163.2 - 2023: 167.9 - 2024: 153.3 - 2025: 142.0 - 2026: 134.0 - 2027: 127.0 - 2028: 121.2 - Gross external financing need (in billions of US dollars): - 2018: 233.6 - 2019: 370.4 - 2020: 352.8 - 2021: 260.5 - 2022: 240.7 - 2023: 259.2 - 2024: 256.0 - 2025: 254.9 - 2026: 257.9 - 2027: 261.7 - 2028: 266.9 - Gross financing need (percent of GDP): - 2018: 71.4 - 2019: 103.9 - 2020: 94.0 - 2021: 60.0 - 2022: 47.5 - 2023: 47.9 - 2024: 44.5 - 2025: 42.2 - 2026: 40.9 - 2027: 39.6 - 2028: 38.7 Key macroeconomic assumptions underlying baseline: - Real GDP growth (in percent): - 2018: 8.5 - 2019: 5.3 - 2020: 6.6 - 2021: 15.1 - 2022: 9.4 - 2023: 1.5 - 2024: 2.7 - 2025: 2.5 - 2026: 2.5 - 2027: 2.5 - 2028: 2.5 - GDP deflator in US dollars (change in percent): - 2018: 5.8 - 2019: -2.1 - 2020: 0.7 - 2021: 4.2 - 2022: -5.1 - 2023: 8.7 - 2024: 3.9 - 2025: 2.7 - 2026: 2.1 - 2027: 1.6 - 2028: 1.6 - Nominal external interest rate (in percent): - 2018: 4.5 - 2019: 4.2 - 2020: 3.4 - 2021: 1.4 - 2022: 1.4 - 2023: 4.5 - 2024: 4.9 - 2025: 4.4 - 2026: 4.6 - 2027: 4.6 - 2028: 4.5 - Growth of exports (US dollar terms, in percent): - 2018: 12.0 - 2019: 13.3 - 2020: 9.7 - 2021: 16.5 - 2022: 21.5 - 2023: -5.7 - 2024: 6.4 - 2025: 5.2 - 2026: 4.1 - 2027: 4.2 - 2028: 4.2 - Growth of imports (US dollar terms, in percent): - 2018: 3.6 - 2019: 47.3 - 2020: -4.5 - 2021: -6.6 - 2022: 21.6 - 2023: -2.4 - 2024: 6.6 - 2025: 5.8 - 2026: 5.0 - 2027: 5.4 - 2028: 5.4 - Current account balance, excluding interest payments: - 2018: 13.6 - 2019: -12.7 - 2020: 0.1 - 2021: 13.9 - 2022: 11.9 - 2023: 12.3 - 2024: 11.6 - 2025: 9.3 - 2026: 8.1 - 2027: 6.7 - 2028: 5.3 - Net non-debt creating capital inflows: - 2018: 0.3 - 2019: 26.9 - 2020: 29.1 - 2021: -4.2 - 2022: -10.4 - 2023: -1.9 - 2024: -1.9 - 2025: -1.8 - 2026: -1.6 - 2027: -1.5 - 2028: -1.4 Notes on scenarios and shocks (from figures): - Individual shocks are permanent one-half standard deviation shocks. - 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 2019 (in the real depreciation shock scenario). ### Sovereign risk and debt sustainability framework (summary) Overall assessment and horizon readings: - Overall: Low (Ireland's overall risk of sovereign stress is low, reflecting relatively low vulnerabilities of the near and medium term outlook, while long term vulnerabilities are considered to be moderate.) - Near term: (mechanical signal not published for surveillance-only cases; near-term assessment performed but not published) - Medium term: Low (Risk of sovereign stress over the medium term is low, consistent with mechanical signals. Reflects relatively low debt burden, favorable debt structure—long maturities, stable investor base, debt predominantly at fixed rates. The Fan chart module signals a moderate risk reflecting uncertainty around the outlook.) - Long term: Moderate (Risks over the long term reflect unfavorable demographic trends: an old age dependency ratio expected to double in the next decades and a retirement age well-below life expectancy.) - In absence of reforms to safeguard pension sustainability, previous authority estimates suggest failure to increase the retirement age as planned could imply a cumulative fiscal cost of about 10 percent of 2022 GDP over the long term. - Health and long-term care expenditures are expected to increase significantly, highlighting the need for a cost-efficient healthcare system in line with authorities’ healthcare reform plans. Sustainability assessment: - Not required for surveillance countries. DSA summary assessment: - Debt stabilization in the baseline: Yes Commentary: - Ireland is at a low overall risk of sovereign stress. - Public debt has been contained through consecutive shocks, falling by more than 10 pp since the onset of the pandemic. - The low interest rate environment of previous years and an active debt management strategy have helped lengthen debt maturity and keep debt servicing costs contained. - Public debt is expected to remain on a firmly downward path despite the projected growth slowdown and a higher interest rate environment. - Vulnerabilities: - When measured against GNI*, public debt is much more elevated (standing at above 80 percent of GNI* in 2022). - Dependence on volatile and uncertain CIT revenues leaves the fiscal position significantly exposed to shocks to the multinational sector. Figure/table disclosures (selected): - Debt coverage in the DSA includes: Budgetary central government (Yes), Extra budgetary funds (EBFs) (Yes), Social security funds (SSFs) (Yes), State governments (Yes), Local governments (Yes), Public nonfinancial corporations (No), Central bank (No), Other public financial corporations (No). *Source: IMF staff (Annex IV . External Sector Assessment, as presented in the provided content).* ### 5. Debt consolidation across sectors: ### 5. Debt consolidation across sectors: ### Debt coverage and structure - Coverage remains unchanged from the last Article IV: it covers general government debt, with most debt issued by the central government. - Commentary: Public debt is entirely in domestic currency, predominantly marketable and largely held by external creditors. - Relatively long average maturity of the debt portfolio: 7 years. - Debt features: debt primarily on fixed rates provides an important buffer to the higher interest rate environment. - Notes on recording and valuation (as presented): - CG=Central government; GG=General government; NFPS=Nonfinancial public sector; PS=Public sector. - Stock of arrears could be used as a proxy in the absence of accrual data on other accounts payable. - IPSGSs: Insurance, Pension, and Standardized Guarantee Schemes, typically including government employee pension liabilities. - Includes accrual recording, commitment basis, due for payment, etc. - Nominal value definition: reflects the value of the instrument at creation and subsequent economic flows (such as transactions, exchange rate, and other valuation changes other than market price changes, and other volume changes). - Face value definition: the undiscounted amount of principal to be paid at (or before) maturity. - Market value of debt instruments: value as if acquired in market transactions on the balance sheet reporting date; only traded debt securities have observed market values. ### Baseline scenario: public debt projections and contributors (Percent of GDP unless indicated) - Public debt (Actual and Projections): - 2022: 44.4 - 2023: 40.4 - 2024: 37.4 - 2025: 34.9 - 2026: 33.0 - 2027: 31.4 - 2028: 30.2 - 2029: 29.1 - 2030: 27.9 - 2031: 26.5 - 2032: 25.5 - 2033: 24.5 - Change in public debt: - 2023: -4.0 - 2024: -3.0 - 2025: -2.5 - 2026: -2.0 - 2027: -1.6 - 2028: -1.3 - 2029: -1.0 - 2030: -1.2 - 2031: -1.4 - 2032: -1.0 - 2033: -1.1 - Contribution of identified flows (matching years): - 2023: -4.0 - 2024: -2.9 - 2025: -2.5 - 2026: -2.0 - 2027: -1.6 - 2028: -1.3 - 2029: -1.0 - 2030: -1.2 - 2031: -1.4 - 2032: -1.0 - 2033: -1.1 - Primary deficit (percent of GDP): - 2022: -2.3 - 2023: -2.2 - 2024: -2.0 - 2025: -1.9 - 2026: -1.7 - 2027: -1.3 - 2028: -1.0 - 2029: -0.9 - 2030: -0.9 - 2031: -0.9 - 2032: -0.9 - 2033: -1.0 - Noninterest revenues (percent of GDP): - 2022: 22.9 - 2023: 23.1 - 2024: 22.9 - 2025: 22.9 - 2026: 22.9 - 2027: 22.8 - 2028: 22.5 - 2029: 22.6 - 2030: 22.6 - 2031: 22.6 - 2032: 22.6 - 2033: 22.6 - Noninterest expenditures (percent of GDP): - 2022: 20.6 - 2023: 20.9 - 2024: 20.9 - 2025: 21.0 - 2026: 21.2 - 2027: 21.4 - 2028: 21.5 - 2029: 21.7 - 2030: 21.7 - 2031: 21.7 - 2032: 21.7 - 2033: 21.7 - Automatic debt dynamics (percent of GDP): - 2023: -2.2 - 2024: -1.7 - 2025: -1.1 - 2026: -0.8 - 2027: -0.8 - 2028: -0.7 - 2029: -0.5 - 2030: -0.5 - 2031: -0.4 - 2032: -0.3 - 2033: -0.2 - Real interest rate and relative inflation (contribution): - 2023: -1.6 - 2024: -0.7 - 2025: -0.2 - 2026: 0.1 - 2027: 0.1 - 2028: 0.1 - 2029: 0.1 - 2030: 0.2 - 2031: 0.2 - 2032: 0.3 - 2033: 0.3 - Real growth rate (contribution): - 2023: -0.7 - 2024: -0.7 - 2025: -1.1 - 2026: -0.9 - 2027: -0.9 - 2028: -0.8 - 2029: -0.8 - 2030: -0.7 - 2031: -0.7 - 2032: -0.6 - 2033: -0.6 - Other identified flows / Other transactions (percent of GDP): - 2023: 0.00 - 2024: 0.40 - 2025: 0.80 - 2026: 0.50 - 2027: 0.50 - 2028: 0.50 - 2029: 0.50 - 2030: 0.40 - 2031: 0.10 - 2032: -0.10 - 2033: 0.20 - Contribution of residual: - 2023: -0. 6 - 2024 onward: 0.00 (no residual contribution shown) - Gross financing needs (percent of GDP): - 2022: 2.9 - 2023: 0.9 - 2024: 0.5 - 2025: 1.3 - 2026: 1.5 - 2027: 0.6 - 2028: 1.3 - 2029: 1.7 - 2030: 2.5 - 2031: 2.6 - 2032: 1.2 - 2033: 1.2 - Debt service (of GFN; percent of GDP): - 2022: 5.3 - 2023: 3.1 - 2024: 2.5 - 2025: 3.3 - 2026: 3.2 - 2027: 2.0 - 2028: 2.4 - 2029: 2.6 - 2030: 3.4 - 2031: 3.6 - 2032: 2.2 - 2033: 2.2 - Currency composition of debt service: - Local currency: same series as debt service above. - Foreign currency: 0.00 across all years shown. - Memo macro parameters: - Real GDP growth (percent): - 2022: 9.4 - 2023: 1.5 - 2024: 2.7 - 2025: 2.5 - 2026: 2.5 - 2027: 2.5 - 2028: 2.3 - 2029: 2.2 - 2030: 2.3 - 2031: 2.3 - 2032: 2.3 - 2033: 2.2 - Inflation (GDP deflator; percent): - 2022: 6.6 - 2023: 5.3 - 2024: 3.4 - 2025: 2.4 - 2026: 2.0 - 2027: 2.0 - 2028: 2.0 - 2029: 2.0 - 2030: 2.0 - 2031: 2.0 - 2032: 2.0 - 2033: 2.0 - Nominal GDP growth (percent): - 2022: 16.6 - 2023: 6.9 - 2024: 6.3 - 2025: 5.0 - 2026: 4.5 - 2027: 4.5 - 2028: 4.6 - 2029: 4.3 - 2030: 4.3 - 2031: 4.3 - 2032: 4.3 - 2033: 4.3 - Effective interest rate (percent): - 2022: 1.4 - 2023: 1.5 - 2024: 1.7 - 2025: 1.8 - 2026: 2.1 - 2027: 2.1 - 2028: 2.3 - 2029: 2.4 - 2030: 2.6 - 2031: 2.9 - 2032: 3.2 - 2033: 3.3 - Staff commentary: Despite the projected growth slowdown and a less supportive interest rate environment, public debt is expected to continue firmly on a downwards path on the back of a strong fiscal position and still robust growth. ### Realism of baseline assumptions and historic context - Staff finds past forecast errors reveal a conservative bias across all indicators. - The projected fiscal adjustment is well within norms. - Debt reduction projections are slightly above norms but still well below Ireland's maximum historical 3-year debt reduction. - Comparative indicators discussed include: - Forecast track record (real-time t+1, t+3, t+5 vintages). - Historical output gap revisions covering annual observations from 1990 to 2019 for MAC advanced and emerging economies. - 3-Year Debt Reduction distribution: 3-year debt reduction above 75th percentile defined as 5.9 ppts of GDP. - 3-Year Adjustment in Cyclically-Adjusted Primary Balance: 3-year adjustment above 75th percentile equals 2 ppts of GDP. - Distribution indicators: - 3-year debt reduction percentile rank: 84.1 - Comment: The projected fiscal adjustment and debt reduction are put in context of historical distributions and comparator groups. ### Medium-term risk analysis and financeability - Debt fanchart and GFN financeability indicators (values shown in figure table): - Fanchart width: 92.0 1.3 - Probability of debt not stabilizing (pct): 13.7 0.1 - Terminal debt level x institutions index: 5.4 0.1 - Debt fanchart index: ... 1.6 - Average GFN in baseline: 1.00 0.4 - Bank claims on government (pct bank assets): 0.7 0.2 - Change in claims on govt. in stress (pct bank assets): 0.3 0.1 - GFN financeability index: ... 0.7 - Medium-term index (MTI) components and normalized levels highlighted; weight in MTI examples shown. - Probabilities for stress detection (2023-2028): - Prob. of missed crisis, 2023-2028 (if stress not predicted): 9.1 pct. - Prob. of false alarm, 2023-2028 (if stress predicted): 58.0 pct. - Commentary: The debt fanchart shows a relatively low probability that Ireland's public debt will not stabilize over the medium term. All medium-term tools point to low level of risks. ### Macroprudential policy for nonbanks — Ireland’s perspective and efforts (Annex VI) - Key context: - Market developments (COVID pandemic onset and fall 2022 gilt turmoil) highlighted fragility of the global financial system and need to reform macroprudential frameworks to cover nonbanks (NBFIs). - Existing frameworks focused on banks or discrete ex post measures for NBFIs have been insufficient given growing systemic importance of nonbanks. - Irish authorities’ actions and leadership: - In November 2022, the CBI announced macroprudential measures aimed at strengthening resilience of Irish property funds sector. - In July 2023, the CBI issued a Discussion Paper for public consideration on an approach to macroprudential policy for investment funds, seeking feedback on channels of systemic risk, current regulatory framework, objectives and principles, tool design and deployment, and operational considerations. - In November 2023, the CBI issued a consultation paper on steady state resilience measures for Irish authorized GBP-denominated LDI funds. - Macroprudential measures for property funds: - Rationale: limit scenarios where vulnerabilities (mainly high leverage and liquidity mismatches) in property funds cause forced asset sales that pressure CRE prices and threaten financial/macroeconomic stability. - Measures to address excessive leverage: - Irish-authorized funds with 50 percent or more of their assets in Irish property must keep total debt (total non-equity liabilities) to total assets ratio below 60 percent. - Existing property funds must comply with the 60 percent leverage limit within a five-year period from announcement (by November 24, 2027). - New property funds authorized on or after November 24, 2022 will not be authorized without leverage below the 60 percent. - Property funds investing at least 80 percent of assets under management in social housing will not be in scope of the leverage limit, subject to meeting certain criteria. - Property funds investing in development activities may use a different methodological framework for valuation of those specific assets as part of the leverage calculation if they choose. - Guidance to address liquidity mismatch: - Property funds should generally provide for a liquidity timeframe of at least 12 months, taking into account the nature of the assets held. - Existing property funds are expected to implement liquidity timeframes by May 24, 2024. - Property funds authorized on or after November 24, 2022 are expected to adhere to the Guidance immediately. - Monitoring and adjustments: - The leverage limit will be subject to regular monitoring and review by the CBI to assess macroprudential aims and economic burden. - In event of adverse CRE shocks, the CBI can consider temporarily removing the limit, subject to conditions, noting that large unanticipated price corrections may cause inadvertent breaches. - The CBI can tighten the limit if significant overheating in the Irish CRE market is identified to require countercyclical reductions in leverage. - The CBI is closely monitoring adoption, effectiveness and impact, including through new data collection and engagement with property funds. - Steady state resilience measures for Irish-authorized GBP-denominated LDI funds: - Background: 2022 gilt market crisis led to sudden yield increases; leveraged LDI funds sold gilts into low liquidity, amplifying yield rises. Irish-authorized GBP LDI funds accounted for approximately 30% of gilt sales over the crisis period (Dunne et al. 2023). - November 2022 supervisory expectations (industry letter coordinated with Luxembourg’s CSSF): GBP LDI funds to maintain an enhanced level of resilience observed at the time — resilience set to a 300-400 basis points (bps) yield buffer so funds would not experience a negative NAV from such yield increases. - Developments and consultation: - Resilience improved from 170 bps in October 2022 to approximately 440 bps in March 2023. - CBI committed to a steady state assessment of required resilience across the sector. - On November 23, 2023, CBI issued a consultation paper (in coordination with CSSF) proposing measures to enhance steady-state resilience of Irish-authorised GBP-denominated LDI funds, codifying/augmenting existing yield buffer measures using Article 25 of the AIFMD. - Proposed measures include design features to facilitate yield buffer usability, buffer composition requirements, and accompanying liquidity guidance. - Consultation open for feedback until January 18, 2024. - CBI expected to announce final steady state measures in the first half of 2024. - Macroprudential policy for investment funds (principles and approach): - The CBI’s Discussion Paper emphasizes that a macroprudential approach for investment funds cannot simply replicate the framework for banks. - Systemic risk materializes after shock events from interplay between fund-cohort vulnerabilities (notably leverage and liquidity mismatch) and interconnectedness with the rest of the financial system and/or real economy. - The Discussion Paper outlines: key objectives of a macroprudential framework for the funds sector; key principles underpinning design; and tools that could be deployed to achieve objectives. *Source: 5. Debt consolidation across sectors (content unit: 1irlea2023001 - 5. Debt consolidation across sectors:).* ### 9. The Discussion Paper advocates for strengthening the funds sector’s resilience to stresses ### 9. The Discussion Paper advocates for strengthening the funds sector’s resilience to stresses ### Objective and scope - Strengthen the funds sector’s resilience to stresses while making it less likely to amplify adverse shocks. - Build on existing regulatory frameworks that largely focus on investor protection. - Focus on collective behavior of segments of funds rather than individual funds and should not target asset prices. ### Key principles to inform and underpin the macroprudential framework for funds - In the case of investment funds, resilience-enhancing measures need to work on a collective or aggregate basis, aimed at fund cohorts; - It is important that resilience be built before crisis conditions occur. Sufficient ex ante policies should be in place targeted at the identified sources of systemic risk, though ex post tools remain important as part of a wider toolkit; - Policy measures could either seek to limit underlying vulnerabilities and/or be targeted at the interconnectedness of the sector, reducing contagion risk; - As the nature and magnitude of systemic risks evolve, it is important that policies have a degree of flexibility over time; - Policy intervention should be the result of a careful balance between costs and benefits for the broader economy; and - Global co-ordination is a critical enabler when designing a macroprudential policy framework for the funds sector. It is also important that macroprudential measures take a system-wide perspective and guard against the possibility that risks shift to other parts of the financial system. ### Operational implications highlighted - Prioritize ex ante resilience-enhancing measures targeted at identified sources of systemic risk, complemented by ex post tools as part of a wider toolkit. - Design measures at the cohort or aggregate level (fund cohorts) rather than at the level of individual funds. - Include tools that address both underlying vulnerabilities and interconnectedness to reduce contagion risk. - Ensure policy flexibility to adapt to evolving nature and magnitude of systemic risks. - Weigh policy interventions against their broader economic costs and benefits. - Emphasize global coordination and system-wide perspectives to avoid risk migration within the financial system. *Source: 1irlea2023001 - 9. The Discussion Paper advocates for strengthening the funds sector’s resilience to stresses* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1irlea2023001.pdf_