## _cr16256 - 26.3 percent, mainly due to much larger net exports contributions, while private consumption ## Source details **Canonical URL:** [_cr16256 - 26.3 percent, mainly due to much larger net exports contributions, while private consumption](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16256.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16256.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16256.pdf.json) --- ### Revised national accounts and GDP - CSO released new national accounts on July 12, showing a large upward level shift of nominal and real GDP largely on the back of higher net exports. - Real GDP growth revisions: - 2015: revised from 7.8 percent to 26.3 percent. - 2014: revised from 5.2 percent to 8.5 percent. - Real GNP growth for 2015 revised from 5.7 percent to 18.7 percent. - External and fiscal ratios (post-revision, staff calculations): - Trade surplus revised from 30.1 percent of GDP to 43.2 percent of GDP. - Current account surplus revised from 4.4 percent of GDP to 10.2 percent of GDP. - NIIP deteriorated from -69.6 percent of GDP to -207.7 percent of GDP due to recording of new large direct and portfolio investment. - General government budget deficit mechanically narrowed from 2.3 percent of GDP to 1.9 percent of GDP. - General government gross debt declined from 93.8 percent of GDP to 78.7 percent of GDP. - Revisions are in line with ESA2010 and BPM6 methodology and largely reflect operations of multinational companies (corporate restructuring, relocation of balance sheets to Ireland, contract manufacturing, increased aircraft imports for international leasing). ### Underlying activity and measurement implications - Staff and authorities agree underlying economic developments remain valid despite revisions; including revised figures in the macroeconomic framework would distort representation of underlying activity and headline ratios to GDP. - Staff recommendation: - Develop additional metrics that better reflect underlying economic activity to support policymaking and public communication. - CSO convened a high-level cross-sector consultative group to examine how best to provide insight and potentially develop additional indicators. ### Recent economic developments (2015–2016 indicators) - Activity and labor market: - Private consumption growth: revised to 4.5 percent in 2015 (old: 3.5 percent). - Retail sales growth in 2015: 8.2 percent. - Employment growth in 2015: 2.6 percent. - Unemployment rate: 2015 = 9.5 percent; June 2016 = 7.8 percent. - Prices: - Headline inflation: 0.1 percent year-on-year in June 2016. - Core inflation remained around 1 percent. - Public finances and external: - General government deficit (pre-revision national accounts) narrowed to 2.3 percent of GDP in 2015, allowing Ireland to exit the Excessive Deficit Procedure. - General government deficit in Q1 2016: €1,471 million (vs €2,331 million in Q1 2015). - General government gross debt: €206.8 billion in Q1 2016 (from €201.3 billion in Q4 2015). - Current account surplus in Q1 2016: €8,955 million (vs €4,519 million in Q1 2015). - Total gross external debt declined to €2,169 million in Q1 2016 from €2,227 million in Q4 2015. - Output and consumption: - On new national accounts, Q1 2016 output was 2.3 percent higher year-on-year; personal consumption rose by 5 percent. - Inflation context: low commodity and fuel prices more than offset rising cost of services, particularly housing rents. ### Projections, risks, and outlook - Growth projections: - Real GDP growth projected to decline to just below 5 percent in 2016 and converge to estimated potential of about 3 percent a year over the medium term. - Authorities’ projected nominal GDP growth rate for 2017: about 5 percent. - Staff projection examples (selected): 2016 projection 4.9; 2017 projection 3.2. - Output gap and external: - Output gap expected to virtually close and current account surplus to moderate by end of forecasting period. - Fiscal stance and risks: - Staff estimate government objective of reaching a structural deficit of ½ percent of GDP remains broadly within reach. - The UK vote to leave the EU amplifies downward risks; severity depends on future UK–EU relationship regarding trade, financial flows, and movement of labor. - Policymakers advised to monitor spillovers closely and stand ready to take remedial actions, including countercyclical fiscal policy and central bank liquidity backstops in euros and other currencies if needed. ### Financial sector and vulnerabilities - Progress since crisis: - Regulatory and supervisory frameworks upgraded and banking sector soundness improved. - Banking sector returned to profitability in 2014-15 reflecting higher net interest income, better asset quality, reduced operating costs, and provisioning reversals. - Remaining fragilities: - Crisis legacies persist: high public and private debts, large stock of NPLs. - High share of impaired loans, with increasing portion of mortgages in deep arrears (above 720 days). - Provision coverage ratio at about 52 percent of total NPLs at end-2015. - Underlying bank profitability remains subdued; bank balance sheets contracting despite gradual pickup in new lending. - Supervisory and macroprudential actions: - IMF FSAP evaluated progress; Directors welcomed improvement but underscored persistent vulnerabilities and need for continued supervisory vigilance. - Significant progress in reducing NPLs, but continued efforts needed; authorities’ plans supported, including access to financial and legal advice for distressed mortgage borrowers. - Directors supported maintaining macroprudential measures on mortgage lending and central bank’s plan to periodically assess effectiveness. - Importance of monitoring commercial real estate market and asset management sector emphasized. ### Policy recommendations and priorities - Fiscal priorities: - Continue public debt reduction to lessen vulnerability and rebuild room for countercyclical policy. - Create a “rainy day” fund over the medium term. - Rebalance tax mix away from direct taxes; widen tax base; reduce burden on middle-income households. - Increase spending efficiency, particularly in health; better target social transfers to improve intergenerational fairness. - Public investment: - Higher and prioritized capital expenditure to buttress competitiveness. - Financial sector: - Continue efforts to reduce NPLs and strengthen private sector balance sheets. - Macroprudential and housing: - Maintain mortgage macroprudential limits as a permanent feature; periodically assess impact and effectiveness. - Implement policies to alleviate housing supply shortage and expedite new construction. - Structural reforms for inclusive growth: - Broaden financing options for SMEs; support innovation; enhance labor activation and technical and vocational programs; strengthen female labor force participation. - Monitoring and communication: - Develop additional metrics that better reflect underlying economic activity for policymaking and public communication. ### Onshoring of intangible assets to Ireland (Box summary) - Overview: - Some MNEs restructured and relocated intangible assets to countries with supportive business environments; Ireland experienced a sharp increase in intangibles investment in 2015. - Quantitative findings: - Intangibles investment increased to 9½ percent of GDP in 2015 from about 5 percent of GDP in 2014. - Multinationals account for 57 percent of the business sector’s gross value added and 20 percent of employment. - Gross fixed capital formation in 2015 mainly driven by investment in intellectual property by MNEs (and a rise in machinery and construction investment). - Economic implications: - Intangibles onshoring is matched by imports and is GDP neutral during the year of the transaction but adds to capital stock and may boost net exports in future. - Surge in intangibles likely contributed to strong CIT receipts in 2015; only one half of the 2015 CIT overperformance can be explained by corporate profitability. - Policy considerations: - Monitor composition of investment and imports to distinguish transitory GDP-neutral onshoring transactions from additions to productive capital stock. - Assess medium-term implications for net exports and royalty flows as onshored intangibles begin to affect external income payments. - Continue vigilance on tax-policy interactions with multinational behavior in the context of BEPS initiatives. ### Banking system repair and supervisory stance - Banking repair progress: - Liquidity indicators improved as banks reduced wholesale funding. - Capitalization stronger though deferred tax assets add substantially to totals. - Underlying profitability subdued; balance sheet contraction continues. - Risks and recommendations: - Address high share of impaired loans and deep mortgage arrears. - Strengthen stress-testing capacity and retain experienced supervisors. - Continue disposal of state bank shareholdings to reduce public debt and contingent liabilities, acknowledging market conditions. ### Housing, macroprudential measures, and property markets - Macroprudential measures introduced in 2015: - LTI and LTV limits implemented; staff recommended retaining them as permanent features and converting LTI to DTI when Central Credit Register (CCR) fully operational. - Central Bank launched annual review of impact/effectiveness to be completed by November 2016. - Housing supply and policy: - Government measures (November 2015) include rebates for housing construction schemes and new planning guidelines. - NAMA to fund delivery of 20,000 residential units by 2020. - Action Plan for Housing aims at delivering 25,000 new houses per year by the end of this decade. - Introduced a vacant site levy effective by 2018 to deter land hoarding. - Commercial real estate: - CRE prices surged since 2013; FSAP analysis inconclusive (overvaluation of 10 percent to undervaluation of 8 percent depending on method). - Staff recommended close monitoring, improved data, proper underwriting standards and activation of policy tools if imbalances emerge. ### Growth, productivity, labor market, and inclusion - Medium-term growth and productivity: - Potential GDP growth projected to stabilize at nearly 3 percent; TFP growth projected just around one percent. - TFP of SMEs lags large firms; foreign-owned medium/large firms outperform domestic peers. - Labor market and inclusion: - Skill mismatches, elevated youth and long-term unemployment, and low female labor force participation persist. - Staff suggestions: affordable high-quality child care, reduce high marginal income tax rates for second earners, upgrade skills via technical and vocational programs. - Policy actions to boost productivity and inclusion: - Broaden financing options for SMEs; increase public support for SME innovation and R&D; implement CCR and Strategic Banking Corporation of Ireland measures. ### Debt sustainability, external debt, and stress scenarios (selected) - Public debt and DSA findings: - Rapid nominal GDP growth and revisions lowered debt-to-GDP ratio to 93.8 percent at end-2015 (from higher previous estimates). - Debt burden threshold for “high risk” category: 85 percent of GDP; Ireland remained classified as highly vulnerable at 93.8 percent. - Staff project public debt to fall to around 76 percent of GDP by 2021 under government plans; alternative stress scenarios show higher peaks. - Gross Financing Needs (GFN): - Peak under combined macro-fiscal shock: 13.7 percent of GDP (vulnerability threshold = 20 percent). - GFN projected to peak at about 12 percent of GDP in 2020, dropping to about 5 percent in 2021. - External debt (non-IFSC sector): - External debt declined from about 320 percent of GDP in 2010 to 248.3 percent of GDP in 2015 (baseline). - Including IFSC, total external debt remains very high at 815 percent of GDP. - Table 1 baseline external debt (percent of GDP): 2015 = 248.3; 2016 = 223.5; 2017 = 206.7; 2018 = 190.8; 2019 = 176.2; 2020 = 162.4; 2021 = 149.5. - Stress-test outcomes (selected box values): - Baseline: 149 (external debt in percent of GDP, 2021). - Interest rate shock: 156. - Growth shock: 162. - Non-interest current account shock: 163. - Combined shock: 169. - Historical scenario: 214 (in one panel) and 213 (with 30% depreciation shock panel). - Contingent liability shock: - A 10 percent of GDP contingent liability shock combined with growth shock would push gross public debt to around 94 percent of GDP in 2017 before declining to about 86 percent by 2021. - Upside from asset sales: - Sale of all state participation in banks would generate about 5 percent of GDP based on end-March 2016 stock prices (not included in baseline). ### Vulnerabilities of household and corporate sectors (Annex VII highlights) - Household sector: - Household debt-to-disposable income ratio: 155.1 percent in 2015Q4 (€151 billion or 74 percent of GDP). - 23 percent of mortgage loans remain in negative equity. - 93 percent of mortgages have variable interest rates; tracker loans 51 percent; SVR loans 41 percent (as of 2015Q2). - At LTV > 150 percent, PD under adverse scenario exceeds 20 percent. - Tracker mortgages average PD of 6 percent in adverse scenario; SVR customers about 10 percent. - Corporate sector: - Share of firms with ICR < 1 moderated to 18 percent in 2013 from about 28 percent in 2009. - Risky debt share declined to about 10 percent in 2013 from 15 percent in 2009. - SMEs notably vulnerable: nearly one half of small firms’ total debt is risky; medium firms 9 percent; large firms 2 percent. - Under an adverse scenario, share of firms with ICR < 1 would triple to 47 percent from 16½ percent baseline; risky debt would increase to about 15 percent. - Policy implications: - Continue corporate and household NPL resolution, strengthen legal processes, support restructuring of viable firms, and implement policies facilitating exit of unviable firms. ### Key statistics (selected, as presented) - Real GDP growth: 2011 2.6; 2012 0.2; 2013 1.4; 2014 5.2 (old)/8.5 (new); 2015 7.8 (old)/26.3 (new); 2016 projection 4.9; 2017 projection 3.2. - Private consumption: 2015 new 4.5 percent (old 3.5 percent). - Gross fixed investment: 2015 new 32.7 percent (old 28.2 percent). - Exports of goods (2015 new): 55.4 percent (old 17.2 percent). - Exports of services (2015 new): 11.5 percent (old 10.0 percent). - Imports of goods (2015 new): 13.6 percent (old 8.4 percent). - Real GNP: 2015 new 18.7 percent (old 5.7 percent). - Gross national saving (percent of GDP) 2015: 26.5. - General government gross debt (percent of GDP): 2015 staff table 93.8 (pre-revision); staff-calculated post-revision 78.7. - General government net debt (percent of GDP): 2015 72.1 (staff table). - Current account (percent of GDP): 2015 old 4.4; 2015 new 10.2. - Unemployment rate: 2015 9.5 percent; June 2016 7.8 percent. - Selected fiscal and macro indicators (from staff tables): - Real GDP (annual percent change): 2015 = 7.8; 2016 = 4.9; 2017 = 3.2. - Gross public debt: about 94 percent of GDP by end-2015; expected decline below 90 percent by end-2016. - Government cash balance: about €8 billion as of end-June, 2016. - Ireland raised €13.4 billion in long-term bonds in 2015 and €6 billion in first half of 2016. - ECB secondary market purchases: about €1.1 billion a month. *Prepared by The European Department; July 21, 2016.* ### 26.3 percent, mainly due to much larger net exports contributions, while private consumption ### _cr16256 - 26.3 percent, mainly due to much larger net exports contributions, while private consumption ### Revised national accounts and GDP - CSO released new national accounts on July 12, showing a large upward level shift of nominal and real GDP largely on the back of higher net exports. - Real GDP growth for 2015 was revised from 7.8 percent to 26.3 percent. - Real GDP growth for 2014 was revised from 5.2 percent to 8.5 percent. - Real GNP growth for 2015 was revised from 5.7 percent to 18.7 percent. - Trade surplus revised from 30.1 percent of GDP to 43.2 percent of GDP. - Current account surplus revised from 4.4 percent of GDP to 10.2 percent of GDP. - Net international investment position (NIIP) deteriorated from -69.6 percent of GDP to -207.7 percent of GDP due to recording of new large direct and portfolio investment. - General government budget deficit mechanically narrowed from 2.3 percent of GDP to 1.9 percent of GDP in staff calculations. - General government gross debt declined from 93.8 percent of GDP to 78.7 percent of GDP in staff calculations. - Revisions are in line with ESA2010 and BPM6 methodology and largely reflect operations of multinational companies (corporate restructuring, relocation of balance sheets to Ireland, contract manufacturing, increased aircraft imports for international leasing). ### Underlying activity and measurement implications - Staff and authorities agree underlying economic developments remain valid despite revisions; including revised figures in the macroeconomic framework would distort representation of underlying activity and headline ratios to GDP. - Staff recommend developing additional metrics that better reflect underlying economic activity to support policymaking and public communication. - CSO convened a high-level cross-sector consultative group to examine how best to provide insight and potentially develop additional indicators. ### Recent economic developments (2015–2016 indicators) - Private consumption growth: revised to 4.5 percent in 2015 (old: 3.5 percent). - Retail sales growth in 2015: 8.2 percent. - Employment growth in 2015: 2.6 percent. - Unemployment rate declined below 8 percent; specifically 7.8 percent in June 2016. - Headline inflation hovered around zero; headline inflation was 0.1 percent year-on-year in June 2016; core inflation remained around 1 percent. - General government deficit (pre-revision national accounts) narrowed to 2.3 percent of GDP in 2015, allowing Ireland to exit the Excessive Deficit Procedure. - General government deficit in Q1 2016 reported at €1,471 million (vs €2,331 million in Q1 2015). - General government gross debt rose to €206.8 billion in Q1 2016 from €201.3 billion in Q4 2015 (reflecting net increase in issuance of debt securities). - Current account surplus in Q1 2016: €8,955 million (vs €4,519 million in Q1 2015). - Total gross external debt declined to €2,169 million in Q1 2016 from €2,227 million in Q4 2015. - Output: on new national accounts, Q1 2016 output was 2.3 percent higher year-on-year; personal consumption rose by 5 percent. - Inflation context: low commodity and fuel prices more than offset rising cost of services, particularly housing rents. ### Projections, risks, and outlook - Taking into account negative spillovers, real GDP growth projected to decline to just below 5 percent in 2016 and converge to estimated potential of about 3 percent a year over the medium term. - Output gap expected to virtually close and current account surplus to moderate by end of forecasting period. - Staff estimate government objective of reaching a structural deficit of ½ percent of GDP remains broadly within reach. - Authorities plan to prepare full macroeconomic projections in advance of Budget 2017, including projected nominal GDP growth rate for 2017 of about 5 percent. - The UK vote to leave the EU amplifies downward risks; severity depends on future UK–EU relationship regarding trade, financial flows, and movement of labor. - Policymakers advised to monitor spillovers closely and stand ready to take remedial actions, including countercyclical fiscal policy and central bank liquidity backstops in euros and other currencies if needed. ### Financial sector and vulnerabilities - Since the crisis, financial regulatory and supervisory frameworks upgraded and banking sector soundness improved; crisis legacies persist (high public and private debts, large stock of NPLs). - IMF Financial Sector Assessment Program evaluated progress; findings summarized in accompanying Financial System Stability Assessment. - Directors welcomed improvement in banks’ financial soundness but underscored persistent banking vulnerabilities and need for continued supervisory vigilance and careful risk management. - Significant progress in reducing NPLs, but continued efforts needed; supported authorities’ plans including providing access to financial and legal advice to distressed mortgage borrowers. - Directors supported maintaining macroprudential measures on mortgage lending and central bank’s plan to periodically assess effectiveness. - Importance of monitoring commercial real estate market and asset management sector was emphasized. ### Policy recommendations and priorities - Fiscal: continue public debt reduction to lessen vulnerability and rebuild room for countercyclical policy; create a “rainy day” fund over the medium term. - Fiscal reform: rebalance tax mix away from direct taxes; widen tax base; reduce burden on middle-income households; increase spending efficiency, particularly in health; better target social transfers to improve intergenerational fairness. - Public investment: higher and prioritized capital expenditure to buttress competitiveness. - Financial sector: continue efforts to reduce NPLs and strengthen private sector balance sheets. - Macroprudential and housing: maintain mortgage macroprudential limits as a permanent feature; periodically assess impact and effectiveness; implement policies to alleviate housing supply shortage. - Structural reforms to support inclusive growth: broaden financing options for SMEs; support innovation; enhance labor activation and technical and vocational programs; strengthen female labor force participation. - Monitoring and communication: develop additional metrics that better reflect underlying economic activity for policymaking and public communication. ### Key statistics (selected, as presented) - Real GDP growth: 2011 2.6; 2012 0.2; 2013 1.4; 2014 5.2 (old)/8.5 (new); 2015 7.8 (old)/26.3 (new); 2016 projection 4.9; 2017 projection 3.2. - Private consumption: 2015 new 4.5 percent (old 3.5 percent). - Gross fixed investment: 2015 new 32.7 percent (old 28.2 percent). - Exports of goods (2015 new): 55.4 percent (old 17.2 percent). - Exports of services (2015 new): 11.5 percent (old 10.0 percent). - Imports of goods (2015 new): 13.6 percent (old 8.4 percent). - Real GNP: 2015 new 18.7 percent (old 5.7 percent). - Gross national saving (in percent of GDP) 2015: 26.5. - General government gross debt (percent of GDP): 2015 staff table 93.8 (pre-revision); staff-calculated post-revision 78.7. - General government net debt (percent of GDP): 2015 72.1 (staff table). - Current account (percent of GDP): 2015 old 4.4; 2015 new 10.2. - Unemployment rate: 2015 9.5 percent; June 2016 7.8 percent. *Prepared by The European Department; July 21, 2016.* ### 1. Onshoring of Intangible Assets to Ireland _______________________________________________________ 8 ### 1. Onshoring of Intangible Assets to Ireland ### Overview - Some multinational enterprises (MNEs) have restructured and relocated intangible assets, such as patents and copyrights, to countries with supportive business environments in response to increasing multilateral efforts to combat aggressive tax planning and avoidance, including the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan. - Ireland, which maintains a competitive taxation environment, including for intellectual property-related activities (Knowledge Box), experienced a sharp increase in intangibles investment in 2015. ### Quantitative findings - Intangibles investment increased to 9½ percent of GDP in 2015 from about 5 percent of GDP in 2014. - Multinationals account for 57 percent of the business sector’s gross value added and 20 percent of employment. - Gross fixed capital formation in 2015 was mainly driven by investment in intellectual property by MNEs (and a rise in machinery and construction investment). - When aircraft purchases by leasing companies and intangibles are excluded from both investment and imports, the core demand expansion is more subdued and net exports contribute positively to GDP growth. ### Economic implications and analysis - Intangibles investment related to patent onshoring is matched by imports and thus is GDP neutral during the year of the transaction. - The investment nevertheless adds to Ireland’s capital stock and, ceteris paribus, will contribute positively to net export growth in the future (mainly due to lower royalty payments abroad). - The surge in intangibles investment likely contributed to strong corporate income tax (CIT) receipts in 2015; however, only one half of the 2015 CIT overperformance can be explained by corporate profitability, and BEPS-related changes could have incentivized corporate restructuring in Ireland with a favorable impact on CIT revenues. ### Policy considerations - Monitor the composition of investment and imports to distinguish transitory GDP-neutral onshoring transactions from additions to productive capital stock. - Assess medium-term implications for net exports and royalty flows as onshored intangibles begin to affect external income payments. - Continue vigilance on tax-policy interactions with multinational behavior in the context of international BEPS initiatives to ensure sustainable revenue and competitiveness outcomes. *Source: IMF Staff Report content unit "1. Onshoring of Intangible Assets to Ireland" (Box 1 and related text).* ### 10. The banking system repair continues, but challenges remain. The recent Financial Sector ### 10. The banking system repair continues, but challenges remain ### Banking-sector repair: recent progress and remaining fragilities - Liquidity indicators have improved as banks reduced their wholesale funding. - Capitalization is stronger, though deferred tax assets add substantially to the total. - The banking sector as a whole returned to profitability in 2014-15 reflecting: - higher net interest income, - better asset quality, - a reduction in operating cost, - provisioning reversals as collateral values increased and loan restructuring continued. - Underlying bank profitability remains subdued. - Bank balance sheets are still contracting despite a gradual pick up in new lending. - High share of impaired loans poses fragilities, particularly given the increasing portion of mortgages in deep arrears (above 720 days) in the total stock of mortgage arrears. - Provision coverage ratio remained broadly stable, and stood at about 52 percent of total nonperforming loans (NPLs) at end-2015. ### Outlook and macroeconomic projections - GDP growth is projected just below 5 percent in 2016 on account of less vigorous domestic demand, mainly due to investment. - Private consumption is expected to keep growing at a dynamic pace reflecting higher employment, lower household indebtedness, and positive wealth effect from rising property prices. - Over the medium term, the Irish economy is likely to be affected by the consequences of the UK vote to leave the EU; the severity will depend on the future UK–EU relationship regarding trade, financial flows, and movement of labor. - Taking into account negative spillovers consistent with model-based calculations in the “limited” scenario outlined in the UK 2016 Article IV report and the accompanying Selected Issues paper, Ireland’s real GDP growth has been revised downward in 2017-18. - Over the medium term, growth is projected to decelerate and converge to its estimated potential (about 3 percent a year) on the back of more moderate export growth and investment activity. - The output gap is expected to virtually close and the current account surplus to moderate by the end of the forecasting period. ### Risks to the outlook (tilted to the downside) - External risks have worsened since the UK referendum result and now prevail: - Prolonged uncertainty over the UK’s new relationship with the EU, larger-than-expected slowdown in the UK and in the rest of Europe, and higher financial market volatility would have a significant adverse effect on Ireland. - In these circumstances, a countercyclical fiscal policy together with the central banks’ commitment to provide additional liquidity would help lessen the impact. - Over the medium term, possible relocation of EU-oriented firms from the UK to Ireland could partly mitigate some effects. - Upside: ongoing restructuring of operations by multinationals could reinforce Ireland’s attractiveness for FDI and increase the capital stock. - Surge in financial market volatility or geopolitical tensions could further undermine confidence and investment. - ECB’s QE, the government’s limited financing needs, and sizeable cash buffers (3½ percent of GDP as of end-June 2016) would mitigate impact on sovereign spreads. - An extended period of low euro area growth could hurt confidence, investment, and FDI. - Inflows of refugees are expected to be small, with a limited fiscal impact. - Domestic risks seem moderate: - Rising incomes and lower deleveraging could lift private consumption and investment above the baseline. - Continued rapid property price growth could generate new vulnerabilities. - Reform fatigue combined with strong growth could lead to policy reversals amid political fragmentation. - The impaired credit channel remains a medium-term risk if future demand for bank lending is not met with adequate supply. ### External position and competitiveness - Ireland’s external position is broadly in line with fundamentals and the economy remains competitive. - External Balance Assessment (EBA) methodologies suggest the external position is broadly in line with fundamentals and desirable policy settings. - The EBA Current Account approach indicates a slight undervaluation of the currency, but the current account gap can be largely explained by undistributed profits of foreign companies headquartered in Ireland. - The External Sustainability and the Real Effective Exchange Rate approaches suggest minor overvaluation. - Competitiveness is strong in the services sector. - Goods exports have resumed robust growth, particularly in the pharmaceutical sector, which appears less cyclical than global trade. - Traditional exports have performed strongly, benefiting from the depreciation of the euro. - Some trade losses could be expected following a depreciation of sterling and a reduction of UK demand. ### Authorities’ views - Authorities broadly shared staff’s assessment regarding Ireland’s economic outlook and risks. - They saw prospects for robust real GDP growth, somewhat decelerating over the medium term. - Continuous progress in resolution of financial crisis legacies alongside increased market confidence should support domestic demand and reduce unemployment. - They concurred with the external sector assessment and predominant downside external risks due to Ireland’s high openness. - They noted mitigation from export concentration in resilient sectors such as pharmaceuticals. - Domestic factors noted as downside risks: tight housing markets (adverse effect on labor mobility and competitiveness) and potential sectoral wage pressures. - Increased political fragmentation could complicate policymaking; better-than-expected domestic demand and additional patent on-shoring represent potential upside. - Authorities’ initial estimate (based on the government’s Summer Economic Statement) is that growth in 2017 will be about ½ percent lower than previously expected. - The authorities will prepare a full macroeconomic projection in advance of Budget 2017 in October, including updated estimates of economic growth, the public finances and the fiscal space, taking account of developments up to that time and the estimated economic impact of the UK vote. - Authorities have published contingency plans to deal with financial market volatility, potential effects on export industries, and FDI flows. ### Rebuilding resilience and supporting sustainable, inclusive growth — overarching priorities - Policies should focus on: - further reducing public debt while enhancing spending efficiency, - lessening private sector vulnerabilities, - improving bank balance sheets, - mitigating boom-bust cycles, - addressing structural weaknesses to support medium-term inclusive growth and job creation. ### Ireland: Medium-term policy priorities — Fiscal policy - Continue rebuilding fiscal buffers, increase expenditure efficiency, and rebalance the tax mix. - Ireland is on track to further improve its fiscal position on the back of strong growth: - Some spending overruns, mainly in the health sector, are estimated to be more than offset by higher-than-expected tax revenues due to solid performance in early 2016. - Staff project the fiscal deficit to narrow to 0.9 percent of GDP in 2016 and the public debt to fall below 90 percent of GDP. - Given uncertainty about durability of exceptional CIT performance, staff advocated saving near-term unanticipated revenues and using them for debt reduction. - Fiscal policy should aim to rebuild buffers: - The high degree of openness increases susceptibility to external shocks and volatility of business cycles. - Staff emphasized continued reduction in public debt to rebuild room for countercyclical fiscal policy. - Staff argued that mere compliance with the SGP rules might not be sufficiently prudent. - Staff estimate that maintaining the medium-term objective (MTO) of a structural budget deficit of 0.5 percent of GDP, once achieved, would imply an unwarranted pro-cyclical fiscal policy given positive output gaps estimated through 2021. - Staff advocated that the authorities overachieve the MTO, with primary balance surpluses, over the medium term. - Avoiding periodic upward revisions of the three-year expenditure ceilings and saving potential tax windfall gains would help rebuild fiscal buffers. - Government plans and staff assessment: - The government’s Summer Economic Statement (SES) (June 21) expressed intention to achieve a structural budget deficit of 0.5 percent of GDP (MTO) by 2018. - The government allocates the fiscal room available under the SGP rules 2:1 toward expenditure increases and tax reductions during 2017-21. - After 2018, the government intends to follow a countercyclical fiscal policy and save a portion of the fiscal space. - Staff estimate the government’s objective of achieving the MTO by 2018 remains broadly within reach even under staff’s scenario of mild spillovers from the UK vote. - Public debt is projected to remain on a downward trend reaching around 76 percent of GDP by 2021. - In the event of a larger-than-expected fallout from the UK vote, authorities should be ready to take remedial actions, such as a countercyclical fiscal policy together with central banks’ commitment to backstop liquidity in euros and other currencies. ### Fiscal policy measures to support job-rich growth - Rebalance the tax mix and broaden the tax base while improving spending efficiency and addressing infrastructure needs: - Rebalancing the tax mix would boost sustainable revenues and support job creation. - Compared to EU peers, Ireland’s tax system relies more on direct taxes, less on property and wealth taxes, while indirect taxes are about the EU average. - Personal income taxation (PIT and Universal Social Charge-USC) has a relatively narrow base (about 30 percent of households are exempted) and rapid progressivity (top marginal rates among the highest in the OECD). - Recent budgets reduced the top marginal rate (now below 50 percent for middle-income households earning up to €70,044), but the tax base has been narrowed by increasing the USC threshold and thus the proportion of exempt households from 27 to 30 percent. - Effects of current design: large tax burden on middle-income households, undermined female labor force participation, welfare traps for low-skilled workers, and discouraged high-skilled worker migration to Ireland. - Consideration could be given to merging the USC into a more comprehensive PIT, with lower rates below the median wage and a broader base. - Potential revenue losses could be compensated by decreasing the number of products with reduced and zero VAT rates and by faster scaling up the property tax. - Income distribution concerns could be mitigated by means-tested allowances for low-income households. - Enhancing spending efficiency would improve delivery of public services. - By most metrics, Ireland is a low spending country. - Expenditure is generally efficient, especially social spending where impact on income inequality reduction is the highest in the EU. - Scope for efficiency gains exists in the health sector; ongoing reforms (strengthening of primary care, reform of hospital budgeting, greater generic drug use) should progress as planned. - Improved targeting of social transfers would enhance inter-generational fairness for the young. - Increasing capital expenditure would buttress competitiveness and support well-being. - Ireland ranks last in the OECD for public investment as a share of government expenditure. - Technology infrastructure (broadband) and core infrastructure (power distribution and ports) need upgrades, and maintenance of existing infrastructure stock is not fully met. - Public capital expenditure should be scaled up and prioritized; strengthening the evaluation framework for public investment would help maximize growth impact. *Source: IMF country report excerpt provided in the content unit.* ### 20. The government reiterated its broad objective to build a social economy based upon ### _cr16256 - 20. The government reiterated its broad objective to build a social economy based upon ### Government objectives and fiscal stance - Broad objective: build a social economy based upon sound public finances. - Key government targets and priorities: - Create additional 200,000 jobs by the end of this decade, mostly outside Dublin. - Establish a rainy day fund to avoid procyclical fiscal policy and build adequate fiscal buffers given Ireland’s high degree of economic volatility. - Address growing demand for housing and supply of critical infrastructure, including main gaps in public transportation across regions and in large cities to achieve more regionally balanced growth. - Value-for-money considerations and continued focus on reform of public services remain a key priority. - Tax policy intentions: - Achieve a stable tax mix and entrench recent base-broadening. - Reform income tax system—including a phasing out of the USC—to expand the base while reducing the burden for lower and middle income earners; reform seen as key to promoting employment growth. - Corporate taxation: recognize wide uncertainty over transitory vs durable nature of recent CIT upswing; future short-term revenue windfalls should be saved. - VAT exemptions: possible removal but to be addressed within a European context. - Property tax: maintain stable property tax revenues during current upswing; current house price valuation freeze remains in place. ### Macro‑financial risks and FSAP findings - FSAP conclusions and sector linkages: - Banking sector tightly connected with Ireland’s real economy, but not with rest of the other financial sector. - Close bank-sovereign linkages through banks’ holdings of government bonds and government’s holdings of bank equity; limited linkages between banking system and funds industry, insurance companies, or pension funds. - Financial soundness of banks, households, and corporates improved, but legacy issues amplify vulnerabilities to shocks. - Solvency and liquidity stress tests under an adverse macroeconomic scenario show significant impact: capital and leverage of several banks could fall below certain hurdle rates (Annex VI). - Implications and policy focus: - Strengthen banking sector resilience to support sustainable growth. - Contain crisis legacies and property market swings to enhance private sector resilience. - Monitor potential emerging imbalances in real estate markets. ### UK referendum (Brexit) channels of impact on banking - Possible channels through which the banking system could be affected: - Profitability of Irish subsidiaries in the UK could be adversely affected by a slowdown in the UK economy and pound depreciation versus the euro. - Deterioration in banks’ asset quality partly via a fall in UK property prices. - Lower demand and profitability for Irish corporates exporting to the UK could hamper debt repayment capacity. - Slower Irish activity and higher unemployment could affect lending volumes, NPLs, bank profitability, and repair of private sector balance sheets. - Heightened uncertainty and market volatility could increase bank funding costs, although heavy reliance on deposits lessens this risk. - Liquidity risks mitigated by central banks’ commitment to backstop liquidity in euros and other currencies. ### Banking sector profitability and risks - Challenges to durable profitability: - Pre-provision profits remain modest. - Headwinds include low credit demand, ongoing system-wide deleveraging, limited scope for lower funding costs, prevalence of low-yield tracker mortgages, unresolved distressed loans, and need to upgrade technology infrastructure. - Potential for banks to lean toward riskier activities to boost earnings; staff urged balance between profit seeking and risk management, conservative collateral valuations, and adequate provisioning. - Selected indicators cited (Q4 data, three main domestic banks: Allied Irish Banks, Bank of Ireland, Permanent TSB): - Mortgages: 90 percent of outstanding mortgages at variable rates as of March 2016. - NPL ratio examples shown in table footnotes (no aggregation invented). ### Household sector vulnerabilities and mortgage arrears - Household indebtedness: - Irish household indebtedness remains high by international standards; about one-tenth of mortgage holders were in negative equity at end-2015. - Mortgage arrears and vulnerabilities: - Deep arrears (over 720 days) have remained stubbornly high. - Some mortgage holders are highly vulnerable even with currently performing loans; high LTV ratios increase default likelihood. - In an adverse scenario, young borrowers and first-time buyers with variable-rate mortgages are particularly vulnerable (Annex VII). - Staff recommendations for households: - Reduce household NPLs to improve banks’ balance sheets and reduce drag on domestic demand; advance resolution of distressed mortgages with focus on deep arrears. - Complement loan restructuring with efforts to ensure legal process supports timely enforcement of contracts and collateral. - Safeguard households’ repayment capacity through prudent mortgage lending: banks should use conservative assumptions on future interest rates and incomes, account for difficulties enforcing collateral, deleveraging, and legacy burdens. - Welcome increased fixed-rate mortgage offerings (though 90 percent of stock as of March 2016 remains variable) as they reduce vulnerability to interest rate shocks. ### Corporate sector vulnerabilities and SME financing - Current conditions: - Recovery supports nonfinancial corporate sector, but high NPLs (13 percent of corporate loans in 2016Q1) and tight credit conditions for SMEs leave vulnerabilities elevated. - Ongoing deleveraging reflects demand and supply constraints for SMEs, including higher borrowing costs and elevated loan-application rejection rates compared to European peers. - FSAP analysis and risks: - Small firms have higher share of risky debt than larger enterprises. - Decline in profitability and increase in interest rates would likely push many firms into a vulnerable state and increase defaults (Annex VII). - Staff recommendations: - Continue pace of corporate NPL resolution, including loan restructuring for the most vulnerable yet viable firms. - Close data gaps on firm-level balance sheets to help Central Bank of Ireland detect and mitigate buildup of new vulnerabilities. ### State ownership in banks and privatization progress - Progress and figures: - Two state-owned banks: AIB and PTSB. - PTSB reduced government stakes to 75 percent from 99 percent in April 2015 and covered capital shortfall identified in ECB’s 2014 comprehensive assessment. - AIB redeemed €1.4 billion of government preference shares and converted the remainder (€2.1 billion) to ordinary shares in December 2015. - Government announced plans to reduce stakes in AIB to 75 percent and further lower holdings in PTSB; specific timeline not set. - Staff view: - Continue disposal of state shareholding to reduce public debt and contain contingent liabilities, acknowledging market conditions (including UK vote) could affect the process. ### Supervision, SSM, and capacity building - Regulatory and supervisory developments: - Financial regulatory framework significantly strengthened since the crisis; Central Bank of Ireland increased resources and adopted a more proactive stance. - Single Supervisory Mechanism (SSM) functioning: Joint Supervisory Teams (JSTs) for Irish banks operate effectively; SSM methodologies, processes, and procedures fully operational. - Staff recommendations: - Preserve recent supervisory gains amid possible changes to banking industry landscape and business models. - Enhance stress testing capacity to challenge banks’ risk modeling. - Review personnel policies to attract and retain experienced supervisors given high turnover. ### Macroprudential policy and property markets - Macroprudential measures: - Measures implemented in 2015 designed to increase resilience of banks and households to property market swings; staff recommended retaining LTI and LTV limits as permanent features of mortgage market. - Staff supported converting LTI limit to a debt-to-income (DTI) limit once Central Credit Register (CCR) becomes fully operational. - Central Bank launched first annual review of impact and effectiveness to be completed by November 2016. - Commercial real estate (CRE) risks: - CRE prices surged since 2013; FSAP analysis provides inconclusive results ranging between an overvaluation of 10 percent to an undervaluation of 8 percent depending on methodology and sample period (Annex VIII). - New CRE lending increasing from low levels but credit stock continues to decline; demand largely funded by foreign investors and domestic equity rather than banks. - Staff recommended close monitoring of CRE, address data gaps, ensure proper underwriting standards and property valuation, and activate policy tools if early signals suggest buildup of imbalances. - Authorities established a new comprehensive CRE market database. - Housing supply and policy measures: - Government measures (November 2015): rebates for housing construction schemes meeting criteria and new planning guidelines seeking to reduce building costs. - National Asset Management Agency (NAMA) to fund delivery of 20,000 residential units by 2020 (within its mandate). - Staff welcomed intent to publish an Action Plan for Housing over the summer and stressed additional policy actions to expedite new construction. - Authorities’ commitments and targets: - Action Plan for Housing aims at delivering 25,000 new houses per year by the end of this decade. - Intend to establish an infrastructure fund for local authorities to develop new housing supply and shorten building permit application processes. - Introduced a vacant site levy that will become effective by 2018 to deter land hoarding. *Source: _cr16256 - 20. The government reiterated its broad objective to build a social economy based upon (IMF staff report).* ### 34. Strong and sustainable economic growth is needed to reduce vulnerabilities. Staff ### Strong and sustainable economic growth is needed to reduce vulnerabilities. Staff ### Growth outlook and productivity - Staff project potential GDP growth to gradually stabilize at nearly 3 percent over the medium term, mainly due to the partly-cyclical rise in labor participation and capital accumulation largely driven by the multinationals’ activity. - Total factor productivity (TFP) growth is projected to remain modest just around one percent under current policies, falling short of the robust increases observed in the late 1990s and early 2000s. - Staff analysis (Selected Issues on Firm-Level Productivity and its Determinants: The Irish Case) indicates: - TFP growth of SMEs has lagged behind that of large firms. - Medium and large-sized foreign-owned firms outperformed their domestic peers. - Domestic firm-level factors that may have contributed to the slowdown in TFP growth include limited access to finance, weak financial soundness, and low research and development (R&D) activity. - Staff encouraged authorities to alleviate impediments by broadening financing options for SMEs and advancing NPL resolution. - Gross domestic expenditure on R&D is mainly financed by large enterprises and is below the OECD average; staff stressed the need to encourage higher innovation activities among domestic SMEs through greater direct public sector support and enhanced partnerships with education institutions. ### Labor market, inclusion, and skills - Job-rich growth would foster inclusion: despite the robust recovery, some parts of the population have yet to feel its benefits. - Labor market challenges noted: - Skill mismatches are relatively high in some segments. - Youth and long-term unemployment rates remain elevated, the latter particularly among adults with lower educational attainment. - Female labor force participation is among the lowest in the EU. - Staff policy suggestions to strengthen incentives and labor supply: - Provide more affordable and high-quality child care. - Reduce the high marginal income tax rates for second earners. - Upgrade labor skills and reduce skill mismatches by strengthening labor activation policies and expanding technical and vocational programs. - The OECD Survey of Adult Skills (PIAAC) noted that, despite improvements, adults in Ireland have lower skills than other OECD countries, especially regarding numeracy and literacy. ### Authorities’ actions and views - Authorities agreed on the need to enhance productivity and job creation to support sustainable and inclusive growth. - Recent initiatives cited: - Establishment of the Strategic Banking Corporation of Ireland in 2015, which provides low cost funding for SMEs. - Expected implementation of the Central Credit Register (CCR) to reduce firms’ informational asymmetry and risk premia charged by banks. - Commitment to increase Ireland’s R&D intensity, improve SMEs’ access to finance for innovation, develop research collaboration between enterprises and the public sector, and tailor support to meet enterprise needs (as outlined in the Innovation 2020 strategy report). - Intent to foster reforms to improve the affordability and quality of child care. - Action Plan for Jobs for 2016 measures to step up skill supply, help qualified workers come to Ireland, and establish regional skills fora. ### Fiscal position, financing, and debt - Financing and cash position developments: - Ireland raised €13.4 billion in long-term bonds in 2015 and a further €6 billion in the first half of 2016. - Revenue over-performance helped increase the government’s cash balance to about €8 billion as of end-June, 2016—almost twice the outstanding stock of Fund credit. - The ECB’s QE is proceeding as planned at secondary market purchases of about €1.1 billion a month, broadly equivalent to staff estimates of average monthly gross financing needs in 2016-17. - Public debt and medium-term outlook: - Gross public debt fell to about 94 percent of GDP by end-2015, and is expected to decline below 90 percent by end-2016. - Further debt reduction is predicated on the authorities’ continued commitment to fiscal prudence. - The 2021–23 period—when the remaining liabilities to the IMF fall due—has relatively modest gross financing needs. - Staff appraisal and fiscal recommendations: - Continued steady reduction in public debt would increase policy buffers to deal with potential negative shocks. - Policies outlined in the recent Summer Economic Statement appear broadly consistent with attainment of the MTO of a structural deficit of 0.5 percent of GDP by 2018, and further improvement thereafter—absent major economic repercussions from the UK vote to leave the EU. - Should repercussions from the UK vote to leave the EU be larger than anticipated, authorities should stand ready to take remedial actions, such as a countercyclical fiscal policy together with central banks’ commitment to backstop liquidity in euros and other currencies—if and when needed. ### Fiscal policy and public spending recommendations - Fiscal policy can be more supportive of job-rich growth: - Rebalance the tax mix away from distortionary direct taxes, including by merging the universal social charge into a broader income tax with lower rates for below-median wage earners. - Implementation of a uniform VAT rate and faster scaling up of the property tax to compensate for lower revenues from direct taxes. - Assuage regressivity with means-tested transfers to low-income households. - Enhance spending efficiency, particularly in the health sector, and better target social transfers to improve inter-generational fairness. - Increase capital expenditure, particularly in infrastructure and R&D, to safeguard Ireland’s competitiveness. ### Financial sector and macroprudential policy - Banking system recovery and risks: - Banks’ financial soundness has improved, but sensitivity analyses under the FSAP’s adverse macroeconomic scenario point to vulnerabilities amplified by crisis legacies. - Fallout from the UK vote to leave the EU could undermine banks’ profitability and balance sheet repair. - Supervisors need to be vigilant to ensure that banks’ profit seeking is supported by appropriate risk management in the low-interest environment. - Mortgage lending rates should adequately reflect market conditions, legacy burden, and credit risk, including difficulties in realizing collateral. - Disposal of the government’s stakes in the banking system should continue to further reduce public debt. - Nonfinancial private sector resilience: - Intensify supervisory efforts to resolve nonperforming loans, supported by legal processes to incentivize cooperation between borrowers and lenders. - Further restructure distressed loans to the most vulnerable but viable firms to support durable expansion and reduce corporate vulnerabilities. - Close data gaps on firm level balance sheets to enable detection and mitigation of new vulnerability buildups. - Ensure provisions remain adequate. - Property market vigilance and macroprudential measures: - Prevent a potential buildup of new imbalances in the property market. - Maintain macroprudential limits on mortgage lending as a permanent feature of the mortgage market. - Central Bank of Ireland’s intent to periodically assess impact and effectiveness of these measures is welcome. - Once the Central Credit Register becomes operational, replace the loan-to-income limit with a debt-to-income limit. - Expedite new construction to address constrained housing supply. - Closely monitor demand pressures in the commercial real estate market and activate policy tools if risks to financial stability emerge. ### Structural reforms and inclusion measures - Address residual structural weaknesses to support robust and inclusive medium-term growth and job creation: - Broaden financing options available to SMEs. - Increase direct public sector support of SME innovation activities, including through closer partnerships with education institutions. - Enhance labor activation policies and expand technical and vocational programs to retool skills and increase employment prospects. - Address high cost and variable quality of child care and reduce high marginal income tax rates on second earners to strengthen incentives for women to enter the labor market. ### Key statistics and indicators reported - Projected potential GDP growth: nearly 3 percent (medium term). - Projected TFP growth: just around one percent. - Ireland raised €13.4 billion in long-term bonds in 2015 and €6 billion in first half of 2016. - Government cash balance: about €8 billion as of end-June, 2016. - ECB secondary market purchases: about €1.1 billion a month. - Gross public debt: about 94 percent of GDP by end-2015; expected to decline below 90 percent by end-2016. - GDP growth in 2015: 7.8 percent. - MTO structural deficit target: 0.5 percent of GDP by 2018. - Recommendation: next Article IV consultation to be held on the standard 12-month cycle. *Source: IMF staff chapter "_cr16256 - 34. Strong and sustainable economic growth is needed to reduce vulnerabilities. Staff"* ### introduction of the new macroprudential measures... ### introduction of the new macroprudential measures... ### Housing market indicators - Price-to-rent ratio is at its historical average (1990Q1-2015Q4). - Price-to-rent Ratio: Index, 2010=100; nominal house prices divided by rent prices. Sources: OECD; and IMF staff calculations. - Price-to-Income Ratio: Deviation of last 4 quarters from long-term average for the period 1990Q1-2015Q4. Countries shown include: SWE, NOR, GBR, BEL, FRA, DNK, EA, NLD, FIN, ITA, IRL, ESP, GRC, PRT. Sources: OECD; and IMF staff calculations. - Price-to-Income Ratio: Index, 2010=100; nominal house prices divided by nominal disp. income per head. Historical average 1990Q1-2015Q4. Sources: OECD; and IMF staff calculations. - House prices have risen faster than income recently, though affordability continues to improve. - Mortgage Value (PDH): Percent of households gross disposable income; calculated as 4-quarter rolling sum. Series shown from 2009Q3 to 2015Q3 with a labeled Historical average 2009Q3-2015Q4. Sources: Central Bank of Ireland; Central Statistics Office; and Haver Analytics. ### Credit and deposit developments (Ireland, 2003–16) - While household deposits remained stable, enterprise deposits are up following strong corporate profitability. - Increased enterprise deposits supported further deleveraging of corporations and resulted in a continued credit contraction. - Deleveraging is evident in the SME sector, where redemptions continue to exceed new credit. - New mortgage lending has moderated following the introduction of the new macroprudential measures. ### Mortgage approvals and outstanding mortgage loans - Mortgage Approvals (Millions of euros): chart series covering 2011–2016 with vertical axis ticks at 500, 1000, 1500, 2000, 2500, 3000 and a secondary axis Number (RHS) with ticks at 100, 200, 300, 400, 500, 600. Sources: Banking & Payments Federation Ireland; and Haver Analytics. - Number and Value of Residential Mortgage Loans (Billions of euros): series covering 2012Q2–2016Q1 with left axis ticks at 870, 890, 910, 930, 950 and right axis Number (thousands, rhs) with ticks at 80, 100, 120, 140, 160. Sources: Central Bank of Ireland; and Haver Analytics. ### Key statistics and reference points drawn from figures - Price-to-Rent Ratio chart uses Index, 2010=100 with historical average 1990Q1-2015Q4. - Price-to-Income Ratio charts reference the period 1990Q1-2015Q4 for historical averages. - Mortgage Value (PDH) chart references 2009Q3-2015Q3 series and a Historical average 2009Q3-2015Q4. *Source: _cr16256 - introduction of the new macroprudential measures...* ### introduction of macroprudential measures in 2015Q1. ### _cr16256 - introduction of macroprudential measures in 2015Q1. ### Banking sector: interest rates, margins, and lending - Low deposit rates and broadly stable lending rates continue to boost banks’ interest margins. - NFCs profitability and deposits (figure context): - NFCs profitability (gross operating surplus to gross value added): series shown 2003Q1–2015Q1 (rhs, percent). - NFCs deposits and Households deposits (Billions of euros) shown 2003Q1–2015Q1. - Loans outstanding to Irish residents (percent change y/y): household and non-financial corporations series shown 2009–2016. - Outstanding SME Credit (Billions of euros): - Gross new lending (s.a.) and Outstanding amounts (rhs) shown Mar-10 to Mar-16. - Note: All resident credit institutions, excluding real estate and financial intermediation. - Housing Loans and Mortgage Approvals (Billions of euros, seasonally adjusted): - New lending for house purchases and Total value of mortgage approvals series shown 2011Q1–2016Q1. - Median lending and deposit rates, new business (percent): - NFC lending rate (loans up to € 1 mln), NFC deposit rate, 3-month interbank market rate, House purchases lending rate, Households deposit rate series shown 2004–2016 (last observation Jan-2016). - Interest rate margins between loans and deposits (percent): - Total outstanding loans and deposits; New loans and deposits; Weighted average loan rate minus weighted average deposit rate series shown 2004–2016. ### Competitiveness and external sector - Competitiveness indicators: - Competitiveness indicators over the last year have improved broadly in line with the euro exchange rate depreciation. - Part of the earlier improvement in competitiveness reflected a shift to higher value-added sectors. - Wages in the manufacturing sector have increased at a slower pace than in the euro area. - Labor productivity continues to outpace that of the euro area. - Ireland’s overall export market share rose in 2015. - Harmonized Competitiveness Indicators (1999Q1=100): Nominal HCI, Real HCI (CPI-based and PPI-based) series shown 2001–2015. - Real Effective Exchange Rates (Index, 1999Q1=100): CPI-based and ULC-based series shown 1999Q1–2015Q1. - Hourly Labor Costs in Manufacturing (2006=100; 4-quarter moving average): Ireland vs Euro area series shown 2006Q4–2014Q4. - Real Labor Productivity (Index, 2005=100, seasonally adjusted): Ireland and Euro area series shown 2000Q1–2015Q1. - Export shares (percent of world non-oil imports): Exports of goods and services, services, goods series shown 1999–2015. ### Public finances: fiscal stance and projections - Headline balance projected to improve over the medium term. - After strong fiscal adjustment in 2009–14 reflecting real spending cuts and revenue-enhancing measures, adjustment has moderated. - The primary surplus is projected to increase marginally driven by further declines in spending to GDP. - Projections: - Revenues are projected to decline by about 3½ percentage points of GDP from 2015 to 2021. - Primary expenditures are projected to fall by 5 percentage points of GDP from 2015 to 2021. - The strong 2015 growth-interest differential will contribute less to debt reduction going forward. - Headline and structural balances (percent of GDP) and Revenue and Primary Expenditure (percent of GDP) series shown 2007–2021 and 2010–2020 respectively. - Revenue composition (percent of GDP): Other (incl. capital receipts), Corporation tax, VAT & Excise, Pay-related social insurance, Personal income tax series shown 2010–2020. - Primary expenditure components (percent of GDP): Capital expenditure (excl. bank support), Current transfers, Compensation of employees, Goods and services series shown 2010–2020. - Sources of increase in net debt-to-GDP ratio (percent of GDP) and Fiscal adjustment: pace and sources series shown 2007–2021 and 2010–2020. ### Public expenditure efficiency and social outcomes - After years of fiscal consolidation, Ireland is a low spender compared to EU peers with comparable income levels. - Successful efforts in controlling the public sector wage bill have helped make public spending more efficient. - Social spending is highly efficient: while low as a share of GDP, it achieves substantial reduction in inequalities. - Better targeting of transfers could help improve further social outcomes and inter-generational fairness. - More efficiency is needed in the health sector to deal with future demographic challenges. - Education should match better the needs of an increasingly sophisticated economy. - “Bang for the Buck” of social spending (GINI coefficient reduction achieved by 1 percent of GDP of social spending), average impact = 1.2 (2013 data). - Spending on means- or income-tested cash benefits (percent of cash public social expenditure) shown 2012. ### Key macroeconomic indicators and medium-term projections (selected) - Real GDP (annual percent change): 2015 = 7.8; 2016 = 4.9; 2017 = 3.2. - Final domestic demand (annual percent change): 2015 = 8.6; 2016 = 5.3; 2017 = 3.8. - Private consumption (annual percent change): 2015 = 3.5; 2016 = 3.1; 2017 = 2.2. - Gross fixed investment (annual percent change): 2015 = 28.2; 2016 = 10.2; 2017 = 7.3. - Exports of goods and services (annual percent change): 2015 = 13.8; 2016 = 6.8; 2017 = 5.2. - Real GNP (annual percent change): 2015 = 5.7; 2016 = 4.5; 2017 = 2.8. - Current account (percent of GDP): 2015 = 4.4; 2016 = 3.8; 2017 = 3.5. - Gross national saving (percent of GDP): 2015 = 26.5; 2016 = 26.8; 2017 = 27.6. - General government gross debt (percent of GDP): 2015 = 93.8; 2016 = 89.0; 2017 = 86.6. - General government net debt (percent of GDP): 2015 = 75.5; 2016 = 72.1; 2017 = 70.5. - Unemployment rate (percent): 2015 = 9.5; 2016 = 8.3; 2017 = 7.7. - Harmonized index of consumer prices (annual): 2015 = 0.0; 2016 = 0.3; 2017 = 1.2. ### Fiscal accounts (selected levels and projections, billions of euros and percent of GDP) - Revenue (billions of euros): 2015 = 70.5; 2016 = 72.6; 2017 = 74.6. - Taxes (billions of euros): 2015 = 53.1; 2016 = 55.3; 2017 = 57.3. - Personal income tax (billions of euros): 2015 = 18.4; 2016 = 19.1; 2017 = 19.7. - Corporate income tax (billions of euros): 2015 = 6.9; 2016 = 7.0; 2017 = 7.0. - Value-added tax (billions of euros): 2015 = 11.9; 2016 = 12.7; 2017 = 13.4. - Expenditure (excl. financial sector support, billions of euros): 2015 = 75.4; 2016 = 74.6; 2017 = 76.1. - Net lending/borrowing (percent of GDP): 2015 = -2.3; 2016 = -0.9; 2017 = -0.6. - Primary balance (excl. bank support, percent of GDP): 2015 = 0.8; 2016 = 1.8; 2017 = 2.0. ### Financial sector indicators and vulnerabilities - Annual credit growth rates (to Irish resident private sector, in percent): 2011 = -2.9; 2012 = -4.0; 2013 = -4.9; 2014 = -4.4; 2015 = -4.4. - Non-performing loans (in percent of total loans): 2011 = 16.1; 2012 = 25.0; 2013 = 25.7; 2014 = 20.6; 2015 = 14.9. - Total provisions for loan losses (in percent of total loans): 2011 = 7.2; 2012 = 11.9; 2013 = 13.0; 2014 = 9.9; 2015 = 6.0. - Regulatory Tier 1 capital to risk-weighted assets (percent): 2011 = 16.6; 2012 = 16.7; 2013 = 17.3; 2014 = 20.6; 2015 = 22.1. - Bank return on assets (percent): 2011 = -0.9; 2012 = -0.8; 2013 = -0.4; 2014 = 0.4; 2015 = 1.0. - Loan-to-deposit ratio vis-à-vis Irish residents: 2011 = 2.1; 2012 = 1.9; 2013 = 1.6; 2014 = 1.5; 2015 = 1.2. - Deposits to M3 ratio: 2011 = 1.2; 2012 = 1.3; 2013 = 1.3; 2014 = 1.1; 2015 = 1.1. ### Balance of payments and external indicators (selected) - Current account balance (percent of GDP): 2011 = -1.2; 2012 = -1.5; 2013 = 3.1; 2014 = 3.6; 2015 = 4.4. - Exports (annual percent change, value in euros): 2011 = 2.8; 2012 = 6.4; 2013 = 2.1; 2014 = 12.3; 2015 = 21.2. - Imports (annual percent change, value in euros): 2011 = 0.0; 2012 = 8.7; 2013 = -0.4; 2014 = 15.0; 2015 = 19.7. - General government debt (percent of GDP): 2011 = 109.1; 2012 = 120.2; 2013 = 120.0; 2014 = 107.5; 2015 = 93.8. - Government bond yield (10-year, percent, end-period): 2011 = 8.5; 2012 = 4.5; 2013 = 3.5; 2014 = 1.2; 2015 = 1.2. ### Monetary and banking sector aggregates (selected end-period levels) - Aggregate balance sheet of domestic market credit institutions, Total assets (end-period, billions of euros): Dec-11 = 644; Dec-12 = 555; Dec-13 = 477; Dec-14 = 424; Dec-15 = 378; May-16 = 369. - Irish Resident Broad money (M3): Dec-11 = 182; Dec-12 = 180; Dec-13 = 201; Dec-14 = 175; Dec-15 = 190; May-16 = 191. - Net domestic assets and private sector credit series shown in monetary survey tables. *Source: _cr16256 - introduction of macroprudential measures in 2015Q1. (IMF staff text and accompanying figures and tables).* ### Annex I. Progress against IMF Recommendations ### Annex I. Progress against IMF Recommendations ### Key recommendations and implemented policies - Further reduce public debt while broadening the tax base, containing the public wage bill, and improving the targeting of social programs. - Public debt ratio rapidly declined in 2015. Budget 2016 aims for further consolidation, but includes measures that erode the tax base. Additionally, the increase in social spending could have been better targeted. - Advance the resolution of distressed loans. - The government announced reforms to increase the utilization of personal insolvency arrangements (May 2015); introduced new court rules to shorten the legal proceedings (August 2015); reduced the bankruptcy discharge period to one year from three years (December 2015). - Strengthen the financial resilience of banks and borrowers. - New macro prudential measures on mortgage lending were implemented (February 2015). Countercyclical Capital Buffer was introduced (January 2016), and “Other Systemically Important Institutions” buffer will be phased in 2019-21 in line with the new EU banking regulations. - Take early actions to strengthen banks’ capital. - PTSB raised equity to cover capital shortfall (April 2015) while AIB redeemed the remaining preference shares (December 2015). - Improve the construction supply response. - The government launched a policy package comprising measures to boost housing supply (November 2015). *Source: Annex I. Progress against IMF Recommendations* ### Annex V. Debt Sustainability Analysis ### Annex V. Debt Sustainability Analysis ### Public debt trajectory and drivers - Rapid nominal GDP growth and revisions to historical GDP lowered Irish debt stock substantially in 2015. - Upward revision of GDP series in mid-2014 led to a decrease of end-2014 debt-to-GDP ratio to 107.5 percent from 110 percent. - Large increase in nominal GDP in 2015: 13.5 percent, resulting in a decline of the debt-to-GDP ratio to 93.8 percent at end-2015. - The end-2015 ratio was about 15 percentage points lower than projected at the time of the 2015 Article IV. - Baseline debt outlook improved substantially relative to the DSA in the 2015 Article IV report due to: - Better growth prospects driven by upward revision to historical GDP data and stronger growth. - Improved financing conditions, including ECB quantitative easing extended and broadened in 2015 and early 2016. - Irish long-term yields have remained below 1 percent. - NTMA had raised some €6 billion of its full-year target of €6-10 billion for 2016, locking in favorable borrowing conditions. - Baseline interest rate trajectory assumes rates return to around 3½ percent by the end of the forecasting period. ### Debt sustainability classification and thresholds - Despite lower debt ratio, Ireland remains classified as highly vulnerable: - Debt burden threshold placing advanced economies into the “high risk” category: 85 percent of GDP. - Ireland on track to cross this threshold in 2018; at 93.8 percent of GDP at end-2015 still classified as highly vulnerable under all scenarios. - Debt profile under all stress scenarios remains below 95 percent of GDP reached under the contingent liability shock. - Gross Financing Needs (GFN): - Peak under combined macro-fiscal shock: 13.7 percent of GDP. - Vulnerability threshold for GFN: 20 percent of GDP (GFN remain below this in all scenarios). - External debt and non-resident holdings: - High external financing requirements and public debt held by non-residents exceed upper risk assessment benchmarks, raising a high risk flag. - High external financing requirement largely reflects intra-company and intra-group debt of large multinational corporations, which is regularly rolled-over. - External debt of the non-IFSC sector has declined rapidly and is projected to continue downward over the forecast period. - Non-resident holders are mainly real-money investors with long-term investment plans. ### Forecast accuracy and fiscal adjustment - No evidence of systematic projection bias: - Median forecast errors for real GDP growth and the primary balance during 2005–13 are below 1 percent and in line with other countries. - Large individual forecast errors occurred during the crisis period, especially for the primary balance due to unforeseen bank recapitalization costs. - Fiscal adjustment projections: - Projected change in the cyclically-adjusted primary balance is slightly below the top quartile of fiscal adjustments observed in advanced and emerging market countries with debt greater than 60 percent of GDP. - Projected adjustment reflects slowing structural adjustment effort and diminishing needs for adjustment as the country approaches the medium-term objective (MTO). - Irish government intention: to over-perform MTO of a structural deficit of 0.5 percent over the medium term. ### Contribution of growth-interest differential and GFN path - Large growth-interest rate differential expected to drive debt ratio lower in the coming two years: - Staff projections attribute about -5 percent of GDP of the decline in the debt ratio over 2016-2017 to the interest rate-growth differential. - Thereafter, more modest declines projected driven by automatic debt dynamics and a headline surplus. - Gross Financing Needs projection: - GFN are projected to peak at about 12 percent of GDP in 2020, before dropping back to about 5 percent in 2021. ### Stress scenarios and vulnerability analysis - Growth shock: - If projected real GDP growth rates for 2016–17 are lowered by one half of a standard deviation, the debt-to-GDP ratio peaks at 90 percent in 2018 (compared with 83.6 percent under the baseline) before declining. - Interest rate shock: - Ireland is relatively shielded due to high share of fixed-rate bonds, EU/IMF and other official sector borrowing, and relatively low financing needs; assumed interest rate increase on new borrowing affects debt trajectory only marginally. - Macro-fiscal shock: - Scenario: slower growth in 2016–17 accompanied by a primary balance shock and an increase in interest rates on new borrowing by 2 percentage points. - Debt ratio rises to about 90 percent of GDP in 2018, then resumes declining to about 85 percent of GDP in 2021. - GFN increase by about 1.6 percentage points of GDP on average over the medium term, reaching 13.7 percent at most in 2020. - Contingent liability shock: - Remaining sources include: (i) inadequate bank provisions for large NPLs; (ii) shortfalls in crystallized value of NAMA assets; (iii) costs related to restructuring of the credit union sector (net loans only 1½ percent of GDP). - Scenario uses a 10 percent of GDP shock (instead of default 10 percent of banking sector assets) to account for prior public support. - Combined with the growth shock, such a shock would push gross public debt to around 94 percent of GDP in 2017 before declining to about 86 percent by 2021. ### Asset sales and upside risks - Asset sales present upside risk to debt trajectories: - Current baseline does not incorporate proceeds from any further state asset disposals of stakes in the banks. - Recent valuations of state holdings conclude that sale of all state participation would generate about 5 percent of GDP based on end-March 2016 stock prices. *Annex V. Debt Sustainability Analysis — IMF staff report content* ### 9. While still high, the external debt of the non-IFSC sector has declined rapidly in the ### 9. While still high, the external debt of the non-IFSC sector has declined rapidly in the ### External debt trends and composition - External debt reached its peak in 2010 at around 320 percent of GDP, and fell to around 250 percent of GDP by end-2015 (Table 1). - The gross debt figure includes debt of large multinational corporations, including both intra-company and intra-group debt, which is sizable in Ireland (around 50 percent of total non-IFSC external debt in 2015). - Including the IFSC, total external debt remains very high at 815 percent of GDP. - Although IFSC debt has declined considerably in recent years, it picked up in 2015, in particular on account of direct investment debt. ### Drivers of the recent decline - The debt decline in recent years mostly represented: - A continued drop in the Target 2 liabilities of the Central Bank of Ireland as banks reduced their reliance on Eurosystem funding. - A significant fall in banks’ short-term debt. - Intra-company and intra-group debt is regularly rolled over and thus helps explain the high annual gross external financing needs to a large extent, therefore mitigating external vulnerabilities. - External debt of the general government has flattened in nominal terms since the last tranches of the EU-IMF program were disbursed in late 2013/early 2014. ### Projections and stress-test outcomes - External debt is expected to continue falling, but this is subject to some risks. - All shock scenarios would suggest more gradual reductions in public debt with the interest rate shock having the lowest impact among the historical scenarios. - The external debt ratio increases to 162-169 percent of GDP under standardized shocks to the non-interest current account and growth, as well as the combined scenario (Figure 6). - Figure 6 box values (selected): - Baseline: 149 (external debt in percent of GDP) - Interest rate shock: 156 - Growth shock: 162 - Non-interest current account shock (CA shock): 163 - Combined shock: 169 - Historical scenario: 214 (in one panel) and 213 (with 30% depreciation shock panel) ### Table 1 — Key external debt and balance metrics (selected rows and projections) - Baseline: External debt (in percent of GDP) - 2011: 301.7 - 2012: 280.6 - 2013: 276.5 - 2014: 269.6 - 2015: 248.3 - 2016: 223.5 - 2017: 206.7 - 2018: 190.8 - 2019: 176.2 - 2020: 162.4 - 2021: 149.5 - Change in external debt (row 2) - 2011: -16.1 - 2012: -21.1 - 2013: -4.1 - 2014: -6.9 - 2015: -21.2 - 2016: -24.9 - 2017: -16.8 - 2018: -15.9 - 2019: -14.6 - 2020: -13.8 - 2021: -12.9 - Identified external debt-creating flows (row 3) - 2011: -30.1 - 2012: 53.4 - 2013: 5.1 - 2014: -3.9 - 2015: 22.8 - 2016: -16.5 - 2017: -11.5 - 2018: -10.4 - 2019: -9.1 - 2020: -8.1 - 2021: -7.3 - Current account deficit, excluding interest payments (row 4) - 2011: -18.2 - 2012: -13.6 - 2013: -24.8 - 2014: -11.9 - 2015: -9.4 - 2016: -13.3 - 2017: -11.2 - 2018: -9.8 - 2019: -9.4 - 2020: -9.1 - 2021: -8.8 - Exports (row 6) - 2011: 92.2 - 2012: 93.0 - 2013: 92.5 - 2014: 99.4 - 2015: 107.0 - 2016: 110.0 - 2017: 111.4 - 2018: 112.3 - 2019: 113.1 - 2020: 113.9 - 2021: 114.7 - Imports (row 7) - 2011: 73.9 - 2012: 81.3 - 2013: 79.1 - 2014: 86.6 - 2015: 92.1 - 2016: 88.3 - 2017: 90.0 - 2018: 90.9 - 2019: 92.0 - 2020: 93.0 - 2021: 94.1 - Automatic debt dynamics (row 9) - 2011: -9.5 - 2012: 43.0 - 2013: 10.2 - 2014: -1.1 - 2015: 26.3 - 2016: -4.1 - 2017: -1.3 - 2018: -1.8 - 2019: -0.9 - 2020: -0.4 - 2021: 0.1 - Contribution from nominal interest rate (row 10) - 2011: 19.0 - 2012: 19.9 - 2013: 26.2 - 2014: 12.7 - 2015: 11.8 - 2016: 7.3 - 2017: 5.6 - 2018: 4.3 - 2019: 4.3 - 2020: 4.3 - 2021: 4.4 - Contribution from real GDP growth (row 11) - 2011: -7.5 - 2012: -0.5 - 2013: -3.8 - 2014: -13.7 - 2015: -22.2 - 2016: -11.4 - 2017: -6.8 - 2018: -6.1 - 2019: -5.2 - 2020: -4.7 - 2021: -4.3 - Residual, incl. change in gross foreign assets (row 13) - 2011: 14.0 - 2012: -74.4 - 2013: -9.3 - 2014: -3.0 - 2015: -44.0 - 2016: -8.3 - 2017: -5.3 - 2018: -5.4 - 2019: -5.5 - 2020: -5.7 - 2021: -5.6 - External debt-to-exports ratio (in percent) - 2011: 327.2 - 2012: 301.6 - 2013: 298.9 - 2014: 271.1 - 2015: 232.1 - 2016: 203.2 - 2017: 185.5 - 2018: 170.0 - 2019: 155.7 - 2020: 142.5 - 2021: 130.3 - Gross external financing need (in billions of US dollars) 4/ - 2011: 108.1 - 2012: 60.0 - 2013: 296.7 - 2014: 268.4 - 2015: 247.1 - 2016: 202.0 - 2017: 199.0 - 2018: 195.5 - 2019: 192.2 - 2020: 189.3 - 2021: 186.4 - Gross external financing need (in percent of GDP) - 2011: 62.1 - 2012: 34.3 - 2013: 165.3 - 2014: 142.0 - 2015: 115.1 - 2016: 87.3 - 2017: 82.1 - 2018: 77.0 - 2019: 72.4 - 2020: 68.2 - 2021: 64.3 ### Realism of baseline assumptions and alternative scenarios (selected) - Baseline underlying assumptions (selected) - Real GDP growth: 2016: 4.9; 2017: 3.2; 2018: 3.1; 2019: 2.8; 2020: 2.8; 2021: 2.8 - Inflation (GDP deflator, in percent): 2016: 2.8; 2017: 1.5; 2018: 1.6; 2019: 1.6; 2020: 1.7; 2021: 1.7 - Effective interest rate (in percent): 2016: 3.3; 2017: 3.3; 2018: 3.4; 2019: 3.3; 2020: 3.6; 2021: 3.7 - Alternative scenarios (examples) - Historical Scenario: Real GDP growth projected at 2016: 4.9; 2017: 2.2; 2018: 2.2; 2019: 2.2; 2020: 2.2; 2021: 2.2 - Constant Primary Balance Scenario: Primary Balance held at 1.5 for projection years. ### FSAP key conclusions and recommendations (selected) - The Irish financial system has strengthened significantly since the crisis but key vulnerabilities remain. - Vulnerabilities identified include exposure to the real estate sector, the sovereign, and funding in pound sterling; pockets of weakness among highly leveraged households; and large cross-border connections in the funds management industry. - Financial regulation and supervision have been much strengthened since the crisis: - Several areas for improvement identified in recent assessments have been tackled. - Authorities have updated regulations to implement relevant EU Directives and refine national legislation. - More off-site analysis and on-site supervision—of individual institutions and cross-cutting themes such as cyber-risk and the economic consequence of the UK vote to leave the EU—is being undertaken. - Staff resources have been expanded substantially, although retention of experienced personnel is proving difficult. - Sector-specific observations: - The Single Supervisory Mechanism (SSM) for banks seems to be working well; further streamlining and regulatory harmonization is expected to yield efficiency gains. - Solvency II regulations for insurers have been shepherded in; priorities include enhancing cross-border supervisory coordination and ensuring insurers manage credit risk with due care. - Securities market regulation continues to evolve; authorities have undertaken major efforts to gather necessary data and analyze systemic risks associated with the funds management industry. - Macroprudential supervision and policy actions have been ramped up at national and European levels. - Financial system safety nets and the resolution framework have been transformed by the establishment of the Single Resolution Mechanism; effort is needed to optimize operations and address transition issues. *Source: IMF staff analysis in the provided content unit.* ### Annex VII. Vulnerabilities of Household and Corporate Sectors ### Annex VII. Vulnerabilities of Household and Corporate Sectors ### Household sector - Recent deleveraging, but high indebtedness: - Household debt-to-disposable income ratio declined to 155.1 percent in 2015Q4 (€151 billion or 74 percent of GDP). - Irish household indebtedness remains among the highest in Europe. - Mortgage characteristics and interest-rate exposure: - 23 percent of mortgage loans remain in negative equity. - 93 percent of mortgages have variable interest rates. - As of 2015Q2, tracker loans accounted for 51 percent of total mortgages and standard variable rate (SVR) loans accounted for 41 percent. - Interest rates on existing tracker mortgages are currently very low (reflecting the ECB policy rate); increases in interest rates would raise interest payments and could create repayment difficulties for some households. - Vulnerability by LTV and interest-rate type (FSAP stress analysis and LLF model projections): - There is a positive relationship between LTV groups and stressed three-year probability of default (PD) for performing loans (predicted as of December 2014 under FSAP baseline and adverse scenarios). - At an LTV ratio of over 150 percent, the PD under the adverse scenario exceeds 20 percent. - Tracker mortgages have an average PD of 6 percent in the adverse scenario, compared with a predicted rate of closer to 10 percent for SVR customers. - High-current LTV ratios make first-time buyers (FTBs), young households, and borrowers outside Dublin particularly vulnerable. ### Corporate sector - Recent performance and balance-sheet dynamics: - Corporate activity rebounded strongly following the 2008–09 downturn and has exceeded many euro-area peers. - Increased profitability supported strong investment activity without heavy reliance on debt issuance; the sector continued to deleverage. - Improvements in financial health: - Median interest cover ratio (ICR) across firm sizes and sectors increased steadily in recent years after the sharp decline in 2008–09. - The share of firms with ICR lower than one moderated to 18 percent in 2013 from about 28 percent in 2009. - The share of risky debt (debt owned by firms with ICR lower than one) declined to about 10 percent in 2013 from 15 percent in 2009. - Remaining vulnerabilities and distributional risks: - SMEs remain particularly vulnerable; they account for most firms in "technical default" (ICR < 1). - Share of risky debt by firm size: - Small firms (less than 50 employees): nearly one half of small firms’ total debt is risky debt. - Medium-sized firms: 9 percent of total debt is risky. - Large firms: 2 percent of total debt is risky. - Financial health of foreign subsidiaries operating in Ireland is significantly better than that of domestic firms. - Sensitivity analysis and adverse-scenario outcomes: - An adverse shock (decline in profitability and increase in interest rates) would substantially increase vulnerability, especially for smaller firms. - Under the adverse scenario: - The share of firms with ICR lower than one would triple to 47 percent from 16½ percent in the baseline. - More than half of the increase in firms with ICR < 1 is related to small firms’ deterioration. - The share of risky debt would increase to about 15 percent (similar to the crisis level). - Policy implications and recommendations: - Continue corporate NPL resolution, including loan restructuring for the most vulnerable yet viable firms, to enable remaining companies to invest and support durable economic expansion. - Implement policies to support the exit of unproductive or unviable firms. *Source: Annex VII. Vulnerabilities of Household and Corporate Sectors (IMF staff report content provided).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16256.pdf_