IMF’s snapshot of our financial future
Paraphrasing, the report outlines that Ireland’s success in raising funding through the NTMA is positive. However, our longer term prospects are questionable, due to high public and private debts.
On public debts, the IMF report suggests that the new European banking union should cease the spiral of low lending causing low growth. The problem with low lending is that it can cause a crystallisation of further contingent liabilities, in other words, low lending causes defaults.
As part of implementation of European banking union, Ireland’s banks will be carrying out their own asset quality reviews later this year, and the results will confirm where Ireland sits in terms of the current recapitalisation, and if further injection of capital is needed.
By mid-2014, the European banking union should be up and running and available to support Ireland’s banks. The report also focuses on Ireland’s private debt sustainability, and cites depressed bank lending to households and SMEs, as well as insufficient progress in resolving non-performing loans, as key areas which need to be addressed.
The European banking union will support both the public and private debt positions for Ireland. On the public side, the organisation will provide a backstop in the event of any future recapitalisation preventing any further strain on government borrowing.
In terms of private debt, the union should make borrowing by Ireland’s banks on international markets easier, liberalising lending to Irish consumers.
The IMF report marks the current response of Ireland’s banks to business debt as having mostly consisted of a combination of forbearance — which can be described as non-action against non-performing loans — and rejections of new SME loans, neither of which is really addressing the issues faced by Ireland’s SMEs.
Interestingly, the report makes reference to Ireland having the second highest level of loan rejections in the EU. This lack of lending to SMEs is hindering domestic demand.
Total credit to Irish consumers contracted by more than 5% to Apr 2013, demonstrating that existing credit facilities are being paid back without the corresponding re-lending of new credit.
Although the labour market is stabilising, with unemployment having reduced slightly at 13.7% in the first quarter of this year, the report recognises that it is emigration that has stemmed the growth in unemployment. This is consistent with recent statistics from the CSO showing that there was a net migration of 34,400 people leaving Ireland in the 12 months up to Apr 2012.
The unemployment figures also mask the hidden increase in non-employment from people leaving the labour force: this can occur with retirements, or where a spouse no longer qualifies for unemployment benefits from social welfare.
The report notes that there are vacancies in some sectors of the economy, and that to maximise employment, cross-sector mobility is needed.
Looking forward, the report suggests that consumption by the public is expected to decline, given the drag on disposable income from recent budget measures.
In the medium term, growth should rise from 0.5% in 2013 to 1.4% in 2014 and greater than 2% in the following years, with the main driver for this growth coming from increased demands for Irish products abroad — a so-called export-led recovery.
Stabilising unemployment increasing credit to SMEs from an improved banking sector are expected to bring a gradual rise in consumption, and a cycle of growth.
Even with a positive longer-term outlook, the report cautions that we could be left with a high core level of long-term unemployed persons.
In summary, the ability for Ireland to meet its fragile growth targets depends on foreign growth, an implementation of banking reforms, measures to address core long-term unemployment, and a continuation of budgetary adjustments.
The scale of these budgetary adjustments was set at €3.1bn for 2014 and €2bn for 2015, compounding on the €3.8bn and €3.5bn adjustments already implemented in 2012 and 2013.
Ireland’s Fiscal Advisory Council recommends that we should stick to these planned adjustments.
