EUROPEAN COMMISSION Brussels, 2.6.2021 SWD(2021) 402 final COMMISSION STAFF WORKING DOCUMENT In-Depth Review for Ireland































































in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK Economic policy coordination in 2021: overcoming COVID-19, supporting the recovery and modernising our economy {COM(2021) 500 final} - {SWD(2021) 401 final} - {SWD(2021) 403 final} - {SWD(2021) 404 final} - {SWD(2021) 405 final} - {SWD(2021) 406 final} - {SWD(2021) 407 final} - {SWD(2021) 408 final} - {SWD(2021) 409 final} - {SWD(2021) 410 final} - {SWD(2021) 411 final} - {SWD(2021) 412 final}



Contents Executive summary 1.Assessment of Macroeconomic Imbalances 2.Thematic Issue: Non-financial Corporate Debt 3.Thematic Issue: Household Debt LIST OF Tables Table 1.1:Assessment of Macroeconomic Imbalances Matrix –- Ireland Table 1.2:Selected economic and financial indicators, Ireland Table 2.1:Non-financial corporations debt indicators, Ireland Table 2.2:Selected external indicators, Ireland Table 3.1:Household debt indicators, Ireland Table 3.2:Selected housing indicators, Ireland LIST OF Graphs Graph 2.1: Thematic Graphs: Non-financial corporate debt Graph 2.2: Thematic Graphs: Non-financial corporate debt (cont.) Graph 3.1: Thematic Graphs: Household debt

Graph 3.2: Thematic Graphs: Household debt (cont.) Executive summary The 2021 Alert Mechanism Report concluded that an in-depth review should be undertaken for Ireland to examine further the persistence of imbalances or their unwinding. In February 2020, under the previous annual cycle of surveillance under the Macroeconomic Imbalances Procedure, the Commission identified “macroeconomic imbalances” in Ireland. These imbalances related to high private and public debt and net external liabilities. The analysis shows that these vulnerabilities remain. It should be noted that the context of the assessment of vulnerabilities in this year’s new in-depth review (IDR) for Ireland is markedly different from last year. Also, the evolution of the COVID-19 pandemic, the strength of the recovery, and possible structural implications of the crisis are all still surrounded by high uncertainty, requiring caution in the assessment. In general, policy action over the past year focused on cushioning the impact of the COVID-19 shock and facilitating the recovery. This has added to indebtedness but should support adjustment in the medium-term. Looking forward, the Recovery and Resilience Plan provides an opportunity to address imbalances, investment and reforms needs. Main observations and findings of this IDR analysis are: ·This IDR is informed by the 2021 spring forecast, which expects an acceleration in economic activity in Ireland with the easing of the COVID-19 crisis. Despite the pandemic, Ireland’s real GDP increased by 3.4% in 2020, as multinational corporations, concentrated in pharmaceuticals and medical equipment as well as information and telecommunication technologies, performed very well. At the same time, the domestic economy of Ireland contracted. Real GDP is projected to increase by 4.6% this year and 5% next year. ·Vulnerabilities related to the still relatively high stock of private debt remain, though the COVID-19 shock has so far had a limited impact on borrowers’ balance sheets. Non-financial corporate debt is inflated by the presence of multinational companies, most of which have very few linkages to the domestic economy. Excluding this effect, the debt of domestically controlled firms stood at 81% of modified gross national income in 2019, above fundamentals-based and close to prudential benchmarks, but credit flows were negative in 2020 and GDP growth positive. Household debt stood at 62% of modified gross national income in 2019, and while close to the fundamentals-based benchmark and below prudential, it still amounted to 113% of household gross disposable income (GDI), remaining amongst the highest in the EU according to this metric. Household overall net credit flows (transactions) in percent of GDP were close to zero in 2020 and the gross disposable income of households increased, allowing for a sharp increase in the household savings rate. ·The downward trend in government debt has been interrupted. The tax base is relatively narrow, with government revenues strongly dependent on corporate tax receipts. Possible reforms towards fairer rules in international taxation pose downside risks to these tax revenues. The public debt-to-GDP ratio increased to 59.5% in 2020, up from 57.4% in 2019 as the government responded to the unprecedented crisis. As a proportion of modified gross national income (GNI*), debt is higher at 105.6% in 2020. Financial market perceptions of sovereign risk, however, remained favourable, as reflected in low sovereign bond yields and credit default swap spreads. Public debt relative to GDP is forecast to increase to 61.4% in 2021 and decrease to 59.7% 2022. The general government balance is forecast to remain negative, at -5% of GDP in 2021 and -2.9% in 2022. ·The net international investment position is still highly negative, though improving. It stood at -168% of GDP in 2020. The large presence of multinational enterprises with very limited links to the domestic economy and the mutual fund sector bloat the stock of net external liabilities, while they bear little connection to the underlying domestic economy. Adjusted figures (of around 57 to 82% of GNI*) suggest that Ireland’s net external debt remains elevated. The current account balance is estimated at 4.6% in 2020, and forecast to remain in surplus in 2021 and 2022. ·The banking sector has continuously reduced NPLs in the past years, but these may increase as support measures are withdrawn. In 2020, the NPL ratio remained essentially unchanged from 2019, at 3.5%, down from 21.6% in 2014. The remaining NPL stock consists mainly of long-term mortgage arrears, which are a challenge for some households. However, there is a risk that NPLs may increase once specific policies to protect corporates from the impact of the COVID-19 crisis are phased out. 1. Assessment of Macroeconomic Imbalances Introduction In February 2020, over the previous annual cycle of surveillance under the Macroeconomic Imbalances Procedure, the Commission identified “macroeconomic imbalances” in Ireland. These imbalances related to large stocks of public and private debt and net external liabilities, and potential vulnerabilities associated to high levels of non-performing loans (NPLs) and rapidly rising house prices. The 2021 Alert Mechanism Report published in November 2020 concluded that a new in-depth review (IDR) should be undertaken for Ireland with a view to assess the persistence or unwinding of imbalances. The context of the assessment of vulnerabilities this year is markedly different from last year's IDRs, which took place before the COVID-19 pandemic. The evolution of the pandemic, the strength of the recovery, and possible structural implications of the crisis are still surrounded by high uncertainty requiring caution in the assessment. Policy action over the past year focused on cushioning the impact of the COVID-19 shock and on facilitating the recovery. While this supports adjustment in the medium-term through stronger fundamentals, it also has added to indebtedness. Follow-up to country-specific recommendations from 2019 and 2020, including those that are MIP-relevant, is taking place in the context of the assessment of the Recovery and Resilience Plans (RRPs). The analysis of policies in the present report was finalised before the formal submission of RRPs and does not draw on information included in RRPs. It is therefore without prejudice to the Commission’s assessment of RRPs, which is ongoing at the time of publication of this report. The key features of the IDR remain unchanged. The assessment follows a similar structure as the IDRs that were included in Country Reports in recent annual cycles. This chapter presents the main findings for the assessment of imbalances, also summarised in the MIP assessment matrix. The assessment is backed by selected thematic chapters that look more at length at non-financial corporate debt and household debt. Spillovers and systemic cross-border implications of imbalances are also taken into account. In addition, also assessments of structural issues made in previous IDRs and in the context of fiscal assessments are considered if relevant. Macroeconomic context Real GDP grew in 2020, due to multinational firms’ performance, but developments in domestic sectors have been more in line with those in other EU countries, with a recovery starting in 2021. Ireland’s real GDP grew by 3.4% in 2020, due to the strong performance of multinational corporations headquartered there. In contrast, domestic sectors contracted, more in line with developments in the other EU countries: modified gross national income GNI* decreased by 4.2% ( ). Although the year 2021 started with a new strict lockdown and slowing economic activity, overall Ireland’s economy is projected to grow by 4.6% in 2021 and by 5.0% in 2022. Potential growth is forecast to recover from the sharp drop in 2020 and reach 2.3% in 2022. The output gap is set to improve from -0.5% in 2021 to 0.1% in 2022. The current account balance was positive in 2020 and is forecast to remain in a surplus of 4.5% of GDP in 2021 and of 4.2% in 2022. The gross saving rate of households, which increased to unprecedented heights as a result of the COVID-19 crisis, is forecast to gradually decline, to 13% in 2022. The unemployment rate is forecast to remain high, at 10.7% in 2021, but to decline to 8.1% in 2022, compared to 5.0% in 2019. HICP inflation is projected to gradually increase to 1.3% in 2022, alongside economic recovery. The economic recovery is expected to be mainly driven by a rebound in domestic demand and be supported by net exports. Consumption is set to benefit from the reopening and the accumulated savings. The vaccination process in Ireland has advanced. Nevertheless, the restrictions have been very stringent and are being lifted only gradually. Investment suffered in the first quarter of 2021 when all construction works except essential ones were banned but is set to rebound once the restrictions are lifted and uncertainty dissipates. Exports are expected to continue to be a strong driver of GDP growth, led by multinational corporations, particularly those producing medical devices and pharmaceuticals or providing information and communication services, and an improving external environment will benefit Ireland. Policy measures to protect jobs and provide liquidity for firms were extended until mid-2021. Downside risks to growth in the short term are a possible surge in corporate insolvencies once the policy support measures are wound down as well as labour market scarring effects and potential changes of the international taxation regime in the medium term. Imbalances and their gravity

Private debt relative to GDP in Ireland is still high but continuously declining. It is expected to have decreased to 184.4% of GDP in 2020 amid positive GDP growth and continuous deleveraging from households and corporates. In 2019, private debt amounted to 202.4% of GDP. It has fallen substantially from its 2015 peak (305.1% of GDP) as a result of strong GDP growth and deleveraging by both households and businesses. In 2019, it still stood well above the EU average (133.1%) and the MIP threshold (133%) but high corporate debt levels need to be viewed in light of the heavy presence of multinational companies (see section 2). Households have actively been deleveraging since 2009. Household debt in proportion to GDP (37.2%) was below the EU average (50.4%) in 2019, but it more substantial when compared to modified gross national income ( ) (61.9%, see section 3). Ireland’s general government balance deteriorated in 2020 amid emergency borrowing, thereby contributing to an increase in the general government debt ratio. The stock of debt increased by around EUR 13.9 billion. Gross general government debt increased to 59.5% of GDP in 2020 from 57.4% in 2019. Even though this is below the MIP threshold (60%), a range of alternative metrics show that Ireland’s stock of public debt remains high by international and historical standards: as a proportion of GNI* , debt stood at 95.6% in 2019 and increased to 105.6% in 2020 (Department of Finance). Nevertheless, according to the latest debt sustainability analysis, Ireland faces low risk in the medium-term and medium risk in the long-term ( ). Financial market perceptions of sovereign risk are favourable, as reflected in low sovereign bond yields and credit default swap spreads. The interest to revenue ratio was estimated at 4.3% in 2020, compared to 5% at in 2019, continuing a decreasing trend from a 25-year peak of 12.6% in 2013. Despite its high level, the burden of public debt is mitigated by several factors. Government financing benefits from favourable conditions, as Irish sovereign credit ratings are robust and their outlook is stable. Borrowing and debt servicing costs are low also due to monetary policy actions, such as the Pandemic Emergency Purchase Programme. The 10-year bond yield for Ireland was low at around -0.3% in December 2020. The vast majority of sovereign debt is at long maturities and fixed rates, which limits the risk from interest rate shocks. The effective interest rate has enjoyed a downward trend for about a decade, in line with the performance of the EU average. The maturity profile of the debt remains comfortable, as there are no redemptions until March 2022. The non-performing loan (NPL) ratio continued its steady decrease before the pandemic. The NPL ratio continued to fall to 3.4% in 2019 – approaching the 2019 euro area average of 2.7%. The share of NPLs was much higher for households (at 7.2%, see also section 3) than for corporates (at 3.2%, see also section 2). Irish banks had made substantial progress in decreasing the share of NPLs through successful restructuring and the sales and securitisations of NPL portfolios. Arrears, while declining, remained significant. The net international investment position improves but remains negative, even when taking out the distorting impact of multinational companies operating in Ireland. Ireland’s net international investment position (NIIP) of -168% of GDP at the end of 2020 was heavily influenced by the activities of multinational companies and the large net position of a financial offshore centre with limited links to the domestic economy. Although the net external positions of some domestic institutional sectors such as commercial banks and the central bank have improved over the last two years, the NIIP remains negative even when adjusting for the impact of multinational companies (see also section 2). Commission estimates of Ireland’s domestic net international investment for 2019, net of multinational firms and Offshore Centre activity, suggest a much lower external liability position of between -34% and -49% of GDP (i.e. -57% and -82% of GNI*), although still likely exceeding MIP thresholds of 35% of GDP and country-specific benchmarks. The current account balance is positive but often highly volatile due to the heavy influence of multinational corporations, while the underlying “domestic” current account is healthy and positive. The current account swung to a surplus of 4.6% in 2020 from a large negative position in 2019 (-11.3% of GDP), in both years largely affected by the multinational corporation activities. Meanwhile the modified current account balance ( ), which better reflects domestic economic activity, has increased to 4.6% in 2019. It suggests that the Irish economy appears to have maintained its external competitiveness. While house price growth slowed down in 2020, housing affordability remains a concern. From 10.2% in 2018, annual house price inflation has moderated substantially to 2.3% in 2019 and to 0.3% in 2020, a level well below the 6% prudential threshold of the MIP scoreboard. Increasing housing supply, coupled with more binding macro-prudential rules, seem to have contributed to this sharp slowdown. Although average national housing prices are not judged to be overvalued, affordability is still a concern: the number of years of gross disposable income required by an average household to buy a 100 square meters dwelling amounted to 14.5 in 2020, the third highest in the EU. Evolution, prospects and policy responses In 2020, the health crisis hit the Irish economy, in particular the labour market, but the government intervention reduced the risk of debt defaults. The Irish government provided income support to households that lost jobs due to the COVID-19 pandemic and offered payment breaks to affected borrowers. The crisis seems to have affected mostly people in lower income echelons, who hold less mortgage debt, while income of many mortgage holders remained unaffected (see also section 3). By November 2020, most payment breaks have expired and a majority of debtors have since returned to normal payments. In 2020, the real estate market froze for some time as mobility and other restrictions reduced transactions but with the reopening of the economy and adjustments to the “new normal” the market revived later on. In the last months of 2020, house prices started climbing again as a result of constrained supply due to construction works being temporarily banned as a part of COVID-19 restrictions, while demand remained stable or even increasing. Consumer loans fell as pandemic restrictions constrained consumption and households increased forced and precautionary savings. Irish companies reduced their debt in 2020, postponing investment decisions amid very high uncertainty. Many businesses have received public support. The prospects of domestic small corporations remain uncertain. In contrast, multinational corporations headquartered in Ireland, concentrated in the pharmaceutical and information and telecommunication sectors, scored well in the crisis with no negative impact expected on their debt (see also section 2). Policy efforts in 2020 focused mostly on short-term measures to address the impact of the COVID-19 pandemic, contributing to an increase in government expenditure and contingent liabilities. The measures included the strengthening of the resources of the health system, a set of measures to preserve employment (temporary work schemes, exemption of social security contributions etc.) and support to companies (direct liquidity support, guarantees, tax deferrals, moratoria etc.). The delay in raising the statutory pension age and a permanent increase of the number of public employees in the health sector add to long term fiscal sustainability risks. In the Stability Programme Update, the Government set out a medium-term pathway for the debt-income ratio to be on a declining trajectory towards 2025. Government revenues are strongly dependent on corporate tax receipts. This constitutes a vulnerability in the context of the ongoing review of the international corporate tax system which might have a negative impact on revenues as of 2022. A relatively narrow tax base weakens the resilience of public finances. The general government deficit is projected at 5.0% of GDP in 2021 and 2.9% in 2022, and the gross government debt-to-GDP ratio is projected at 61.4% in 2021 and 59.7% in 2022. Although the non-performing loan (NPL) ratio increased only modestly in 2020, short-term trends in NPLs need to be closely monitored. The capital and liquidity positions of the banks remain strong. However, the steady trend of NPL reduction was halted by the COVID-19 pandemic, with the NPL ratio increasing slightly from 3.1% in the first quarter of 2020 to 3.5% in the second and third quarters of 2020. This increase was driven by the NPL ratio for corporates, which grew from 3.1% in the first quarter of 2020 to 5.3% in the third quarter of 2020. ( ) The increase in NPL ratios would have been much more pronounced without the wide-ranging government support measures in response to the COVID-19 pandemic. Corporate insolvencies declined in 2020, but are likely to increase as support measures are withdrawn (see section 2). The continuous decline in household debt masks some legacy issues, such as high mortgage arrears. Long-term mortgage arrears remain an issue for many households, despite the existence of a number of schemes that help resolve those arrears (see section 3). These deep arrears are particularly persistent and use of some of those schemes has been low. On the other hand, the mortgage measures put in place by the Central Bank of Ireland are helping limit the share of risky mortgages and safeguard the resilience of both households and banks. The completion of the central credit register in mid-2019 will ensure safer lending and a better monitoring of financial stability risks. Ireland’s overall highly negative NIIP has improved marginally due to an improvement in its domestic component. Its domestic component is projected to decrease further on the back of continued current account surpluses (see also section 2). The evolution of corporate external liabilities (in particular of multinational corporations and the International Financial Services Centre), which comprise the largest share, is hard to predict. That said, the links of these corporations to the domestic economy are limited, which in turn reduces domestic exposure. The general government’s substantial NIIP share has diminished over time but it might increase due to borrowing related to the COVID-19 pandemic. The risks associated with general government’s external liabilities are somewhat smaller as part of them are loans disbursed by official creditors during the economic adjustment programme, which have long maturity and low interest rates, thus posing little risk in the short and medium term. The net external position of the central bank is positive and has gradually improved over recent years. Large increase in precautionary households savings will have a positive influence on the domestic component in the short run. The current account is expected to amount to 4.5% of GDP in 2021 and 4.2% in 2022. Stripping out the activities of the multinationals, the modified current account is expected to remain stable and increasingly positive, following the trend of previous years. While policies implemented in recent years seem to have been effective in curbing house price growth, challenges remain in further increasing housing supply sufficiently. The housing stock has continued expanding in 2020, although at a slower pace than foreseen as restrictions were placed on construction works due to the COVID-19. The number of new housing units commenced in 2020 also decreased, by 17%. Even a moderate decrease in completions might fuel property and rent prices, with housing supply still running behind needs. Indeed, in the last months of 2020 and first quarter of 2021, a rebound in house price growth was already visible. Capacity constraints in the construction sector and administrative deficiencies in the vacant site levy application remain insufficiently addressed to help supply growth and ultimately improve housing affordability in the medium-term (see also section 3). House price growth is expected to accelerate in 2021 and 2022. In the rental sector price growth decreased markedly in 2020. The lack of international tourism led landlords to switch from short-term letting to the regular renting, temporarily increasing rental supply, particularly in the Dublin area. Furthermore, emergency legislation during the lockdown temporarily banned rent increases and evictions during some months of 2020 and 2021. Overall assessment Overall, risks to the domestic economy continued to abate, though stock imbalances, notably large public, private and external debt, still exist and uncertainties related to the COVID-19 crisis persist. Ireland has made steady progress in decreasing indebtedness and NPLs, but vulnerabilities associated with debt stock imbalances remain and these legacy imbalances can amplify adverse economic shocks. In 2020, policy efforts mostly focused on short-term measures to address the impact of the COVID-19 pandemic. The government has been successful in these efforts (providing income support, payment breaks and other alleviating measures), with NPLs increasing only marginally despite the unprecedented health crisis. The full impact of the COVID-19 pandemic, however, is likely to become visible with a delay. A negative impact on domestic corporations is likely, with potential repercussions to the labour market. In contrast, the multinational corporations that account for a large share of the NFC debt, performed very well during this crisis. Hence, while the risk stemming from high private indebtedness might have increased in the medium term, due to the dual nature of the Irish economy, it increased less than in many other European countries, as credit flows remained subdued in Ireland. While before 2020 the NPL ratio had continued its steady decline towards the EU average, the likely delayed impact of the COVID-19 pandemic means the NPL ratio warrants tight monitoring. Public debt has increased as a result of countercyclical fiscal policy and the working of automatic stabilisers.

External vulnerabilities linked to large negative NIIP exist but seem to be unwinding and the associated risks are limited. The current account was positive in 2020 and is projected to remain positive in 2021 and 2022. While the NIIP remains very negative, the imbalances are narrowing. A further mitigating factor is the presence of multinational corporations in Ireland, which, although they account for a very large share of the negative NIIP, have been beneficial for the growth of the Irish economy (effectively the main driver of growth) and their performance in the midst of the crisis has reduced risks rather than increased. Housing policies seem to have been effective but the crisis is set to have negative repercussions on housing supply. Policies implemented in recent years seem to have been effective in curbing house price inflation. Various measures to support housing supply contributed to increasing housing completions by almost 40% annually from 2017 to 2019. However, the pandemic has slowed housing completions, which could reignite inflationary pressure. Housing affordability remains problematic. Table 1.1:Assessment of Macroeconomic Imbalances Matrix –- Ireland (Continued on the next page) Table (continued) Source: European Commission Services Table 1.2:Selected economic and financial indicators, Ireland Source: Eurostat and ECB as of 2021-05-05, where available; European Commission for forecast figures (Spring forecast 2021) 2. Thematic Issue: Non-financial Corporate Debt Situation entering the COVID-19 crisis Excluding the foreign debt of multinationals and re-domiciled PLCs, corporate debt stocks in Ireland have been contained. Non-financial corporate debt in Ireland is significantly affected by foreign debt of companies with a foreign parent (95% of GDP in 2019), which pose limited risk to the Irish economy, and by debt of re-domiciled PLCs (22% of GDP in 2019). ( ) The amounts concerned correspond roughly to the FDI and foreign arm’s length loans (Graph 2.1(a)). The ratio of non-financial corporate debt to GDP, excluding the foreign debt of MNEs and re-domiciled PLCs, amounted to 48.5% of GDP in 2019, which stands below the prudential benchmark and close to the fundamentals-based benchmark. However, including also re-domiciled PLCs, the ratio is close to prudential (Table 2.1). ( ) Using gross national income (GNI*) as the denominator to exclude the impact of MNEs, domestic non-financial corporate debt amounts to close to 81% of GNI* (or 117.5% including the debt of re-domiciled PLCs corresponding to the grey area in Graph 2.1(b)). These values are above the fundamentals-based benchmark adjusted for GNI* and close to the prudential threshold, which might however be overstated in the case of Ireland. ( ) Up to the start of the pandemic credit flows to the domestic non-financial corporate sector were limited and deleveraging took place. The domestic non-financial corporates deleveraged in 2018 and to a lesser extent in 2019 (Graph 2.1(b)). In both years, deleveraging was supported by GNI* growth, but in 2018 there was also a decline in nominal debt stocks. Available data on net credit transactions and other changes in debt (e.g. valuation effects) is distorted by the presence of multinationals and is more difficult to interpret, but also points to debt reduction (Graph 2.1(c)). Deleveraging is also observed in debt-to-equity and debt-to-financial assets (Graph 2.1(d)). NFC debt held by banks has substantially fallen, with the share held by other financial institutions exceeding the share held by banks in recent years (Graph 2.1(a)). Loans to the real estate sector continue to represent the largest share of non-financial corporate bank loans, even though substantial deleveraging has taken place in this sector (Graph 2.2(a)). Distortions in the aggregate balance sheet structure of non-financial corporations are likely to inflate the negative net financial asset position. Net financial assets of non-financial corporations reached an accumulated balance of -211% of GDP in 2019, much more negative than that of other euro area countries. Both assets and liabilities are significantly inflated by the presence of multinationals and re-domiciled PLCs (Graph 2.1(e)), but equity liabilities may be disproportionately inflated. Local investment is dominated by construction, which is necessary to catch up with the insufficient supply, particularly in housing, but is arguably less productivity-enhancing for the local economy. While provision of housing in Ireland is a long-standing issue, since housing shortage in some areas may constrain labour supply and increase labour cost, other productivity enhancing investment are also important and might be more supportive of higher growth potential and of sustainable corporate debt. Net investment reached 30% in 2019, but the increase in net debt financed just a small part of it (Graph 2.2(d)). In terms of composition, total gross fixed capital formation is dominated by the activities of multinationals, with R&D representing 66% of total investment and transport equipment 12%. Construction investment, including dwellings and other structures, amounted to 16% of total investment, while other investment, including machinery and equipment, represented only 6% of the total and has been contracting since 2014. Credit developments and repayment capacity For non-financial corporations net bank credit flows were negative in 2020, despite a moratorium for loan payments, due to the relatively low gross credit flow (Graph 2.2(c)). There has been a peak in suspended payments at around mid-2020 (13% of all loans – both NFC and household), with the share of suspended credit facilities declining since then. A public guarantee scheme was introduced in September 2020, but with a relatively low take-up (possibly also due to Brexit-related uncertainties). The cost of borrowing for corporates remains higher in Ireland than in the euro area (Graph 2.2(b)) and, while this differential has been increasing since 2015, in 2021Q1 the level of interest rates appears to have driven up corporate credit demand according to the ECB lending survey (Graph 2.2(f)). In 2020 corporate credit demand was instead motivated mostly by inventory and working capital needs. The payment breaks (moratoria) that were granted under the EBA-compliant moratorium scheme have almost all expired, with most borrowers resuming capital and interest payments in full. From March 2020 to September 2020, Irish banks provided payment breaks of up to 6 months (12 months for large corporations) under a national industry-led scheme. At the peak in June 2020, 13% of loans (18% for corporate loans) were subject to such a payment break. The moratorium scheme stopped accepting applications at end-September 2020, but support can still be provided to borrowers that need assistance on a case-by-case basis. By end-December, the vast majority of these payment breaks had resumed a full repayment schedule according to the Banking and Payment Federation Ireland - with active payment breaks representing less than 1% of total outstanding loans in terms of outstanding value. Credit developments reflected in part measures taken by the government to shield companies from liquidity pressures. Companies have been shielded from liquidity pressures since the start of the pandemic, not only by the moratorium on loan payments but also by a range of fiscal support measures including a wage subsidy scheme and tax deferrals. Rent and trade credit payment breaks also added to the support. The non-financial corporate debt-to-GDP ratio is estimated to have declined in 2020, owing to the limited credit transactions and positive GDP growth (Graph 2.1(c)). In this respect, Ireland is an outlier in the EU with the GDP increase attributable mostly the multinational sector (ICT and pharmaceuticals), while modified domestic demand, reflecting better domestic activity, has contracted. However, the increase in non-financial corporate debt in percent of modified domestic demand is contained by the low level of net credit transactions in 2020. Non-financial corporate deposits in the banking sector have increased, while local investment declined. Irish non-financial corporations saved in 2020, with corporate deposits increasing by close to 3% of GDP (ECB BSI data), amidst heightened uncertainty relating to the pandemic and the impact of Brexit. Simultaneously, modified domestic investment decreased by 8.5% y-o-y, driven primarily by the negative contribution of construction (-5.7 pps). According to the ECB bank lending survey, investment plans contributed negatively to explaining the demand for credit by NFCs in 2020, but switched to positive in 2021 Q1, indicating that more firms plan to invest (Graph 2.2(f)). The commercial real estate sector is particularly vulnerable to structural implications of the COVID-19 pandemic. There has been an annual decline in capital values of 5.6% in commercial real estate (CRE) property in 2020Q3 and year-on-year rental deflation of 0.8 per cent. ( ) Irish banks’ exposure to the sector has declined since 2012, with investment funds (often funded from abroad) holding a significant share of the market (above 40%), making the sector vulnerable to withdrawal of foreign capital. ( )

Non-performing loans After a reduction from nearly 40% in 2014 to 3% in 2019, non-financial corporate non-performing loans started to increase again in 2020 amid the pandemic. Non-performing non-financial corporate loans started to rise, to 4.5% of non-financial corporate loans in 2020Q2 and 5.3% in 2020Q3 (Graph 2.1(f)). There were signs of significant credit tightening in 2020Q4, but less severe in 2021Q1, according to the ECB bank lending survey (Graph 2.2(e)). The tightening can be mostly attributed to higher risk perceptions. Reduced access to credit for non-financial corporations could delay the recovery. Corporate insolvencies declined in 2020, but are likely to increase as support measures are withdrawn. Insolvencies in 2020 were held back not only by temporary impediments to the procedures, but also by the support measures in place. ( ) Calculations based on data from the company registry indicate that in 2020 the rate of insolvent liquidations was close to the “normal annual rate” for Ireland, estimated at around 0.25% of active firms, and do not reflect the economic impact of the COVID-19 crisis. ( ) Between March and September 2020, only the most affected sectors such as Accommodation and Food Services and Wholesale and Retail Trade, displayed signs of higher liquidations relative to the same period in 2019. The insolvency framework may face challenges should the flow of applications increase once support measures start to be withdrawn. Ireland scores lower than other EU countries in the World Bank Index of Strength of the Insolvency Framework (with lower scores in creditor participation and reorganization proceedings), as well as on the Quality of the Judicial Index (with lower scores on case management and court automation). ( ) Despite a relatively benign impact of the COVID-19 crisis when compared to other countries, Ireland may therefore benefit from additional measures in the area of insolvency to cope with a possible additional inflow of filings. Companies facing financial difficulties in Ireland can enter into Examinership for possible restructuring (26 applications in 2019, 20 of which returned to normal status and 1 entered into liquidation) or Receivership, for piecemeal liquidation or sale as going concern (2,188 firms under receivership in 2019). ( ) The use of Examinership is comparatively lower. The process has considerable court involvement and entails significant costs, particularly in the case of SMEs. The 2019 EU Directive on Preventive Restructuring encourages Member States to enhance the availability of solutions with more limited court involvement. ( ) External position Irish external statistics are distorted by the impact of multinational enterprises. As it is the case with corporate debt and GDP, the headline current account and the net international investment position (NIIP) also give a distorted picture due to MNEs’ activities. The current account balance jumped from 6% of GDP in 2018 down to -11.3% of GDP in 2019 and back up to 4.6% of GDP in 2020 and is forecast to remain above 4% in 2021 and 2022 (Table 2.2, BoP). To adjust for the MNEs effects, the Irish Central Statistical Office (CSO) developed complementary indicators, such as the modified current account balance (denoted as CA*), which adjusts the headline current account figures in a way consistent with the calculation of the GNI*. ( ) CA* is often expressed in % of the GNI* and it has been much less volatile than the headline measure. It amounted to 4.6% of GDP in 2019, up from 3.7% in 2018, which corresponds to 7.7% of GNI*, up from 6.1% in 2018, indicating a large and widening gap between domestic savings and domestic investment, which is supporting the correction of the negative NIIP. The headline net international investment position of Ireland has been very negative over the last decade. The Irish NIIP reached -174% of GDP in 2019 (-180% in 2020Q1), far below the MIP threshold of -35%, but also below the prudential and fundamental NIIP benchmarks amounting to -135% and 7% of GDP, respectively. ( ) The NIIP excluding the non-defaultable instruments (NENDI) was even more negative at -285% of GDP. However, the NIIP is strongly affected by the large negative position of MNEs and specifically of the International Finance Service Centre (IFSC) ( ), to which the domestic sector has only very little exposure. A sectoral breakdown shows a negative NIIP of the general government at -35% of GDP in 2019, (slightly worsening to -37.5% in 2020Q1) and positive net positions of around, respectively, 13% and 9% of GDP for the monetary authorities and for monetary and financial institutions (MFI) not in the IFSC sector. Thus, the substantial negative NIIP originates from other sectors, with financial intermediaries in the IFSC sector (other than monetary authority and MFI) holding gross external assets and liabilities in excess of the tenfold of GDP in 2019, and their net position equal to -53% of GDP (-50% in 2020Q1). ( ) The NFC sector ( ) has had gross external assets and liabilities amounting to, respectively 272% and 441% of GDP end of 2019, yielding a negative NIIP of -173% of GDP (178% in 2020Q1). The estimated NIIP adjusted for the impact of multinationals is much less negative and has been improving over recent years. To adjust the NIIP for the MNEs effects, one can start with the earlier NIIP figures known to be less affected by the offshore activities than the current data and cumulate the modified current account balances. ( ) For 2019, this procedure yields an estimate range between -34% and -49% of GDP (i.e. -57% and -82% of GNI*), depending on the choice of the base year. This is much more favourable than the headline NIIP, but still considerably below the fundamental NIIP benchmark. The adjusted NIIP has been improving steadily at least since 2014, given the CA* surpluses and growing GDP and GNI* recorded over this period.



Table 2.1:Non-financial corporations debt indicators, Ireland Source: (a) Eurostat, (b) Ameco, (c) European Commission calculations, (d) ECB Table 2.2:Selected external indicators, Ireland Source: (a) Eurostat, (b) AMECO, (c) European Commission calculations, (d) WIOD database Graph 2.1:Thematic Graphs: Non-financial corporate debt Source: European Commission Services Graph 2.2:Thematic Graphs: Non-financial corporate debt (cont.) Source: European Commission Services 3. Thematic Issue: Household Debt Situation entering the COVID-19 crisis The stock of household debt in Ireland has declined since the Irish banking crisis, though deleveraging needs may remain. The ratio of household debt to GDP declined significantly from an average of 108% in the period 2008-2012 to 37% in 2019 (Table 3.1 and Graphs 3.1(b)). Deleveraging has concerned not only bank debt but also other debt liabilities (Graph 3.1(a)) and was achieved through both negative net credit flows (transactions) and GDP growth (Graph 3.1(c)). The household debt stock in 2019, at 37% of GDP, was significantly below the prudential benchmark and below but close to the fundamentals-based benchmark. ( ) However, GDP in Ireland is overstated by the presence of multinationals and is misleading as a denominator for household debt. Household debt in percent of modified gross national income (GNI*), which is a better measure of domestic output, stood at 62%, below prudential (72%), but this benchmark could be overstated in the case of Ireland. ( ) Irish household debt still amounted to 113% of household gross disposable income (GDI) in 2019, remaining amongst the highest in the EU according to this metric. The household sector on aggregate holds a significant stock of liquid financial assets, including currency and deposits. The ratio of debt to gross financial assets was close to 32% in 2019 (Table 3.1) and households hold a significant share of deposits (Graphs 3.1(f)). In the third wave (2017) of the ECB household finance and consumption survey, about 3% of households with mortgage debt showed a negative net wealth. ( )