By Peter OBIORA InvestAdvocate
Lagos (INVESTADVOCATE)-The International Monetary Fund (IMF) Friday reported that due to the stabilisation of banks in Ireland, its economy is beginning to recover.
Craig Beaumont, IMF Mission chief to Ireland said this at the end of his mission’s visit to the country as part of the Fund’s regular surveillance of countries with IMF credit outstanding above 200 percent of quota.
‘’ The Irish economy is beginning its recovery from an exceptionally severe banking crisis. Banks have been stabilised and downsized. Substantial fiscal consolidation has been achieved. Importantly, Ireland has smoothly exited its EU-IMF supported program where the authorities built a track record of steadfast policy implementation,’’ Beaumont said.
Apart from Ireland’s bank stabilisation, Beaumont said strong job creation in the country was an indicator of its economic recovery, affirming that with almost all sectors creating jobs, employment growth reached 3.3 percent year-on-year (y/y) in the fourth quarter (Q4) of 2013.
According to the IMF’s mission chief to Ireland, consumer confidence and retail sales are rising and residential property market recovery is spreading beyond Dublin. ‘’Core investment, including construction, surged in the second half of 2013. Confirming these trends, tax revenues are off to a solid start in the first quarter of 2014. So, despite some volatility in recent GDP data, the mission expects economic growth of 1.7 percent in 2014 and about 2½ percent in 2015,’’ Beaumont said.
However, the IMF mission to Dublin noted that financial market conditions have improved; yet lending remains weak.
Beaumont said the Irish authorities have resumed regular bond auctions with borrowing costs reaching new lows. ‘’Banks’ declining bond yields are supporting their progress toward profitability. Market appetite for distressed Irish assets is evident in recent Irish bank resolution corporation (IBRC) and national asset management agency (NAMA) transactions. However, modest new lending continued to be outweighed by the ongoing deleveraging of heavily indebted households and SMEs,’’ he said.
In terms of financial sector, the IMF affirmed that a sustained job-rich economic recovery hinges on reviving healthy lending. ‘’ Investment is beginning to rebound from depressed levels, largely financed by retained earnings. In the medium term, however, a paucity of credit would impede the domestic demand revival which is critical for job creation. Hence, there is a need to continue improving the health of the banks. Expanded nonbank intermediation can also help provide finance and share risks, as indicated by recent REIT activity,’’ the IMF said.
Still on the financial sector, the IMF affirmed that the recent successful disposal of IBRC loans indicates a step change in the Irish financial sector restructuring.
‘’With some 90 percent of these assets sold to the private sector, the government’s contingent liabilities are notably reduced. Raising NAMA bond redemptions in 2014 will further reduce such liabilities, and it is appropriate for NAMA to preserve flexibility as it considers accelerating its disposals,’’ the IMF noted.
The Fund further affirmed that resolving high nonperforming loans (NPLs) remains a vital factor in rebuilding the Irish bank’s lending capacity. ‘
The IMF said an overhang of NPLs reduces banks’ profitability including through higher market funding costs.
The report said strengthened provisioning and increased investor interest should facilitate a broadening of loan workouts such as durable mortgage resolution requiring continued intensive efforts.
‘’Banks report exceeded the CBI’s target to conclude sustainable solutions for 15 percent of mortgages in arrears at end 2013. The easing in residential mortgage arrears in late 2013 is a welcome first sign that household financial distress is being addressed. The aim should be to resolve a majority of arrears cases by year end while ensuring these solutions are lasting through audits and close supervisory engagement with banks,’’ the IMF affirmed.
Also, the Fund said that a significant portion of banks NPLs in Ireland are commercial real estate (CRE) loans that are not connected with other businesses, facilitating their resolution.
‘’Banking supervision should press for the restructuring or disposal of these NPLs as permitted by improved market conditions. Resolution of SME loans in difficulty needs to continue while ensuring the durability of these workouts,’’ the IMF said.
