IMF says State needs to do more on housing and shadow banking

The International Monetary Fund (IMF) said the Republic’s growth outlook remains positive, despite global headwinds from the war in Ukraine.

However, the Washington-based fund said that the country needs to do more to resolve housing shortages and enhance risk analysis of its very large international market-based finance sector, or what is known as shadow banking.

“Growth is projected to slow from 13.5 per cent in 2021 to a still robust 7.5 per cent in 2022. This is partly due to the envisaged deceleration of the IT and pharmaceutical sectors from their exceptional 2021 performance and the indirect impact of the war in Ukraine,” the IMF said on the conclusion of a staff visit to the State.

“Several pre-pandemic challenges remain, including housing shortages, infrastructure, social and green investment gaps, and the need to strengthen [multinational groups’] inward linkages to broaden growth and make it more inclusive,” the IMF said.

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The fund said that the main indirect effects from the war in Ukraine on the State could be “substantial” due to rising inflation and weakening global demand. The Central Bank said on Thursday that Irish inflation could reach as high as 10 per cent this year.

The IMF also said that the Republic needs to work more closely with international supervisors on reinforcing regulation in its market-based finance sector. The State is home to the world’s fifth-largest “shadow banking” industry, with some €3.45 trillion of assets as of the end of 2020, mainly in IFSC-based international funds that invest in debt, according to a Central Bank note published earlier this year.

The Irish shadow banking sector has tripled in size in the past decade and now equates to nine times the size of the economy, driven by growth in investment and money market funds that put money into debt securities or have significant borrowings. There were €2.09 trillion of assets in such investment funds at the end of 2020 and a further €630 billion in money market funds.

Most of the rest of the Irish sector is comprised of special purpose vehicles used to house pools of international loans that are refinanced in the bond markets through a process called securitisation.

On the domestic banking sector, the IMF said the Irish financial sector weathered the pandemic crisis well thanks to high capital buffers and effective policy support. This is believed to refer to Government supports for households and businesses during the crisis, which service to support their creditworthiness.

“The impact of the pandemic on borrowers’ financial position has started to dissipate, but uncertainty remains. Retail bank profitability is still lower than peers,” it said.

The IMF also noted that two retail banks — Ulster Bank and KBC Bank Ireland — are exiting but new non-bank lenders are entering the market. “New risks have emerged, including from the rapid expansion of non-bank lenders, that have tripled their share of new mortgage lending over last two years [to 13 per cent in 2021],” it said.