The Department of Finance has today published a new economic research paper, Analysis of private sector debt in Ireland . This complements the Department’s annual report on public debt.
Despite a near decade of deleveraging by households and firms, Ireland's stock of private sector debt, as measured by the private sector debt-to-GDP ratio, remains high and is consistently flagged as a macroeconomic risk. However, in light of the large FDI footprint in Ireland, not all of this debt represents a genuine macroeconomic risk to the economy. This paper analyses the components and dynamics of Ireland’s private debt ratio to better understand the macroeconomic risks related to the current level of debt held by households and firms.
The paper’s key findings include:
- After nearly a decade of deleveraging, household debt is on a much more sustainable path. Household debt now stands at 126 per cent of disposable income, a level last seen in 2003, having peaked at 212 per cent in 2009. However, Ireland’s household debt ratio is still the fourth highest in the EU.
- The high headline (household plus corporate) private debt ratio is partially a result of the activities of multinational enterprises. MNE debt - a significant amount of which is cross border intra-group lending for FDI purposes - inflates the debt ratio but does not represent a substantial risk to the domestic economy or financial system.
- This paper addresses these distortions to produce a 'core' Irish private debt ratio, which excludes the FDI-related debt, and which is expressed as a share of GNI*, the CSO’s new underlying measure of national income.
- Overall, the core private debt-to-GNI* ratio is estimated at 172 per cent in 2017, compared to a debt-to-GDP ratio of 244 per cent. This is composed of household debt at 77 per cent of GNI* and ‘core’ corporate debt at 95 per cent.
- The paper estimates benchmarks against which to compare Ireland's core private debt ratio based on fundamental economic factors.
- Household debt is found to be below the benchmark, although Ireland's households nonetheless remain among the most indebted in the EU, with pockets of high debt still existing. For the corporate sector, core Irish debt has been broadly in line with the benchmark in the last two years.
- The analysis suggests that certain features of the Irish economy, including expected economic growth and population growth, have given rise to higher levels of both household and corporate debt than certain other European nations.
- While the levels of debt appear to be explained by these structural aspects of the Irish economy, the higher base of debt that now exists could pose a risk in the event of a downturn. For instance, a stable private debt ratio, i.e. with debt growing at the same pace as the economy (GNI*), but no faster, would result in household debt reaching a level close to its pre-crisis peak by 2023.
Commenting on the publication, Minister for Finance and Public Expenditure and Reform, Paschal Donohoe T.D., said:
“I welcome the publication of this paper, which fills an important gap in our understanding of the debt burden of the private sector in Ireland, and offers a far more nuanced perspective on our debt position than what is generally reported.
The high level of private debt in Ireland has continually been highlighted as an economic risk, including on the European Commission’s Scoreboard of Macroeconomic Imbalances. Understanding how much of this debt relates to the domestic economy and how much is attributable to the activities of multinationals is crucial to allow us to formulate appropriate economic policy.
While the paper finds that household debt levels are not out of line with fundamental economic drivers, the fact that Ireland’s households remain among the most indebted in the EU highlights the continued need for the Government to closely monitor trends in household debt, including regarding mortgage arrears.
We are actively engaging with our colleagues in the EU as part of the European Semester process, to ensure we continue to unwind any harmful macroeconomic imbalances that developed during the crisis and avoid the build-up of any new imbalances.”
Notes to Editors
- The private sector debt-to-GDP ratio is defined as the nominal value of loans and debt securities owed by households and non-financial corporations (NFCs) divided by gross domestic product (GDP). This figure was 244 per cent in Ireland in 2017.
- The European Commission’s macroeconomic imbalance scoreboard sets a threshold of 133 per cent as an imbalance in this area. Ireland’s private sector debt has exceeded this threshold since the early 2000s.
- The ‘core’, or underlying, Irish NFC debt ratio is defined as the debt of Irish-owned NFCs, borrowed from banks or counterparties either in Ireland or internationally. The debt of companies with foreign parents (i.e. MNEs) and redomiciled plcs, which accounts for 70 per cent of total NFC debt, is excluded.
- Core Irish private debt should be expressed against GNI*, which better reflects domestic economic activity, rather than GDP. The core private debt-to-GNI* ratio was 172 per cent in 2017, compared to the headline private debt-to-GDP ratio of 244 per cent.
- In 2017, the core NFC debt-to-GNI* ratio was 95 per cent, compared to the headline NFC debt-to-GDP ratio of 196 per cent. Household debt-to-GNI* was 77 per cent, compared to a debt-to-GDP ratio of 48 per cent.
- Household debt now stands at 126 per cent of disposable income, a level last seen in 2003, having peaked at 212 per cent in 2009. However Ireland’s ratio is still the fourth highest in the EU. Ireland also has the 6th highest level of household debt in the EU on a per capita basis, at €29k per person.
- The paper uses a regression-based methodology produced by the European Commission to estimate bespoke benchmarks for private debt in Ireland, based on country-specific fundamental economic factors.
- Household debt is found to be below the estimated benchmark using this model (whether on a GDP or GNI* basis), while the ‘core’ Irish NFC debt ratio is marginally above it, though it has been broadly in line with the benchmark on average over the last two years.
- The key drivers of household debt accumulation in Ireland are found to be expected future economic growth, population growth, unemployment, and credit regulations. For NFCs, the main fundamental drivers are expected future economic growth, unemployment and construction investment (driven partially by population growth). These drivers are all cyclically adjusted to take out the impact of the economic cycle on debt levels.