Despite the anticipated recovery in Ireland over the next few years, high levels of non-performing loans (NPLs), limited credit availability and household deleveraging will restrain the pace of growth, Moody's Investors Service said in a new report published on Wednesday.
The rating agency said that the rise of domestic demand and consumer confidence will propel the recovery in Ireland, returning growth rates to at least 3% over the next few years. However, several external factors stand in the way of the country's recovery.
Banks continue to face the challenge of high NPL levels. Many residential mortgage accounts are currently in arrears, and in many cases, the residential mortgage amount exceeds the house value.
Furthermore, as banks continue to enforce rigid underwriting criteria on highly indebted households, on the back of already weak household demand for credit, retail lending will not likely increase. Tight lending criteria will also limit the availability of loans to small and medium-sized enterprises, owing partly to the large size of banks' NPL portfolios.
Nevertheless, the expected pick-up in Ireland's growth rate will temper the government's fiscal cuts and help address Ireland's high indebtedness. Growth in the industrial, service and construction sectors also suggest that government revenues will continue to grow faster than nominal GDP.
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