DBRS Confirms Republic of Ireland at A (high), Stable Trend

DBRS, Inc. has confirmed the Republic of Ireland’s long-term foreign and local currency issuer ratings at A (high) and its short-term foreign and local currency issuer ratings at R-1 (middle). The trends on the ratings are Stable.

The confirmation of the ratings reflects Ireland’s strong economic performance and improving public finances. Though the UK vote to exit the European Union poses downside risks, the Irish economy is growing at a solid pace and public debt dynamics continue to improve.

The A (high) ratings are underpinned by Ireland’s openness to trade and investment, young and educated workforce, flexible labor market, and access to the European market, all of which support the economy’s competitiveness and solid medium-term growth prospects. These strengths are countered by several credit weaknesses, including high public debt, medium-term fiscal pressures, and asset quality concerns in the banking system. External risks have also intensified since DBRS’s last review in September 2016. In addition to the fallout from Brexit, elections in Europe and uncertainty over U.S. tax and trade policy present downside risks to the outlook.

The revision of Ireland’s National Accounts data last year led to a large increase in GDP. This appears to be largely driven by the onshoring of intellectual property by multinational firms in Ireland. According to the new series, GDP expanded 26.3% in 2015, up from previous reporting of 7.8%. The updated figure clearly does not reflect the pace of underlying growth in the Irish economy.

Irrespective of the statistical revision, a wide range of indicators suggest that Ireland continues to grow at a strong pace, even as the economy may have lost some momentum in the second half of 2016. Private consumption is benefiting from strong employment growth, and building and construction investment is increasing amid pent-up demand. These underlying domestic factors should continue to support the economy in the near term. Even including the fallout of the UK decision to the leave the EU, the outlook for the Irish economy is favorable. The IMF projects GDP growth of 4.6% in 2016, 3.2% in 2017, and 3.2% in 2018.

Fiscal policy shifted to a more neutral stance in 2016 after years of budgetary tightening. The general government deficit declined slightly from €3.0 billion in 2015 to an estimated €2.4 billion in 2016. This year fiscal policy is set to tighten modestly, a policy stance which appears well-calibrated given the signs of diminishing slack in the domestic economy as well as the government’s desire to rebuild fiscal buffers. With strong economic growth and a modest fiscal deficit, public debt dynamics are on a firm downward trajectory. Proceeds from the sale of government holdings in Irish banks could further reduce the public debt burden.

Although public finances are improving, public debt remains high and vulnerable to adverse shocks. General government debt-to-GDP declined to an estimated 76% in 2016, which is moderate compared to other euro area countries. However, this ratio is distorted by Ireland’s GDP data. Using alternative debt metrics, such as debt-to-revenues and interest cost-to-revenues, Ireland’s public debt ratios are declining but remain among the highest in the euro area.

At the same time, risks to Ireland stemming from the external environment have intensified. The UK’s exit from the European Union is potentially negative for the Irish economy. DBRS believes Ireland could be adversely affected through trade, investment and confidence channels, although the intensity and duration of the shock will be determined by the nature of the withdrawal agreement. Although the overall effects of Brexit on the Irish economy have been subdued so far, traditional manufacturing exports have slowed and consumer confidence in Ireland has moderated since the Brexit vote. Other external risks to the outlook include upcoming elections in several large euro area member states and uncertainty over trade and tax policy in the US.

On the domestic front, the deficit has narrowed but budgetary pressures could emerge over the medium term. One concern stems from the use of sharply higher corporate tax revenues to fund increased permanent spending. There is some uncertainty about the durability of this revenue, particularly given the possibility of corporate tax reform in the US. On the spending side, demand for public pay increases is building and perennial spending overruns in healthcare raise concerns about expenditure management. The central fiscal challenge for the government will be to reconcile these demands of the electorate with the fiscal objectives of demand-management and debt reduction.

In addition, there has been significant progress restructuring the Irish banking system in recent years. Banks now have higher levels of capital and improved funding profiles. All three domestic banks returned to profitability in 2015. Although significant progress has been made, the remaining high level of impaired assets across the banking system continues to be a challenge for the sector.

RATING DRIVERS
The Stable trend reflects DBRS’s view that pressures on the ratings are broadly balanced. Measures that enhance the economy’s resilience, particularly given that the economy is highly open and exposed to adverse shocks, could warrant upward rating action. Specifically, the ratings could be upgraded if public debt declines to more moderate levels on the back of sound fiscal management. On the other hand, if medium-term public debt dynamics reverse course – due to either a material downward revision in the growth outlook or a weakening in fiscal discipline – the ratings could face downward pressure.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales. These can be found at http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include Department of Finance, Central Bank of Ireland, Central Statistics Office Ireland, NTMA, NAMA, European Central Bank, European Commission, Eurostat, IMF, Statistical Office of the European Communities, UNDP, SNL, Allied Irish Bank, Bank of Ireland, Permanent TSB, The Economic and Social Research Institute, Bloomberg, and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

For further information on DBRS’ historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository see http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period while reviews are generally resolved within 90 days. DBRS’s trends and ratings are under constant surveillance.

Lead Analyst: Michael Heydt, Vice President, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG and Sovereign Ratings
Initial Rating Date: 21 July 2010
Last Rating Date: 2 September 2016

For additional information on this rating, please refer to the linking document under Related Research.