DBRS Ratings GmbH (DBRS Morningstar) confirmed the Republic of Ireland’s Long-Term Foreign and Local Currency – Issuer Ratings at AA (low). At the same time, DBRS Morningstar confirmed its Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (middle). The trend on all ratings is Stable.
KEY RATING CONSIDERATIONS
The Stable trend reflects DBRS Morningstar’s view that the ongoing external risks to Ireland are balanced against the economy’s favourable growth outlook. The improved economic sentiment to start the year from the easing of COVID restrictions has been complicated by the disruption to global trade and price trends caused by Russia’s invasion of Ukraine. Strong expansion of the multinational sector nonetheless allows the Irish economy to continue its path of high growth. GDP expanded above trend in 2020 and by double digits in 2021. Even when excluding activity of the multinational sector, the contraction of the domestic oriented economy in 2020 and its 2021 recovery outperformed the EU average. Thus, standard measures of public finances in Ireland deteriorated less than its peers, despite one of Europe’s largest direct fiscal support packages.
Ireland’s AA (low) ratings are underpinned by the country’s institutional strength, robust trade and investment flows, flexible labour market, young and educated workforce, and its access to the European internal market. These features support the economy’s competitiveness and its medium-term growth prospects. The country’s credit strengths are countered by several weaknesses, including volatile fiscal revenue sources and medium-term fiscal cost pressure. Rising expenditure demands come at a time when efforts to change the global corporate tax landscape could challenge revenues. Using various debt ratios, Ireland is among the countries in Europe with high stocks of public debt.
The ratings could be upgraded if Irish authorities are able to durably reduce various fiscal deficit and debt metrics. Sustained strong economic performance combined with increased resilience against external risks would also support upward ratings pressure.
The ratings could be downgraded if there is substantial deterioration in Ireland’s medium-term economic outlook; or if the country experiences a more permanent relaxation of fiscal discipline that significantly weakens its public debt position.
Ireland’s Economy Continues To Operate At Two Speeds
Irish GDP expanded by 5.9% in 2020 and by 13.5% in 2021, despite Brexit and pandemic-related disruptions. As always, the strong GDP outcome needs to be viewed with caution. The growth rate reflects strong performance of external-facing sectors such as pharmaceuticals and information and communications technology (ICT), and overstates the wealth generation of the economy. The strong headline GDP figure masks the shock to the domestic oriented economy. Real modified domestic demand (MDD) contracted by 4.9% in 2020, before expanding by 6.5% last year. DBRS Morningstar applies a positive qualitative assessment in the “Economic Structure and Performance” building block to reflect accounting complications that make the economy appear more volatile.
Forces supporting economic growth in the near-term appear stronger than those opposing. Ireland’s open economy is exposed to Russia’s invasion of Ukraine indirectly, via increased uncertainty, supply bottlenecks, and rising inflation. The invasion dampens trade and investment prospects in Ireland as elsewhere and drives up the price of energy, food and other basic goods. The flash inflation reading for June 2022 points to a 9.6% rise in CPI, eroding real household income and weighing on consumer sentiment. However, post pandemic conditions – such as accumulated savings, upbeat business sentiment, and a strong labour market – support domestic demand. Furthermore, net exports stemming from the multinational corporations less affected by Russia’s invasion will continue to support economic expansion. The European Commission (EC) forecasts real GDP growth of 5.3% this year and 4.0% next year.
The Government Expects The Budget To Reach Balance This Year, Despite The Large Fiscal Effort In Recent Years
From a budget surplus in 2019, the deficit in 2020 widened to EUR 19.1 billion (5.1% of GDP) before narrowing in 2021 to EUR 8.1 billion (1.9% of GDP). This result outperformed European peers, despite the Irish government implementing one of the largest counter-cyclical spending programs (roughly 13% of GDP or 23% of GNI*) to support the economy over the last two years. More than four-fifths of the response consisted of direct expenditure measures to support employees, households, and businesses as well as increased health and capital spending. Strong GDP growth and resilient revenue performance explains the Exchequer’s less severe deterioration of the deficit in the face of major economic disruption and loss of employment. The progressive nature of taxation and success of multinationals operating in Ireland have meant resilient income and corporate tax receipts.
However, the fiscal position appears worse when measured against a modified denominator. The deficit was 9.2% of GNI* (a calculation of output that strips away output contributions from multinationals) in 2020 and 3.6% of GNI* in 2021. These statistical considerations weigh negatively on DBRS Morningstar’s assessment in the “Fiscal Management and Policy” building block. Efforts at the multinational level to reform the global corporate tax system risks reducing Ireland's corporate tax base, although proposed changes appear manageable under current assumptions. The government expects profit-sharing could cost the exchequer roughly EUR 2 billion in corporate tax receipts each year. In the 2022 Summer Economic Statement the government has temporarily increased spending to support the public against the rapid rise in the cost of living. Despite the additional fiscal impulse, the government expects public finances to return to a balanced position or a small surplus this year.
Strong Growth And Fiscal Repair Results In Favourable Debt Dynamics
Ireland’s general government gross debt increased as a result of the COVID crisis from EUR 204 billion in 2019 to EUR 218 billion in 2020, equivalent to 58.5% of GDP or 105% of GNI. The still expansionary fiscal stance led to further debt accumulation in 2021 to EUR 237 billion or 106% of GNI. When using this or other alternative measures of debt, Ireland remains one of the most highly indebted countries in Europe. This factor weighs negatively on DBRS Morningstar’s “Debt and Liquidity” building block assessment. That said, Ireland’s strong growth performance, the expected repair of the budget, and favourable financing conditions point to a rapid reduction of the debt ratios. The government expects by 2025 the debt burden to decline to 46.6% of GDP or 79% of GNI*.
External Shocks Complicate Already Rising Property Prices; Irish Banking Sector In Stronger Position Than In Past Crises
The pandemic created supply chain disruptions and capacity issues in some sectors that have increased price pressure in Ireland and across Europe. This supply shock was particularly acute in Ireland’s property market, where demand for new housing completions remains strong. Construction materials increased by over 18% year-over-year in April 2022, and the property price index increased by 14.3% over the same time. DBRS Morningstar remains of the view that headline price pressures will trend down over the course of the year, as construction costs ease and housing completions rebound. Likewise, healthy private sector balance sheets and strong macroprudential measures protect the financial sector from the rise in property prices. The Irish banking system in general has made significant progress over the years that helps safeguard the system. Banks are profitable, have healthy levels of capital, and strong funding profiles. Asset quality also remains strong even if the consequences of the pandemic – stemming from SMEs that had financial difficulties prior to the pandemic – are not yet clear.
External Sector Indicators Are Complicated By National Accounting; Global Tax Changes May Affect Future Investment Flows
The IMF’s measure of the headline current account deficit for 2019 was 19.9% of GDP, followed by a smaller deficit in 2020, a surplus of 13.9% in 2021, and large surpluses forecast thereafter. The large swings in the data are due to the activity performed by large multinational firms. Contract manufacturing affects the accounting for exports, while movements of intellectual property products impact imports. The government calculates a measure of the current account surplus modified for these effects to have reached 11.5% of GNI* in 2020. Ireland’s large negative net international investment position, at -140% of GDP in 2021 according to the IMF, overstates external sector risks. This supports DBRS Morningstar’s positive adjustment to the “Balance of Payments” building block.
Negotiations to reform the global corporate tax landscape intensified in 2021. International tax reform as currently envisioned by the OECD/G20 has two main pillars, each with possible varying effects on Ireland's budget, its existing capital stock, and future direct investment. The consequences for Ireland would depend on how the Irish government and the corporate sector respond the changes. The main long-term risk is that proposed reforms to global taxation affect future direct investment inflows to Ireland. Yet, DBRS Morningstar is of the view that coordinated execution around global tax reforms will be difficult to implement, and Ireland has significant advantages that keep its economy competitive should reforms threaten the country's economic model.
Ireland’s Institutional Strengths Evident By Effective Crisis Management
Ireland’s general election in February 2020 coincided with the early spread of COVD-19 across Europe. The election resulted in a significant loss of seats for the two main political parties, Fine Gael and Fianna Fáil, and gains by Sinn Féin and the Greens. Though the inconclusive election occurred at a challenging time, the political cycle did not undermine Ireland’s strong institutional quality or its stable macroeconomic policy-making. A new coalition government that includes Fine Gael, Fianna Fáil, and the Greens took office in June 2020 and seamlessly continued the plan for containing the pandemic and supporting the economy. Ireland is a strong performer on the World Bank’s governance indicators, and its governments over the last decade have demonstrated policy continuity.
Brexit-related challenges have not been fully resolved. A Free Trade Agreement between the UK and EU was agreed in December 2020 following a long negotiation. The deal allows for tariff-free trade, and in conjunction with the 2019 Withdrawal Agreement, the worst-case scenarios concerning risks associated with lower output potential and a physical border on the island of Ireland from no-deal were averted. However, goods moving between the UK and the EU are subject to customs and controls that require extra processes. Due to these non-tariff barriers, Brexit will likely result in lower levels of aggregate trade between the two blocks. Additional agreements around the trade of services and the contentious Irish Protocol will likely be necessary before accurately assessing the consequences of Brexit on Ireland.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, Governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments. https://www.dbrsmorningstar.com/research/399917
EURO AREA RISK CATEGORY: LOW
All figures are in Euros unless otherwise noted. Public finance statistics reported on a general government basis unless specified.
The principal methodology is the Global Methodology for Rating Sovereign Governments (July 9, 2021) https://www.dbrsmorningstar.com/research/381451/global-methodology-for-rating-sovereign-governments. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).
The sources of information used for this rating include Department of Finance (Budget 2022), Central Bank of Ireland (Quarterly Bulletin 2Q 2022), Central Statistics Office Ireland, NTMA (Investor Presentation June 2022), European Central Bank, European Commission (Spring Forecast 2022), Eurostat, IMF WEO (April 2022), IMF IFS, Statistical Office of the European Communities, OECD, World Bank, The Economic and Social Research Institute, Irish Fiscal Advisory Council, Global Carbon Project, Social Progress Index, World Economic Forum, Bloomberg, BIS, and Haver Analytics. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.
DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/399916
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Jason Graffam, Vice President, Global Sovereign Ratings
Rating Committee Chair: Thomas R. Torgerson, Managing Director, Co-Head of Sovereign Ratings
Initial Rating Date: July 21, 2010
Last Rating Date: January 14, 2022
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