Morningstar DBRS Confirms Republic of Ireland at AA, Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the Republic of Ireland's (Ireland) Long-Term Foreign and Local Currency - Issuer Ratings at AA. At the same time, Morningstar DBRS confirmed its Short-Term Foreign and Local Currency - Issuer Ratings at R-1 (high). Also, Morningstar DBRS confirmed Ireland's USD 50 billion Euro-Commercial Paper Programme (ECP Programme) Rating at R-1 (high). The trend on all ratings is Stable.

KEY CREDIT RATING CONSIDERATIONS
The confirmations of the credit ratings and trends reflect Morningstar DBRS' view that Ireland's strong credit profile and solid economic and fiscal projections mitigate the significant build-up of external risks. The budgetary position was extraordinarily strong in 2024, with a fiscal surplus estimated at 7.2% of Modified Gross National Income (GNI* ), skewed by the one-off proceeds from the Apple case. The Central Bank of Ireland (CBI) projects the fiscal surplus to average 2.5% of GNI* for the period 2025-2027 and the public debt-to-GNI* to decline to 59.9% in 2027. The government transferred in excess of EUR 10 billion by end-2024 to the newly created long-term savings funds. If successfully capitalised over time this would improve the resilience of public finances and prepare Ireland to better manage structural economic challenges. The domestic economy is expected to continue to grow solidly over the medium term, albeit capacity constraints could eventually slow its pace. Still, Morningstar DBRS notes that the risks surrounding these favourable medium-term economic and fiscal projections remain tilted to the downside, especially given the large exposure of the Irish economy to trade and its sectoral concentration. Significant changes in U.S. economic policies, including tariffs or corporate taxation, that affect the activity or profitability of U.S. multinationals in Ireland, could have major implications for the Irish economy and for future tax revenues.

Ireland's credit ratings are underpinned by the country's institutional strength, strong fiscal performance, and favourable public debt dynamics. Furthermore, Ireland's robust trade and investment flows, flexible labour market, young and educated workforce, and its access to the European internal market also support its credit ratings. These features strengthen the economy's competitiveness and its medium-term growth prospects. Still, Ireland's public debt-to-GNI* remains elevated given Ireland's small and open economy. Moreover, the benefits to the economy from large multinational enterprises domiciled in Ireland come with some concentration risks and economic volatility, which, if not properly managed, could translate into fiscal vulnerabilities.

CREDIT RATING DRIVERS
Morningstar DBRS could upgrade the credit ratings if Ireland's public finances substantially improve, and there is evidence of significant economic and fiscal resilience to Ireland's concentration risk.

Morningstar DBRS could downgrade the credit ratings if a substantial deterioration in Ireland's medium-term economic outlook occurs, or if a structural deterioration in Ireland's fiscal position significantly weakens its public debt outlook.

CREDIT RATING RATIONALE

Irish Economic Growth to Remain Favourable, However, Uncertainty Increased Markedly

The activity of large foreign-owned multinational enterprises (MNEs) headquartered in Ireland, the aircraft leasing sector, and the onshoring of intellectual property assets have large effects on national accounts. The multinational-dominated sector accounted for, on average, about 47% of Ireland's GDP between 2020 and 2023. The size and evolution of the multinational-dominated sector complicates the assessment of the Irish economy, inflating per capita income, nominal GDP, real GDP growth, and output volatility, especially since 2015. Morningstar DBRS applies a positive qualitative adjustment to the "Economic Structure and Performance" building block assessment to reflect its view that these accounting effects are overstating the underlying volatility of the domestic economy. Underlying conditions of the domestic economy are better reflected by GNI* or Modified Domestic Demand (MDD).

Irish economic growth has outperformed the euro area average over the last decade, helped by the strength of private consumption, strong employment growth, and supportive fiscal policy. The annual average growth rate of real GNI* and MDD was 4.4% and 3.7% between 2013 and 2023, respectively. Ireland has proven resilient to the successive economic shocks caused by the United Kingdom leaving the European Union, the pandemic, and the global energy price and interest rate shocks, among others. The good performance of the economy is also reflected in the unemployment rate of 4.0% in January 2025, and 36 consecutive months below 5%, and employment 17.1% higher than pre-pandemic levels. Headline HICP inflation has decreased significantly to 1.7% in January 2025 after peaking in 2022 as both energy prices and cost-push pressures have abated. The responsiveness of labour supply to demand conditions, benefiting from strong net migration flows and the increase in the female participation rate, has eased inflationary pressures from a rapidly expanding economy, although some sectors, such as construction, continue to face labour shortages. On the other hand, capital formation has progressed more slowly, with bottlenecks in housing and infrastructure. These pressure points have been reflected more in house price and rent inflation, and over time could increasingly damage competitiveness and limit economic growth.

Ireland's economic growth outlook remains strong, although external risks have increased. The CBI projects real MDD growth of 2.7% and real GDP growth of 4.1% on average during 2025-27. Increasing households' disposable income and less restrictive monetary policy is expected to support consumption and investment. Furthermore, investment both in dwellings and public infrastructure is expected to remain elevated in coming years. Net exports are also expected to remain supportive, despite the subdued external backdrop. The economic outlook nonetheless is subject to significant downside risks related to the escalation of trade and geopolitical tensions. The U.S. is Ireland's largest bilateral trading partner, and the overall economy is heavily exposed to potential policy changes from the U.S., including trade or tax policies. Around 29% of Irish cross-border goods exports are destined to the U.S. market, with around two-thirds of this concentrated in the chemical and pharmaceutical sectors. Therefore, the imposition of tariffs on European products, especially on the pharmaceutical sector, could have an outsized effect on the Irish economy. The relatively low price elasticity of demand for medicines, high regulatory constraints, and stickiness of physical capital mitigate the near term risks, but the effects could become bigger over time, if firms decide to lower future investment plans in the country. Importantly, Morningstar DBRS is of the view that Ireland has significant advantages that will likely keep the economy competitive.

Ireland's Fiscal Position to Remain Strong in the Coming Years, But Revenue Concentration Raises Uncertainty

Ireland has posted sizable fiscal surpluses since 2022 despite the continued support to firms and individuals to overcome the successive shocks and higher capital expenditures to deal with its infrastructure bottlenecks. The CBI estimates the fiscal surplus reached 7.2% of GNI* in 2024. This exceptionally strong surplus was influenced by the EUR 14.1 billion (including interest) of additional receipts following the Court of Justice of the European Union's (CJEU) ruling in September 2024 on the Apple state aid case. Excluding this one-off windfall, the estimated fiscal surplus was smaller than projected in the 2025 Budget due to weaker-than-expected corporate income tax (CIT) growth and higher spending. Growth in personal income tax (PIT) and value-added tax (VAT) revenues remained strong thanks to the dynamism of the domestic economy and to wage gains. Corporate income tax receipts grew by 64% YoY in 2024 and by 18% YoY if excluding the proceeds from the Apple case. Gross voted expenditure growth remained elevated, pressured by healthcare overruns. The Department of Finance (DoF) projects a surplus of 2.9% of GNI* for 2025 incorporating a fiscal package of EUR 10.5 billion included in the 2025 Budget. The package is made up of higher permanent expenditure of EUR 6.9 billion, permanent tax changes worth EUR 1.4 billion, and EUR 2.2 billion one-off measures.

The CBI projects an average fiscal surplus of 2.5% of GNI* for the period 2025-2027, roughly in line with the DoF's 2.4% average during the same period. These projections do not include potential additional expenditures to be financed by the Apple case proceeds, the use of which will likely be decided during next years' budgeting round, or bank share sales. Importantly, these very strong fiscal projections appear less favourable when the so-called windfall corporation taxes, or receipts in excess of what can be explained by the domestic economy, are excluded. Removing the effect of the CIT windfall, the CBI estimates average fiscal deficits of 2.8% of GNI* and the DoF of 1.9% of GNI* for the period 2025-2027. Ireland's tax base narrowed and became more dependent on corporate tax revenues over the past decade. According to the Irish Fiscal Advisory Council, Ireland's fiscal council, corporate tax collection (excluding the Apple case) accounted for 28% of total tax in 2024 and more than doubled compared to their 2019 level. Large multinational companies play a significant role in corporate tax collection in Ireland as well as contributing to other tax receipts such as PIT and VAT revenues. This makes public finances vulnerable to company or sector-specific shocks as well as changes in U.S. or international tax policies affecting multinationals domiciled in Ireland. Morningstar DBRS applies a negative qualitative adjustment to the "Fiscal Management and Policy" building block assessment to reflect the risks associated with revenue volatility.

The main fiscal challenge for Ireland remains to find the right balance between addressing its infrastructure deficit, without overheating the economy, while at the same time preparing for a scenario without excess corporate tax revenues. Ireland is working on building resilience through the establishment of two long-term savings funds to which it allocated in excess of EUR 10 billion in 2024. The Future Ireland Fund (FIF)'s purpose is to help finance the future spending pressures including ageing, climate and the digital transitions from 2041 onwards. The Infrastructure, Climate and Nature Fund (ICNF) was created with the objective of supporting capital spending during downturns and supporting climate and nature related objectives. The government plans to utilise EUR 3.15 billion in the ICNF for multiyear funding for green transition projects over the period 2026-2030. The legislation sets out annual transfers from the Exchequer of 0.8% of GDP from 2024 to 2035 to the FIF and EUR 2 billion from 2025 to 2030 to the ICNF. In time, the government estimates the FIF capitalisation could reach as much as EUR 100 billion. The final size of the funds is subject to uncertainty linked to the trajectory of GDP, corporate tax revenues and investment return.

Ireland's Public Debt Metrics Rapid Decline Expected to Continue Driven by Favourable Dynamics

Irish public debt metrics, compared to GDP or GNI* have improved markedly over the past decade thanks to a stronger fiscal position and a rapidly growing economy. The CBI projects the public debt-to-GDP at 41.4% of GDP in 2024, well below the 118.7% peak in 2012 and the pre-pandemic level of 55.9% in 2019. When using GNI* as a denominator, the CBI projects the public debt ratio would be 70.4% in 2024, much lower than the 163.4% peak in 2012. Still, Ireland's public debt-to-GNI* remains relatively elevated and underpins Morningstar DBRS' negative qualitative adjustment of the "Debt and Liquidity" building block assessment. Looking ahead, favourable debt dynamics are expected to continue driven by the combination of large primary surpluses, strong nominal economic growth, and a low effective interest rate. The CBI projects a further decline in the debt ratio to 59.9% of GNI* /33.4% of GDP by 2027. The picture for public finances could be even better than the falling debt metrics would suggest, in that the government is planning to build up substantial financial assets in the two funds. On the other hand, the reversal of excess corporate receipts and spending pressures could lead to higher debt levels over time.

Ireland's proactive debt management strategy and favourable debt structure strengthen the government's credit profile. The National Treasury Management Agency (NTMA) lengthened the debt's maturity profile at the same time as locking in low interest rates during the period of extremely easy monetary conditions in the euro area. The weighted-average maturity of outstanding government debt stood at 10.2 years and the average cost of debt is around 1.6%. On top of this, Ireland's strong cash position provides significant financial flexibility. The cash buffer reached EUR 34 billion at end-2024 boosted by the strength of CIT revenues and the proceeds from the Apple case, although is expected to fall during 2025. Projected fiscal surpluses and modest redemptions should keep Ireland's bond issuance at a low level. All of this is helping to absorb higher funding costs after years of exceptionally easy monetary policy. Interest expenditure as share of GNI* are expected to remain contained at 1.1% on average during 2025-2030.

The Irish Banking Sector is Well Prepared to Face Stress; Housing Shortages Keep Price Pressures Strong

The Irish banking system has strong capital and liquidity ratios, well above minimum requirements, that support its capacity to absorb potential shocks. Irish banks profitability, which increased between 2022 and 2024 driven by higher interest income, likely reached a cyclical peak and should soften in response to the ECB policy rate cuts. Asset quality remains adequate, with non-performing loans below 2%. Still, domestic banks are indirectly exposed to potential spillovers from changes in U.S. economic policies affecting MNEs' future employment, investment, or production affecting households and local businesses. The presence of prudent underwriting standards, good coverage ratios, and strong macroprudential measures, together with the strength of Ireland's labour markets and a decade of private sector deleveraging, mitigate the risks.

The housing market heated up again, with the residential property price growth at 8.7% year-on-year in December 2024. Ireland's persistent housing deficit, coupled with less restrictive monetary policy, is likely to keep price pressures elevated. The CBI revised upwards the number of new homes estimated to meet demand to around 52,000 a year considering a decade of under-supply and higher than previously projected population growth. The significant increase in home completions in recent years, which slowed in 2024, is expected to continue in the coming years. Mortgage credit growth remains moderate, mitigating risks to financial stability. Nevertheless, a continued deterioration in housing affordability could limit Ireland's growth and competitiveness over time and stoke social tensions. The domestic banking system remains resilient to the downturn in the commercial real estate (CRE) sector. Irish banks' exposure to this sector is lower and less risky than in the past. The increase in foreign investment in recent years has resulted in a more diversified funding profile for the CRE sector, which has reduced direct risk to domestic banks and the economy. On the other hand, Ireland's large and complex market-based financial sector (more than 20 times GNI*), despite being mainly externally oriented, could still have some spillover effects on the CRE sector in Ireland, according to the IMF.

Irish Exports to Remain Strong, but Uncertainty Linked to U.S. Policy Changes Remains High

Ireland's external accounts are heavily influenced by the internationalisation of its corporate sector, which is dominated by foreign-owned multinationals producing goods and services mainly for exports and large offshore financial services sector intermediating non-resident borrowers and lenders. This leads to large swings in its balance of payments data. The current account averaged a deficit of 13.9% of GDP in 2019-20 but then shifted to an average surplus of 9.7% of GDP in 2021-23. Goods exports have recovered strongly in 2024 driven by chemicals and pharmaceuticals, which recovered after a pandemic-related slump in 2023. Service exports continued their expansion, driven by computer services. The prospects for pharmaceutical and computer services remain strong as their demand is expected to remain structurally strong. Still, this is subject to significant uncertainty linked to the risk of U.S. tariffs or other trade barriers affecting future Irish exports or the evolution of the activity in Europe.

Ireland's annual savings remain large, even when adjusted for the large multinational sector. The modified current account (CA* ) calculated by the Central Statistics Office provides an estimate of the underlying current account corrected for the effects related to intellectual property, aircraft leasing activities, and R&D service imports, among other items. The Department of Finance forecast the CAsurplus at 6.8% of GNI in 2024 and to remain elevated at 6.1% on average during 2024-2030. Still, Morningstar DBRS notes that much of the surplus is explained by the windfall corporation tax receipts. Ireland's large negative net international investment position (NIIP) at 79.9% of GDP in Q3 2024 overstates external sector risks. Much of the NIIP liabilities are not owed by Irish residents but result from cross-border financing of large corporates. This supports Morningstar DBRS' positive adjustment to the "Balance of Payments" building block assessment.

Ireland's Institutional Strengths Underpin Sound Policy Making

The high quality of Irish institutions, as reflected in the Worldwide Governance Indicators, and the stable macroeconomic policy framework underpin a very strong policy environment. Ireland's two mainstream parties, Fianna Fáil (FF) and Fine Gael (FG), have led Irish governments for decades. Following the last parliamentary elections in November 2024, FF and FG struck a deal to remain in power, now with the support of independent MPs instead of the Greens as in the previous legislature. Micheál Martin, from FF, became the Prime Minister (Taoiseach) in January 2025 and as part of the coalition agreement will hand over Prime Ministerial duties to FG's leadership by late 2027. The parliamentary elections resulted in another fragmented parliament, with FF winning the vote count ahead of FG and Sinn Féin. Compared to previous elections, Sinn Féin and the Greens lost ground to independent candidates. Morningstar DBRS expects the new government to remain committed to prudent fiscal policies while, at the same time, using the available fiscal space to deal with structural constraints to the economy, including housing and infrastructure.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments.

EURO AREA RISK CATEGORY: LOW

Notes:
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 (15 July 2024) https://dbrs.morningstar.com/research/436000. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include the Department of Finance (Budget 2025, Economic and Fiscal Outlook; Draft Budgetary Plan 2025; Medium-Term Fiscal and Structural Plan, October 2024), Central Bank of Ireland (Quarterly Bulletin December 2024; Financial Stability Review 2024:II), Central Statistics Office Ireland, The National Treasury Management Agency (Investor Presentation February 2025), Irish Fiscal Advisory Council (Fiscal Assessment Report, December 2024), European Commission, European Central Bank, International Monetary Fund (WEO and IFS), Statistical Office of the European Communities (Eurostat), The Organization for Economic Cooperation and Development, World Bank, Bank of International Settlements, The Economic and Social Research Institute, The Social Progress Imperative, and Macrobond. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

Morningstar DBRS does not audit the information it receives in connection with the credit 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. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/449905/.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Javier Rouillet, Senior Vice President, Global Sovereign Ratings
Rating Committee Chair: Nichola James, Managing Director, Global Sovereign Ratings
Initial Rating Date: 21 July 2010
Last Rating Date: 20 September 2024

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