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

DBRS Ratings Limited (DBRS) 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 improved public finances. Though the UK vote to exit the European Union (EU) 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, its flexible labor market, young and educated workforce, and the country’s access to the European market. These credit fundamentals support the economy’s competitiveness and its medium-term growth prospects. The country’s strengths are countered by several credit weaknesses, including high public debt, medium-term fiscal pressures, and asset quality concerns in the banking system. Potential adverse external developments, principally the fallout from Brexit 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. According to the new series, GDP expanded 25.6% in 2015, compared with the 7.8% earlier estimate. This was largely driven by the on-shoring of intellectual property by multinational firms in Ireland. The new series, though improving key credit indicators, does not fully reflect the pace of underlying economic growth. Authorities recently introduced a measure of modified gross national income (GNI) that attempts to strip out distortionary contributions from foreign asset inflows. Since the statistical exercise shrinks the economy by roughly 30% less than the nominal GDP calculation, headline credit indicators appear much worse when measured as a share of GNI.

Irrespective of the statistical revision, a wide range of indicators suggest that Ireland continues to grow at a durable pace. 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. The outlook for the Irish economy is favorable. The European Commission (EC) projects GDP growth of 4.0% in 2017 and 3.6% in 2018.

Fiscal policy has shifted to a more neutral stance, after years of budgetary tightening. The general government deficit declined to €1.8 billion (0.7% of GDP) in 2016. The government expects small deficits through 2018 and surpluses thereafter. The policy stance 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 recent sale of 29% of government holdings in Allied Irish Bank (AIB) 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 75% 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, public debt ratios remain among the highest in the Euro area.

At the same time, Ireland faces potential adverse external developments. 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. How Brexit might affect the historically sensitive border with Northern Ireland adds to the uncertainty. While the overall effects of Brexit on the Irish economy have thus far been subdued, the intensity and duration of the shock will be determined by the nature of the withdrawal agreement. Uncertainty over trade and tax policy in the US poses a second external risk to the outlook.

Domestically, 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 corporate 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.

Although significant progress has been made in restructuring the Irish banking system, the remaining high level of impaired assets across the banking system continues to be a challenge for the sector. Despite, the still elevated stock of non-performing loans, banks are profitable with higher levels of capital and improved funding profiles.

RATING DRIVERS

The Stable trend reflects DBRS’s view that pressures on the ratings are balanced. Measures that enhance the economy’s resilience, 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 on www.dbrs.com 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.

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

DBRS 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.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

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

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Jason Graffam, Vice President, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global Sovereign Ratings
Initial Rating Date: 21 July 2010
Last Rating Date: 24 February 2017

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