DBRS up­grades Ire­land to A, public debt im­proved

Financial Mirror (Cyprus) - - FRONT PAGE -

DBRS, Inc. has up­graded the Repub­lic of Ire­land’s long-term for­eign and lo­cal cur­rency is­suer rat­ings to A from A (low) and changed the trend to ‘sta­ble’ from ‘pos­i­tive’, while con­firm­ing the short-term for­eign and lo­cal cur­rency is­suer rat­ings at R-1 (low) with a sta­ble trend.

The rat­ings are un­der­pinned by Ire­land’s open­ness to trade and in­vest­ment, young and ed­u­cated work­force, flex­i­ble labour mar­ket, and ac­cess to the Euro­pean mar­ket, all of which sup­port the econ­omy’s com­pet­i­tive­ness and solid medium-term growth prospects, DBRS said.

The up­grade also re­flects the as­sess­ment that the out­look for public debt sus­tain­abil­ity in Ire­land has im­proved. This is the re­sult of a strength­en­ing eco­nomic re­cov­ery, progress on re­duc­ing the fis­cal deficit, and di­min­ished risks stem­ming from con­tin­gent li­a­bil­i­ties.

The New York-based rat­ing agency said its ex­pec­ta­tion is that public debt ra­tios will trend down­wards in the com­ing years, with im­prove­ments in the “Fis­cal Man­age­ment and Pol­icy” and “Debt and Liq­uid­ity” sec­tions of its anal­y­sis as key fac­tors in the de­ci­sion to up­grade the rat­ings.

“The Sta­ble trend re­flects our view that risks to the rat­ings are broadly bal­anced. If sus­tained im­prove­ment in the fis­cal ac­counts place public debt ra­tios on a firm down­ward tra­jec­tory and cre­ate greater pol­icy space to ac­com­mo­date ad­verse shocks, the rat­ings could be up­graded,” DBRS said.

“On the other hand, Ire­land’s growth out­look is sub­ject to a high de­gree of un­cer­tainty and spend­ing pres­sures could in­ten­sify. If debt dy­nam­ics de­te­ri­o­rate – due to ei­ther a markedly weaker growth per­for­mance than cur­rently ex­pected or fis­cal slip­page – the rat­ings could face down­ward pres­sure.”

DBRS ex­plained

that

the

re­cov­ery

in Ire­land is gain­ing mo­men­tum. The IMF es­ti­mates that GDP grew by 4.7% in 2014 driven by ex­ports, which ben­e­fited from strength­en­ing de­mand in the United States and United King­dom.

Ro­bust ex­port ex­pan­sion was ac­com­pa­nied by a re­vival in do­mes­tic de­mand, which made its first pos­i­tive con­tri­bu­tion to GDP growth since 2007. Pri­vate con­sump­tion was sup­ported by an im­prov­ing la­bor mar­ket, pos­i­tive wealth ef­fects driven by ris­ing home prices, and strength­en­ing con­sumer sen­ti­ment. Ma­chin­ery and equip­ment in­vest­ment also ac­cel­er­ated at a solid pace.

The re­cov­ery is ex­pected to con­tinue this year. The IMF fore­casts GDP growth of 3.3%. How­ever, the near-term growth out­look faces up­side and down­side risks. Lower en­ergy prices, a weaker euro, and a pick-up in res­i­den­tial in­vest­ment as the mar­ket starts to ad­dress a hous­ing short­age could act as tail­winds, pro­vid­ing fur­ther sup­port to the re­cov­ery. On the other hand, eco­nomic weak­ness in the euro area and debt over­hang among Ir­ish house­holds could pose ob­sta­cles to stronger growth.

Ire­land has made sub­stan­tial progress putting its fis­cal ac­counts on a sus­tain­able path. The fis­cal re­sults for 2014 out­per­formed tar­gets. The head­line deficit nar­rowed to an es­ti­mated 4.0% of GDP, well be­low the Ex­ces­sive Deficit Pro­ce­dure (EDP) ceil­ing of 5.1% as well as the gov­ern­ment’s ini­tial deficit tar­get of 4.8%. With the re­cov­ery strength­en­ing, Ire­land ap­pears well­po­si­tioned to re­duce the deficit be­low 3.0% of GDP this year and exit the EDP on sched­ule.

Sup­ported by ris­ing prop­erty prices and strong in­ter­est from in­ter­na­tional in­vestors, the Na­tional As­set Man­age­ment Agency (NAMA) had re­deemed ?16.6 bln out of ?30.2 bln in gov­ern­ment-guar­an­teed bonds by the end of 2014, and now ex­pects to wind up op­er­a­tions by 2018, two years ahead of sched­ule. The liq­ui­da­tion of Ir­ish Bank Res­o­lu­tion Cor­po­ra­tion (IBRC) could gen­er­ate a sur­plus suf­fi­cient to re­pay un­se­cured cred­i­tors, in­clud­ing the Ir­ish gov­ern­ment. In ad­di­tion, Ire­land’s two pil­lar banks passed the ECB/EBA com­pre­hen­sive as­sess­ment in Oc­to­ber 2014 with­out re­quir­ing ad­di­tional cap­i­tal. This, com­bined with fact that both banks re­turned to prof­itabil­ity in 2014, sug­gest that fi­nan­cial sec­tor-re­lated risks to public fi­nances have di­min­ished.

The out­look for public debt sus­tain­abil­ity in Ire­land has i mproved. Gross gen­eral gov­ern­ment debt is es­ti­mated to have de­clined to 111% of GDP in 2014. With ad­di­tional im­prove­ments in the fis­cal po­si­tion as the econ­omy re­cov­ers, the pri­mary sur­plus should in­crease suf­fi­ciently to put debt ra­tios on a clear down­ward path over the medium term. Debt dy­nam­ics also ben­e­fit from ex­cep­tion­ally favourable fund­ing con­di­tions. Ire­land is tak­ing ad­van­tage of record low yields to re­fi­nance most of its ?22.5 bln in IMF loans, thereby re­duc­ing in­ter­est costs and ex­tend­ing its ma­tu­rity pro­file. In ad­di­tion, pro­ceeds from the sale of gov­ern­ment hold­ings in Ir­ish banks could po­ten­tially be used to re­duce the public debt bur­den.

How­ever, though public debt ra­tios are de­clin­ing, they re­main high and vul­ner­a­ble to ad­verse shocks. The prin­ci­pal risk stems from the ex­ter­nal en­vi­ron­ment. The out­look for the euro area is frag­ile, with weak growth ex­pected in 2015. Fall­out from dis­rup­tive events in Greece or es­ca­lat­ing ten­sions with Rus­sia could fur­ther weaken Euro­pean de­mand. This would likely have ad­verse ef­fects on Ire­land’s re­cov­ery and public debt dy­nam­ics. On the do­mes­tic front, Ir­ish banks face weak prof­itabil­ity and a high stock of non-per­form­ing loans. Ad­verse shocks could worsen credit con­di­tions for the real econ­omy. More­over, Ir­ish house­holds re­main heav­ily in­debted, de­spite six years of delever­ag­ing.

De­mand for public ser­vices, no­tably health­care and ed­u­ca­tion, is ex­pected to in­crease due to de­mo­graphic changes, and pres­sure to in­crease public sec­tor pay could build. Gen­eral elec­tions, which need to take place by April 2016, pose some un­cer­tainty over the pol­icy out­look. Nev­er­the­less, DBRS be­lieves it is most likely that pru­dent macroe­co­nomic pol­icy will be main­tained through the elec­toral cy­cle.

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