Moody’s ups Ire­land to A3, out­look ‘pos­i­tive’

Financial Mirror (Cyprus) - - FRONT PAGE -

Moody’s said its de­ci­sion to up­grade Ire­land’s rat­ing to A3 re­flects the fol­low­ing key driv­ers:

(1) Ire­land’s key credit fun­da­men­tals have con­tin­ued to im­prove at a faster pace than ex­pected even a few months ago, in­clud­ing a stronger eco­nomic re­cov­ery and a more marked re­duc­tion in the pub­lic debt ra­tio, which stood at be­low 94% of GDP by end-2015. The gov­ern­ment’s pub­lic fi­nances also con­tin­ued to im­prove at a rapid pace last year;

(2) In Moody’s view, the risk of a re­ver­sal of the fis­cal con­sol­i­da­tion seen over the past sev­eral years is low. The re­cent po­lit­i­cal agree­ment be­tween the two largest par­ties in par­lia­ment and the re­cent elec­tion of a mi­nor­ity gov­ern­ment led by Fine Gael, which has es­tab­lished a strong track record of fis­cal man­age­ment over the past sev­eral years, give com­fort that the bud­get deficit will be re­duced fur­ther in com­ing years.

The oulook on the rat­ings re­mains pos­i­tive and re­flects Moody’s view of a likely con­tin­u­a­tion of th­ese trends in the com­ing years. While the rat­ing agency ex­pects eco­nomic growth rates to mod­er­ate com­pared to the out­stand­ing growth of last year, Ire­land will likely see con­tin­ued ro­bust growth on ac­count of sub­stan­tial com­pet­i­tive­ness gains as well as strong ex­port and pro­duc­tiv­ity growth sup­ported by a large and ex­pand­ing multi­na­tional sec­tor. The strong growth in turn will fa­cil­i­tate a con­tin­ued re­duc­tion in Ire­land’s pub­lic and pri­vate debt lev­els, in Moody’s view.

Con­cur­rent with the rat­ing ac­tion on the sov­er­eign, Moody’s has also up­graded the rat­ing of the Na­tional As­set Man­age­ment Agency (NAMA) to A3 from Baa1 with a pos­i­tive out­look, given that NAMA’s debt obli­ga­tions are ex­plic­itly guar­an­teed by the Repub­lic of Ire­land.

In ad­di­tion, Ire­land’s long-term for­eign and lo­cal-cur­rency bond and de­posit ceil­ings have been up­graded to Aaa from Aa1. The short-term for­eign-cur­rency bond and de­posit ceil­ings re­main un­changed at P-1.

The first driver for the up­grade is the con­tin­u­ing and ma­te­rial im­prove­ment in Ire­land’s growth per­for­mance and debt bur­den re­duc­tion over the past year. In 2015, real and nom­i­nal GDP growth were much stronger than Moody’s ex­pected at 7.8% and 13.5% re­spec­tively, which in turn helped to re­duce the pub­lic debt ra­tio to just be­low 94% of GDP, com­pared to a peak of over 120% of GDP three years ear­lier and also com­pared to Moody’s own ex­pec­ta­tion for 2015 of a ra­tio around the 100% mark. The gov­ern­ment’s pub­lic fi­nances con­tin­ued to im­prove, with the gen­eral gov­ern­ment deficit re­duced to 2.3% of GDP from 3.8% in 2014. Lev­er­age in the pri­vate sec­tor has also con­tin­ued to de­cline, and the risk posed by the Ir­ish bank­ing sec­tor to the gov­ern­ment’s bal­ance sheet con­tin­ues to di­min­ish. The re­cov­ery is in­creas­ingly broad-based, not fu­elled by un­sus­tain­able credit growth as in the pre-cri­sis boom pe­riod.

The bank­ing sec­tor is also much smaller in scale than it was then and has a sounder fund­ing base and higher cap­i­tal lev­els. While there are signs of emerg­ing price pres­sures in parts of the com­mer­cial real es­tate sec­tor, Moody’s notes that the Ir­ish cen­tral bank re­acted early to emerg­ing house price pres­sures by im­pos­ing macro-pru­den­tial mea­sures to cool down the hous­ing mar­ket.

The sec­ond driver for to­day’s up­grade re­lates to the ris­ing con­fi­dence that fis­cal pol­icy will re­main on a pru­dent course, fol­low­ing the re­cent agree­ment be­tween the two largest par­ties in the Ir­ish par­lia­ment. The re­cently elected mi­nor­ity gov­ern­ment led by Fine Gael has es­tab­lished a strong fis­cal track record over the past sev­eral years and there seems to be broad con­sen­sus on the need to re­duce the bud­get deficit and pub­lic debt fur­ther. Moody’s con­sid­ers the gov­ern­ment’s longer-term fis­cal ob­jec­tive of a bud­get sur­plus by 2018 to be cred­i­ble and achiev­able.

Set against those pos­i­tive trends, Ire­land’s growth tends to be much more volatile than its peers’, prin­ci­pally on ac­count of its open­ness and in­te­gra­tion into multi­na­tion­als’ global value chains. Ire­land is also more ex­posed than most peers to po­ten­tial shifts in global tax­a­tion rules, given that its low cor­po­rate tax rate has been in­stru­men­tal in at­tract­ing many multi­na­tional com­pa­nies to its ter­ri­tory. A higher de­gree of eco­nomic volatil­ity re­quires larger fi­nan­cial and fis­cal buf­fers to deal with neg­a­tive shocks. Coun­tries with sim­i­larly high lev­els of eco­nomic volatil­ity — ex­am­ples in Europe in­clude the Baltic states — have ma­te­ri­ally lower debt ra­tios than Ire­land. The fact that Ire­land’s debt ra­tio is much higher than that of its peers in the A-rat­ing cat­e­gory and will re­main so for many years re­mains an im­por­tant con­straint on the credit.

The pos­i­tive out­look re­flects Moody’s view that Ire­land’s key credit met­rics might im­prove fur­ther in the com­ing years, not­with­stand­ing the above-men­tioned con­straints. While GDP growth will likely mod­er­ate com­pared to last year’s ex­cep­tional growth, Ire­land will con­tinue to grow at above-trend rates over the next two to three years, on ac­count of strong and sus­tained com­pet­i­tive­ness gains and the large and ex­pand­ing pres­ence of high value-added multi­na­tional firms that have driven re­cent in­creases in ex­ports.

In­vest­ment prospects are pos­i­tive, not only in the multi­na­tional sec­tor, and longer-term de­mo­graphic trends are also more favourable in Ire­land than in most other Euro­pean peers. Moody’s fore­casts real GDP growth of around 5% and 3.5% in 2016 and 2017 re­spec­tively. While a UK exit from the EU would have neg­a­tive reper­cus­sions on Ire­land, given the close eco­nomic ties, Moody’s con­sid­ers that this risk would be man­age­able for the Ir­ish econ­omy.

Such ro­bust GDP growth rates are in turn ex­pected to en­able fur­ther re­duc­tions in the pub­lic debt ra­tio. Moody’s ex­pects the debt ra­tio to stand at be­low 87% of GDP by the end of 2017, a ra­tio broadly in line with that of many of Ire­land’s euro area peers. The down­ward debt tra­jec­tory is ro­bust to a range of stress sce­nar­ios, in­clud­ing lower GDP growth, higher in­ter­est rates and slower fis­cal con­sol­i­da­tion. The debt trend might turn out more favourably than un­der Moody’s base­line as­sump­tions should the gov­ern­ment sell some of the bank shares it still holds.

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