Ireland growing at a strong pace, Brexit risk remains, says DBRS

DBRS, Inc. confirmed on Friday 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). All ratings have a Stable Trend.

The confirmation of the ratings reflects Ireland’s strong economic performance and improving public finances. Though the UK vote to exit the European Union poses downside risks, the Irish economy is benefiting from substantial growth momentum and public debt dynamics continue to improve.

The A (high) 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. These strengths are countered by several credit weaknesses, including high public debt, medium-term fiscal pressures, heavily indebted households and asset quality concerns in the banking system. DBRS said current expectations do not incorporate any ramifications from recent corporate tax-related announcements, but it will continue to follow these events as they develop.

The recent revision to Ireland’s National Accounts data led to a large increase in GDP in 2015. This appears to be largely driven by the onshoring of intellectual property by multinational firms in Ireland. According to the new series, GDP expanded 26.3% in 2015, up from previous reporting of 7.8%. The updated figure clearly does not reflect the pace of underlying growth in the Irish economy. Furthermore, the rating agency said the statistical revision does not change its view on Ireland’s sovereign creditworthiness, despite the beneficial effects on some public finance metrics expressed as a share of GDP.

Irrespective of the statistical revision, a range of indicators confirm that the Irish economy is growing at a strong pace. Improving labour markets and strengthening consumer confidence are lifting private consumption. Firms are investing following years of cutbacks. External factors have also bolstered the economy’s performance, with Ireland benefiting from low energy prices and moderate growth from key trading partners. Even including the fallout from the Brexit vote, the outlook for the Irish economy is favourable. The IMF projects GDP growth of 4.9% in 2016 and 3.2% in 2017, albeit with downside risks.

The 2015 fiscal deficit fell comfortably below 3% of GDP for the first time in eight years, thereby enabling Ireland to exit its Excessive Deficit Procedure on schedule. Ireland is now subject to the preventive arm of the Stability and Growth Pact (SGP). With spare capacity in the economy diminishing, fiscal policy is shifting to a more neutral stance. Revenue growth in 2016 is outpacing expenditure growth, signalling less fiscal impulse. The deficit is projected to narrow to EUR 2.0 bln in 2016, down from 3.2 bln last year (excluding one-offs).

The commitment to remain compliant with EU fiscal rules was reinforced by the policy agreement reached between the Fine Gael minority government and the main opposition party.