Ir­ish out­look shows chal­lenges

The Pak Banker - - Front Page -


Global rat­ing agency Fitch says the re­vi­sion of the Out­look on Ire­land's ' BBB+' sov­er­eign rat­ing to Sta­ble re­flects coun­try-spe­cific con­sid­er­a­tions, rather than sig­nalling a change in for­tune for the eu­ro­zone pe­riph­ery as a whole but Ire­land's at­tempts to ad­dress el­e­ments of the cri­sis that also ap­ply to other sov­er­eigns can help il­lus­trate how progress has var­ied from coun­try to coun­try.

One com­mon chal­lenge for the bloc's three pro­gramme coun­tries, plus Spain (which has se­cured an EFSF loan of up to EUR100bn for bank re­cap­i­tal­i­sa­tion but has not re­quested a full pro­gramme) has been how to bal­ance fis­cal and eco­nomic ad­just­ment with eco­nomic growth.

Ire­land is bet­ter placed to emerge from its down­turn partly be­cause it was the first eu­ro­zone coun­try to go into re­ces­sion, in 2008.

Its down­turn was long and deep, with a peak-to-trough fall of 11% in real GDP, but Ire­land is now fur­ther along in its ad­just­ment process than other pro­gramme coun­tries.

This is il­lus­trated by the im­prove­ment in com­pet­i­tive­ness which, to­gether with an open econ­omy with a flex­i­ble labour mar­ket, has sup­ported ex­ports, boosted growth (we fore­cast real GDP growth of 1.2% next year) and im­proved the cur­rent ac­count sur­plus. Ire­land is now meet­ing its fis­cal tar­gets with­out ex­pe­ri­enc­ing con­tin­ued GDP de­clines, and looks set to re­gain full bond mar­ket ac­cess, al­though risks to the eco­nomic re­cov­ery, such as sen­si­tiv­ity to ex­ter­nal de­mand, re­main.

Spain is also still fac­ing a lengthy ad­just­ment, and we fore­cast real GDP con­trac­tion of 1.5% in 2013 as pri­vate con­sump­tion and cor­po­rate in­vest­ment ac­tiv­ity weigh on growth. Some ex­ist­ing re­forms, such as the in­crease in gen­eral VAT to 21% from 18% in Septem­ber and a cut in em­ploy­ers' so­cial se­cu­rity con­tri­bu­tions, could help close the com­pet­i­tive­ness gap with the rest of Europe if they achieve some­thing akin to a fis­cal de­val­u­a­tion.

How­ever, deeper re­forms to labour and prod­uct mar­kets are needed to boost com­pet­i­tive­ness and long-run growth po­ten­tial.

The com­bi­na­tion of eco­nomic weak­ness and a poor track record in deficit re­duc­tion since the cri­sis, partly due to developments at re­gional level, con­trib­ute to the Neg­a­tive Out­look on Spain's 'BBB' rat­ing.

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