Scope Ratings AG today confirms the Republic of Ireland’s long-term local-currency issuer rating at A+, following the release of its revised sovereign rating methodology, and converts its status from subscription to public. The agency also assigns a long-term foreign-currency issuer rating of A+, along with a short-term issuer rating of S-1+ in both local and foreign currency. The sovereign’s senior unsecured debt in both local and foreign currency was also rated at A+. All Outlooks are Stable.

Rating drivers

The ratings are underpinned by Ireland’s euro area membership within a large common market, a strong reserve currency, an independent European Central Bank effectively acting as a lender of last resort, and an economic governance and macro prudential framework that supports credible macroeconomic policies. Scope believes that these are important elements that reflect better protection of the euro area from adverse shocks, underpinning sovereign creditworthiness of member states.

Ireland's A+ sovereign ratings are supported by a wealthy and diversified economy that benefits from strong institutions and generates the highest per-capita income in the A category. The rating also takes into account economic growth in Ireland, which has continued to outperform peers in the recent past, helping to improve public finance credit metrics.

Robust economic growth has outperformed peers since 2014 and is expected to continue in the medium term. The Irish economy has continued to grow at high rates on the back of robust domestic demand. Further improvement in private-sector balance sheets can be expected to support private consumption and investment activity. Continued strong export performance is likely to benefit from economic growth in main trading partners. GDP growth is projected to converge towards its potential of about 3% in the medium term.

Higher-than-projected tax revenues, particularly corporate income tax receipts, supported a decline in the 2016 fiscal deficit to -0.6% of GDP, below the target of -0.9% of GDP. Savings on interest payments also helped to improve the deficit ratio and reflect supportive financial conditions. General government debt came down from 78.8% in 2015 to 75.6% of GDP in 2016. Scope expects the debt ratio to continue its downward trajectory based on Ireland’s ongoing economic recovery. Proceeds from the state’s holdings in banks are expected to contribute positively to the debt ratio’s downward trend.

Ireland’s strong institutional framework has continued to attract foreign investment, ranking well in indicators of global competitiveness, based on a sound legal and regulatory system, a skilled workforce and flexible labour market. Low corporate income taxes, EU membership as well as the native English environment are also relevant factors that support economic growth and revenue generation in Ireland.

Ireland’s credit strengths are balanced by relatively high private- and public-sector indebtedness, which also lead to external vulnerabilities and limit the system’s shock absorption capacity. Moreover, there are downside risks stemming from the potential impact of Brexit on trade activity with the UK as well as from the Irish economy’s material dependence on US-based multinational enterprises (MNEs) and their global tax strategies.

Despite projected improvements in general government debt metrics, Scope notes that government debt to GDP at levels of above 70% remain substantially higher than the average among peers. As a consequence, public debt sustainability remains vulnerable to adverse economic growth shocks. General government debt in relation to revenues at 275% in 2016 is also substantially higher than the peer average, indicating challenges to debt affordability (interest costs are 8.7% of general government revenues). Net external debt remains higher than peers’, and the net international investment position (NIIP) is strongly negative at -176% of GDP in 2016.

As a small and very globalised economy, Ireland is particularly vulnerable to adverse shifts in the external environment that are likely to impact economic activity and revenue generation. The potential impact of Brexit is expected to be material, and can have both positive and negative effects. Uncertainty around possible corporate tax reforms in the US and EU may substantially slow down or even reverse FDI flows and affect MNE operations in Ireland, with potentially adverse repercussions on output, employment and the fiscal position.

Several years after the crisis, Irish banks have deleveraged and their capital positions have significantly strengthened. The structure of the balance sheet as well as the quality of the banks’ assets has improved mainly due to ongoing restructuring, asset sales as well as rising collateral values. While still high, non-performing loans have declined. In Q3 2016 they stood at 14.6% of total loans. Brexit-related uncertainties and international regulatory changes pose additional challenges.

Importantly, Scope notes that even though Irish GDP data point to robust economic performance, there are important uncertainties. Irish GDP statistics, even though fully compliant with international standards, tend to substantially overstate economic growth. This is due to the fact that headline GDP growth figures also reflect the substantial activity of mainly US-based MNEs partially delinked from underlying Irish activity. This complicates the assessment of economic developments as well as quantitative cross-country economic analysis. Scope takes into account that credit metrics such as public debt and deficit ratios are also affected by inflated GDP data.

Sovereign rating scorecard (CVS) and qualitative scorecard (QS)

Scope’s Core Variable Scorecard (CVS), which is based on the relative rankings of key sovereign credit fundamentals, provides an indicative AA (aa) rating range for the Irish sovereign. This indicative rating range can be adjusted by the Qualitative Scorecard (QS) by up to three notches depending on the extent of relative credit strengths or weaknesses as compared to peers, based on Scope analysts’ qualitative findings.

For Ireland, relative credit weaknesses have been identified for the following analytical categories: i) macroeconomic stability and imbalances; ii) vulnerability to short-term shocks; and iii) macro financial vulnerabilities and fragility. No relative qualitative credit strength against peers has been identified. Combined CVS and QS analysis indicate a AA- sovereign rating for Ireland. The lead analyst has recommended a further adjustment of the indicated rating to A+ in order to take into account important distortions in Irish economic data, which tend to overstate the performance of underlying fundamentals and credit metrics in the CVS. The results have been discussed and confirmed by a rating committee.

For further details, please see Appendix 2 in the rating report.

Outlook and rating change drivers

The Stable Outlook reflects Scope’s assessment that the challenges Ireland faces are manageable. The ratings could be downgraded if: i) GDP growth proved substantially weaker than expected, disrupting or even reversing the downward trend in general government debt to GDP; or ii) external shocks led to substantially weaker medium-term growth and fiscal consolidation prospects.

Conversely, the ratings could be upgraded if fiscal consolidation and economic growth turned out to be more resilient than projected to external risks such as Brexit and potential shifts in international corporate taxation policies.

For the detailed research report, please click here.

Rating committee

The main points discussed during the rating committee were: (i) Ireland’s economic outlook, (ii) the fiscal performance and debt sustainability, (iii) external vulnerabilities due to reliance on American multinational enterprises and uncertainties arising from Brexit, (iv) the existence of contingent liabilities, (v) peers considerations. The committee also discussed the impact of MNEs on Irish statistics, as well as their possible distortionary effect on CVS data.

Methodology

The methodology applicable for this rating and/or rating outlook, Public Finance Sovereign Ratings, is available on www.scoperatings.com.

Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/governance-and-policies/regulatory/esma-registration. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default and definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.

The rating outlook indicates the most likely direction in which a rating may change within the next 12 to 18 months. A rating change is, however, not automatically a certainty.

Regulatory disclosures

This credit rating and/or rating outlook is issued by Scope Ratings AG.

Rating prepared by Dr Giacomo Barisone, Lead Analyst

Person responsible for approval of the rating: Karlo Stefan Fuchs, Executive Director

The ratings/outlook were first assigned by Scope as a subscription rating in January 2003. The subscription ratings/outlooks were last updated on 05.05.2017.

The senior unsecured debt ratings as well as the short term issuer ratings were assigned by Scope for the first time.

As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Republic of Ireland are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Sovereign Ratings Calendar of 2017" published on 21.07.2017 on www.scoperatings.com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the deviation was due to the recent revision of Scope’s Sovereign Rating Methodology and the subsequent placement of ratings under review, in order to conclude the review and disclose ratings in a timely manner, as required by Article 10(1) of the CRA Regulation.

Solicitation, key sources and quality of information
The rating was initiated by Scope and was not requested by the rated entity or its agents. The rated entity and/or its agents did not participate in the ratings process. Scope had no access to accounts, management and/or other relevant internal documents for the rated entity or related third party.

The following material sources of information were used to prepare the credit rating: public domain and third parties. Key sources of information for the rating include: Ministry of Economy and Finance, Central Statistics Office (CSO), National Bank of Ireland, NTMA, IMF, OECD, European Commission, United Nations, World Bank, Eurostat, and Haver Analytics.

Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.

Prior to publication, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds upon which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Conditions of use / exclusion of liability
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