For the updated rating report, click here.

Rating action

Scope Ratings GmbH has today affirmed the Republic of Ireland’s AA- long-term issuer and senior unsecured local- and foreign-currency ratings, along with its short-term issuer rating of S-1+ in both local and foreign currency. All Outlooks remain Stable.

Summary and Outlook

Scope’s affirmation of Ireland’s AA- ratings reflects its: i) wealthy, diversified and competitive economy that generates one of the highest per-capita incomes in Scope’s rated universe and robust growth potential; ii) track record of fiscal discipline pre-crisis and gradual decline of fiscal deficits in 2022-23, alongside a long maturity of public debt, significant official-sector ownership of government debt as well as low borrowing rates; iii) well-established institutional framework and ability to attract significant foreign direct investment; and iv) European Union and euro-area membership within a large common market, a strong reserve currency and access to regional lenders of last resort for banks via the European Central Bank and the sovereign via the European Stability Mechanism.

Rating challenges include: i) still high public and private debt levels when assessed against underlying economic activity; ii) strong dependence on multinational corporations whose corporate tax contributions make up a significant portion of government revenues; and iii) the economy’s vulnerability to sudden international shocks in the context of a small and very open economy.

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced over the next 12 to 18 months.

The AA-/Stable ratings/Outlooks could be upgraded if, individually or collectively: i) public debt relative to modified gross national income is placed on a clear and sustained downward trajectory; and/or ii) -private-sector debt continues to fall significantly.

Conversely, the ratings/Outlooks could be downgraded if: i) Ireland’s growth potential proves substantially weaker than anticipated, for example, due to shifts in international corporate taxation policies; ii) fiscal discipline weakens significantly, resulting in an increasing general government debt ratio over the medium term; iii) private-sector and financial-system risks increase meaningfully, impacting longer-term macro-economic and financial stability; and/or iv) net external debt increases or an external shock significantly impairs government and domestic banks’ balance sheets.

Rating rationale

Ireland’s AA- ratings are supported by Ireland’s wealthy, diversified and competitive economy which has proven resilient during the pandemic crisis. The strong growth in the multinational enterprise (MNE) sector, including sectors such as pharmaceuticals and IT which benefited from lockdown restrictions, more than offset the economic slowdown in the domestic economy. Government intervention also helped contain the impact from the health crisis, with direct budgetary support amounting to EUR 30bn (13% of modified gross national income – GNI*) over 2020 and 2021. This was mostly directed at labour market support, income support and turnover compensation payments to firms operating in severely affected sectors including tourism, culture and entertainment. The underlying Irish economy, as measured by modified domestic demand (MDD), registered a 4.9% contraction in 2020 which was slightly better than the rest of the euro area (-6.5%).

The Irish economy is recovering well from the crisis, benefiting from a successful vaccination campaign and a progressive lift of public health restrictions. GDP growth reached 13.5% in 2021, while MDD grew by 6.5%, ending the year above its pre-pandemic level. The rebound was driven by household consumption, government expenditure and exports. Scope expects MDD growth to remain strong in 2022, at around 5% supported by household consumption which is underpinned by growing wages in a tightening labour market and by the normalisation of savings rates. Investment should also continue to increase but is expected to be hampered by the fallout from the Ukraine war, which will further accelerate rising construction and machinery and equipment costs. Capacity constraints and rising cost pressures may delay full implementation of the government’s ambitious ‘Housing for All’ strategy under which EUR 4bn (0.9% of 2021 GDP) will be spent per year to tackle the country’s housing shortage.

Though direct exposures through trade linkages are low, the Russian invasion of Ukraine is exacerbating inflationary pressures. Inflation (HICP) accelerated to 2.5% on average in 2021, up from -0.5% in 2020, largely driven by the release of pent-up demand, supply bottlenecks and energy prices. Core inflation was more moderate, averaging 1.7% over the same period. Similar to peers, price increases have accelerated further, up to 6.9% in March 2022, and have become more broad-based, with core inflation well above 2% in recent months. The conflict in Ukraine has caused sharp spikes in energy and raw material prices, as well as supply-chain disruptions, which should further fuel inflation over the 2022-23 period.

The AA- ratings are also underpinned by the country’s track record of fiscal discipline in the run-up to the pandemic and gradual decline of fiscal deficits going forward, alongside a long maturity of public debt, significant official-sector ownership of government debt as well as low borrowing rates.

The strong economic recovery in 2021 resulted in increased government revenue with corporate income tax receipts reaching a record high of EUR 15.3bn, while expenditures grew at a slower pace than initially budgeted. This led to a lower-than-expected general government deficit in 2021, at 1.9% of GDP, or 3.6% of GNI*. Scope expects a general government deficit of 0.4% of GDP in 2022, and a surplus of 0.2% in 2023. Medium term headwinds to fiscal consolidation relate to the fallout of the Ukraine war and its impact on energy costs. The Irish government rolled out several measures aimed at tackling rising costs of living, including reduced VAT rates for energy products and a significant cut to excise duties on fuel, for a total cost of slightly more than EUR 1bn. The government also estimates that the costs of hosting Ukrainian refugees could rise to EUR 1.7bn this year, and to EUR 2.5bn in 2023.

The debt-to-GNI* ratio stood at about 106% at end-2021 (56% of GDP), still above the pre-pandemic level of 95% in 2019. Scope expects the debt-to-GDP ratio to return to its downward trajectory, falling to about 54% of GDP this year and to gradually decline to 42% by 2026. Our medium-term view is supported by the large liquidity reserves accumulated by the government throughout the pandemic (EUR 27.5bn at the beginning of 2022) which the government intends to reduce to support funding needs. Government finances are further supported by the recent introduction of a new spending rule which limits permanent spending increases to 5% on average over the medium term. However, as the Irish Fiscal Advisory Council noted, the fiscal rule has so far not been codified into law which reduces its effectiveness.

reland benefits from a favourable debt profile, supported by a high share of public sector debt held by the Eurosystem (28% as of Q3 2021) and by official sector institutions. Average debt maturity counts among the longest in the euro-area, at 10.9 years as of March 2022, which partially shields the government from the gradual increase in interest rates that will follow from the global tightening of monetary policy. Similar to peers, financing costs have increased recently with the 10-year government yield at 0.93% on average in March 2022, up from 0.03% in March 2021.

Finally, Ireland’s AA- ratings reflect the well-established institutional framework and its ability to attract significant foreign direct investment. The country ranks well in various indicators of global competitiveness supported by its sound legal and regulatory system, a skilled workforce, flexible labour market, and low corporate income tax rates. Access to the EU single market and the English-native-speaking environment are also important factors to the large MNEs that have invested in high productivity industries such as pharmaceuticals and information technology. These sectors have become increasingly important in supporting economic growth and revenue generation in Ireland. The country’s euro-area membership remains an important factor to draw in foreign direct investment. At the same time, it provides Ireland with a strong reserve currency and access to regional lenders of last resort such as the European Central Bank for banks and the European Stability Mechanism for sovereigns. This can provide a backstop against economic crises by reducing the impact of financial market turmoil.

Despite these considerable credit strengths, Ireland faces several challenges.

First, while debt-to-GDP levels have declined significantly in recent years, when compared to the underlying economy, the Irish government debt stock remains high. At 105.6% of GNI* as of end-2021, it exceeds other peer countries such as Austria (83% of GDP in 2021) and Germany (69%), instead placing it on similar levels as countries such as the UK (103%) or Belgium (108%). Household balance sheets improved significantly, in large part due to government support measures. However, private-sector debt remains elevated, at 197% of GDP, well above the 160% EU private sector debt sustainability threshold.

Second, there remains a strong dependence on MNEs whose corporate tax contributions make up a significant portion of government revenues. Ireland has grown increasingly reliant on corporation tax receipts in recent years, a trend that has become a source of risk for its public finances. In 2021, corporation tax represented more than 22% of total government revenue, compared with 12% a decade prior according to the Revenue Commissioners. This reliance on corporate tax is expected to increase again this year, before gradually declining in subsequent years. Foreign-owned MNE represented 82% of all corporation tax receipts in 2020, with more than half of the total amount coming from the ten largest payers.

This represents a significant vulnerability for Ireland when put in context with current global corporation tax reform discussions. The reforms are expected to reduce the attractiveness of Ireland for firms re-locating to the country purely for tax structuring purposes. Tax receipts have not been significantly impacted by the reforms to date and there is no indication of widespread restructuring of MNEs’ operations. Some uncertainty concerning the implementation timeline of the tax reforms remains and the net effect on Ireland’s tax receipts will only become evident over the medium-term.
Finally, 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 expected implementation of border checks between Ireland and the United Kingdom, and the impact of global tax reforms on Ireland’s MNE sector add to uncertainty. This is shown in the volatility of Ireland’s current account balance which reflects distortions from large scale MNE operations linked to manufacturing and intellectual property imports. Net external debt remains higher than peers’, and the net international investment position (NIIP) is strongly negative at -138% of GDP at end-2021. The negative NIIP largely reflects the positions of the financial sector as well as intra-company loans operated by MNEs.

Core Variable 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 rating of ‘aaa’ for the Republic of Ireland, after including adjustment for reserve currency under Scope’s methodology. As such, under Scope’s methodology, a ‘aaa’ indicative rating can be adjusted by the Qualitative Scorecard (QS) by up to three notches depending on the size of relative qualitative credit strengths or weaknesses against a peer group of countries.

For Ireland, the following relative credit strengths via the QS have been identified: i) growth potential. Conversely, the following relative credit weaknesses have been identified: i) macro-economic stability and sustainability; ii) debt sustainability; (iii) current account resilience; (iv) external debt structure; (v) resilience to short-term shocks; vi) financial imbalances; and vii) social risks.

Combined relative credit strengths and weaknesses identified in the QS result in a 2-notch negative adjustment. An additional 1-notch negative adjustment is made to capture distortions in Irish economic data that tend to overstate the performance of underlying fundamentals and credit metrics of Ireland in Scope’s Core Variable Scorecard. This indicates a sovereign credit rating of AA- for Ireland.

A rating committee has discussed and confirmed these results.

Factoring of environment, social and governance (ESG)

Scope explicitly factors in ESG sustainability issues during its rating process via the sovereign methodology’s stand-alone ESG sovereign risk pillar, with a 20% weighting under the quantitative model (CVS) as well as in the methodology’s qualitative overlay (QS).

With respect to environmental risks, Ireland receives high CVS scores for having low carbon emissions per GDP. Compared with peers, Ireland achieves above average scores regarding the ecological footprint of consumption compared with available biocapacity biodiversity, and only marginally below average scores for natural disaster risk. Scope assesses Ireland’s QS adjustment for environmental risks as ‘neutral’. While the government has adopted ambitious climate goals in line with peer countries to achieve carbon neutrality by 2050, the country’s energy mix remains largely fossil fuel based and has one of the highest greenhouse gas emissions per capita in the EU.

Regarding social risks, Ireland scores high in the CVS for maintaining low income inequality and achieves the highest score among its peers for having a low old-age dependency ratio. However, it has the lowest score among peers for labour force participation. Scope assesses Ireland’s QS adjustment for social risks as ‘weak’. This reflects Ireland’s favourable demographics, but moderate income inequality and the increased risks from social exclusion reflected by a high share of young people neither in employment nor in education and training (‘NEET’) compared with peers.

Ireland benefits from the high quality of its institutions and a stable political environment. Under the governance-related factors captured in Scope’s Core Variable Scorecard, Ireland achieves scores on a composite index of six World Bank Worldwide Governance Indicators only slightly lower than other highly rated peers. The country is currently led by its first grand coalition between rival conservative parties Fianna Fáil and Fine Gael and the Green party. Current Taoiseach Micheál Martin rose to the premiership in June 2020 and will hand over the leadership to Leo Varadkar at the end of 2022, in a rotating premiership arrangement.

Rating Committee
The main points discussed by the rating committee were: i) domestic economic risk, including growth potential and resilience; ii) public finance risks, including fiscal framework and debt dynamics; iii) external risks; iv) financial stability risks, including housing market and household debt; v) ESG considerations; and vi) peer developments.

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Rating Methodology: Sovereign Ratings, 8 October 2021), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: the Rated Entity and public domain.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data. Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks is/are UK-endorsed.
Lead analyst Eiko Sievert, Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 28 July 2017. The Credit Ratings/Outlooks were last updated on 21 May 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
© 2022 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions 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. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5, D-10785 Berlin.