Rating action

Scope Ratings GmbH (Scope) has today affirmed Ireland’s long-term issuer rating and senior unsecured local- and foreign-currency ratings at AA- and revised the Outlooks to Positive from Stable. Ireland’s short-term issuer ratings have been affirmed at S-1+ in both local and foreign currency, with Stable Outlooks.

For the updated report accompanying this review, click here.

Summary and Outlook

The revision of Ireland’s AA- long-term sovereign rating Outlook to Positive reflects the following credit-rating drivers: 

1. The Irish economy’s strong economic performance, including its resilience to the fallout from the Ukraine war, and solid growth prospects underpinned by the country’s ability to attract sizeable foreign direct investment inflows.  
    
2.  A favourable fiscal trajectory following a marked improvement in Ireland’s fiscal metrics in 2022, with a return to government surpluses and a marked decline in the country’s general government debt ratios.

The Outlook revision reflects Scope’s updated assessments under the ‘domestic economic risk’ and ‘public finance risk’ categories of its sovereign methodology and represents Scope’s opinion that risks to the sovereign ratings are skewed to the upside over the next 12-18 months.

The ratings could be upgraded if, individually or collectively: i) debt sustainability strengthened significantly, underpinned by sustained improvements in Ireland’s fiscal fundamentals; and/or ii) the robust growth outlook was maintained over the forecast horizon.

Conversely, the ratings/Outlooks could be revised to Stable if: i) Ireland’s economic growth outlook proved substantially weaker than expected; ii) fiscal discipline weakened, leading to lower-than-expected budget balances and a weaker general government debt trajectory over the medium term; and/or iii) private sector and financial system risks increased significantly, impacting longer-term macroeconomic and financial stability.

Rating rationale

The first driver of the Positive Outlook revision of Ireland’s sovereign ratings is the country’s solid economic performance. This includes the strong resilience it demonstrated to headwinds from the Ukraine war and its solid medium-term growth prospects.

Domestic economic activity, as measured by modified domestic demand (MDD), grew by 8.2% in 2022, up from 5.8% in the previous year. This positive performance primarily reflects strong growth during the first half of the year. Growth was supported by positive momentum in household consumption following the relaxation of pandemic-era restrictions and the release of pent-up demand. These factors temporarily offset negative consequences from the escalation of the Ukraine conflict. The Irish economy also benefitted from very strong investment dynamics in 2022. Modified investment, which excludes distortions related to intellectual property movements and aircraft leasing activities, grew by nearly 20% over the year. This was largely driven by large plant-specific investments in the multinational (MNE) sector.

 Economic momentum weakened during the second half of the year, with consecutive negative quarter-on-quarter MDD growth rates of 1.1% and 1.3% in Q3 and Q4 respectively. This deceleration primarily reflected the negative impact of rising price pressures, heightened uncertainty and tightening financial conditions on household consumption and domestic private investment decisions. After rising sharply in 2022, HICP inflation has been declining since October 2022 and reached 8.1% YoY as of February 2023. While inflation stands slightly below the euro area average, it remains well above target. Core inflation (HICP excluding energy, food, alcohol & tobacco) has also eased somewhat, to 4.9% (down from a peak of 5.8% in August 2022). However, it remains well above historical averages, reflecting a broadening of domestic price pressures. Scope expects consumer price dynamics to gradually moderate over the course of the year from the combined impact of base effects and a more favourable external environment. This should drive a moderation in energy and food price dynamics.

Private demand is likely to slow over H1 2023, reflecting stagnant household consumption due to persistent inflationary pressures and tighter borrowing conditions. However, Scope expects output growth to remain robust for the full year, with a pickup in private demand in H2 2023. This will come largely from the expectations of easing energy prices, improvements in supply bottlenecks and growing international trade.

Overall, Scope expects MDD growth of about 3.0% in 2023 and 2024 and GDP growth to remain above its long-term potential in 2023 and 2024 at 5.5% and 4.5% respectively (after GDP growth reached 12.0% in 2022). The growth outlook is subject to a significant degree of uncertainty, however, owing to the influence of the MNE sector and the risk of more persistent inflation as the economy continues to grow in a robust manner. Still, Scope expects medium term economic growth will continue to be underpinned by the country’s favourable business environment and ability to attract sizeable international investment flows, particularly in high value-added sectors such as pharmaceuticals and information and communication technology.

The country’s growth potential will be further supported by the rollout of the government’s National Development Plan¹, under which the level of public investment is expected to increase to 5.0% of modified gross national income (GNI*) on average over 2021-30. The plan includes a total of EUR 165bn of earmarked public funds and aims to tackle some of Ireland’s key infrastructure needs, including housing shortages, regional disparities and the transition to a green economy.

Finally, Scope expects the continued strong growth rates over the medium term to be further driven by robust labour market dynamics. The employment rate remained near all-time highs at 73.2% in 2022, and the unemployment rate was near historical lows at 4.3% as of February 2023. The ICT sector makes an important contribution to economic activity and accounts for 6.4% of employment and almost 25% of corporation tax revenue in Ireland². Despite a global sector-wide slowdown, with significant job losses announced, the impact on Ireland’s job market remains low with an estimated 2,307 layoffs (around 1.4% of total ICT jobs) in the year to February 2023. The labour force has grown robustly since the end of the pandemic crisis and was about 10% above its end-2019 level by Q4 2022, boosted in part by strong net migration. The Irish workforce is expected to continue to grow over the medium term, supported by comparatively favourable demographics and strong net migration inflows as reflected in UN forecasts, which expect the Irish working-age population to grow by 0.7% on average over 2023-27³.

The second driver supporting the revision of Ireland’s rating Outlook to Positive is the strong resilience of public finances, including the declining trajectory of general government debt over the forecast horizon.

The robust economic growth in 2022 enabled a sharp improvement in the general government balance, which moved from a 3.0% deficit of GNI* in 2021 to a 2.3% surplus last year. This performance reflects strong revenue growth, especially buoyant growth in corporate income tax receipts (up 48%), which more than offset spending pressures stemming from the energy crisis.

Sustained, robust revenue growth is set to support further improvements in fiscal metrics, offsetting the impact of cost-of-living support measures (estimated at about 2.0% of GNI* for 2023) and moderately higher interest payments. Tax receipts continued to grow strongly across sectors in early 2023, with tax revenue rising by 12.6% in the year to February 2023. Expenditure growth remained modest at 4.9% over the same period. Scope expects the headline budget surplus to remain stable at 2.3% of GNI* in 2023 before increasing to 3.7% of GNI* in 2024 (about 1.2% and 2.0% of GDP respectively).

In line with the robust economic growth and return to primary surpluses, the debt-to-GNI* ratio declined to 86% in 2022 (corresponding to a debt-to-GDP ratio of about 44.5%), below its pre-pandemic level of 95%. Scope expects debt metrics to improve further as a result of robust nominal growth and growing primary surpluses.

These positive developments should largely offset the effects of the recent increase in borrowing costs, which saw the yield on the 10-year government bond increasing to 2.86% on average in February 2023 (from 0.78% in the same period last year). Scope expects the feedthrough of this increase to the Irish government’s overall debt-servicing payments to be gradual in view of a favourable refinancing profile, a very long average maturity of above 10 years and significant liquidity reserves held by the National Treasury Management Agency (NTMA), amounting to EUR 28.5bn as of February 2023. This provides the government with significant flexibility when executing its issuance programme. The NTMA announced its funding range in December at between EUR 7bn-11bn for 2023, of which EUR 4.75bn had already been issued as of March 2023⁴. Debt as a share of GNI* is expected to decline to 80% (41% of GDP) in 2023, 73% (37% of GDP) in 2024 and fall below the Maastricht criteria by 2027.

Ireland’s public finances are further supported by the implementation of a stricter spending rule introduced in 2021, under which permanent spending growth is limited to 5% per year. The Fiscal Council noted in its 2022 Fiscal Assessment Report⁵ that adherence to the spending rule should lead to a structural surplus – even adjusted for excess corporate tax receipts – and a steady reduction in the debt ratio. Additionally, the Irish Treasury monitors a set of alternative fiscal metrics, including the ‘underlying fiscal balance’, with the aim of quantifying the level of windfall tax receipts, which cannot be explained by the underlying dynamics of the Irish economy. Between November 2022 and February 2023, the Irish Treasury transferred a total of EUR 6bn into the National Reserve Fund (currently capped at EUR 8bn, 3% of 2022 GNI*), in line with plans outlined in the 2023 Budget⁶. This reinforced fiscal framework, including the National Reserve Fund, should help lower the risk of relying on short-term volatility in tax revenue flows while limiting unsustainable public spending growth.

Finally, Ireland benefits from a well-established institutional framework and an ability to attract significant foreign direct investment. The country ranks well in various indicators of global competitiveness, supported by a sound legal and regulatory system, a skilled workforce, a flexible labour market and low corporate income tax rates. Access to the EU single market and the native English-speaking environment are also important factors to large MNEs. 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 credit strengths, Ireland’s ratings face several credit challenges.

First, public and private sector debt remains elevated compared to higher-rated peers. While debt-to-GNI* levels have declined significantly in recent years, the Irish government debt stock remains elevated. At 86% of GNI* as of end-2022, it exceeds other highly rated peer countries, such as Austria (estimated at 79% of GDP in 2022), Germany (71%) and Finland (67%). Household balance sheets improved significantly, boosted by the accumulation of pandemic-era savings and positive housing asset revaluations. However, private sector debt remains elevated at 186% of GDP, well above the 160% EU’s private sector debt sustainability threshold.

Second, the Irish economy remains strongly dependent on a small number of large MNEs, which account for a significant portion of economic growth and tax revenue. They have been the main drivers of productivity growth in recent years, with the labour productivity of MNEs increasing by 9.4% per year on average over 2011-20 versus 0.7% for domestic firms⁷. Corporate tax contributions represent the Irish government’s second largest source of tax revenue. Ireland has grown increasingly reliant on corporate tax receipts in recent years, a trend that has become a source of risk for its public finances. In 2022, corporate tax receipts represented more than 27% of total government revenue, compared with 12% a decade prior according to the Revenue Commissioners. To help mitigate fiscal risks related to the short-term volatility of corporate income tax revenue, the government is contributing to the National Reserve Fund.

This concentration risk makes Ireland vulnerable to adverse developments in the performance of MNEs and/or in changes in their investment strategies, particularly in the context of current global corporate tax reform discussions focused on base erosion and profit shifting⁸. The reforms are expected to make Ireland less attractive to firms relocating 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. A scenario analysis by the Economic and Social Research Institute⁹ indicates that Ireland is likely to see corporate tax revenue remain close to current levels. This assumes American MNEs continue to be profitable and no widespread corporate restructuring takes place. The net effect on Ireland’s tax receipts will only become evident over the medium term given some ongoing uncertainty about how tax changes will be implemented and to what degree Ireland will still be able to offer tax credits to MNEs.

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. 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 that of peers, and the net international investment position is very weak at negative 121% of GDP at end-2022. The negative net international investment position largely reflects the positions of the financial sector as well as intracompany loans operated by MNEs. At the same time, implementation of the Windsor Framework should reduce uncertainty surrounding trade with the United Kingdom.

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 an adjustment for reserve currency under Scope’s methodology. Hence, 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 versus a peer group of countries.

For Ireland, the following relative credit strengths have been identified via the QS: 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, the relative credit strengths and weaknesses identified in the QS result in a two-notch negative adjustment. An additional one-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 standalone ESG sovereign risk pillar, with a 25% weighting under the quantitative model (CVS) and a 20% weighting in the qualitative overlay (QS).

With respect to environmental factors, Ireland receives a high CVS score for its low carbon emissions per GDP and a low score for its greenhouse gas emissions per capita. Compared with peers, Ireland achieves above-average scores on its ecological footprint of consumption compared with the available biocapacity within its borders and marginally below-average scores for natural disaster risk. Scope assesses Ireland’s QS adjustment for environmental factors 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 levels of greenhouse gas emissions per capita in the EU.

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

Finally, 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 scores slightly lower than other highly rated peers on a composite index of six World Bank Worldwide Governance Indicators. The country is currently led by its first grand coalition of rival conservative parties Fianna Fáil and Fine Gael and the Green party. The current Taoiseach (prime minister) Leo Varadkar returned to the post in December 2022 as part of 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.

Rating driver references 
1. Department of Public Expenditure, NDP Delivery and Reform - National Development Plan 2021-2030 
2. Central Bank of Ireland – Quarterly Bulletin March 2023  
3. United Nations - 2022 World Population Prospects     
4. NTMA Annual Funding Plan for 2023        
5. Fiscal Council – Fiscal Assessment Report November 2022             
6. Department of Finance, Press release: Minister McGrath announces €4 billion transfer to the National Reserve Fund        
7. OECD - Economic Surveys: Ireland 2022       
8. OECD – Inclusive Framework on Base Erosion and Profit Shifting         
9. Economic and Social Research Institute – Quarterly Economic Commentary Autumn 2022   

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 27 September 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for this Credit Rating and Outlook is the Core Variable Scorecard version 2.1, available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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.

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: public domain, the Rated Entity.
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 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 are UK-endorsed.
Lead analyst: Eiko Sievert, Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings in 28 July 2017. The Credit Ratings/Outlooks were last updated on 22 April 2022.

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

Conditions of use/exclusion of liability
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