Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Republic of Ireland (long-term local- and foreign-currency issuer and senior unsecured debt ratings: AA-/Positive Outlook; short-term local- and foreign-currency issuer ratings: S-1+/Stable) on 4 March 2024.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

For the updated rating report accompanying this review, click here. 

Ireland’s AA- ratings reflect several credit strengths, including its: i) wealthy, diversified and competitive economy and robust growth potential; ii) track record of fiscal discipline and expected fiscal surpluses in the medium term, alongside a long maturity of public debt, significant official sector ownership of government debt and a favourable refinancing profile; 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 financial institutions via the European Central Bank and the sovereign via the European Stability Mechanism.

Despite these credit strengths, challenges to Ireland’s ratings remain, including: 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, growing portion of government revenues; and iii) the economy’s vulnerability to sudden international shocks in the context of a small and very open economy.

Domestic economic activity, as measured by modified final domestic demand (MDD), slowed more than expected in 2023 to 0.6% compared with 9.7% in 2022. This reflects lower investments and a weakening in consumer spending as higher interest rates impact disposable incomes. Growth is expected to recover modestly in 2024 as net exports increase and real incomes improve as inflation continues to fall. Labour market developments demonstrate continued resilience of the domestic economy with the unemployment rate remaining low at 4.5% and the number of vacancies still well above pre-pandemic levels.

Scope expects the general government budget balance to remain in surplus over the coming years, reflecting continued sizable windfall corporate income tax receipts. These have increased sharply since the pandemic, more than doubling from EUR 10.9bn (17% of government revenues) in 2019 to EUR 23.8bn (26% of government revenues) in 2023. Authorities expect growth in corporate tax revenues to continue, though at a slower rate.

The government will have to balance increased spending pressures with an economy operating at capacity to avoid overheating. The Irish Fiscal Advisory Council noted that the 2024 Budget is not in line with the self-imposed National Spending Rule which was adopted in 2021 and aims to limit core expenditure growth to 5% per year. Similarly, the Central Bank of Ireland highlighted that the relatively expansionary budget plans, including the one-off additional welfare payments, could keep inflation higher for longer.

In an effort to support fiscal policy over the medium-term, the government plans to set up two new sovereign wealth funds this year to invest excess corporate tax revenues. Under current proposals, at least 0.8% of GDP (around EUR 4.3bn in 2024) would be invested in the Future Ireland Fund every year until at least 2035. Withdrawals from the FIF, which could reach total assets of around EUR 100bn, would be possible from 2041, with the NTMA advising the government on the level of income that can be withdrawn. At the same time, around EUR 2bn per year will be invested in the Infrastructure, Climate and Nature Fund from 2024 to 2030. The fund will have total assets of around EUR 14bn and aims to smooth procyclicality of capital spending in Ireland. The legislation to underpin both Funds is expected to be introduced in the Oireachtas during the first half of 2024.

The Positive Outlook reflects Scope’s view that risks to the ratings are skewed to the upside.

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.

The methodology applicable for the reviewed ratings and rating Outlooks (Sovereign Rating Methodology, 29 January 2024) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Eiko Sievert, Director

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