Rating action

Scope Ratings GmbH (Scope) has today upgraded the Republic of Ireland's (Ireland) long-term issuer and senior unsecured local- and foreign-currency debt ratings to AA from AA- and revised the outlooks to Stable, from Positive. Scope has also affirmed Ireland’s short-term issuer rating at S-1+ with a Stable Outlook in both local and foreign currency.

The upgrade of Ireland’s long-term ratings reflects the strong outlook for its public finances, including continued general government surpluses and a falling debt-to-GNI* ratio over the medium term. Moreover, Ireland’s economic growth, as measured by modified domestic demand, has proven resilient during recent crises and is expected to remain robust over coming years. The main credit challenges relate to: i) Ireland’s high dependence on multinational corporations; and ii) vulnerabilities to external shocks as a small, open and financially interconnected economy.

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Key rating drivers

Ireland’s strong public finance outlook supported by high corporate tax revenue from multinational enterprises. 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 (18% of government revenues) in 2019 to EUR 23.8bn (27% of government revenues) in 2023. Growth in corporate tax revenue has remained strong during the first half of 2024 and is up more than 15% compared with the same period in 2023¹.

The high tax revenues are supporting a continued improvement in public debt metrics. While debt-to-GNI* levels have declined significantly in recent years, the Irish government debt stock still stood at 76% of GNI* as of end-2023, exceeding that of peers such as Germany (64% of GDP in 2023), the Netherlands (47%), Norway (42%) and Switzerland (38%). However, looking ahead, Scope expects the headline budget surplus to remain high at 2.8% of GNI* in 2024 (1.6% of GDP), averaging around 2% of GNI* (1.1% of GDP) between 2024-29. On this basis, debt-to-GNI* is set to remain on a steady decline from 78% in 2023 to 53% by 2029 (with debt-to-GDP falling from 43% to 29% over the same period).

Further strengthening Ireland’s fiscal position, the government has set up two new long-term savings funds in 2024² to ringfence excess corporate tax revenues, estimated to be more than EUR 10bn per year over coming years³. At least 0.8% of GDP, around EUR 4-6bn, will be transferred to the Future Ireland Fund (FIF) every year until 2035. The government estimates that the Fund could grow to around EUR 100bn, allowing future governments to draw down the Fund’s investment returns from 2041 onwards to contribute to future spending pressures from an ageing population, the digital and climate transitions without depleting the original capital. In addition, around EUR 2bn per year will be transferred to the Infrastructure, Climate and Nature Fund (ICNF) from 2024 to 2030. The Fund will have total assets of around EUR 14bn and is intended to provide a buffer to support investments during economic downturns and support climate and nature related objectives.

Ireland’s favourable refinancing profile including its long maturity of public debt further support the fiscal outlook. Average 10-year government bond yields increased from around -0.1% in 2020 to 2.8% in 2024 but the impact on the government’s overall debt-service costs is expected to be low over the next years. The redemption profile is modest with just 35% of outstanding debt set to mature in the next five years reflecting Ireland’s very long average debt maturity of more than 10 years. Funding flexibility is further supported by the National Treasury Management Agency’s (NTMA) significant liquidity reserves of around EUR 27bn as of July 2024⁴, which is set to fall to around EUR 19-20bn in 2024 as transfers to the FIF and ICNF occur. To support market liquidity, the NTMA announced a funding range for 2024 between EUR 6bn-10bn, of which EUR 5bn had already been issued as of July 2024. As a result of the favourable debt profile, interest expenditure as a share of general government revenue is expected to remain stable at around 2.8% over the coming years, well below the EU average of around 4%.

Resilient economy during recent crises and a strong domestic recovery. Domestic economic activity as measured by modified final domestic demand (MDD), which excludes investment in aircraft related to leasing, R&D service imports and trade in intellectual property, increased by 2.7% in 2023, slowing significantly from 9.1% growth in 2022. Still, comparing Ireland’s MDD growth to GDP growth in highly-rated peers, indicates that Ireland’s domestic economy saw a particularly strong recovery with output being 13.7% above pre-pandemic levels at the end of 2023 compared with Denmark (+11.1%), the Netherlands (+6.8%), Switzerland (+6.1%), Sweden (+4.1%) and Germany (+0.2%). Ireland’s MDD growth is set to remain robust over coming years, growing by 2.1% in 2024 and 2.5% in 2025⁵. This is supported by a low unemployment rate of 4.3% as of Q1 2024, inflation near its target at 2.2% as of July 2024, as well as rising real wages and high excess pandemic savings in households’ deposit accounts of around EUR 30bn.

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 also be supported by the rollout of the government’s National Development Plan⁶, under which the level of public investment is expected to increase to 5.0% of GNI* on average over 2021-30 (compared with 3.3% of GDP in the EU in 2023). 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. The government will have to balance increased spending pressures with an economy operating at capacity to avoid overheating.

Rating challenges: high concentration of corporate tax revenue and elevated vulnerability to external and financial shocks

The Irish economy remains highly 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 and government finances have become increasingly reliant on corporate tax revenue which now makes up around 26% of total revenues compared with less than 10% a decade ago. There is also an additional concentration risk as the Irish Fiscal Advisory Council estimates that just three firms contribute around 43% of corporation tax. This concentration risk makes Ireland vulnerable to adverse developments in the performance of MNEs and/or in changes in their company and investment strategies, particularly in the context of ongoing global corporate tax reform discussions focused on base erosion and profit shifting⁷. If excess corporate tax revenues are excluded, the general government balance would be in deficit at around 1% of GNI*. Moreover, the government has repeatedly breached its self-imposed spending rule which aims to limit net spending increases to 5% per year, with actual net spending rising 11.1% in 2023 and expected to rise by 7.2% in 2024.

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. The net international investment position is very weak at negative 109% of GDP at end-2023, largely reflecting the positions of the financial sector as well as intracompany loans operated by MNEs. External debt has fallen from around 1,100% of GDP in 2010, but it remains significantly higher than that of peers at 594% of GDP as of Q1 2024 compared with the Netherlands (362%), Switzerland (253%) and Sweden (184%). Given Ireland’s role as a key European hub for investment funds and other financial institutions, aggregate financial liabilities held by financial corporations remain exceptionally high at 1,400% of GDP in 2022, with investment funds accounting for around half of liabilities. This is higher than the Netherlands (967%), Denmark (538%), Sweden (444%) and Germany (427%), reflecting an elevated risk of global financial imbalances crystalising in Ireland in the event of a global financial crisis as reflected during the market turmoil in money market funds at the onset of the Covid-19 pandemic⁸.

Outlook and rating sensitivities

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

Upside scenarios for the long-term ratings and Outlooks are if (individually or collectively):

1. Vulnerabilities to public finances were to reduce significantly, including a more diversified tax revenue base; and/or
    
2. Vulnerabilities related to external and financial-system risks reduced substantially.

Downside scenarios for the long-term ratings and Outlooks are if (individually or collectively):

1. The fiscal outlook weakened and/or the declining debt-to-GNI* trajectory reversed, for example due to a severe macroeconomic shock, declining international competitiveness or weakening fiscal discipline;
    
2. The medium-term economic growth outlook weakened substantially; and/or
    
3. Private-sector and financial-system risks were to increase meaningfully, impacting longer-term macro-economic and financial stability.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s Sovereign Quantitative Model (SQM) provides a first indicative credit rating of ‘aa+’ for Ireland. This ‘aa+’ first indicative rating receives a one-notch uplift from the SQM’s reserve-currency adjustment and no negative adjustment from the political-risk adjustment. This results in a final SQM indicative credit rating of ‘aaa’ for Ireland. On this basis, the final SQM quantitative rating of ‘aaa’ is reviewed by the Qualitative Scorecard (QS) and can be changed by up to three notches depending on the size of Ireland’s qualitative credit strengths or weaknesses compared against a peer group of sovereign states identified by the SQM.

Scope identified the following relative credit strengths for Ireland: i) growth potential and outlook; and ii) long-term debt trajectory. The following relative credit weaknesses were identified: i) macro-economic stability & sustainability; ii) current account resilience; iii) external debt structure; iv) resilience to short-term external shocks; v) financial imbalances; and vi) social factors. On aggregate, the QS generates a one notch negative adjustment for Ireland’s credit ratings. An additional one notch negative adjustment is applied to capture distortions in Irish economic data that tend to overstate the performance of underlying fundamentals and credit metrics of Ireland. Together these adjustments result in the final AA long-term foreign- and local-currency ratings for Ireland.

A rating committee has discussed and confirmed these results.

Environment, social and governance (ESG) factors

Scope explicitly factors in ESG issues in its ratings process vis-à-vis the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

With respect to environmental factors, Ireland receives a high SQM 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 a lower score for its slightly higher risk to natural disasters. 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.

Socially related credit factors are captured under Scope’s SQM where Ireland receives the second highest score among peers. This reflects Ireland’s low old-age dependency ratio, which counterbalances the relatively high degree of income inequality and lower labour force participation. Scope assesses Ireland’s QS adjustment for social factors as ‘weak’. While Ireland is considered a top-tier country in the Global Social Progress Index⁹, it still ranks behind its peers, with relatively weaker scores for access to affordable housing, equal access to quality healthcare, and the share of population with at least some secondary education.

Finally, Ireland benefits from the high quality of its institutions and a stable political environment. Under the governance-related factors captured in Scope’s SQM, Ireland scores slightly lower than other highly rated peers on a composite index of five World Bank Worldwide Governance Indicators. In March 2024, Simon Harris was elected as the new Taoiseach (prime minister) and leader of the Fine Gael party after the resignation of Leo Varadkar who held the position from 2017 to 2020 and 2022 to 2024 as part of the country’s first grand coalition of rival conservative parties Fianna Fáil, Fine Gael and the Green party. Scope expects a broad continuation of economic and fiscal policies following the next general election to be held by March 2025.
 
Rating committee
The main points discussed by the rating committee were: i) domestic economic risk; ii) public finance risk; iii) external economic risk; iv) financial stability risk; v) ESG-related risk; and vi) rating peers.

Rating driver references
1. National Treasury Management Agency, Institutional Investor Presentation, July 2024
2. Houses of the Oireachtas, Future Ireland Fund and Infrastructure, Climate and Nature Fund Act 2024, June 2024
3. Irish Fiscal Advisory Council, Fiscal Assessment Report, June 2024
4. National Treasury Management Agency, 2024 mid-year business update, July 2024
5. Central Bank of Ireland, Quarterly Bulletin – June 2024
6. Department of Public Expenditure, National Development Plan 2021-2030, October 2021
7. OECD, Base erosion and profit shifting (BEPS)
8. Financial Stability Board, Holistic Review of the March Market Turmoil, November 2020
9. Social Progress Imperative, Global Social Progress Index
 
Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 29 January 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model Version 3.0), 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.
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: 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/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks 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, Senior Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 28 July 2017. The Credit Ratings/Outlooks were last updated on 31 March 2023.
 
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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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