Paris, August 13, 2021 -- Moody's Investors Service ("Moody's") has today
affirmed the Government of Ireland's long-term issuer rating
of A2. Concurrently, the outlook has been changed to positive
from stable. Ireland's senior unsecured bond, MTN programme
and commercial paper ratings have also been affirmed at A2, (P)A2
and Prime-1, respectively.
The key drivers behind the positive outlook on the A2 ratings are:
1. The resilience of the Irish economy to shocks, and Moody's
expectations that developments with regard to Brexit, global corporate
income tax reform, or the pandemic will not derail economic progress;
2. Moody's expectations that the government will remain committed
to reducing debt, thus preserving the increase in fiscal space that
has been rebuilt in recent years.
Concurrently, Moody's has also affirmed the National Asset
Management Agency's (NAMA) A2 backed long-term issuer rating
and Prime-1 backed short-term issuer ratings and backed
commercial paper Prime-1 ratings. NAMA's ratings are
aligned with those of the Irish sovereign, as Moody's views
NAMA as a vehicle of public policy that is indistinguishable from the
Irish government. Moody's considers that the willingness
of the Irish government to back NAMA's obligations is no lower than
its commitment to service its own sovereign bonds. The outlook
on the ratings has also been changed to positive from stable.
Ireland's long-term local and foreign-currency bond
and deposit ceilings remain unchanged at Aaa. The short-term
foreign currency bond and deposit ceilings are also unaffected by this
rating action and remain at P-1.
RATIONALE FOR THE POSITIVE OUTLOOK
FIRST DRIVER: THE IRISH MODEL HAS BEEN MORE RESILIENT TO SHOCKS
THAN MOODY'S HAD PREVIOUSLY ANTICIPATED
Being a small and open economy exposes Ireland to shocks. However,
the Irish economy has successfully weathered several shocks in recent
years, including Brexit and the pandemic. While there is
still lingering uncertainty over these issues, as well as global
corporate tax reform, Moody's view is that the Irish economy
remains well-positioned to absorb any negative credit implications
associated with these challenges.
Irish GDP continued to record strong growth during the pandemic.
Real GDP growth came in at 5.9% in 2020 despite the pandemic
shock, after average growth of 9.8% in 2014-19.
While multinational corporations underpinned the strong growth in activity,
Moody's believes that it also reflects the attractiveness of some
key sectors dominated by multinational corporations. In particular,
the resilience of the pharmaceutical, medical and technology sectors,
which are dominated by foreign-owned multinational corporations,
throughout the pandemic underpinned the strong growth in exports.
Modified final domestic demand, which better captures domestic activity,
declined by 4.7% in 2020. Given the severe pandemic-related
restrictions in place in the country, the severity of the contraction
is not disproportionate compared to peers. Moody's views
the support measures introduced by the authorities as being effective
in protecting the supply side of the economy and in mitigating the impact
of the shock on households' income.
While Brexit will continue to have negative implications for some Irish
entities—particularly in the agricultural sector—over the
next few years, Moody's believes that Ireland's credit
profile has also been and will remain resilient to this shock, though
implementation of permanent trade agreements will likely result in short-term
trade frictions and force Irish exporters to re-organise their
supply chains (and may actually discourage some producers from exporting).
It could also have negative repercussions on employment in some sectors
such as agriculture and agri-processing. Ireland will receive
around €1 billion in capital receipts from the European Union (EU,
Aaa stable) as part of the Brexit Adjustment Reserve to support affected
companies, especially in agriculture-related sectors,
and to encourage reskilling of affected workers. Consequently,
Moody's view remains that the economy's fundamentals will
not be materially affected.
Looking ahead, global corporation tax reform is among the main risks
facing Ireland's credit profile. Although Ireland has so
far opposed this agreement, Moody's believes that Ireland
will eventually join whatever agreement is finally struck. While
this will likely have some impact on future tax revenues and could deter
some foreign investors from making future investments, Moody's
does not believe that it will have a large long-term negative impact
on the public finances and the strength of the economy.
The government has estimated that as a result of the global tax initiative,
corporate tax receipts could be €2 billion lower over the medium
term. This revenue shortfall is already incorporated in the authorities'
fiscal projections, and it is included in Moody's forecasts.
Once the details of the agreement are known, this estimate could
be revised upward. Risks associated with the global tax reform
are exacerbated by the concentration of corporate tax receipts in the
country, with ten companies accounting for 51% of net receipts
in 2020. Foreign-owned multinational corporations accounted
for 82% of net receipts in 2020. In addition to the impact
on revenue, a reduced presence of multinational corporations and
lower FDI flows in the country could also weigh on Ireland's economic
Moody's baseline scenario is that Ireland will manage these revenue
shortfalls, and that the reform will not affect the presence of
multinational corporations already present in the country. Many
multinationals have long-established businesses in Ireland and
will likely continue to use the country as their base for exports to European
and other markets. Beyond its attractive tax rate, the Irish
economy also benefits from several assets, including its highly
skilled, English-speaking and flexible labour force,
and easy access to European markets. Ireland's status as a preferred
destination for US (United States of America, Aaa stable) multinational
corporations in Europe also stems from its relative proximity to the US
and a smaller time difference compared with most other parts of Western
Europe. Ireland's capacity to manage other shocks in the
recent past provides additional comfort over the authorities' capacities
to mitigate the impact of the reform.
SECOND DRIVER: DEBT IMPROVEMENTS HAVE REMAINED RESILIENT TO THE
Irish fiscal and debt metrics deteriorated as a result of the pandemic,
albeit to a more modest extent than for peers. After two years
of small surpluses, the Irish government recorded a deficit of 5.0%
of GDP in 2020. The latter was driven by the introduction of a
sizeable support package to limit the scarring impact of the pandemic
on the real economy. The fiscal impact of the support measures
totalled €25 billion (6.7% of GDP) in 2020, and
is expected to total €16.3 billion (4.0% of
GDP) in 2021. A robust revenue performance greatly softened the
impact of fiscal support on headline deficits. The deterioration
in the fiscal position (-5.3pp of GDP) was more modest and
the headline deficit smaller than for peers at the A1 and A2 rating levels.
Like other EU sovereigns, Ireland has also experienced a significant
improvement in debt affordability metrics because of the low interest
Moody's expects debt to return to a downward trajectory in 2022,
driven by lower deficits and strong nominal growth. Moody's
forecasts the deficit to decline to 3.4% in 2022,
and to fall below 2% of GDP from 2023 onwards. The July
2021 Summer Economic Statement marks a departure from previous fiscal
policy strategy by introducing expenditure ceilings for the years 2022-2025
that will grow at a pace broadly in line with the estimated trend growth
rate of the economy (estimated at 5%) for 2022-25.
The ceiling will not be amended in case tax revenues fluctuate as a result
of the economic cycle or profitability levels for important corporates.
This strategy departs from that of previous years, when outperforming
tax receipts, largely driven by higher-than-projected
corporation tax receipts, have often fueled an increase in current
spending in excess of what had been budgeted. The government's
capacity to comply with the expenditure ceiling will be a key indication
on the government's fiscal policy effectiveness and would provide
additional confidence over the trajectory of public finances.
The Summer Economic Statement also points to a gradual reduction in the
budget deficit, which reflects health- and infrastructure-related
spending pressures that predate the pandemic. The Summer Economic
Statement stressed the need to improve the provision of healthcare,
especially through Slaintecare -- the government's ten-year
programme introduced in 2018 to reform the healthcare system. Prior
to the pandemic, healthcare had been a recurring cause of over-spending,
reflecting weak budgeting and implementation. The Summer Economic
Statement also increased budgeted capital expenditure by a cumulative
€5.9 billion (1.4% of forecast 2022 GDP) over
2022-25 compared with the April Stability Programme. Higher
capital expenditure aims to address the under-supply of social
housing, and to improve other infrastructure, including transportation.
While the higher spending levels and more gradual reduction in deficits
will slow the debt reduction process, Moody's believes that
the trajectory of public finances will remain favourable compared to peers.
From 2023 onwards, only capital expenditure will be covered by borrowing
needs. In addition, infrastructure investment will likely
have a positive impact on Ireland's economic attractiveness,
which will in turn have a positive impact on investment by multinational
corporations. By 2025, Moody's forecasts government
debt to reach 57% of GDP and to around 107% of GNI*
(based on GNI* forecasts from the Summer Economic Statement).
In addition, Moody's sees sources of further improvements
to the debt trajectory, including the government's sizeable
cash reserves and the potential sale of government stakes in Irish banks.
At end-July 2021, the government has cash reserves worth
€30.5 billion (7.4% of 2021 forecast GDP),
up from €17.4 billion (4.7% of 2020 GDP) at
end-2020. Given the front-loaded nature of issuances,
reserves will likely decline in the second half of 2021, but Moody's
does not expect the government to use all of these buffers to finance
the deficit. Meanwhile, government stakes in Irish banks
amount to €4.7 billion (estimated market value, equivalent
to 1.1% of GDP) in March 2021. The government announced
in June 2021 its intention to start selling its 14% stake in Bank
of Ireland in the following six months. Proceeds could be used
to reduce government debt, but the overall impact would be small.
RATIONALE FOR THE AFFIRMATION OF THE A2 RATINGS
The A2 ratings reflect Ireland's high wealth levels, strong
growth rates (even throughout the coronavirus pandemic) as well as robust
institutions and governance, balanced against still-elevated
public debt and economic volatility.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Ireland's ESG Credit Impact Score is positive (CIS-1),
reflecting low exposure to environmental risk, a positive influence
of its social considerations on the rating and, like many other
advanced economies, very strong governance profile and in general
capacity to respond to shocks.
Ireland's overall E issuer profile score is neutral-to-low
(E-2), reflecting low exposure to environmental risks across
Moody's assesses Ireland's S issuer profile score as positive
(S-1). Ireland is among the few sovereigns for which social
attributes support the rating, reflecting in particular relatively
favorable demographics compared to many other EU countries, as well
as its significant diaspora population. The score also reflects
high-quality education, high housing availability,
and good quality healthcare and basic services.
Ireland's very strong institutions and governance profile support
its rating and this is captured by a positive G issuer profile score (G-1).
Ireland scores very highly on institutional factors, as captured
in the Worldwide Governance Indicators, reflecting strong policy
effectiveness and rule of law. Policymakers' effectiveness in addressing
the crisis through successive administrations, and in preparing
for Brexit despite high uncertainty, further underpins this assessment.
Coupled with high wealth levels and moderate government financial strength
this supports a high degree of resilience.
GDP per capita (PPP basis, US$): 94,392 (2020
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 5.9% (2020 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): -1%
Gen. Gov. Financial Balance/GDP: -5%
(2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.7% (2020 Actual)
(also known as External Balance)
External debt/GDP: [not available]
Economic resiliency: aa3
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 10 August 2021, a rating committee was called to discuss the
rating of the Ireland, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have materially increased.
The issuer's institutions and governance strength, have not materially
changed. The issuer's fiscal or financial strength, including
its debt profile, has not materially changed. The issuer's
susceptibility to event risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
FACTORS THAT COULD LEAD TO AN UPGRADE
Moody's would consider upgrading Ireland's A2 sovereign ratings
if the economy demonstrates continued resilience in the face of external
risks emanating from the United Kingdom (Aa3 stable)-EU trading
relationship and international corporate tax reform. Greater clarity
that the debt burden will continue to fall steadily over the coming 1-2
years would also support upward pressure on the rating.
FACTORS THAT COULD LEAD TO A DOWNGRADE
Given the positive outlook to the A2 ratings, a downgrade seems
unlikely at this stage. However, Moody's would likely
return the outlook to stable if the course of fiscal policy changed,
resulting in debt stabilizing at higher levels. Although not Moody's
core scenario, a material adverse impact of global corporate tax
reform, post-Brexit trading arrangements or other external
shocks on Ireland's growth and fiscal performance over a multiyear
period would also exert negative pressures on the rating.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Sarah Carlson, CFA
Senior Vice President
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