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Rating Action:

Moody's upgrades Ireland's sovereign rating to A3, outlook remains positive

14 May 2016

Note: On May 16, 2016, the press release was corrected as follows: In the Ratings Rationale section, the following was added as the last paragraph. “The publication date of this press release deviates from the previously scheduled release date that is reflected on the sovereign release calendar published on www.moodys.com.” Revised release follows.

London, 14 May 2016 -- Moody's Investors Service ("Moody's") has today upgraded Ireland's long-term government bond ratings to A3 from Baa1. The short-term rating was affirmed at Prime-2. The outlook on the ratings remains positive.

Moody's decision to upgrade Ireland's rating to A3 reflects the following key drivers:

(1) Ireland's key credit fundamentals have continued to improve at a faster pace than expected even a few months ago, including a stronger economic recovery and a more marked reduction in the public debt ratio, which stood at below 94% of GDP by end-2015. The government's public finances also continued to improve at a rapid pace last year;

(2) In Moody's view, the risk of a reversal of the fiscal consolidation seen over the past several years is low. The recent political agreement between the two largest parties in parliament and the recent election of a minority government led by Fine Gael, which has established a strong track record of fiscal management over the past several years, give comfort that the budget deficit will be reduced further in coming years.

The oulook on the ratings remains positive and reflects Moody's view of a likely continuation of these trends in the coming years. While the rating agency expects economic growth rates to moderate compared to the outstanding growth of last year, Ireland will likely see continued robust growth on account of substantial competitiveness gains as well as strong export and productivity growth supported by a large and expanding multinational sector. The strong growth in turn will facilitate a continued reduction in Ireland's public and private debt levels, in Moody's view.

Concurrent with the rating action on the sovereign, Moody's has also upgraded the rating of the National Asset Management Agency (NAMA) to A3 from Baa1 with a positive outlook, given that NAMA's debt obligations are explicitly guaranteed by the Republic of Ireland.

In addition, Ireland's long-term foreign and local-currency bond and deposit ceilings have been upgraded to Aaa from Aa1. The short-term foreign-currency bond and deposit ceilings remain unchanged at P-1.

A full list of affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

RATIONALE FOR RATING UPGRADE TO A3

The first driver for the upgrade is the continuing and material improvement in Ireland's growth performance and debt burden reduction over the past year. In 2015, real and nominal GDP growth were much stronger than Moody's expected at 7.8% and 13.5% respectively, which in turn helped to reduce the public debt ratio to just below 94% of GDP, compared to a peak of over 120% of GDP three years earlier and also compared to Moody's own expectation for 2015 of a ratio around the 100% mark. The government's public finances continued to improve, with the general government deficit reduced to 2.3% of GDP from 3.8% in 2014.

Leverage in the private sector has also continued to decline, and the risk posed by the Irish banking sector to the government's balance sheet continues to diminish. The recovery is increasingly broad-based, not fuelled by unsustainable credit growth as in the pre-crisis boom period. The banking sector is also much smaller in scale than it was then and has a sounder funding base and higher capital levels. While there are signs of emerging price pressures in parts of the commercial real estate sector, Moody's notes that the Irish central bank reacted early to emerging house price pressures by imposing macro-prudential measures to cool down the housing market.

The second driver for today's upgrade relates to the rising confidence that fiscal policy will remain on a prudent course, following the recent agreement between the two largest parties in the Irish parliament. The recently elected minority government led by Fine Gael has established a strong fiscal track record over the past several years and there seems to be broad consensus on the need to reduce the budget deficit and public debt further. Moody's considers the government's longer-term fiscal objective of a budget surplus by 2018 to be credible and achievable.

Set against those positive trends, Ireland's growth tends to be much more volatile than its peers', principally on account of its openness and integration into multinationals' global value chains. Ireland is also more exposed than most peers to potential shifts in global taxation rules, given that its low corporate tax rate has been instrumental in attracting many multinational companies to its territory. A higher degree of economic volatility requires larger financial and fiscal buffers to deal with negative shocks. Countries with similarly high levels of economic volatility -- examples in Europe include the Baltic states -- have materially lower debt ratios than Ireland. The fact that Ireland's debt ratio is much higher than that of its peers in the A-rating category and will remain so for many years remains an important constraint on the credit.

RATIONALE FOR POSITIVE OUTLOOK

The positive outlook reflects Moody's view that Ireland's key credit metrics might improve further in the coming years, notwithstanding the above-mentioned constraints. While GDP growth will likely moderate compared to last year's exceptional growth, Ireland will continue to grow at above-trend rates over the next two to three years, on account of strong and sustained competitiveness gains and the large and expanding presence of high value-added multinational firms that have driven recent increases in exports.

Investment prospects are positive, not only in the multinational sector, and longer-term demographic trends are also more favourable in Ireland than in most other European peers. Moody's forecasts real GDP growth of around 5% and 3.5% in 2016 and 2017 respectively. While a UK exit from the EU would have negative repercussions on Ireland, given the close economic ties, Moody's considers that this risk would be manageable for the Irish economy.

Such robust GDP growth rates are in turn expected to enable further reductions in the public debt ratio. Moody's expects the debt ratio to stand at below 87% of GDP by the end of 2017, a ratio broadly in line with that of many of Ireland's euro area peers. The downward debt trajectory is robust to a range of stress scenarios, including lower GDP growth, higher interest rates and slower fiscal consolidation. The debt trend might turn out more favourably than under Moody's baseline assumptions should the government sell some of the bank shares it still holds.

WHAT COULD MOVE THE RATING UP/DOWN

A combination of continuing strong growth, a further reduction in the budget deficit and a consequent rapid decline in the debt ratio could trigger a further upgrade of Ireland's rating. Further improvements in the banking sector, in particular a strong reduction in the banks' non-performing loans, could also be a trigger for a rating upgrade, as could the earlier and more profitable sale of the government's stakes in the banks.

Conversely, downward pressure on the rating could appear if Ireland does not continue to reduce the budget deficit and ensure a sustained reduction in the debt ratio.

On 10 May 2016, 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 fiscal or financial strength, including its debt profile, has materially improved. The issuer's susceptibility to event risks has not materially changed. Other views raised included: The issuer's institutional strength/ framework, have not materially changed.

GDP per capita (PPP basis, US$): 55,533 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 7.8% (2015 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.1% (2015 Actual)

Gen. Gov. Financial Balance/GDP: -2.3% (2015 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 4.4% (2015 Actual) (also known as External Balance)

External debt/GDP: [not available]

Level of economic development: Very High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Ratings 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.

LIST OF AFFECTED RATINGS

..Issuer: Ireland, Government of

Upgrades:

....LT Issuer Rating, Upgraded to A3 from Baa1

....Senior Unsecured Regular Bond/Debenture, Upgraded to A3 from Baa1

....Senior Unsecured MTN, Upgraded to (P)A3 from (P)Baa1

....Senior Unsecured Shelf, Upgraded to (P)A3 from (P)Baa1

Affirmations:

....Commercial Paper, Affirmed P-2

....Other Short Term, Affirmed (P)P-2

....Outlook, Remains Positive

..Issuer: NAMA (National Asset Management Agency)

Upgrades:

.... Backed LT Issuer Rating, Upgraded to A3 from Baa1

Affirmations:

....Backed ST Issuer Rating, Affirmed P-2

....Backed Commercial Paper, Affirmed P-2

....Backed Other Short Term, Affirmed P-2

....Outlook, Remains Positive

The publication date of this press release deviates from the previously scheduled release date that is reflected on the sovereign release calendar published on www.moodys.com.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Kathrin Muehlbronner
Senior Vice President
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's upgrades Ireland's sovereign rating to A3, outlook remains positive
No Related Data.
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