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DBRS confirms Ireland at A (low), trend changed to stable

29 March, 2014

DBRS has confirmed the Republic of Ireland’s long-term foreign and local currency issuer ratings at A (low) and changed the trend from ‘negative’ to ‘stable’. The rating agency has also confirmed the short-term foreign and local currency issuer ratings at R-1 (low) and maintained the ‘stable’ trend.
“The rating confirmation reflects Ireland’s highly productive economy, strong political commitment to fiscal consolidation and evidence of macroeconomic rebalancing,” DBRS said in its rating action, adding that “the coalition government has already made substantial progress on fiscal consolidation and the 2014 budget will reduce the deficit further.”
“Positive developments in the fiscal accounts have been accompanied by improved competitiveness and a strengthened growth outlook. Moreover, Ireland exited its EU-IMF programme at the end of 2013 in a strong funding position. The buildup of cash balances, the promissory note deal, and the maturity extension of official loans have helped ease post-program funding pressures.
“In fact, Ireland is fully funded through mid-2015. However, these supportive factors are balanced by significant challenges: the fiscal deficit is still large, the public and private sectors are heavily indebted, and the banking system continues to face a high stock of impaired loans and weak profitability.
The change in trend to stable from negative reflects DBRS’s assessment that prospects for debt sustainability have improved.
Consequently, DBRS sees risks to the ratings as broadly balanced.
“If structural improvement in the fiscal balance firmly places public debt ratios on a downward path and substantial progress is made to resolve the high stock of non-performing loans in the financial system, the ratings could experience upward pressure over the medium term. On the other hand, weakened political commitment to fiscal consolidation or a material downward revision to growth prospects could pressure existing rating levels,” the rating agency added.
Despite weaker-than-expected GDP data in 2013, most activity indicators suggest that Ireland’s economic recovery is picking up. Domestic demand is stabilising as labour and property markets continue to heal. Total employment increased by 3.3% in the fourth quarter of 2013, the fifth consecutive quarter of employment growth. Residential property prices were up in 2013, although dynamics varied between Dublin and the rest of the country. Construction investment is also starting to rebound, and the recovery in the value of housing assets has supported households’ efforts to repair their balance sheets. Encouraging signs in the domestic market have been accompanied by a strengthening outlook for external demand. The 2014 growth forecasts for Ireland’s key trading partners – the United Kingdom, the United States and the Euro area – have all been revised upwards over the last three months. Moreover, Ireland’s openness to trade and investment, its young and educated workforce, and its flexible labour market support medium-term growth prospects.
Macroeconomic imbalances built up during the boom years are being unwound. The fiscal deficit likely fell below 7.5% of GDP in 2013, suggesting Ireland met its deficit target for the third consecutive year. The 2014 budget aims to narrow the deficit to 4.8% of GDP.
Contingent liabilities stemming from sovereign support of the banking system are large but declining. The National Asset Management Agency has redeemed €10.5 bln of the original €30.2 bln in senior government-guaranteed bonds and is well-positioned to make further redemptions this year. Although additional fiscal costs stemming from support of the banking system cannot be ruled out, the position of the domestic Irish banks has strengthened, partly as a result of improvements made following the Central Bank of Ireland’s 2013 balance sheet assessment. Moreover, the Eligible Liability Guarantee scheme, which was introduced at the height of Ireland’s financial crisis, was allowed to expire in March 2013. As a result, outstanding guarantees have declined significantly.