* But high public debt remains a constraint, NPLs at 25% of loans *
Ireland's (Baa1, stable) economy is recovering at a reasonably strong pace now, and its fiscal performance has also been improving over the past several years, according to Moody’s, adding that key rating constraints are the high public debt level as well as remaining weaknesses in the Irish banking sector.
The rating agency also notes that fiscal policy is being loosened in 2015 and the strong 2014 growth performance is unlikely to be repeated this year.
"Ireland's 2014 economic performance was strong with real GDP growth estimated at around 5%, and the country's growth prospects remain solid. However, the strong growth in exports is unlikely to be repeated as it was partly due to special factors related to offshore production activity. We expect growth rates of 3.8% and 3.0% in 2015 and 2016, respectively, which is still a very solid performance," said Kathrin Muehlbronner, a Senior Credit Officer at Moody's.
The rating agency cautions that the strong investment recovery now under way will at some point in the future require a pick-up in bank lending. But as the banking sector remains weak, with non-performing loans at 25% of total loans, as well as low current and prospective profitability, it remains one of Ireland's key constraints.
At the same time, Moody's considers that the risks arising from the banking sector for the government's balance sheet have been materially reduced as a result of strengthened capital, liquidity and funding profiles. Also, contingent liability risks related to the National Asset Management Agency (NAMA) have further declined, given the strong cash flow and faster-than-expected repayment of government-guaranteed debt.
Moody's also expects that Ireland will continue to bring down its budget deficit, with the 2015 budget targeting a deficit reduction to 2.7% of GDP (from 3.9% in 2014). Aside from the economic recovery, government finances will benefit from the savings on interest expenditure following the replacement of IMF loans with cheaper market funding, Moody's said.
However, the rating agency noted that fiscal policy in 2015 is being loosened significantly compared with earlier commitments of the government. As such, the 2015 budget means that Ireland's elevated debt levels will likely reduce at a slower pace than initially expected.
While 2014 represented the first year in which the public-debt-to-GDP ratio declined, the ratio remains among the highest in Moody's sovereign rating universe, although the agency expects the debt ratio to decline gradually below the 100% mark by 2018.
