Research Update:
Ireland Upgraded To 'A-' On Improved
Domestic Prospects; Outlook Positive
Primary Credit Analyst:
Kyran A Curry, London (44) 020-7176-7845; [Link]@[Link]
Secondary Contact:
Frank Gill, London (44) 20-7176-7129; [Link]@[Link]
Analytical Group Contact:
SovereignEurope; SovereignEurope@[Link]
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Key Statistics
Related Criteria And Research
Ratings List
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Research Update:
Ireland Upgraded To 'A-' On Improved Domestic
Prospects; Outlook Positive
Overview
We have revised our 2014-2016 average real GDP growth projections for
Ireland upward to 2.7% from 2.0%.
This reflects our expectation of a continued strong external performance
and a sustained recovery of the domestic economy.
We are therefore raising our long-term sovereign credit ratings on
Ireland to 'A-' from 'BBB+'. We are affirming the short-term ratings at
'A-2'.
The outlook is positive, reflecting our view of at least a one-in-three
possibility that we could raise our ratings on Ireland again in the next
two years.
Rating Action
On June 6, 2014, Standard & Poor's Ratings Services raised its long-term
foreign and local currency sovereign credit ratings on the Republic of Ireland
to 'A-' from 'BBB+'. At the same time, we affirmed the short-term ratings at
'A-2'. The outlook is positive.
Rationale
The upgrade reflects our view of the brightening prospects for Ireland's
domestic economy, which we expect to underpin further improvements in the
government's financial profile, capital markets access, and financial system
asset quality. We also note the 3 billion prepayment of senior debt by
National Asset Management Agency (NAMA), Ireland's publicly owned bad bank,
which we include in the general government sector. From repayments of 10.5
billion to date, we anticipate that NAMA will increase the pace of bond
redemptions this year. This raises the possibility of a faster decline in
levels of general government debt to GDP.
In 2013 alone, Ireland attracted high inflows of foreign direct investment
(FDI) totaling 26.7 billion, or 16% of GDP. Much of this FDI financed the
labor-intensive service sector, which has been posting sustained
competitiveness gains. We expect FDI to bolster Ireland's real GDP growth
performance, which we now believe will average 2.7% over 2014-2016.
Since 2008, Ireland's flexible labor and products markets have facilitated a
correction of the 2005-2008 overshoot in nominal wage and price levels. As a
consequence, unit labor costs have dropped by an estimated 21% back to 2005
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levels--the strongest adjustment in the eurozone with the exception of Greece.
Since 2005, labor productivity per hour worked has risen by 5%, in line with
the eurozone average, while Ireland's export share in global trade continued
to expand.
The real effective appreciation of the euro since mid-2012 and a deterioration
in Ireland's terms of trade have so far not undermined its external
performance: Ireland's current account surplus rose to 6.6% of GDP in 2013
from 1.3% in 2011. We project that Ireland's current account surpluses will
average close to 6% of GDP through 2017, as rises in services exports outpace
goods exports. Offsetting these flows, the income deficit continues to be
sizable and highly sensitive to the timing of dividend and interest payments
on Ireland's high external liabilities.
While lower-than-previously-expected GDP growth in 2013 reflected weaker
pharmaceutical sector production and exports (due to major patent
expirations), the domestic economy gained traction with gross national product
(GNP) expanding by 3.4%. (GNP adds to GDP the net balance of income accruing
to domestic residents minus the income that nonresidents earn from their
investment in Ireland. In Ireland's case, GNP is one fifth smaller than GDP
given the large stock of inbound FDI.)
We believe the domestic recovery is broadening and has gathered pace in the
first quarter of 2014. Full-time employment grew by 2.3% from the 2013 March
quarter to the 2014 March quarter, with the unemployment rate estimated to
have declined to 11.8% in May 2014, the lowest since April 2009.
We also link our expectation of improving budgetary performance to
strengthening domestic economic conditions, as well as Ireland's track record
of meeting its stated fiscal goals since entering into an EU/IMF program in
2011. The government completed this program in December 2013 and will amortize
this official debt over the next 30 years. In 2014, we expect the general
government deficit to be about 5.1% of GDP, on the back of spending control
and, to a lesser extent, out-performance of tax receipts.
We expect net general government debt to peak at 127% of GDP in 2013 (partly
reflecting a strong cash buffer) and to decline to 112% by 2017. Our estimate
of Ireland's gross and net general government debt includes NAMA obligations
issued to purchase loans and other distressed assets from participating Irish
banks at a discount to market value. They amount to 19% of GDP. Although we
consolidate NAMA's debt into general government debt, we do not consider
NAMA's assets, apart from cash and cash equivalents, as liquid. Should NAMA
convert its loan assets into cash through foreclosure or sale more quickly
than we expect, Ireland's general government debt net of liquid assets could
commensurately decline faster than we project.
The consensus among most of the country's larger political parties--in favor
of fiscal consolidation and policies aimed at promoting economic flexibility,
competitiveness, and openness--supports Ireland's policy and institutional
effectiveness. The 2008/2009 recession revealed shortcomings in this regard.
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Research Update: Ireland Upgraded To 'A-' On Improved Domestic Prospects; Outlook Positive
In our opinion, these shortcomings have mostly been addressed through
regulatory and legal reforms, under the IMF/EU bailout program.
While external performance has improved, our complete assessment of Ireland's
external risks is hampered by transaction flows and asset and liability stock
inconsistencies on the external side. This reflects a possible overstatement
of current account receipts due to transactions by nonresident companies that
are domiciled in Ireland for tax purposes; if these companies were to
re-domicile elsewhere, this would likely reduce the current account surpluses.
Regarding the stock of Ireland's external position, the large asset and
liability positions of international financial services companies (IFSCs)
operating in Ireland create similar analytical complexities. At end-December
2013, IFSCs accounted for 93% of all Ireland's total foreign assets and 93% of
Ireland's total foreign liabilities. Valuation of these assets and liabilities
can lead to large discrepancies between Ireland's balance-of-payments flows
and net external debt stock measurements on a cash basis.
The government's international capital markets access has improved and the
maturity extension of its European Financial Stability Facility and European
Stability Mechanism official debt, agreed earlier in 2013, has reduced its
short-term financing needs. The government's large cash buffer--equivalent to
10.7% of GDP at year-end 2013 or all its remaining 2014 gross borrowing
requirements--has supported this. During 2013, several Irish banks returned to
commercial financing via sales of unsecured debt. The Bank of Ireland notably
used the proceeds of its issuance to redeem 1.8 billion of its preference
shares held by the government. Given the uncertainties related to global
liquidity, however, we view Ireland's private-sector access to external
funding as still tenuous.
We observe that employment growth is coinciding with a gradual decline in
long-term mortgage arrears. We estimate nonperforming loans (NPLs; more than
90 days past due) in the Irish financial sector at a very high 35% of domestic
loans compared to Portugal (about 13.5%) and Spain (about 19%). While some
lenders are reporting the total stock of NPLs as falling, we expect this
process will be slow. To date, the highest levels of NPLs have been recorded
in commercial real estate. These NPLs are well provisioned, however. We expect
NPLs in the small and midsize enterprise sector--typically in the 25%-40%
range--to decline slowly.
Our main concern relates to banks' mortgage books. According to industry data
at March 31, 2014, a high 13.7% of all mortgage accounts were more than 90
days past due. Moreover, if we include cases that are in forbearance and not
in arrears (that is, repayments have been temporarily postponed or
restructured), as well as those that are less than 90 days past due and
properties in possession, then a very high 26.5% of all mortgage cases are in
some form of difficulty.
Nevertheless--prompted by the regulator--the banks have developed their loan
work-out capabilities. Combined with government legislation that removed legal
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Research Update: Ireland Upgraded To 'A-' On Improved Domestic Prospects; Outlook Positive
obstacles to repossession, a new personal insolvency regime that is now up and
running, and a revised code of conduct that governs how lenders must treat
struggling mortgage borrowers, this suggests banks will soon be better placed
to address the asset quality of their mortgage book through foreclosure,
rescheduling, or other remediation.
Although individual Irish bank capitalization is currently weak or barely
moderate by our measures, we assess contingent liabilities from the financial
sector as limited, under our criteria, given the thoroughness of the Irish
banking system's restructuring in the last five years.
Outlook
The positive outlook reflects our view of at least a one-in-three possibility
that we could raise our ratings on Ireland again in the next two years. An
upgrade could result from additional data confirming that Ireland's economic
recovery is well-entrenched and that its fiscal deficits have narrowed to well
below 3% of GDP. We also would expect Ireland's major banks to take additional
resolute steps to address asset quality, including continued provisioning and
loan write-offs.
On the other hand, the ratings would stabilize if the Irish economy returned
to weaker economic performance, government debt reduction slowed, or if banks'
asset quality did not improve from current weak levels.
Key Statistics
Table 1
Republic of Ireland - Selected Indicators
2007 2008 2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Nominal GDP (US$ bil) 260 264 225 209 214 211 218 227 228 238 249
GDP per capita (US$) 59,811 59,228 49,865 46,028 46,881 45,961 47,456 49,360 49,395 51,533 53,949
Real GDP growth (%) 5.0 (2.2) (6.4) (1.1) 2.2 0.2 (0.3) 1.9 2.9 3.2 3.5
Real GDP per capita growth
(%)
1.8 (4.7) (7.7) (1.7) 1.7 (0.1) (0.5) 1.7 2.8 3.1 3.3
Change in general government
debt/GDP (%)
1.8 18.0 15.4 43.2 15.7 11.9 12.1 (0.4) 1.9 (0.5) (0.2)
General government
balance/GDP (%)
0.2 (7.4) (13.7) (30.6) (13.1) (8.2) (7.2) (5.1) (2.9) (2.2) (1.2)
General government
debt/GDP (%)
24.9 44.2 64.4 109.3 122.0 132.9 144.9 141.0 137.4 131.0 124.8
Net general government
debt/GDP (%)
8.9 20.0 37.9 88.1 106.1 112.6 126.7 126.4 122.7 118.0 112.1
General government interest
expenditure/revenues (%)
2.8 3.8 5.9 9.0 9.4 10.4 12.6 13.8 13.1 12.9 12.3
Oth dc claims on resident
non-govt. sector/GDP (%)
199.2 220.0 232.1 212.2 199.7 185.7 171.3 163.1 154.4 147.9 141.8
CPI growth (%) 2.8 3.1 (1.7) (1.6) 1.1 2.0 0.5 0.6 1.1 1.2 1.4
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Research Update: Ireland Upgraded To 'A-' On Improved Domestic Prospects; Outlook Positive
Table 1
Republic of Ireland - Selected Indicators (cont.)
Gross external financing
needs/CARs +use. res (%)
447.8 513.8 654.1 620.9 531.1 514.5 479.0 437.9 421.2 398.6 375.9
Current account balance/GDP
(%)
(5.3) (5.2) (3.0) (0.7) 1.3 4.4 6.6 6.6 5.5 5.3 5.3
Current account balance/CARs
(%)
(4.2) (3.9) (2.4) (0.5) 0.9 3.0 4.6 4.2 3.5 3.4 3.4
Narrow net external
debt/CARs (%)
151.6 183.9 238.5 271.1 278.5 297.2 319.0 264.3 243.5 217.8 191.8
Net external liabilities/CARs
(%)
16.4 50.8 79.6 65.2 61.9 78.9 77.6 64.7 61.5 56.3 51.0
Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition
of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior
year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is
defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus
public-sector liquid assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negative
number indicates net external lending. CARs--Current account receipts.
The data and ratios above result from S&Ps own calculations, drawing on national as well as international sources, reflecting S&Ps independent
view on the timeliness, coverage, accuracy, credibility, and usability of available information.
Related Criteria And Research
Related Criteria
Sovereign Government Rating Methodology And Assumptions, June 24, 2013
Methodology For Linking Short-Term And Long-Term Ratings For Corporate,
Insurance, And Sovereign Issuers, May 7, 2013
Criteria For Determining Transfer And Convertibility Assessments, May 18,
2009
Related Research
Sovereign Ratings And Country T&C Assessments, June 3, 2014
Climate Change Is A Global Mega-Trend For Sovereign Risk, May 15, 2014
Banking Industry Country Risk Assessment Update: June 2014, June 6, 2014
Calendar Of 2014 EMEA Sovereign, Regional, And Local Government Rating
Publication Dates: First-Quarter Update, April 3, 2014
Sovereign Risk Indicators, March 24, 2014
Credit Conditions: Europe Is On A More Stable Path, Amid Turbulence In
Emerging Markets, March 21, 2014
European Sovereign Debt Report 2014: Gross Commercial Borrowing To
Decline 2.4% To EUR1.3 Trillion, Feb. 28, 2014
Standard & Poor's Sovereign Ratings Have No "Home Bias", Feb. 10, 2014
Outlooks: The Sovereign Credit Weathervane, Year-End 2013 Update, Feb. 4,
2014
Sovereign Defaults And Rating Transition Data, 2013 Update, April, 2014
In accordance with our relevant policies and procedures, the Rating Committee
was composed of analysts that are qualified to vote in the committee, with
sufficient experience to convey the appropriate level of knowledge and
understanding of the methodology applicable (see 'Related Criteria And
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Research Update: Ireland Upgraded To 'A-' On Improved Domestic Prospects; Outlook Positive
Research'). At the onset of the committee, the chair confirmed that the
information provided to the Rating Committee by the primary analyst had been
distributed in a timely manner and was sufficient for Committee members to
make an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and critical issues
in accordance with the relevant criteria. Qualitative and quantitative risk
factors were considered and discussed, looking at track-record and forecasts.
The chair ensured every voting member was given the opportunity to articulate
his/her opinion. The chair or designee reviewed the draft report to ensure
consistency with the Committee decision. The views and the decision of the
rating committee are summarized in the above rationale and outlook.
Ratings List
Upgraded; Ratings Affirmed
To From
Ireland (Republic of)
Sovereign Credit Rating A-/Positive/A-2 BBB+/Positive/A-2
Transfer & Convertibility Assessment AAA
Senior Unsecured A- BBB+
Short-Term Debt A-2
Commercial Paper A-2
National Asset Management Agency
Issuer Credit Rating A-/Positive/A-2 BBB+/Positive/A-2
Housing Finance Agency PLC
Commercial Paper* A-2
National Asset Management Ltd.
Short-Term Debt A-2
Short-Term Debt* A-2
Commercial Paper* A-2
*Guaranteed by the Republic of Ireland.
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Research Update: Ireland Upgraded To 'A-' On Improved Domestic Prospects; Outlook Positive
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Research Update: Ireland Upgraded To 'A-' On Improved Domestic Prospects; Outlook Positive
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