Dagong Global Credit Rating Co., Ltd.
May 24, 2018
Dagong Global Credit Rating Co., Ltd. (hereafter referred to as "Dagong") has decided today to maintain both the local and foreign currency sovereign credit ratings of the Republic of Ireland (hereafter referred to as “Ireland”) at BBB+, each with a stable outlook. Ireland’s repayment environment is widely stable, while the government’s structural reform gives a major boost to domestic demand. Economic recovery continues, fiscal deficits narrow and the government debt burden keeps falling, thus government solvency is stable.
The key reasons for maintaining the sovereign credit ratings of Ireland are below:
First, Ireland’s repayment environment is basically stable, although the government needs to stay vigilant against underlying risks. The Fine Gael minority government faces relatively enormous pressure reigning over the country, while the tendency of partisan fragmentation might increase difficulties in forming a cabinet at the expiration of office terms. However, since Ireland’s political system is comparatively mature and various political parties have only minor disagreement, its consistency of policy can be preserved. The government’s structural reform to attract foreign funds, boost employment and improve social welfare, amongst other goals, continues to enhance the country’s wealth creation capabilities while consolidating the virtuous circle wherein Ireland’s economy grows and debt continues falling. In terms of credit environment, the banking system continues repairing the balance sheets, yet under the continuous low-rate environment, property prices enter into a new round of skyrocketing. Given the heavy private-sector debt and the banking system’s non-performing loans, Ireland’s credit system faces underlying risks.
Second, improved domestic demand supports economic growth in the short term, yet structural imbalances sapping credit relations limit growth in the medium to long term. In the short term, residents will see higher disposable incomes and stronger consumption confidence, thanks to increased job opportunities, the government adjusting minimum wages, and increasing the minimum threshold for personal income tax as well as the universal social charge. Higher property prices and heavier government investment in infrastructure both lead to increases in investment, thus domestic demand strongly supports the economy. Nevertheless, Ireland’s export might be subject to Brexit’s progress and thereby slows down, thus it is projected that in 2018 and 2019, Ireland’s economy will expand at 4.4% and 3.9%, respectively. In the medium and long term, a relatively sound economic base, a labor force with comparatively high education, as well as relatively low corporate rates will enable Ireland to maintain its competitive advantages. However, due to the structural imbalances facing the private sector, it still takes much time for the real economy to recover. Amounting to as much as 265.2% of GDP, private-sector debt severely undermines the inner driving force for growth. Moreover, the country’s export-oriented economy is highly susceptible to the external environment, thus Ireland’s growth is projected to average around 3.0% over this period.
Third, the country’s consistently improving fiscal situation and relatively low financing costs guarantee the stability of repayment sources. In the near term, relaxed fiscal constraints will cause the government to spend more on Medicare, education, social benefits, the building of affordable houses for low-income groups, and so forth. However, economic rebounding and a stronger labor market are expected to broaden the tax base, thus resulting in remarkable increases in fiscal revenues. It is projected that in 2018 and 2019, the Irish general government’s fiscal deficit will decline to 0.2% and 0.1%, respectively. Although financing needs at the same period will hit 6.8% and 7.4% of GDP due to a large amount of maturing debts, yet relatively low financing costs can somewhat ease financing pressure, and hence government repayment sources are stable.
Fourth, government debt continues falling and government solvency is stable. Thanks to noticeable improvements in economy and finances, 2017 witnessed general government debt drop by 4.4 percentage points to 68.5%. It is forecasted that in 2018 and 2019, government debt will further fall to 65.0% and 61.6%, while the ratio of general government debt to fiscal revenues will decline by 13.4 and 11.4 percentage points to 249.1% and 237.6% throughout the same period. That, coupled with the fact that Irish debt is mainly comprised of euro-denominated debt in the medium to long term, renders government solvency consistently stable.
In the short term, Ireland’s minority government and Brexit will both incur growing uncertainty about its repayment environment. However, improvements in domestic demand and government finances cause government debt to continue declining. Meanwhile, the relatively low financing costs and optimized debt structure help stabilize government solvency. Therefore, Dagong assigns a stable local and foreign currency sovereign credit rating outlook for Ireland in the following one to two years.