Credit rating agency Standard & Poor’s has upgraded its assessment of Ireland’s debt, saying it now expects the economy to grow by more than previously foreseen.
In a statement this evening, S&P said the broadening recovery would underpin further improvements in the Government’s budgetary position.
The agency has raised its long- and short-term rating on Ireland to “A/A-1” from “A-/A-2”, a level which should reinforce the Government’’s position as it raises new debt next year to pay off more IMF loans and makes preparations for the maturity of an €8 billion bond in 2016.
“The stable outlook balances our view that government finances have improved and that financial system asset quality is on the mend, against the prevailing downside risks associated with euro zone trading partners’ uncertain growth prospects and the Irish government’s still highly-leveraged balance sheet,” S&P said in a statement.
The upgrade was immediately welcomed by Minister for Finance Michael Noonan, who said the agency’s intervention was a “vote of confidence” in the recovery .
“The upgrade reflects Ireland’s solid economic growth prospects, the continued strong management of the public finances, and the progress that NAMA and the Irish banks are making,” said Mr Noonan, who will hold meeting in Beijing and Shanghai next week with members of the Chinese investment community.
“The return to investment grades across all of the main ratings agencies this year has reopened new markets to us across Asia,” the Minister added.
The upgrade was also welcomed by John Corrigan, chief of the National Treasury Management Agency, who said it concludes a “very positive” year for Irish ratings.
“Since regaining investment-grade status with all three of the main ratings agencies at the beginning of 2014, Ireland has climbed to A rating status with both S&P (A) and Fitch (A-) in their long-term ratings. Today’s upgrade is also noteworthy by formally moving Ireland to the top slot on S&P’s short-term rating scale,” Mr Corrigan said.
In its statement, S&P said it could again raise its ratings on Ireland within the next two years if GDP growth continues on the upside, exceeding its expectations or if general government debt, including Nama’s debt, reduces faster than projected.
However, it said the ratings could come under downward pressure if the Irish economy returned to weaker economic performance or if asset prices became depressed and debt reduction slowed.
S&P said in its statement that it had raised its average real gross domestic product growth projections for the 2014-2016 period to 3.7 per cent from 2.7 per cent.
“The National Asset Management Agency, which has benefited from a recovering property market, has now repaid about half of its original government-guaranteed senior bonds,” it said.
“The upgrade reflects our view of Ireland‘s solid economic growth prospects,
which we expect to underpin further improvements in the Government’s budgetary position.
“During the first nine months of 2014, private-sector employment grew by 2.2 per cent; the improving jobs market is healing financial sector asset quality and benefiting the Government’s budget.”
The agency said Ireland’s policy and institutional effectiveness was supported by the strong consensus “among most of its largest political parties” in favour of fiscal consolidation and policies aimed at promoting economic flexibility, competitiveness, and openness.
“In our opinion, under the IMF/EU bailout programme, Ireland’s government has generally strengthened its regulatory and legal framework.”
Nama’s early repayment of bonds will have reduced net general government debt by about 15 per cent of GDP in 2013 and 2014, to 103.5 per cent of GDP by the end of 2014, S&P said .
“This is because, as with the debt of all asset management companies (‘bad banks’), we include Nama’s debt in the general government sector.
“As we expected, Nama increased the pace of its redemptions this year, bringing cumulative redemptions to about half of the total issued.”
S&P said gross national product growth has exceeded GDP growth since the third quarter of 2013, implying that the domestic economy is “replacing” the foreign-owned sector as the key growth driver.
Citing €30 billion in foreign direct investment in 2013 alone, S&P said however that such flows were likely overstated as a result of tax incentives for foreign parent companies to book and reinvest their earnings in Ireland. Still, it said inflows remain “exceptionally high” even on an adjusted basis.
“We project current account surpluses to average close to 4.8 per cent of GDP through 2017. With exports now 25 per cent above 2009 levels, we assume that services exports (particularly information and communications technology and business services such as aircraft leasing) will continue to expand and the goods trade surplus will remain substantial and stable.
“We also expect that export receipts will continue to offset sizable income deficits (averaging 23.2 per cent of GDP through 2017). These deficits will remain highly sensitive to the timing of dividend and interest payments on Ireland‘s high external debt and investment liabilities.”
“Improving economic conditions, as well as Ireland’s strong track record of meeting its fiscal goals since its December 2013 exit from the EU/IMF programmme, underpin our expectation of further improvement in its fiscal performance.
“For 2014, we expect the general government deficit to be about 3.7 per cent of GDP, on the back of expenditure control and, to a lesser extent, outperformance of tax receipts.”
“We expect net general government debt to peak at 117 per cent of GDP in 2013 (partly reflecting a strong cash buffer) and to decline to 91.4 per cent by 2017. This pace of debt reduction stands out in the context of high and static public debt levels in most of the euro zone.
“Our estimate of Ireland’s gross and net general government debt includes Nama‘s obligations issued to purchase loans and other distressed assets from participating Irish banks at a discount.”
