Global debt rating agency Moody’s Investors Service has affirmed the Government of Ireland’s long-term issuer rating of A2 and changed the outlook to positive from stable.
Ireland’s senior unsecured bond, MTN (medium-term note) programme and commercial paper ratings have also been affirmed at A2, (P)A2 and Prime-1, respectively.
Moody’s said the key drivers behind the positive outlook on the A2 ratings are “the resilience of the Irish economy to shocks, and Moody’s expectations that developments with regard to Brexit, global corporate income tax reform, or the pandemic will not derail economic progress … and Moody’s expectations that the government will remain committed to reducing debt …”
Concurrently, Moody’s also affirmed the Irish National Asset Management Agency’s (NAMA) A2 backed long-term issuer rating and Prime-1 backed short-term issuer ratings and backed commercial paper Prime-1 ratings.
“NAMA’s ratings are aligned with those of the Irish sovereign, as Moody’s views NAMA as a vehicle of public policy that is indistinguishable from the Irish government,” said the debt rating agency.
“Moody’s considers that the willingness of the Irish government to back NAMA’s obligations is no lower than its commitment to service its own sovereign bonds.
“The outlook on the ratings has also been changed to positive from stable.
“Ireland’s long-term local and foreign-currency bond and deposit ceilings remain unchanged at Aaa.
“The short-term foreign currency bond and deposit ceilings are also unaffected by this rating action and remain at P-1.”
Moody’s added: “Being a small and open economy exposes Ireland to shocks.
“However, the Irish economy has successfully weathered several shocks in recent years, including Brexit and the pandemic.
“While there is still lingering uncertainty over these issues, as well as global corporate tax reform, Moody’s view is that the Irish economy remains well-positioned to absorb any negative credit implications associated with these challenges.
“Irish GDP continued to record strong growth during the pandemic.
“Real GDP growth came in at 5.9% in 2020 despite the pandemic shock, after average growth of 9.8% in 2014-19.
“While multinational corporations underpinned the strong growth in activity, Moody’s believes that it also reflects the attractiveness of some key sectors dominated by multinational corporations.
“In particular, the resilience of the pharmaceutical, medical and technology sectors, which are dominated by foreign-owned multinational corporations, throughout the pandemic underpinned the strong growth in exports.
“Modified final domestic demand, which better captures domestic activity, declined by 4.7% in 2020.
“Given the severe pandemic-related restrictions in place in the country, the severity of the contraction is not disproportionate compared to peers.
“Moody’s views the support measures introduced by the authorities as being effective in protecting the supply side of the economy and in mitigating the impact of the shock on households’ income.
“While Brexit will continue to have negative implications for some Irish entities — particularly in the agricultural sector — over the next few years, Moody’s believes that Ireland’s credit profile has also been and will remain resilient to this shock, though implementation of permanent trade agreements will likely result in short-term trade frictions and force Irish exporters to re-organise their supply chains (and may actually discourage some producers from exporting).
“It could also have negative repercussions on employment in some sectors such as agriculture and agri-processing.
“Ireland will receive around €1 billion in capital receipts from the European Union (EU, Aaa stable) as part of the Brexit Adjustment Reserve to support affected companies, especially in agriculture-related sectors, and to encourage reskilling of affected workers.
“Consequently, Moody’s view remains that the economy’s fundamentals will not be materially affected.
“Looking ahead, global corporation tax reform is among the main risks facing Ireland’s credit profile.
“Although Ireland has so far opposed this agreement, Moody’s believes that Ireland will eventually join whatever agreement is finally struck.
“While this will likely have some impact on future tax revenues and could deter some foreign investors from making future investments, Moody’s does not believe that it will have a large long-term negative impact on the public finances and the strength of the economy.
“The government has estimated that as a result of the global tax initiative, corporate tax receipts could be €2 billion lower over the medium term.
“This revenue shortfall is already incorporated in the authorities’ fiscal projections, and it is included in Moody’s forecasts.
“Once the details of the agreement are known, this estimate could be revised upward.
“Risks associated with the global tax reform are exacerbated by the concentration of corporate tax receipts in the country, with ten companies accounting for 51% of net receipts in 2020.
“Foreign-owned multinational corporations accounted for 82% of net receipts in 2020.
“In addition to the impact on revenue, a reduced presence of multinational corporations and lower FDI flows in the country could also weigh on Ireland’s economic strength.
“Moody’s baseline scenario is that Ireland will manage these revenue shortfalls, and that the reform will not affect the presence of multinational corporations already present in the country.
“Many multinationals have long-established businesses in Ireland and will likely continue to use the country as their base for exports to European and other markets.
“Beyond its attractive tax rate, the Irish economy also benefits from several assets, including its highly skilled, English-speaking and flexible labour force, and easy access to European markets.
“Ireland’s status as a preferred destination for US (United States of America, Aaa stable) multinational corporations in Europe also stems from its relative proximity to the US and a smaller time difference compared with most other parts of Western Europe.
“Ireland’s capacity to manage other shocks in the recent past provides additional comfort over the authorities’ capacities to mitigate the impact of the reform …”