Country risk: Why Moody’s is wrong on Ireland

By:
Jeremy Weltman
Published on:

Ireland’s triple-B rating is out of line with its improving ranking in Euromoney’s country risk survey. Even Fitch and S&P might need to take action if the trend continues.

IFSC-531
The International Financial Services Centre in Dublin – said to be 'one of the leading hedge
fund service centres in Europe'


Ireland moved back into the second of ECR’s five tiered categories in the third quarter of 2015, synonymous with an A- to AA credit rating.

The country climbed to 34th out of 186 countries surveyed, sliding between Oman and Saudi Arabia in the global rankings.

On 64.7 points from a maximum 100 in the survey, Ireland’s risk score is presently around seven points higher than both Spain and Italy, which are tier-three sovereigns lying 46th and 47th respectively.

 

The 51 basis points five-year CDS spread pricing in the cost of insuring against Irish default is presently half that of Spain’s and a third of Portugal’s.

Ireland is moreover two places higher in the survey than Lithuania, rated A3 by Moody’s, performing much better on political and structural risk factors and rapidly narrowing the gap where its economics is concerned.

Its capital access score is also far superior.

"Based on headline figures and underlying trends in the economy, Ireland is long overdue another upgrade in credit ratings to bring its risk valuations closer in line with core euro area sovereigns," says Constantin Gurdgiev, adjunct professor at Trinity College Dublin.

Tiger economy

Ireland’s recovery is nothing short of miraculous. Weighed down by a crippling banking crisis, the collapse of the real estate market, and forced to go cap in hand to multilateral creditors for an emergency bailout, the country's prospects nosedived along with the rest of the eurozone periphery in the wake of the 2008 global crisis.

Very strong economic activity during the first half of this year means forecasters are upgrading their prognoses of 3% to 4% real GDP growth, to 6% or more, which is unprecedented for such an advanced, industrialized country.

Unusually high contracted pharmaceutical exports have exaggerated the upturn, but exports generally are benefiting from the more competitive euro exchange rate.

Private consumption, driven by low energy prices, employment growth and tax cuts is buoyant, as balance-sheet readjustment lowers personal debt.

Foreign direct investment is soaring, notably from US companies attracted to Ireland as an entry point into the eurozone.

More than 700 US companies are active in Ireland, employing more than 140,000 workers, and supporting an extensive local supplier network.

Fiscal improvement

GDP is now almost 6% above its pre-recession peak, the unemployment rate is slowly falling and ECR experts have upgraded all five economic risk factors since last year.

The upshot is a fiscal deficit that is improving at a more rapid pace than expected as tax revenue soars.

The general government deficit (EU measure) is on course to come in at 2.3% of GDP this year, compared with 4% in 2014 according to the IMF.

But those forecasts are a little dated. Corporate tax receipts rose 45% year on year during the first nine months of this year (value-added tax receipts by 8%), and many experts believe the deficit will be closer to 1.5% in spite of a small giveaway pre-election budget to support the economy.

"Ireland’s funding outlook remains strongly positive," says Peter Coary, an economist at Depfa Bank.

Gross debt, which peaked at 120% in 2013, falling to 107.6% last year, will continue to slide, to just below 100% by 2016. Debt-servicing costs have fallen thanks to refinancing of IMF loans and the erosion of debt will be larger if the government moves ahead with the privatization of a 25% shareholding in the failed lender AIB.

The public finances are benefiting from economic growth and the speedy wind-down of the National Asset Management Agency, the bad bank repository established in 2009, which is expected to create a €1 billion profit.

Political tail-risk

An election due by April 2016 is still generating some uncertainty given that there is such a split in the voting preferences following the rise in popularity of independents and minor parties.

Enda Kenny’s Fine Gael is leading in the opinion polls, but the question is whether it will be able to form a majority in the slimmed-down 158-member legislature, even with its junior coalition partner, the Labour Party.

Coary believes it will. "Waiting until 2016 to hold the elections is a positive and increases the chance of re-election for the coalition," he says, also citing the economic improvement.

This article was originally published by ECR. To find out more, register for a free trial at  Euromoney Country Risk.