Country risk: Confidence in Ireland still sagging


Jeremy Weltman
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In spite of the sovereign's successful return to the capital markets in late-July, confidence in Ireland (rated BBB+ by Fitch and S&P, but Ba1 negative by Moody’s) has continued to slip as the eurozone crisis deepens.

With its score falling to 56.7, the sovereign has dropped to 50 in ECR’s global rankings since Q2, two places below Spain, and is now nestled midway within the third of ECR’s five tiered groups.

The sovereign’s borrowing costs have fallen, but remain elevated. The yield on 10-year government bonds is hovering around 6%, similar to Italy's level, with a 560 basis point premium to the equivalent Bund.

And the economic outlook remains dangerously weak. The Organization for Economic Cooperation predicts real GDP growth of 0.6% this year, with a stronger recovery in 2013 (2.1%) despite fiscal austerity. But it will not have gone unnoticed that several of Ireland's most important export markets, including the eurozone and the UK, are enduring weak conditions.

Constantin Gurdgiev, adjunct professor at Trinity College Dublin, and one of ECR’s contributors, says: “The Irish economy can be expected to grow at around 1.25% to 1.5% per annum in real terms on average over the period 2012 to 2021, but debt sustainability requires at least a 2.7% to 3% growth range.”

Scores for all three of ECR’s contributor assessment categories (economic, political and structural) have deteriorated lately, including the bank stability and employment/unemployment indicators, which already had low scores. Ireland’s unemployment rate is expected to top 14% this year.

According to Brian Lucey, professor at the Trinity College Business School, and also one of ECR’s contributors: “The rise in unemployment is predominantly affecting construction workers with a narrower skills-set that makes it difficult for them to find new work, whereas those with language and/or IT skills are in demand.”

He goes on to state: “There are two main problems affecting Ireland: 1. A lot of debt to be refinanced, and; 2. Losses still emerging in the banks, linked to the depressed property market.”

Professor Gurdgiev further highlights several areas for concern, including:

  • Pressure on exchequer revenue from medium-term stagnation of domestic demand and credit markets;
  • A refusal to implement structural reforms to improve public expenditure;
  • Gradually diminishing non-tax revenues, including from the EU;
  • External balance adjustments due to pharmaceuticals (accounting for over 90% of the Irish goods trade surplus facing a “patent cliff”;
  • A renewal of the social partnership pact between government and the trade unions, increasing the costs of slimming down the public sector and of future public sector pensions liabilities, and;
  • Massive emigration from Ireland (official figures show 73,000 emigrating in 2011, while Australian figures show well in excess of 100,000 Irish citizens arriving there alone), reducing tax revenues.

It may be a while before Irish eyes are smiling again

This article was originally published by Euromoney Country Risk.