Sunday 22 January 2017

A+ for Ireland but S&P warns of spending 'slippage' before election

Published 06/06/2015 | 02:30

Minister for Finance Michel Noonan
Minister for Finance Michel Noonan

Ratings agency Standard & Poor's has raised Ireland's long-term sovereign credit ratings to A+, from A.

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The agency said yesterday that it expected Ireland's economy to grow by 3.6pc on average between 2015 and 2018, one of the fastest in the Eurozone.

It is the third upgrade by the agency in the past year. The two other big ratings giants, Moody's and Fitch, have Ireland at Baa1 and A- respectively.

S&P said it has kept its outlook for Ireland at stable. But it warned that if the Government embarked on an "overly expansionary fiscal policy", it could be at risk of a downgrade.

"The upgrade reflects our view of Ireland's improved fiscal performance, higher state asset sales, and robust economic performance, which have combined to lead to a quicker decline in net general government debt than we had previously forecast," the agency said.

It said Ireland's economic performance had surpassed that of other countries in the Eurozone.

An improvement in the jobless numbers has helped contribute to domestic demand. It said the unemployment rate is expected to drop sharply to 7.5pc by 2017.

"Such improved labour market conditions, coupled with higher labour compensation (expected to grow by around 3pc year-on-year) and a fall in energy prices, should boost household disposable incomes and support private consumption," S&P said.

Both Finance Minister Michael Noonan and the State's debt management body, the National Treasury Management Agency (NTMA), welcomed the upgrade.

"This upgrade recognises Ireland's commitment to restoring the public finances to full health and the significant progress made to date in this regard. It is also reflective of Ireland's strong economic growth potential into the medium term," Mr Noonan, pictured below, said. NTMA director of funding and debt management Frank O'Connor said the upgrade was the third by S&P over the last year, and was part of a steady upward trend in Ireland's sovereign ratings.

"In addition to Ireland's improved fiscal and economic performance, S&P notes the lowering of borrowing costs, including the early repayment of IMF loans.

"An A+ rating will have a positive impact on investor sentiment towards Ireland and broaden the universe of buyers for Irish Government bonds."

S&P said improving economic conditions, as well as Ireland's track record of meeting its fiscal goals since it exited the bailout programme in December 2013, underpins its fiscal projections.

It said it expects the deficit to narrow to 2.8pc of GDP this year, but said it is expecting "some slippage" in government targets up until the general election next year.

The agency also predicted the State's fiscal balance will not return to a surplus until before 2019 because of spending over-runs, particularly in health.

Net debt, it said, is expected to fall to 85pc of the value of the economy by 2018.

Nama will redeem all of its senior bonds by 2018, it said, and the likelihood that the bad bank will have a surplus when it winds up exceeds the chances that it will incur a loss.

S&P said it could raise its ratings on Ireland again if the Government reaches a sustained fiscal surplus earlier than expected, or if the net general government debt, including that of Nama, were to reduce faster than projected.

"We could also raise our ratings if the banks' asset quality were to materially improve as the private sector rebuilds its balance sheet, and credit conditions start to align with ECB policy," the agency said.

The ratings would come under pressure if policy shifts undermine the growth prospects for the economy, resulting in the weakening of public or private-sector balance sheets, it added.

"Moreover, if the Irish Government embarks on an overly expansionary fiscal policy, or if the conditions for further privatisation become less favourable, resulting in Ireland's public-sector debt burden to persist at the current high level, the ratings could also come under pressure."

Irish Independent

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