December 15, 2017 / 9:11 PM / a month ago

Fitch Upgrades Ireland to 'A+'; Outlook Stable

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Ireland - Rating Action Report here LONDON, December 15 (Fitch) Fitch Ratings has upgraded Ireland's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'A+' from 'A'. The Outlook is Stable. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS The upgrade of Ireland's ratings reflects the following key rating drivers and their relative weights: High Fitch believes the health of the banking sector is improving, reducing risks to the Irish sovereign and economy. The ratio of non-performing loans (NPL) has fallen to 11.9% in 2Q17 from a peak of 25.7% in 2Q13. Banks' regulatory tier 1 capital ratio increased to 25.3% in 2Q17, from 23.7% in 2Q16. Reflecting these trends, Fitch recently upgraded the ratings of Bank of Ireland Group plc (to BBB/F2/bbb from BBB-/F3/bbb-) and Allied Irish Banks, plc (AIB; to BBB-/F3/bbb- from BB+/B/bb+), which together account for around two-thirds of banking sector assets. Ireland's household debt-to-income ratio is declining and reached 141.6% in 2Q17, but remains the fourth-highest in the EU. Rising house prices have cut the proportion of residential mortgages in negative equity to 11.8% in 1Q17 from a peak of 39% at end-2012. Moreover, the National Asset management Agency (NAMA), the 'bad bank' set up to address the problems in the banking and real estate sectors arising from the financial crisis, recently repaid its remaining senior guaranteed debt ahead of schedule, removing the associated contingent liability for the sovereign, which had stood at EUR43.2 billion in 2011. Medium Fitch forecasts the general government debt-to-GDP ratio to fall to 65.8% by 2019, from 72.8% at end-2016 (1.1 percentage points of which is due to the sale of part of the state's stake in AIB). However, Ireland's debt ratio remains well above both the 'A' median of 47.7% and 'AA' median of 42.3%. Government debt as a share of revenue is also substantially higher than most peers (265% forecast at year-end, compared with 141% and 159% for 'A' and 'AA' medians respectively). Fitch expects the general government deficit to shrink to 0.4% of GDP in 2017 from 0.7% in 2016, as 5.2% growth in current tax revenue (on an annual basis in the year to November) outpaces a 3.8% increase in public spending. The 2018 budget introduces net tax rises, including stamp duty for commercial property, worth around 0.3% of GDP. We expect the deficit to narrow to 0.2% in 2018 and a balanced budget to be achieved in 2019. Financing costs for the public debt stock have fallen, with interest payments as a share of GDP forecast to decline to 1.9% this year from a peak of 4.3% in 2013. Ireland's planned early repayment of its outstanding loans to the IMF (and some bilateral loans) amounting overall to around EUR5.5 billion will lower interest costs slightly further. Ireland's IDRs also reflect the following key rating drivers:- Ireland's sovereign ratings are supported by strong institutions and a wealthy, flexible economy, with among the highest per capita income in the 'A' category. These factors are balanced by still elevated levels of public and private debt, external vulnerabilities and downside risks, such as the potential impact of Brexit and shifts in global policies on corporate taxation. Headline GDP and national accounts have been distorted since 2015 by the impact of the activities of multinational enterprises (MNEs), with the level of GDP boosted substantially by activities often unrelated to economic activity in Ireland. This has the effect of flattering various credit indicators such as debt/GDP and GDP per capita. Real GDP rose 5.5% on an annual basis in 1H17. Investment and trade data are particularly volatile due to MNE activities. On the basis of data up to 2Q, we estimate real GDP growth for this year of 5%. Early estimates for 3Q point to stronger GDP growth. We expect growth to slow to 3.8% in 2018 and 3% in 2019. Unemployment fell to 6.1% in November 2017 from 7.4% in December 2016. The uncertainty surrounding the UK/EU negotiations over Brexit and the future trade relationship between the EU and the UK is a risk to growth prospects over the medium-term. In Fitch's view, the agreement between the EU and the UK of Friday 8 December is a step towards a potential agreement but the process remains challenging, and the future status of the border between the Republic of Ireland and Northern Ireland remains uncertain. Another downside risk is related to potential changes in international corporate tax policies. Ireland has been a favoured destination of foreign direct investment (FDI) by MNEs over the past 20 years but faces a risk of smaller inflows or reversals if corporate tax incentives change radically. At end-2016, the stock of FDI in Ireland was just under EUR800 billion (around 3x GDP), around 30% of which was accounted for by US companies. Proposed US tax reforms in Congress do not include a border adjustment tax, which could have a large negative effect on Ireland, but lower corporate tax rates may make US firms less likely to locate activities abroad. We expect the current account surplus to average 2.7% of GDP over 2017-19. Net external debt (excluding internationally-traded financial service activities) remains higher than peers, and is expected to be 41% of GDP at end-2017 (compared with 6% for the 'A' median and -32% for the 'AA' median). SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Ireland a score equivalent to a rating of 'AA' on the Long-Term Foreign-Currency (LT FC) IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term FC IDR by applying its QO, relative to rated peers, as follows: - Public Finances: -1 notch, to reflect still highs levels of government indebtedness. MNE activities flatter the level of GDP and therefore credit metrics such as the government debt-to- GDP ratio. Government debt as a share of revenue is much higher than the peer median. - External Finances: -1 notch, to reflect the country's relatively high net external debt stocks, and potential vulnerability to external shocks, such as the impact of Brexit and potential changes in international corporate taxation. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The following factors may, individually or collectively, result in positive rating action: -A continued reduction in government indebtedness; and -A continued reduction in external indebtedness and evidence that the economy is resilient to the impact of Brexit and potential shifts in international corporate taxation rules. The following factors may, individually or collectively, result in negative rating action: -Reversal of the downward trend in government indebtedness; -Weaker economic performance, for example triggered by external shocks; and -Adverse developments in the banking sector affecting the sector's asset quality and capitalisation. KEY ASSUMPTIONS In its debt sensitivity analysis, Fitch assumes on average, over the next 10 years, real GDP growth of 2.8%, GDP deflator inflation of 2%, a primary balance falling towards 1% of GDP and averaging 1.3%, and an average effective interest rate of 2.3%. On the basis of these assumptions, the general government debt-to-GDP ratio is projected to decline to 49% by 2026. The full list of rating actions is as follows: Long-Term Foreign- and Local Currency IDRs upgraded to 'A+' from 'A'; Outlook Stable Short-Term Foreign- and Local-Currency IDR upgraded to 'F1+' from 'F1' Country Ceiling affirmed at 'AAA' Issue ratings on long-term senior unsecured local-currency bonds upgraded to 'A+' from 'A' Issue ratings on short-term senior unsecured local-currency bonds upgraded to 'F1+' from 'F1' Issue ratings on commercial paper issues upgraded to 'F1+' from 'F1' Issue rating on NAMA-guaranteed issuance: 'F1' withdrawn on early repayment. Contact: Primary Analyst Alex Muscatelli Director +44 20 3530 1695 Fitch Ratings Ltd 30 North Colonnade London E14 5GN Secondary Analyst Marina Stefani Associate Director +44 20 3530 1809 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings Criteria (pub. 21 Jul 2017) here Sovereign Rating Criteria (pub. 21 Jul 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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