Fitch Revises Outlook on Ireland to Stable; Affirms at 'BBB+'
November 15, 2012 Fitch Ratings
Fitch Ratings-London-14 November 2012: Fitch Ratings has revised the Outlooks on the Republic of Ireland's (Ireland) ratings to Stable from Negative. At the same time, the agency has affirmed the Long-Term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB+'. Ireland's Country Ceiling has been affirmed at 'AAA' and Short-term foreign currency IDR at 'F2'.
The ratings of guaranteed issuance by National Asset Management Ltd (NAMA) have also been affirmed at 'BBB+' and 'F2', in line with the sovereign ratings.
The affirmation and revision of the Outlooks to Stable from Negative reflects Ireland's continued progress with its fiscal consolidation, external adjustment and economic recovery, as well as the sovereign's improved financing options. Fitch judges that the risks surrounding the adjustment path have narrowed and become more balanced, reflecting the following factors.
Fiscal consolidation remains on track, broadly in line with the original trajectory of the EU-IMF programme, which envisaged a 120% debt/GDP ratio in 2012, peaking in 2013-14 before declining. So far, Ireland has met all the quarterly fiscal targets of the programme. Fitch expects the 2012 deficit to be close to the target of 8.6% of GDP, implying a primary deficit of 4.5%, despite some expenditure overruns. More fundamentally, fiscal policy has so far successfully managed to meet the fiscal targets without excessive adverse impact on economic growth in 2011-2012. Nevertheless, significant further adjustment is needed to bring the deficit below 3% by 2015 as required under the EU-IMF programme and the Excessive Deficit Procedure.
A strong improvement in competitiveness is supporting a substantial contribution of net exports to GDP growth and a further improvement in Ireland's current account surplus, which Fitch forecasts at 2.4% of GDP in 2012.
Although Fitch forecasts GDP growth at 0% in 2012, down from 1.4% in 2011, this would still be better than the eurozone average, which Fitch forecasts at -0.5%, and significantly better than other so-called peripheral eurozone countries, highlighting Ireland's progress towards returning to economic growth.
In addition, Ireland has made significant further progress in returning to market financing, issuing five- and eight-year bonds in August and September at lower yields.
However, Ireland's rating remains constrained and faces downside risks from its high public and private debt levels, persistent vulnerabilities in the financial sector and its sensitivity to external demand and financial conditions.
The combination of the recent economic slowdown and adverse financing conditions has increased some vulnerabilities in the financial sector. The mortgage portfolio is a particular source of concern as NPLs are still rising and house prices have shown only tentative signs of stabilisation in 2012, with downside risk persisting, while transaction numbers remain low in the housing market. Consequently, the quality of bank loan portfolios has likely deteriorated close to the stress scenario of the 2011 prudential capital assessment review (PCAR).
Nevertheless average core Tier 1 capital ratio was 16.5% in Q112 and household and corporate deposits have stabilised, despite the recent downward trend in deposit rates, as the banks attempt to improve their weak profitability. Deleveraging of the system has also progressed broadly in line with the EU-IMF programme targets.
RATING OUTLOOK - STABLE
The main factors that could lead to negative rating action are:
- A re-intensification of the eurozone crisis could hinder the return to market financing and adversely affect Irish exports and GDP growth, with a knock-on effect on public debt dynamics
- Material divergence from the fiscal consolidation path, resulting in a significantly higher debt ratio
- Additional recapitalisation needs of the banking sector by the Irish sovereign
The main factors that could lead to positive rating action are:
- A smooth and full return to market financing, robust economic growth and fiscal performance in line with Fitch's forecasts, in particular a declining debt ratio over the medium term
- A substantial cut in the public debt through an EU agreement to share the burden on legacy costs of bank recapitalisation, although this is not Fitch's expectation
KEY ASSUMPTIONS AND SENSITIVITIES
Ireland's growth prospects are sensitive to conditions in its main trading partners. Fitch's macroeconomic forecast of flat GDP in 2012 followed by the resumption of an export-driven recovery from mid-2013 is based on the assumption that the recession in the eurozone, Ireland's major trading partner, proves to be shallow and short, followed by modest economic growth. The agency expects GDP growth in Ireland to reach 2% from 2014 as the drag on domestic demand stemming from the private sector deleveraging fades. Nevertheless, unemployment is expected to remain above 13% until 2014, declining only modestly from its current level of 15%.
Fitch's projections of government deficits and debt are based on the assumption of budget consolidation remaining consistent with the EU-IMF programme and especially meeting the 7.5% deficit target for 2013. While the lack of details on the 2013 fiscal measures creates some uncertainty regarding the budget outcome, the strong political support behind the multi-year fiscal consolidation plan and the broader public acceptance of its necessity are considered to be key factors for the adjustment process.
Fitch further assumes that Ireland regains full market access by the end of 2013, in line with its EU-IMF programme.
Despite downside risks in the banking sector, Fitch assumes that the capital buffer built up on top of the PCAR stress scenario means that the sovereign will not need to provide additional resources to recapitalise the banking sector.
The rating does not incorporate any mutualisation of the legacy bank recapitalisation costs by eurozone institutions. The timing and extent of any deal remains highly uncertain even almost five months after the June Summit.
Furthermore, Fitch assumes there will be progress in deepening fiscal and financial integration at the eurozone level in line with commitments by euro area policy makers. It also assumes that the risk of fragmentation of the eurozone remains low and is not incorporated into Fitch's current rating of Ireland, although Fitch's 'CCC' rating of Greece reflects a material risk of a Greek exit from the eurozone over the next few years.
Company — Ireland
Full nameThe Republic of Ireland