Moody’s raises outlook for Republic for first time since 2017

Moody's has changed its outlook for the Republic to "positive" from "stable", while also affirming its existing long-term debt rating of A2.

The change in outlook is the first to occur since September 2017, when the ratings agency upgraded Ireland to A2 from A3.

It comes after last month’s decision by DBRS Morningstar to change the trend on the State’s rating to “positive” from “stable” and an upgrade in May by Scope Ratings to AA- from A+.

The National Treasury Management Agency (NTMA), which is charged with raising money on behalf of the State, has welcomed the move. The agency expects to raise up to €20 billion in bond markets this year to cover a budget gap caused by the Government's response to the Covid-19 pandemic and potential fallout from Brexit. Favourable changes in ratings can help lower the cost of borrowing.

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“This is the latest in a series of favourable ratings actions relating to Ireland, with the rating agencies noting the resilience of the economy in addressing the exceptional challenge of the pandemic and other risks,” said Frank O’Connor, NTMA director of funding and debt management.

“The favourable trend in outlook and commentary from rating agencies is consistent with strong investor demand for Ireland’s debt over the past 12 months and continued positive feedback from our global investor base,” he added.

Challenges

Outlining the reasons for its change in outlook, analysts at Moody’s said the upgrade “reflects the strong growth and fiscal track record of the past few years, and the resilience of the economy to recent shocks including Brexit and the pandemic.”

“We expect the economic and fiscal trajectory to be resilient to lingering uncertainty surrounding the global corporate tax reform. However, challenges will remain in the form of elevated high public debt levels and a relatively high degree of economic volatility,” Moody’s said.

The economy continued to grow strongly during the pandemic, with real GDP growth of 5.9 per cent last year, after average growth of 9.8 per cent between 2014 and 2019.

Moody’s said it would consider upgrading Ireland’s A2 sovereign rating if the economy demonstrates continued resilience in the face of external risks that include international corporate tax reform.

The agency said proposed global corporate tax reforms will have a negative impact but are unlikely to derail fiscal and economic trajectory.

Debt

Moody’s expects debt to return to a downward trajectory in 2022, driven by lower deficits and strong nominal growth.

Moody’s forecasts the deficit to decline to 3.4 per cent next year and to fall below 2 per cent of GDP from 2023 onwards.

“Greater clarity that the debt burden will continue to fall steadily over the coming one to two years would also support upward pressure on the rating,” it said.

The agency added that a downgrade is unlikely but that a return to a “stable” outlook was possible if fiscal policy changed and resulted in debt stabilising at higher levels.

“Although not our core scenario, a material adverse impact of global corporate tax reform, post-Brexit trading arrangements or other external shocks on Ireland’s growth and fiscal performance over a multi-year period would also exert negative pressures on the rating,” analysts said.