An exacerbation of the Covid-19 health crisis could see Ireland’s sovereign rating downgraded, while a no-deal Brexit is another significant risk event which could affect the country’s ability to borrow, DBRS Morningstar said .
On Monday, the ratings agency affirmed Irelands sovereign rating at A (high), stable trend, noting that Ireland’s ratings are underpinned by the “country’s institutional strength, robust trade and investment flows, flexible labour market, young and educated workforce, and its access to the European market”.
It noted that Ireland, from an economic perspective, has thus far weathered the crisis better than some, with real GDP declining by just 3.7 per cent in the second quarter, pitching it among the better performers among advanced countries.
However, it warned Ireland would be at risk of a downgrade should the current Covid-19 health crisis, or a no-deal Brexit, cause “substantial deterioration” in Ireland’s medium-term economic outlook. Another risk is if the country experiences a more permanent relaxation of fiscal discipline that significantly weakens its public debt position.
Banks will also be hit by the current crisis, with DBRS Morningstar warning that, notwithstanding ECB liquidity support measures and loan payment break programmes offered by the Government, the Covid-19 shock will weaken banking sector asset quality.
The ratings agency also warned that a possible alignment of specific tax rates across Europe could challenge Ireland’s growth model and create an unpredictable environment for multinationals in Ireland.
“Significant shifts in tax rates could result in a reduction in future investment flows into Ireland,” it said.
If multinationals decide to re-shore activity, shift operations, move intangible assets, or book profits outside of Ireland, this will also hit Ireland’s tax base. However, DBRS Morningstar said at present, it sees “little incentive for large international corporates to leave Ireland”.
Upgrade
On the other side, the ratings agency noted that the country could be upgraded if it sees evidence of “enhanced resiliency” of the Irish economy to external developments; or if its assessment of debt sustainability improves to more moderate levels on the back of sound fiscal management.
