Rating agency Standard & Poor’s has upgraded its assessment of Ireland’s sovereign debt, saying it expects the economy to expand at one of the fastest rates in the euro zone until 2018.
With the general election due in less than a year, S&P said the upgrade was premised on its expectation that the next government “will not deviate significantly from current fiscal targets and commitments.”
S&P has indicated it expects the Fine Gael-Labour Coalition to run its course. Its view is that the next administration is likely to take office a year from now.
The upgrade comes in spite of the fact that S&P foresees “some slippage” vis-à-vis the Government’s deficit-reduction targets until the election.
“We therefore don’t expect the fiscal balance to return to surplus before 2019 as we think expenditure overruns (especially in health care) will be recurrent,” it said.
“We also expect public-sector wage pressure to emerge after current accords lapse and public investment to pick up.”
However, S&P said Ireland’s policy and institutional effectiveness was supported by a “consensus” among most of the main political parties “in favour of sound public finances and policies aimed at promoting economic flexibility, competitiveness, and openness.”
Citing the rebound in Irish property prices, S&P expects Nama to redeem all of its senior bonds by the end of 2018. “We believe the likelihood that Nama will remit a residual gain to the government when it winds up its operations exceeds the likelihood that it will incur a shortfall,” it said.
“We note that the price rebound in the housing market hasn’t been driven by mortgage credit, though approvals for mortgage loans have started to pick up.
“We expect the constrained supply of new housing to remain a key factor behind rising house prices.
In a statement on Friday evening which it forecast average annual economic growth of 3.6 per cent between 2015 and 2018, S&P said it foresees a narrowing deficit, higher state asset sales and further redemptions of Nama senior bonds. This will bring net general government debt below 100 per cent of GDP by the end of this year, it said.
"We are therefore raising our long-term sovereign credit ratings on Ireland to 'A+' from 'A'.
The outlook is stable,” said S&P.
The upgrade was welcomed by Minister for Finance Michael Noonan, who said it
recognised 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 said.
Although Irish borrowing costs have risen in recent from record low levels amid volatility in international debt markets, rating upgrades such as the action by S&P mark a boost for the Government as it still needs to borrow to fund the budget deficit.
S&P, which said Ireland is taking a big benefit from the reduction in the euro’s value against the dollar, said it expects the unemployment rate to “fall sharply” to 7.5 per cent in 2017 from the present rate of 9.8 per cent.
“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,” said S&P.
“Ireland’s economic performance has surpassed that of most euro zone countries, with real GDP growth reaching 4.8 per cent in 2014, compared to an average of 0.9 per cent for the euro zone.
“The domestic economy, measured by gross national product, has expanded at a faster pace than GDP (which includes accounting effects from Ireland’s large multinational sector) for three straight years.
“We expect Ireland’s recovery to remain steady with real GDP growth of 3.6 per cent over 2015-2018. Much of the strong growth in the past few years has stemmed from the economy rebounding from a deep financial crisis.
“Net exports contributed to two-thirds of Ireland’s economic growth in 2014, primarily in aspects of the services sector such as information and communications technology and business services. Ireland has notably benefitted from the economic recovery of some of its key trading partners such as the UK and US, which we expect to continue over the forecast period.
