TEXT- S&P affirms Ireland's ratings
Overview -- In our view, the Irish government has made strong progress in stabilizing its fiscal position, although risks associated with its high deficits and debt burden, and the challenge of complying with the EU/IMF fiscal adjustment program, still persist. -- We consider that the economic outlook for Ireland is also improving, although we see significant downside risks given its reliance on exports for its recovery. -- We are therefore affirming the 'BBB+' long-term and 'A-2' short-term sovereign credit ratings on Ireland. -- The negative outlook reflects our view of prevailing downside risks to financial sector stability and the government's balance sheet given high net public borrowing needs, and uncertain growth prospects for the domestic economy. Rating Action On Jan. 11, 2013, Standard & Poor's Ratings Services affirmed its 'BBB+' long-term and 'A-2' short-term local and foreign currency sovereign credit ratings on the Republic of Ireland. The outlook is negative. The Transfer & Convertibility (T&C) assessment for Ireland remains at 'AAA'. Rationale The affirmation reflects our view of the government's commitment to stabilizing Ireland's public finances, as well as the high wealth, openness, and resilience of the Irish economy. These strengths are moderated, however, by Ireland's still-substantial fiscal deficits, heavy public and private debt burdens, and its weak financial system that collectively undermine growth prospects as well as its capacity to respond to large economic and financial shocks. Ireland has a wealthy economy, with GDP per capita estimated at $45,000 in 2012. We consider that the economy is showing signs of a modest recovery, led by improving exports (such as pharmaceuticals and information and communication technology) that have been supported by competitiveness gains (particularly through lower labor costs and labor shedding relative to other eurozone countries) in recent years. Household and private sector sentiment and spending remain weak, in our view, with domestic demand as of end-2012 down an estimated 25% versus 2007. We believe that fiscal consolidation, private sector deleveraging, and weak investment, labor, and property markets will continue to weigh on Ireland's growth prospects. After three successive years of contraction, Ireland's economy returned to positive GDP growth of 1.4% in 2011 and an estimated 0.4% in 2012 (albeit in per capita GDP terms, growth continued to contract by an estimated -0.8% and -1.8%, respectively). We expect GDP to increase to 1.2% in 2013 and to average 2.5% over 2014-2016, though the outlook for GNP is more uncertain. While we expect Ireland's economy to benefit from its openness and flexibility, we continue to see considerable downside risks surrounding the sustainability of recoveries in its key trading partners. The steep fiscal deficits and consequent increase in Ireland's debt burden associated with the global recession and support for its distressed banks have been more pronounced than for peers, and could, in our view, persist for longer given the risks to Ireland's economic growth. We forecast that the general government deficit will fall close to the government's target of -7.5% of GDP in 2013, from -8.4% in 2012 (excluding support for the financial sector). At the same time, our forecasts for government gross debt largely match the official projections. However, consolidating the government's National Asset Management Agency (NAMA; BBB+/Negative/A-2) debt obligations, we project Ireland's net debt burden to peak at a high 120% of GDP in 2013 (about 106% excluding NAMA obligations). While we assess Ireland's public finances as weak, we note that the government has made substantial progress in its fiscal consolidation measures in recent years. Excluding government-funded banking sector recapitalization payments, we estimate that the government will have adjusted its fiscal position by about EUR25 billion (16% of estimated 2012 GDP) over 2008-2012 and will deliver additional fiscal savings of EUR8.6 billion (5% of GDP) over 2013-2015. We expect general government debt to fall to around 109.8% of GDP by 2016 as the deficit shrinks to about 3% of GDP over this period. We believe the high net external debt carried by Ireland's public sector (illustrated by the ratio of gross external debt less liquid external assets to current account receipts averaging 234.2% over 2013-2016) make the government's balance sheet vulnerable to a deterioration in external financing conditions. That said, there has also been progress in this area in 2012. The Irish electorate's vote on May 31, 2012, to amend the constitution to allow the government to ratify the Treaty on Stability, Coordination, and Governance in the EU enables access to Europe's EUR500 billion permanent financial support mechanism (the European Stability Mechanism (ESM)) once the current EU/IMF (EUR67.5 billion, 42% of GDP) program ends in 2013. We also observe early indications of a return to private financing through the issuance of treasury bills and longer-term bonds in 2012 and January 2013 that were mainly purchased by foreign investors. We estimate Ireland's gross borrowing requirement for 2013 to be EUR26.5 billion, to be funded through market financing (EUR16.1 billion in gross issuance, including rollovers), cash drawdowns (EUR1.3 billion), and through official program support (European Financial Stabilisation Mechanism/European Financial Stability Facility: EUR6.4 billion; Bilateral EU EUR1.8 billion; and IMF EUR3.5 billion). A return to health of Ireland's banks is another precursor to an improvement in its growth prospects and the sustainability of the government's medium-term debt dynamics. We observe that the banks have significantly downsized--a process that is ongoing--and are well capitalized on a regulatory basis, but that by our measures capitalization is a relative weakness and we expect the banks will remain loss making in 2013. We consider that the banks have ongoing multiple revenue pressures, cost bases that need realigning, and impairment charges that will remain elevated. Ireland's central bank emergency liquidity arrangement was a high EUR40.7 billion in November 2012. Severe negative equity in domestic residential mortgage portfolios will also likely hamper a fuller recovery by Ireland's banks and thus their fuller role in buttressing Ireland's medium-term growth outlook and credit quality (see "Banking Industry Country Risk Assessment Update: December 2012," published Dec. 5, 2012, and "Banking Industry Country Risk Assessment: Ireland," published July 25, 2012). Outlook The negative outlook reflects our view of prevailing downside risks to financial sector stability and the government's balance sheet given high net public borrowing needs, and uncertain growth prospects for the domestic economy. We could lower the ratings if the government under-executes the EU/IMF program, which, in our opinion, would likely reverse the government's progress in regaining market access and complicate its negotiations for what would then be a required successor program. A downgrade could also accompany impaired market access in meeting 2013 funding requirements, or weaker growth amid financial disintermediation across Europe. The latter could occur if there is delay or reversal in eurozone fiscal and banking integration. Conversely, the ratings could stabilize at the current level if the government were able to sell its sizable equity position in the domestic banking system to the ESM or to the nonresident private sector, enabling authorities to pay down general government debt to levels below 100% of GDP. The injection of nondomestic capital support into the distressed Irish financial sector would, in our opinion, place banks in a stronger position to fund GNP, enabling the labor market to improve--a development that we consider would likely reduce arrears on residential mortgages, fostering a more sustained recovery of intermediation and the domestic economy. A further rating positive would be restructuring relief for government interest payments in respect of the Irish Bank Resolution Corporation (IBRC) promissory notes. The 2013 fiscal deficit estimate assumes a EUR3.06 billion cash payment in respect of the next instalment of the IBRC note. Related Criteria And Research -- Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009 -- Sovereign Government Rating Methodology And Assumptions, June 30, 2011 -- The Eurozone Debt Crisis: 2013 Could Be A Watershed Year, Jan. 9, 2013 -- Sovereign Rating and Country T&C Assessment Histories, Jan. 4, 2013 -- The Eurozone Enters An Uncertain 2013 As The New Recession Drags On, Dec. 13, 2012 -- Banking Industry Country Risk Assessment Update: December 2012, Dec. 5, 2012 -- Buffeted By Recession, The Gap Between Western Europe's Core And Peripheral Banking Systems Widens, Oct. 4, 2012 -- The Eurozone's New Recession-Confirmed, Sept. 25, 2012 -- The European Central Bank's Policy Initiatives Could Benefit Some Sovereigns, But Implementation Risks Remain, Sept. 7, 2012 -- Financial Repression Would Hurt The Highest-Rated Sovereigns, But Help Those At The Bottom, Aug. 30, 2012 -- Ireland Ratings Affirmed At 'BBB+/A-2'; Outlook Remains Negative, Aug. 2, 2012 -- Banking Industry Country Risk Assessment: Ireland, July 25, 2012 -- Ratings On Ireland Affirmed At 'BBB+/A-2' On Crisis Response; Outlook Remains Negative, April 26, 2012 -- No Fast Lane Out Of Europe's Recession, April 4, 2012 -- Ireland's 'BBB+/A-2' Ratings Affirmed; Off Watch Neg; Outlook Negative, Jan. 13, 2012 Ratings List Ratings Affirmed Ireland (Republic of) National Asset Management Agency Sovereign Credit Rating BBB+/Negative/A-2 Ireland (Republic of) Transfer & Convertibility Assessment Local Currency AAA Ireland (Republic of) Senior Unsecured BBB+ Short-Term Debt A-2 Commercial Paper A-2 Certificate Of Deposit Local Currency A-2 Housing Finance Agency PLC Commercial Paper* A-2 National Asset Management Ltd. Short-Term Debt* A-2 Commercial Paper* A-2 *Guaranteed by Ireland (Republic of).
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