August 15, 2014 / 8:10 PM / 3 years ago

Fitch Upgrades Ireland to 'A-'; Outlook Stable

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Ireland - Rating Action Report here LONDON, August 15 (Fitch) Fitch Ratings has upgraded Ireland's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'A-' from 'BBB+'. The Outlooks are Stable. The issue ratings on Ireland's senior unsecured foreign and local currency bonds have also been upgraded to 'A-'. The Short-term foreign currency IDR has been upgraded to 'F1' from 'F2' and the Country Ceiling raised to 'AAA' from 'AA+'. The rating of National Asset Management Ltd's (NAMA) guaranteed issuance has also been upgraded to 'F1' from 'F2', in line with the sovereign rating. KEY RATING DRIVERS The upgrade of Ireland's IDRs reflects the following key rating drivers and their relative weights: Medium The Irish government has continued its multi-year fiscal consolidation programme following the exit from the Troika programme at the end of 2013 and remains compliant with domestic and eurozone fiscal rules. Fitch forecasts the 2014 general government deficit to be below the 4.8% of GDP target and expects a small primary surplus compared with a primary deficit peak of more than 9% of GDP in 2009. We believe Ireland's gross general government debt (GGGD) to GDP ratio peaked in 2013 at 123%, albeit after an increase of 100pp since 2007 to a level among the highest of Fitch-rated sovereigns. Market financing conditions have steadily improved over the past two years since Ireland returned to the markets. The yield curve has declined significantly and Irish yields are close to historical lows. The cash buffer remained high in 1H14 (EUR21bn in July 2014, equivalent to 12% of GDP) and the 2015-16 redemption profile has been successfully smoothed in recent months. Ireland's reserve currency flexibility score has been increased to '1' from '0' in Fitch's Sovereign Rating Model in light of its track record of favourable market access since the end of the Troika programme. The employment-led recovery of the Irish economy gained momentum in 1Q14 and Fitch forecasts GDP growth of 2.2% this year and 2% in 2015-16. Unemployment continued to decline in 1H14 and reached 11.5% in July 2014, in line with the 11.5% eurozone average, from a peak of 15% in early 2012. The improving labour market conditions have positive spill-over effects for heavily indebted households, the housing market and public finances. Ireland also benefits from the strengthening recovery of its major trading partners, especially the UK, reflected in exports growth accelerating to 7.4% in 1Q14. External debt sustainability has improved over the past years driven by the widening current account surpluses, reaching 4.4% of GDP in 2013. Net external debt has declined from its 2009 peak of 105% of GDP to 75% in 2013 and Fitch forecasts the current account surplus to remain around the 2013 level during 2014-16. Vulnerabilities in the banking sector have declined. Fitch upgraded the Viability Ratings of Ireland's two largest banks, Bank of Ireland (bb-) and Allied Irish Bank (b+), in July 2014 as they have managed to improve capital flexibility and return to profitability in 2014. Non-performing loans peaked in 2013, albeit at a high level, and house prices have started to increase, while exposure to real estate remains high. Ireland's 'A-' IDRs also reflect the following key rating factors: The composition of growth will become more balanced as domestic demand turns positive driven by private consumption and investment. Fitch maintains its view that the medium-term growth potential of the Irish economy is around 2%. Fitch's baseline forecast is that inflation will remain low until 2016, but deflation risks are material. Very low inflation, and especially deflation, increases the real debt burden for indebted domestic sectors and thus acts as a persistent drag on the recovery. The increase in the price level since 2005 is 8pp lower in Ireland than the eurozone average and 10pp below the trend determined by the ECB's 2% target. The new ESA 2010 methodology for national accounts, already adopted by the Irish National Statistics Office, has two major effects for macroeconomic and fiscal indicators. The level of GDP is higher by 6.7pp in 2013 (EUR11bn), due primarily to higher R&D. Reclassification of the public sector, including Irish Bank Resolution Corporation's (IBRC) balance sheet as a defeasance vehicle, increased GGGD by EUR12.6bn in 2013. As IBRC's balance sheet is winding down, its impact on GGGD is declining, thus the net effect of GGGD/GDP ratio for 2014 will be broadly neutral. To maintain consistency of peer comparison, Fitch will switch to the ESA2010 methodology after all EU members states publish the new time series by September 2014. Fitch forecasts a GGGD/GDP ratio declining close to 110% by 2019 based on the assumption of a 2% primary surplus from 2015 onwards and no decline in the sovereign's cash buffers or recovery from previous financial sector interventions. Ensuring a declining debt path requires a substantial primary surplus given the combination of high debt and the subdued expected nominal growth of the economy over the medium term. The outstanding senior bonds of NAMA, a contingent liability to the sovereign, were equal to EUR22.7bn (13% of GDP) at the end-2013. NAMA has met its 2013 debt redemption target (EUR7.5bn) and expects senior bond redemptions to reach EUR15bn by the end of 2014. Ireland has retained many of its structural strengths throughout the crisis. It is a wealthy, flexible economy, its per capita gross national income is USD35,100 in purchasing power parity terms, well above the 'A' median of USD23,300. RATING SENSITIVITIES The Outlook is Stable. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. However, future developments that could individually or collectively, result in an upgrade include: - Steady declining trend of the GGGD/GDP ratio to significantly lower levels. - Further reduction in financial sector vulnerabilities and contingent liabilities for the sovereign. The main factors that could lead to a negative rating action are: - Divergence from the fiscal targets leading to an increasing GGGD/GDP ratio. - Significant recapitalisation needs of the financial sector by the Irish sovereign, for example in the context of the ECB's Comprehensive Assessment exercise. - Weaker economic performance, particularly if accompanied by a prolonged period of deflation, resulting in a substantial deterioration of banks' existing loan portfolio or a negative impact on the fiscal stance. KEY ASSUMPTIONS Fitch assumes that fiscal consolidation efforts will continue in 2015 to ensure the exit from the EDP by 2015 in line with the government's recent stability programme and the original Troika programme announced in December 2010. High public ownership in the banking sector implies a close bank-sovereign link, amid the eurozone level progress towards banking union and the on-going comprehensive assessment. Fitch assumes that any additional sovereign support would be limited in size and required by smaller institutions only. Bank of Ireland would be able to tap equity markets if necessary to improve capital ratios and Allied Irish Bank would convert its perpetual preferential shares into equity. Fitch assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key economic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. Fitch assumes the eurozone will avoid long-lasting deflation, such as that experienced by Japan from the 1990s. Contact: Primary Analyst Gergely Kiss Director +44 20 3530 1425 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst- Michele Napolitano Director +44 20 3530 1536 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 12 August 2014 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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