Scope Ratings says that Ireland (A+/Positive) has experienced a severe health and economic crisis but has responded forcefully, including prompt and stringent restrictions of economic activity from 27 March followed by a staggered re-opening of its economy. The formation of Ireland’s first grand coalition government – between Fianna Fáil and Fine Gael after the February elections – has created a more predictable political climate.

“The political breakthrough should help Ireland navigate through this severe global health crisis, including the risk of a second wave of coronavirus incidence in Europe in the 2H-20, and engineer a robust economic rebound,” says Dennis Shen, lead analyst at Scope for Ireland.

The Irish economy grew by 1.2% QoQ in Q1 2020, though the true economic barometer for 2020 is Q2, a quarter during which Scope expects output to have contracted significantly. Scope forecasts a real output contraction of around 7% for the full-year 2020, as the Irish economy entered recovery after April troughs, a milder forecast than European Commission expectations for a 7.9% contraction in 2020.

“The coronavirus-related demand and supply shock has curtailed output in Ireland’s domestic consumer-oriented sectors such as retail, real estate, construction, entertainment, transport and hospitality, while the financial sector, industry – including the important pharmaceuticals sector – and the information and communications technology sector have been more resilient,” says Shen.

In 2021, Scope forecasts a sturdy economic rebound of around 7.5%.

The government has announced fiscal support of about EUR 18.5bn, equivalent to 5.5% of GDP, since the start of the crisis, including income support, healthcare and investment spending, grants for small and medium-sized enterprises, tax cuts and payment holidays, and credit-guarantee schemes. After the announcement of the July stimulus package, the Irish National Treasury Management Treasury estimates total bond funding activity for this year will be at the upper end of a range of EUR 20bn to EUR 24bn, over 80% of which has been financed via long-term bond issuance already, with an average issuance maturity of above 11 years.

“We expect Ireland’s public debt stock to rise to around 70% of GDP this year, however, having declined to less than 58% of GDP in 2019,” says Shen. “This rise in debt does return Ireland to ratios of debt per 2016 or 2017.”

“However, we expect the debt ratio to return on a sustained downward trajectory, reaching 66% of GDP by 2024, given the economy’s robust growth potential, supported by increases in the working-age population of an estimated 0.9% a year alongside steady improvements in productivity,” says Shen. Scope also expects the current government to take action to reduce budget deficits post-crisis.

“However, public debt compared with the underlying Irish economy – as measured by debt to nominal modified GNI – is significantly more elevated. Under this metric, public debt is expected to increase in 2020 to around 120% of modified GNI – justifying the government’s continued attention on ensuring post-crisis fiscal consolidation.”

Highly accommodative financing rates continue to support Ireland’s capacity to lower public debt over the medium run. Ireland can borrow at a 10-year yield of -0.12% at time of writing – equal to a spread of 39 bps over Germany.

“The recent ruling of the EU General Court against the European Commission’s earlier decision to make Apple pay to Ireland EUR 14.3bn or 4.4% of GDP in back taxes and interest does impact government assets and, as such, net debt levels, pending the outcome of any Commission appeal to the European Court of Justice,” says Shen. “At the same time, the ruling may hold medium-run consequences as well in regard to greater tax certainty for US multi-nationals with operations in Ireland.”

“Brexit remains another risk,” says Shen. “The impact of a year-end no-deal UK exit from the EU single market and customs union, even though it is not an outcome that Scope expects, would weigh upon Ireland’s economic performance.”

In late June, Ireland’s political parties agreed on a three-way grand coalition, made up of the centre-right parties, Fianna Fáil and Fine Gael, alongside the Green Party, the first such coalition since the Irish independent state’s founding in 1922. The coalition government’s priorities include the addressal of a housing shortage and homelessness, an overhaul of healthcare, and achievement of ambitious climate-change objectives.

Scope’s next scheduled review date of Ireland’s sovereign ratings is 18 December 2020.