Ireland: Risk Assessment
Country Risk Rating
|A3||Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behavior. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average.|
Business Climate Rating
|A1||The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.|
Sustained growth, powered by domestic demand and exports
Following a spurt in 2015, growth is expected to continue in the right direction in 2016, even if at a somewhat slower pace, reflecting the underlying base effects. It will be driven by consumption, rising as unemployment declines and which is expected to reach 8.7% in 2017, against 9.5% in 2015, as well as by rising wages (the minimum wage is due to be raised by 50 cents/hour) and tax reductions.
Investment is also likely to play a key role in the consolidation of economic expansion and will be supported by public investment in the context of the multi-year plan introduced by the government in September 2015 (Infrastructure and Capital Investment 2016-2021) and with an expected cost of 45 billion dollars, equal to 3.5% of GDP per year. These investments will include areas such as transport, education, healthcare, property and renewable energy sources, and are likely to create over 45,000 jobs. The attractiveness of the country for multinationals (labor flexibility and favorable tax treatment) and the upturn in the construction sector should also boost investment.
Economic activity will also be supported by export performances, in particular the pharmaceutics and financial and IT services sectors. Export sales of services abroad, in particular, have grown strongly, benefiting from increased competitiveness and improved demand in the US and UK.
Inflation, having remained low in 2015, thanks to falling energy prices and the moderate rate of growth in wages, is likely to increase in 2016. This will be a reflection of stronger domestic demand and the end of falling energy prices.
External accounts in surplus and a budget deficit under control
Ireland began recording current account surpluses in 2010 thanks to the low level of imports, in a context of contracting domestic demand, and a boost to its price competitiveness which helped increase exports. The current account surplus is expected to remain large relative to GDP in 2016. The vitality of exports should be buoyed not just by the multinational firms operating in Ireland, but also its domestic companies benefiting from a euro which is experiencing a moderate depreciation against the dollar and by easier access to finance. Export sales continue to be dominated by foreign owned companies in the high tech, financial and chemicals sectors, with this latter accounting for almost 60% of exports of goods. This advance in exports should help offset the growth in imports driven by strengthening domestic demand, the increase in royalties paid to parent companies and the purchase of intermediate chemical products.
The country ended, in December 2013, its international rescue plan without having to call on its Precautionary and Liquidity Line. Budgetary policy is likely to become slightly expansionary in 2016 with the tax cuts (a series of tax reforms worth 600 million euros was contained in the 2016 draft finance bill) and a faster growth in spending than expected. The public debt ratio, which has ballooned in recent years as a result of the bail-out of the banking sector and the recession, remains very high but is gradually being reduced. The potential viability of the debt has improved but continues to be contingent on the country’s ability to generate a fast enough rate of growth and primary budget surpluses.
Tensions within the governing coalition in the run-up to parliamentary elections
After three years of austerity and despite internal tensions, the governing coalition remains united. It has however lost popularity, as was evidenced by the collapse of the Labour Party (center-left), one of the two elements of the coalition, in the European and municipal elections in May 2014. The government however has not been faced with any serious social unrest and looks likely to be in a position to complete its term of office. Because of the political fragmentation of the country, the outcome of the next elections (April 2016 at the latest) could oblige Fine Gael, the leader in the polls, to govern with a wider coalition than the current one.
The country is not expected to see serious social tensions thanks to the continuing dialog with the union, social protection, the wealth accumulated during the boom years and emigration.
Finally, Ireland retains its ranking above the European average in terms of governance, in 17th position out of 189 countries.