Ireland: Risk Assessment
Country Risk Rating
Business Climate Rating
- Flexible labor and goods markets
- Favorable business environment, attractive taxation
- Presence of multinational companies, particularly from the United States, which account for 22% of employment and 63% of value added in the non-financial business sector
- Presence through multinationals in sectors with high value added, including pharmaceuticals, IT and medical equipment
- Dependent on the economic situation and tax regimes of the United States and Europe, particularly the United Kingdom
- Vulnerable to changes in the strategies of foreign companies
- Public and private debt levels still high
- Banking sector still vulnerable to shocks
Activity set to resume, after resilience attributable to multinationals
The Irish economy is expected to record significant growth in 2021, after a year marked by the economic consequences of the pandemic. While, in 2020, the country was one of the few in the region not to see its activity decline, this was exclusively due to the strength of exports by multinationals in the pharmaceutical sector (31% of exports of goods in 2019, 52% including chemicals) and computer services (more than half of exports of services). While the activity of these firms will remain solid in 2021, the acceleration of the Irish economy will be driven by domestic activity, which was hit in 2020 by two lockdowns, first in the spring and then in the autumn. These measures, coupled with uncertainty, hampered household consumption and pushed households to increase their savings considerably, despite having their purchasing power boosted by support measures (short-time work arrangements, a temporary reduction in VAT from 23% to 21% from September). Although the return to a normal VAT rate in March and the uncertainty surrounding the health situation should encourage some precautionary saving at the beginning of the year, household consumption should then rebound strongly. In a progressively more upbeat context, businesses should also step up their investments again, after a year marked by the pandemic and uncertainty about future trade relations with the United Kingdom (13% of Irish exports of goods and services). The signing of a trade agreement between London and the European Union in December 2020 is, in this respect, good news, especially for certain sectors that are highly dependent on Britain, such as agri-food (meat, dairy products, bakery).
Public accounts still deep in deficit to sustain activity
The public accounts deteriorated sharply in 2020 due to the support measures implemented to limit the consequences of the pandemic on households and businesses (direct aid to SMEs, state-guaranteed loans, reduction in income tax for self-employed people, VAT cut from 13.5% to 9% in the hotel and catering sector from November 2020 to the end of 2021), for a total amount over two years estimated at EUR 25 billion (7% of GDP). As the majority of these measures have been extended in the 2021 budget, the public deficit will remain significant, despite the increase in revenue in line with activity. The public debt is expected to continue to grow, after falling steadily between 2013 and 2019. The economic and budgetary situation could be severely affected over the next few years if discussions on the introduction of international corporate taxation are successful, given the country's dependence on the activity of multinationals: the share of corporate tax in tax revenues rose from 7% in 2014 to 20% in 2019.
The investment decisions of these firms also have a considerable effect on the external accounts and make the current account extremely volatile. While the balance of goods shows a large structural surplus (38% of GDP at the end of September 2020), the services deficit seesaws depending on R&D services imports (9% of GDP in the first three quarters of 2020, compared with 21% of GDP in 2019). At the same time, the repatriation of dividends by multinationals generates a chronic income deficit (24% of GDP at the end of September 2020). These substantial flows are attributable to the significant foreign direct investments made by these firms, which are, however, likely to vary. Excluding effects related to multinationals, the current account has been in surplus since 2015 (5% of gross national income in 2018).
Despite historic breakthrough, Sinn Féin cannot form government
After four years of negotiations following the vote to take the United Kingdom out of the European Union, the establishment of a physical border between Northern Ireland and the Republic of Ireland was ultimately avoided: customs duties will be levied in the Irish Sea (depending on the final destination of the product), thus complying with the 1998 peace treaty.
Domestically, the February 2020 general elections saw a historic breakthrough for the nationalist Sinn Féin party, which has a left-wing platform but is above all in favor of reunification with Northern Ireland. It came out on top with 24.5% of the votes but won only 37 seats (out of 160) because it had not put forward enough candidates. However, because of its links with the IRA, a nationalist paramilitary organization that ended its armed campaign in 2005, the other main parties had ruled out any coalition with Sinn Féin, making it almost impossible for it to come to power. After four months of negotiations, Fianna Fáil (22%, 38 seats) and Fine Gael (21%, 35 seats), the two rival centrist parties that have traded power back and forth for a century, agreed to form a coalition with the Greens (7%, 12 seats) to obtain a parliamentary majority. The new Taoiseach (Prime Minister), Micheál Martin, leader of Fianna Fáil, succeeded Leo Varadkar (Fine Gael) in June 2020. However, according to the rotating leadership agreement, Mr. Varadkar will return to power in December 2022 and take charge of the second part of the term. While tensions cannot be ruled out, this agreement should ensure political stability, as in the previous term, where Fine Gael governed as a minority with the non-participating support of Fianna Fáil.