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. - Source: Coface

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.

Strengths

  • Flexible labour and goods markets
  • Favourable 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 market sector
  • Presence through multinationals in high value-added sectors, including pharmaceuticals, IT and medical equipment

Weaknesses

  • 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
  • Uncertainties about future relations with the United Kingdom

Current Trends

Further slowdown in growth in 2020

Growth will continue to slow in 2020, but will remain strong, thanks to household consumption, which will continue to be brisk, driven by a very low unemployment rate (4.8% in October 2019) and significant real wage increases. In addition, with extremely favourable financing conditions continuing to support housing demand, residential investment will remain robust. Conversely, after an exceptional 2019, investment in research and development (R&D) by multinationals will make a much less positive contribution to growth. At the same time, investment in equipment is likely to be curbed by an adverse international environment, including uncertainties about the future relationship with the United Kingdom, global trade tensions and a US slowdown. However, after weighing heavily on growth in 2019, due to substantial imports of R&D services (as a result of investment), foreign trade should make a positive contribution in 2020. On the one hand, imports are going to decelerate sharply, in line with investment, while on the other, exports should remain resilient, thanks to the pharmaceutical sector (32% of exports in 2018, 52% including organic chemicals), which is not very sensitive to the global economy. However, the size of the slowdown will depend on the outcome of the negotiations between the United Kingdom and the European Union. If the British Parliament ratifies the withdrawal agreement, trade conditions would remain unchanged during the transition period until December 31, 2020, as the United Kingdom would still be part of the customs union and the single market, although growth could still be dented by a decline in household and business confidence. In addition, uncertainty would remain high during the probably long and difficult negotiations on the future trade relationship with the United Kingdom, which accounts for 14% of Irish exports of goods and services. Some sectors such as agri-food (in particular meat and dairy products) are particularly dependent on the UK and would be severely affected if trade barriers were imposed.

Fiscal policy still prudent

Ireland’s public accounts are expected to remain balanced in 2020, despite a relatively expansionary 2020 budget, including spending increases for education (+€1.9 billion or 0.5% of GDP), social housing (€1.1 billion), health (€1 billion) and social assistance (€690 million). At the same time, budgetary revenues will continue to be driven mainly by strong economic growth, which is fuelling corporate taxes in particular. Unlike in previous years, there will be no changes to income tax brackets, as the government is pursuing a prudent fiscal policy to be ready for the possibility of a disorderly Brexit. Public debt, which stood at 120% of GDP in 2013, will therefore continue its significant downward trajectory (although this partly reflects GDP growth of 26% in 2015, attributable to asset relocations by multinational firms).

The current account, which is highly volatile, is largely dependent on the activity of multinational companies and in particular on their investment decisions. While the goods balance consistently shows a substantial surplus (35% of GDP in 2018), the services deficit seesaws depending on R&D services imports (20% of GDP in the first half of 2019, against 2% of GDP in 2018). In addition, the repatriation of dividends by multinational companies leads to a large and chronic income deficit (22% of GDP in 2018). Thanks to its extremely advantageous tax regime, the country receives considerable foreign investments (direct and portfolio). However, the amount of these investments will once again depend on the unpredictable strategies of multinationals, set against 2020’s uncertain international environment.

Heading for snap elections in early 2020?

At the beginning of January 2020, the British Parliament, now largely Conservative, was about to vote on the United Kingdom’s agreement to withdraw from the EU. Under the terms of this agreement, the need to erect a physical border between Northern Ireland and Ireland at the end of the transition period will be avoided by levying customs duties in the Irish Sea (according to the final destination of the product), thus respecting the 1998 Peace Treaty.

In terms of domestic policy, the minority government of the Taoiseach (Prime Minister), Leo Varadkar, is expected to go back to the polls in early elections (in principle elections are scheduled for April 2021). His right-wing Fine Gael (FG) party won only 54 seats (including 6 allies) out of 158 in the 2016 elections, so Mr Varadkar depends on the support of the second largest force in Parliament, the centre-right Fianna Fáil (FF) party (43 seats), which agreed not to oppose the government until the end of 2019 to guarantee political stability during the Brexit negotiations. At the beginning of January 2020, both parties were in favour of holding elections in the first half of the year. According to polling in late November 2019, elections would yield an unchanged situation, with FG in the lead (30% of the votes), but still dependent on an agreement with FF (24%). The biggest increase would be for the Green Party (7%, up from 3% in 2016), which would be in a position to influence a future coalition.

 

Source:

Coface (02/2020)
Ireland