S&P upgrades outlook on strong Irish performance

The bond rating agency has raised its outlook on the country from stable to positive and said that, although the economy would start to slow next year, it wouldn’t dip into negative territory.

S&P analysts forecast growth of 1.2pc as measured by GNI* in 2023, with a recovery to at least 3.0pc the following year as inflationary pressures ease. The Government expects 1.25pc growth next year.

The agency expects growth of 5.1pc for 2022 based on “significant pharmaceutical and information and communications technology exports”.

The relatively robust economic performance is set to keep Government finances strong despite the recent increases in spending as outlined in Budget 2023, with debt falling to just 60pc of national income by 2025, S&P said.

“The positive outlook indicates our view that, even in the face of a global economic slowdown, Ireland’s growth and fiscal outcomes may lead to a more rapid reduction in government debt then we currently project as Ireland returns quickly to operating primary budgetary surpluses above the euro area average,” the agency said in a note explaining its outlook upgrade.

However, S&P also warned of the Exchequer’s increased reliance on corporation tax receipts over the last decade, noting windfalls in that tax category were four times higher in 2021 than in 2011, with the share of tax revenue more than doubling in the same period.

Yet even S&P’s downside scenario for the Irish economy is relatively benign, with the agency saying it could revise its outlook back to ‘stable’ if fiscal or economic performance does not improve as expected.

It said this could happen if structural bottlenecks were not addressed, ultimately dampening economic growth potential.

But overall the agency was optimistic that significant household savings would support consumption, despite high inflation, and that exports would hold up despite a slowdown in global demand.

S&P said it would consider raising Ireland’s AA- debt rating in the next two years if the Government continues to deliver budget surpluses and reduce the country’s debt load. It also wanted to see more diversification in the economy and less dependence on corporation taxes.

Ireland is set for a surplus equal to 0.4pc of national income even after spending billions on inflation relief for businesses and households. Next year that surplus is expected to grow to 2.25pc, notwithstanding €6.9bn in permanent spending increases announced in September’s budget.

A higher debt rating would give Ireland cheaper access to international financial markets to fund deficit spending, although the State coffers are amply financed at the moment.

The National Treasury Management Agency (NTMA) said in September that it would not tap the markets again until 2023 due to the Government’s strong budgetary position.

At that time, the NTMA had raised €7bn of the targeted €10bn-€14bn bondsplanned for 2022.

Instead the agency committed more than €6bn of its cash balance to finance Government spending, leaving it with a €20bn cushion going into next year.