The consolidation of Irish public debt, measured as a percentage of modified gross national income (GNI *) – an indicator of the underlying output of Ireland’s globalized economy – will be slower than that of the nominal debt-to-GDP ratio , with the latter measure set to fall to pre-crisis levels by 2025 in the absence of a significant adverse shock. The GNI benchmark * excludes the economic contribution of multinational pharmaceutical, technology and other companies with operations in Ireland which have performed strongly amid the crisis and could benefit in the longer term from structural economic changes due to the pandemic.
Ireland is among the euro area member states with the greatest capacity to reverse the large debt build-up resulting from the crisis.
Comparatively resilient economic performance
Ireland’s comparatively resilient economic performance, with 3.4% growth in 2020 followed by a high QoQ of 7.8% in the first quarter of 2021, as well as robust growth expected after the crisis, yields to the government a substantial margin to consolidate the surplus budget deficits. We Upgraded Ireland’s sovereign credit ratings to AA- May 21, with Outlook revised to Stable.
The Irish government’s significant fiscal response to the global Covid-19 crisis – equivalent to â¬ 38 billion or 18% of GNI * in 2020 and 2021 – will nonetheless see a budget deficit of around 9% of GNI * this year , about the same as last year. deficit of the year. The correction of Ireland’s budget then begins to take off more significantly from 2022.
A further modest increase in the public debt ratio in 2021, before medium-term reductions
Scope expects a further modest increase in the public debt ratio to 110% of GNI * (62% of GDP) this year, as government support to businesses and households remains in place during the early stages of the recovery economic. Public debt rose to nearly 106% of GNI * (60% of GDP) in 2020 against 95% in 2019 (57% of GDP).
As the recovery takes hold, our expectation of robust growth underpins a forecast of post-crisis public debt reduction: we estimate Ireland’s potential annual growth at 4% in terms of real GDP and at 3% according to a modified definition of real domestic demand. Output growth is expected to accelerate this year, growing at 5% in terms of GDP and 3% in the underlying economy.
Brexit has had a mixed impact on the Irish economy. The consequences of greater friction in trade between the UK and Ireland following Britain’s exit from the single market contrast with the windfall of Brexit for foreign direct investment in Ireland, the latter supporting real growth.
An improvement in the profile of the outstanding public debt
One constructive element is the improvement in the profile of Irish public debt. The official sector holds an increased share of public debt. Public sector loans represented 19% of Ireland’s outstanding debt at the end of 2020, including bailout loans from 2011 to 2013. Almost another 30% of outstanding debt is likely to be held on the balance sheet Eurosystem, after the ECB’s asset purchases, by the end of the year, further reducing the share of Irish taxable debt outstanding held by the private sector. The cost of servicing the debt has moderated, with 10-year financing rates of 0.2%.
Ireland’s National Treasury Management Agency took advantage of favorable borrowing conditions to extend the maturity of debt securities to a weighted average of 11.2 years at end-March, comparing favorably to an average of 7.1 years in the past. advanced economies. Since the start of the year, issues in 2021 have a longer average maturity of 14.6 years. Ireland has raised â¬ 6.1 billion in sovereign green bonds since 2018.
The economy retains significant inherent vulnerabilities
Irish fiscal dynamics will improve over time after the crisis, but we must bear in mind that the economy retains significant inherent vulnerabilities to external and / or internal shocks, given the importance of multinational companies in the private sector, a very open economic structure, high public and private debt stocks and a considerable size of the financial system relative to the size of the real economy. The upcoming changes in international corporate tax policy pose a significant risk to Ireland’s economic comparative advantages.
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Dennis Shen is Director of Sovereign and Public Sector Ratings at Scope Ratings GmbH.