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Ireland will have a ‘favourable budget position’ in years to come, helped by rising corporate tax proceeds and ‘tight’ expenditure control, Fitch Ratings predicted on Friday.
Fitch lifted its outlook on Ireland’s long-term foreign-currency issuer default rating to ’positive’ from ’stable’. The rating itself was maintained at ’AA-’.
The ratings agency noted Ireland’s budget surplus amounted to €8 billion in 2022, a marked swing from a near-€7 billion deficit the year prior.
Fitch added: ‘Corporation tax revenues surged in 2021 and especially 2022, mainly due to the windfall tax received from external activities of multinational enterprises, an estimated €6 billion in 2021 and €11 billion in 2022.
‘The strong underlying domestic economy and high inflation led to robust revenue growth in Ireland, similar to many eurozone countries, while expenditure is under tight control, as the focus of the domestic fiscal rule is on expenditure growth.
‘Against this background, Fitch expects the favourable budget position to prevail over the rating horizon and the budget surplus is forecast above €12 billion in 2024 and 2025.’
Public debt as a percentage of gross domestic product ebbed to 44.7% in 2022, the median for an ’AA’ rated nation, from 58.4% in Covid-19-hit 2020. Fitch expects that percentage to decline over the next five years and fall below 40% next year.
The Irish economy is also on strong footing, according to Fitch. It has a robust labour market and the economy is in a ‘strong cyclical position’, despite declining at the start of the year and meeting the definition of a recession.
Gross domestic product fell by 2.8% quarter-on-quarter in the first quarter of 2023, the Central Statistics Office confirmed on Friday. It had shrunk marginally in the fourth quarter, meaning Ireland entered a technical recession in the first three months of 2023.
Fitch added: ‘Fitch forecasts GDP growth to slow in 2023 to close to 5% and to around 3.5% in 2024.’
GDP growth will be good news for Ireland’s ‘robust’ banking sector.
‘GDP growth should provide business growth opportunities for banks in 2023 and the impact of rising rates and inflation should result in a limited increase in non-performing loan rates and flat asset quality ratios. Bank balance sheets are strongly benefiting from rising loan interest rates combined with measured pass-through to rates on deposits. Headline operating profitability grew strongly in 1Q23 and asset quality continued to perform well. Irish banks’ capital ratios are strong and funding and liquidity profiles are robust,’ the rating agency added.
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