Moody’s plays down Brexit shock on Ireland

Moody’s Investors Service has become the first authoritative international voice to play down the potential shock to the Irish economy were the UK to vote next month to leave the EU.

Moody’s plays down Brexit shock on Ireland

The credit ratings firm suggests that though problematic, the effects on the Republic would likely be “manageable”, and not catastrophic.

Its assessment comes in a weekend report which marked Moody’s most sparkling assessment of the prospects of the Irish economy since the devastating banking crash.

Published early Saturday morning, Moody’s restored its credit rating for Ireland to ‘A3’ — albeit still a lowly ‘A’ grade — but also maintained a “positive” outlook on the State’s diminishing debt pile. That suggests it could be minded to upgrade its credit rating further.

The upbeat message was maintained throughout the report as Moody’s considered the potential risks facing the economy — including a key risk of the UK leaving the EU because approximately 15% of the Republic’s exports go to the UK.

Many of those exports include agricultural and processed foods which, unlike some of the big value export sectors dominated by the multinationals, are made by indigenous small and medium-sized firms that provide lots of jobs. In weighing the risk of a Brexit, Moody’s nonetheless suggests that the outlook for the economy is sufficiently rosy for Ireland to weather any Brexit storm.

Explaining its reasons for maintaining the positive outlook, Moody’s said this weekend: “While GDP growth will likely moderate compared to last year’s exceptional growth, Ireland will continue to grow at above-trend rates over the next two to three years, on account of strong and sustained competitiveness gains and the large and expanding presence of high value-added multinational firms that have driven recent increases in exports.

It went on: “Investment prospects are positive, not only in the multinational sector, and longer-term demographic trends are also more favourable in Ireland than in most other European peers. Moody’s forecasts real GDP growth of around 5% and 3.5% in 2016 and 2017 respectively.

“While a UK exit from the EU would have negative repercussions on Ireland, given the close economic ties, Moody’s considers that this risk would be manageable for the Irish economy,” the report said.

Ryan McGrath, senior bond trader at Cantor Fitzgerald Ireland, said yesterday: “The upgrade is important and the outlook is positive. It is very, very rosy.”

He predicted Irish bonds would outperform their European peers in trading today on the back of the report.

Moody’s assessment on the Brexit effects contrasts with those produced closer to home, by Dublin think tanks and warnings from leading politicians.

The Institute of International and Economic Affairs in a major study last year had highlighted the potential disruption to trade, warning that Ireland’s exports, from north and south into Britain, put the economy of the whole island in the firing line if the UK were to leave the EU.

Ibec and the Economic and Social Research Institute — ESRI — had also produced major reports on the effects of a Brexit on the Irish economy. The ESRI had also addressed the potential political strains across Ireland and the potential for political violence in the North should immigration border controls and tariff controls be mounted between Newry and Derry.

The ESRI’s Edgar Morgenroth has also said that Dublin, in the event of a Brexit vote on June 23, would need to strike special deals with Brussels to protect large parts of economic activity across the island, including the all-Ireland energy market and the milk processing industries which are intertwined north and south.

Mr Morgenroth told the Irish Examiner last month that Dublin might need to reconsider building an electricity interconnector with France to secure energy needs for the island if the UK decided to leave.

Moody’s had long been the hardest of the ratings firms to convince on the long-term outlook of the country’s debt pile, one of the largest in the eurozone after the banking crash.

During the crisis, Moody’s was the only one of the world’s big three ratings firms to downgrade Irish government debt to junk, and was the slowest to upgrade Ireland, as its prospects markedly improved.

In some respects, the opinions of the ratings firms — although still closely anticipated by sovereign debt offices and debt traders, including the National Treasury Management Agency (NTMA) — carry less importance.

Since early 2015, the ECB has announced its massive monthly programme of buying sovereign debt of eurozone countries which has helped push borrowing costs for many eurozone countries to record lows, or even negative levels.

Last week, the NTMA sold bonds that mature in six years at an interest rate or yield of 0.157%. Irish 10-year bonds traded on Friday at 0.83%. Moody’s weekend report does highlight that Ireland is susceptible to external shocks, but is upbeat.

“The positive outlook reflects Moody’s view that Ireland’s key credit metrics might improve further in the coming years, notwithstanding the above-mentioned constraints,” it said.

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