OREANDA-NEWS. Fitch Ratings has affirmed Ireland's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'A' with Stable Outlooks. The issue ratings on Ireland's senior unsecured foreign - and local-currency bonds have also been affirmed at ''A'. The Country Ceiling has been affirmed at 'AAA' and the Short-Term Foreign-Currency IDR and short-term commercial paper at 'F1'. The rating of National Asset Management Ltd's (NAMA) guaranteed issuance has also been affirmed at 'F1', in line with the sovereign rating.

KEY RATING DRIVERS

Ireland's 'A' IDRs reflect the following key rating drivers:

Ireland's economic recovery remains strong and Fitch expects it to remain resilient in the near term despite the negative impact from the Brexit referendum. High frequency indicators point to robust domestic demand growth in 1H16, boosted by a rise in employment and the unemployment rate falling to 7.8% in June, the lowest level since October 2008. Although export and investment growth will lose momentum compared to 2015 (as evidenced by a 2.1 q-o-q fall in Q12016), we project GDP growth of 4% this year, the fastest rate in the EU and above the 'A' median of 3.2%.

The Central Statistical Office (CSO) recently revised national account figures for 2010-15, with a major upward revision to 2015 real GDP growth from 7.8% to a staggering 26.3%. The changes were mainly related to the reassessment of intangible assets of re-domiciled Irish companies and contract manufacturing. Although much stronger nominal GDP levels have substantially improved some ratios such as public debt/GDP, they cloud the assessment of the real economy, creating uncertainty about data quality. Other measures such as employment growth, tax intake and net national income show a much more moderate, albeit still robust expansion in 2015.

Macroeconomic performance beyond 2017 is subject to considerable downside risks following Brexit, especially if an adverse UK-EU deal creates trade and labour mobility barriers. The UK accounts for about 17% of total Irish goods and services, with around 30% of all jobs in Ireland in sectors linked to UK exports. Ireland could gain from a shift of some foreign direct investment from the UK to the EU or from international businesses relocating from the UK, but this is highly uncertain. In this context, and given structural constraints such as inadequate infrastructure and need for further deleveraging, Fitch maintains its cautious long-term growth forecasts for the Irish economy of 2.0%-2.5%, below the 3% estimated by the government.

Public finances will continue to benefit in the short term from positive macroeconomic performance and savings from lower social payments. Fitch expects the deficit to fall to 1.1% of GDP in 2016 from 1.8% in 2015. The government has approved EUR540m in extra spending for healthcare and justice in the 2016 budget, but we expect this to be offset by over-performance in income, corporate and capital tax, social insurance contributions, as well as lower interest rate expenditure.

In June the new government published its medium-term fiscal plan, reinstating its goal to reach a budget balance by 2018. It also identified EUR11.3bn in net fiscal space for 2017-2021 (amount of fiscal policy easing consistent with meeting its Medium Term Objective), two-thirds of which will be in expenditure measures. However, these plans could be affected in light of Brexit, in particular if tax intake disappoints. Although the authorities have shown a strong commitment in recent years to meet fiscal targets, there is at present little appetite among political parties and the electorate to revert to austerity measures.

According to Fitch's baseline projections, public debt dynamics will remain favourable over the medium-term, helped by robust nominal growth. Based on new nominal GDP, we expect gross general government debt (GGGD) to fall to 63.7% in 2020, from 78.7% in 2015 and 119.5% in 2013. However, this would still be above the 'A' median of 43.9% and subject to downside risks related to lower growth. Other sectors of the economy such as households will also continue to deleverage, helped by rising wages and income. At end-2015 household debt to income was 155%, the lowest level in a decade.

Revised CSO figures show a more pronounced improvement in the non-International Financial Services Centre external sector than we previously expected. Net external debt stood at only 14.8% of GDP at end-2015. Although this still compares unfavourably with the 'A' median (net external creditor 18.8%), it is well below the high of 102% of GDP in 2012. This has been driven by a stronger external position for banks and other private sectors, as well as the rapid reduction in Central Bank currency and deposits liabilities (reflecting repayments of Emergency Liquidity Assistance funds provided during the 2011 crisis). Moderate current account surpluses in 2016-18 will continue to help Ireland's external adjustment and reduce the negative IIP position (which stood at close to 60% of GDP in 2015).

The financial sector has continued to see improvements in profitability and asset quality, with the ratio of non-performing loans falling to 15% at 1Q16, the lowest level in six years (although it remains high). Fitch expects the country's biggest banks to continue to improve, but a weakened operating environment could put pressure on asset quality and profitability. The two biggest Irish banks are not only exposed to a slowdown in growth prospects in Ireland and declines in real estate prices, but also through direct exposures to the UK through their operations. Depending on the size of their UK exposures, this could affect their profitability, in particular if there is a prolonged downturn in UK real estate prices.

Ireland has retained many of its structural strengths over the past seven years. It is a wealthy, flexible economy, with a per capita gross national income in PPP terms of USD41,000 compared with USD26,100 for the 'A' median. It also ranks the highest in terms of human development and governance indicators in the 'A' category.

SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)

Fitch's proprietary SRM assigns Ireland a score equivalent to a rating of 'AA' on the Long-Term FC IDR scale.

In accordance with its rating criteria, Fitch's sovereign rating committee decided to adjust the rating indicated by the SRM by more than the usual maximum range of +/-3 notches because: in our view the country is recovering from a crisis.

Consequently, the overall adjustment of four notches reflects the following adjustments:-

-Macro: -1 notch, to reflect the fact that the model uses (the revised) GDP numbers which could be subject to large revisions and do not entirely reflect real developments in the economy. - Public Finances: -1 notch, to reflect still high levels of government debt. The SRM is estimated on the basis of a linear approach to government debt/GDP and does not fully capture the higher risk at high debt levels.

- External Finances: -1 notch. The model gives 2-notch enhancement for reserve currency but a one-notch uplift is more appropriate for Ireland given the country's recent financial crisis and need of an IMF programme. Exposure to Brexit also highlights vulnerabilities to shocks.

- Structural Factors: -1 notch, to reflect weakness in the banking system for which the average viability rating is two categories below the sovereign rating.

Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

RATING SENSITIVITIES

The following factors may, individually or collectively, result in positive rating action:

-Further reduction in the general government debt/GDP ratio.

-Reduction in external vulnerabilities, evidence that the economy is resilient to Brexit.

The following factors may, individually or collectively, result in negative rating action:

-Divergence from the fiscal targets that reverses the decline in the GGGD/GDP.

-Weaker economic performance, resulting in a substantial deterioration of banks' existing loan portfolios or a negative impact on the fiscal stance.

KEY ASSUMPTIONS

We assume Ireland and the eurozone as a whole will avoid long-lasting deflation, with the ECB's asset purchase programme helping to underpin inflation expectations, although deflation risks could intensify in the case of further economic shocks.