Ireland is one of the most exposed countries to Brexit - Fitch

Fiona Reddan

The UK vote to leave the European Union is negative for Ireland, raising risks to growth and creating uncertainty around future relations with Northern Ireland, Fitch Ratings said on Tuesday. While the ratings agency ruled out any " immediate implications" for Ireland's sovereign rating in the near term, a medium-term rating impact would be possible "if the economic dislocation of Brexit were to prove severe."

In a separate note, the agency warned that any economic weakness could slow improvements in the asset quality and capitalisation among the Irish banks.

Fitch said that Ireland, along with Malta, Belgium, the Netherlands, Cyprus and Luxembourg, are the most exposed countries to Brexit, given that their exports of goods and services to the UK represent at least 8 per cent of GDP. Total goods and services exports to the UK are equivalent to around 17 per cent of Irish GDP.

A UK slowdown, sterling depreciation and potential future trade barriers between Ireland and the UK would weigh on Irish exports, economic growth and employment, Fitch said, although added that the full impact will only become clear as EU-UK negotiations develop.

Lower economic growth would reduce the tax intake, reducing the medium-term fiscal space that the government identified in its recent Summer Economic Statement.

“We think the most important near-term impact will be through reduced domestic confidence,” Fitch said.

While Fitch noted that in the medium term, 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, this is “highly uncertain”.

But while negative, Brexit is “unlikely to undermine” the progress that Ireland has made in reducing its government debt, and Fitch says it still expects Ireland’s debt/GDP ratio of 93.8 per cent to fall in the medium term, and this will be helped in part by lower nominal interest rates.

In relation to the Irish banks, Fitch said that a “ decline in Irish real estate prices or deteriorating growth prospects, rising unemployment and reduced investment confidence could put pressure on Irish banks’ asset quality and profitability.” The banks also have direct exposure to the UK through their operations, it pointed out.

A downturn in UK real estate prices is a risk for Bank of Ireland, it said, as UK loans, largely retail mortgages and commercial real estate loans, account for 44 per cent of its overall loan portfolio. AIB is less exposed to a downturn in the UK’s operating environment because the UK represents a lower 16 per cent of its lending.

The ratings of the banks are driven by the standalone fundamentals, Fitch said, with their financial strength having improved steadily in recent years.

“But a weaker operating environment, sparked by slowdown in economic growth, and reducing investor confidence, could reduce the banks’ profitability and limit their ability to dispose of impaired loans.”