Moody’s warns of threats from Brexit and US tax changes

Ratings agency says Ireland is the European country ‘most exposed’ to dual risks

The Republic will be the country most affected by the UK's exit from the European Union, while changes to US tax policies also present a serious threat to the public finances, Moody's has warned.

In a new report the ratings agency said the Irish economy had been growing strongly since 2014 and was expected to continue to do so in the coming years. However, it adds that a “hard” Brexit and the likelihood of major corporate tax reforms in the US constituted big risks to the country’s otherwise very positive growth prospects.

“While these risks are not exclusive to Ireland, we believe it is the European country most exposed to them,” Moody’s said.

The ratings agency said Brexit could bring about more disruption to Ireland than initially thought because it was now clear that Britain would not remain in the EU single market. The Republic would be particularly exposed if the UK failed to reach a comprehensive free trade deal with the EU and trade was governed World Trade Organisation (WTO) rules.

This would mean the imposition of tariffs and other barriers, hitting Irish exporters to the UK and disrupting business supply chains which operate between the Republic and the UK.

Lower exports

“For Ireland this could mean lower export growth and deeper disruption to well-established supply chains aside from the need for Border controls,” Moody’s said. Exporters in the food sector and in the general manufacturing sectors were most at risk, it warned, hitting companies who often have low profit margins and were often bigger employers in rural areas of the country.

While the State may benefit from increased foreign direct investment (FDI) as a result of Brexit, Moody’s warns that Ireland faces a number of supply constraints that could affect this, most particularly the issue of available housing to buy or rent. For this reason Ireland might not be able to take full advantage of the opportunity to attract additional FDI.

Moody’s had already cut its 2017 GDP growth forecast for Ireland from 3.5 per cent to 3.1 per cent due to the impact of business uncertainty and possible sterling weakness. It expects a similar growth rate in 2018.

The agency said it had taken the Brexit risk into account when upgrading Ireland’s credit rating in May to A3 with a positive outlook. This was on the assumption that Britain would seek a trade deal with the EU which preserves most of the benefits of its current trading relationship. This remains the agency’s expectation, but it warned that a harder Brexit would carry more risks.

Tax changes

Moody’s says that while the nature of any US tax changes remained unclear at this stage, the importance of US multinationals to the Irish economy meant that any amendments would have a big impact here.

“While many US multinationals have a long-established presence in Ireland and will likely continue to serve European markets from their Irish base, future investment inflows could be materially lower.”

The agency added that corporate tax rule changes may also hurt the public finances as 60 per cent of such tax revenues come from US companies.