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Scope affirms the Republic of Ireland’s credit rating at A+; Outlook Stable

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Scope assigns new A+ Issuer Rating to Lloyds Banking Group following ring-fencing-related changes

Euro area membership, strong institutional framework, continued deleveraging, and robust growth potential support the rating. Still high public- and private-debt levels as well as external vulnerabilities constrain rating upside.
For the detailed rating report, click here.

Scope Ratings GmbH today affirms the Republic of Ireland’s long-term local-currency issuer rating at A+. The agency also affirms Ireland’s long-term foreign-currency issuer rating at A+, along with its short-term issuer rating at S-1+ in both local and foreign currency. The sovereign’s senior unsecured debt in both local and foreign currency are affirmed at A+. All Outlooks are Stable.

Rating drivers

Ireland’s A+ sovereign ratings are underpinned by its European Union (EU) and euro area membership within a large common market, a strong reserve currency, an independent European Central Bank effectively acting as a lender of last resort, and a regional economic and financial governance framework that has been enhanced since the Great Financial Crisis and supports the creditworthiness of euro area member states. Ireland’s ratings are further reinforced by its strong national institutions and wealthy, diversified economy that generates one of the highest per-capita incomes in Scope’s rated universe (at USD 70,638 in 2017). The rating acknowledges the strengths in Ireland’s robust growth potential, improving public finances and declining public-debt ratios, long maturity of public debt, increase in Ireland’s current account surplus alongside private-sector debt reductions and the mending of financial system weaknesses.

However, Ireland’s ratings remain constrained by the economy’s vulnerability to sudden reversal, learning the lessons from the Great Financial Crisis and subsequent euro area debt crisis. In addition, the still high public-debt levels (especially when assessed against underlying economic activity) and meaningful leverage within the financial system and non-financial private sector, even after years of significant deleveraging, represent risks. The size and complexity of Ireland’s financial and corporate sectors, when considered in the context of a small and very open economy (with nominal GDP of EUR 294bn in 2017) alongside the Irish government’s weakened balance sheet relative to pre-crisis levels, creates susceptibilities to both domestic and international shocks, captured in the A+ rating. In addition, ongoing risks concerning Brexit, uncertainties around the global economic cycle (and Ireland’s sensitivity to this), and questions surrounding the impact of US and European corporate tax reforms are further areas for monitoring. Steps taken to reduce some of these vulnerabilities and/or evidence that risks will prove less meaningful than anticipated could support a stronger assessment on Ireland’s sovereign creditworthiness.

Robust economic growth in Ireland has significantly outperformed that of peers since 2014; real GDP expanded by 7.2% in 2017 – the highest of EU member states. The strong performance has been broad-based across private and public consumption, investment, and net exports. Further improvement in private-sector balance sheets can be expected to support private consumption and investment. GDP growth is projected to converge towards a potential of about 3.5% over the medium term.

The 2017 fiscal deficit dropped to 0.3% of GDP, from 0.5% in 2016. In 2018, the headline government deficit is foreseen at 0.2% of GDP, with a general government surplus aimed for by 2020. In structural terms, the cyclically-adjusted fiscal deficit is seen at 0.6% of GDP in 2018, up from 0.1% in 2017, before dipping under the medium-term objective of 0.5% by 2019. In its latest assessment, the European Commission cautioned about deviations in the structural deficit and expenditure growth benchmarks in 2018. General government debt has declined to 69.3% of GDP as of Q1 2018, from 75.8% a year prior and 124.6% during the Q1 2013 peak. This decline has been driven by high nominal growth, improvements in the fiscal position, and proceeds from the state’s bank holdings. Scope expects the debt ratio to continue the downward path moving ahead.

Ireland is in the process of collecting EUR 13bn in back taxes (plus interest and penalties) that the European Commission in August 2016 ordered Apple to pay; both the company and Ireland have appealed. Irish officials expect to have all funds (worth over 4% of GDP) in an escrow account by the end of September. In addition, the weighted average maturity of Ireland’s long-term debt (marketable and official) is very long at about 12 years. However, 57% of Irish government bonds was held by the rest of the world as of March 2018 – a risk in stressed scenarios, in Scope’s view.

Ireland’s current account surplus increased to 9.7% of GDP in the year to Q1 2018, from -2.6% of GDP in the year to Q1 2017, in large part due to globalisation effects. The IMF foresees a gradual correction of Ireland’s volatile current account balance, though remaining elevated at 6.5% of GDP by 2023. The current account surplus has, alongside external debt deleveraging, helped improve the net international investment position, albeit to a still negative -156.6% of GDP in 2017.

Ireland’s credit strengths are balanced by credit weaknesses, such as the still very high levels of private- and public-sector indebtedness, which accentuate external vulnerabilities and limit the system’s shock absorption capacity. Corporate indebtedness amounted to 312% of GDP in Q4 2017, bringing total non-financial private-sector debt to 364% of GDP – which is high under a comparison against peers. The size and complexity of the Irish banking system (with outstanding financial system debt of 423% of GDP, although down from the 2011 peak of 646%) remains a further risk.

Despite meaningful improvements in general government debt metrics, Scope notes that government debt relative to GDP remains elevated at 69%. In addition, drawbacks in GDP data due to the activities of mainly US-based multinationals add uncertainties to analytics premised on ratios using nominal GDP.

To address this, the central statistics office prudently designed a “de-globalised” measure of Irish annual product: modified GNI. Public debt to modified GNI is higher: around 111.1% of modified GNI as of 2017. This 111% of modified GNI figure remains higher than it was pre-crisis (27.7% of modified GNI as of 2006), even though Ireland has reduced this also meaningfully from peaks (debt to modified GNI peaked in 2012 at 166.1%). Given Ireland’s propensity for economic volatility, coupled with the still leveraged private sector (and thus, greater risk for spill-over in a stressed case), continued public-sector debt reduction remains a core priority in facilitating greater resilience and shock-absorption means.

As an economy highly integrated with the global cycle, Ireland is vulnerable to adverse shifts in the external environment that can impact economic activity and revenue generation. The economic slowdown in the UK, together with a weak British pound, adversely impacts Irish trade. A hard Brexit, while not anticipated by Scope, nonetheless represents a risk. Also of concern are the recent EU-US trade disputes, international tax policy changes, and EU actions against illegal state aid. Over recent decades, Ireland has been a favoured destination for foreign direct investment by multinationals. Corporate tax cuts in the US and EU may slow such flows and affect multinational operations.

Several years after the crisis, Irish banks have deleveraged significantly and strengthened capital positions. Balance sheet structures and asset quality have also improved, supported by robust economic conditions, restructurings, asset sales and write-offs as well as rising collateral values. While still high, non-performing loans have also declined to 10.7% of total loans as of Q4 2017, from 27.1% in 2013.

Core Variable Scorecard (CVS) and Qualitative Scorecard (QS)

Scope’s Core Variable Scorecard (CVS), which is based on the relative rankings of key sovereign credit fundamentals, provides an indicative “AA” (“aa”) rating range for the Republic of Ireland. This indicative rating range can be adjusted by the Qualitative Scorecard (QS) by up to three notches depending on the extent of relative credit strengths or weaknesses as compared with peers, based on Scope analysts’ qualitative findings.

For Ireland, relative credit weaknesses have been identified for the following analytical categories: i) macroeconomic stability and sustainability; ii) current account vulnerability; iii) external debt sustainability; iv) vulnerability to short-term external shocks; and v) financial imbalances and financial fragility. No relative qualitative credit strengths against peers were identified. Combined relative credit strengths and weaknesses generate a downward adjustment and signal an AA- sovereign rating for the Republic of Ireland. The lead analyst has recommended a further adjustment of the indicated rating to A+ in order to take into account important distortions in Irish economic data that tend to overstate the performance of underlying fundamentals and credit metrics in the CVS. The results have been discussed and confirmed by a rating committee.

For further details, please see Appendix 2 in the rating report.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s assessment that the challenges Ireland faces are manageable over the foreseeable horizon.

The ratings and/or outlook could be upgraded if, individually or collectively: i) improvements in public finances and economic growth bring about a further, significant reduction in government debt ratios; ii) private sector debt reductions make additional strides and banking system resilience improves; and/or iii) vulnerabilities to external risks are reduced via continued external debt deleveraging, and/or Scope gains greater confidence surrounding Ireland’s resilience to risks stemming from Brexit, global trade disputes and global economic growth, and/or shifts in international corporate taxation policies.

Conversely, the ratings and/or outlook could be downgraded if: i) economic growth or growth potential proves substantially weaker than anticipated, or the fiscal balance weakens significantly, threatening or even reversing the decline in general government debt relative to GDP; ii) private-sector and banking system risks begin to regather, impacting long-term macroeconomic and financial stability; and/or iii) net external debt increases or external shocks result in substantially weaker medium-term growth and damage financial stability.

Rating Committee

The main points discussed during the rating committee were: 1) economic and fiscal policy framework; 2) debt metric improvements and sustainability; 3) Ireland’s economic model and boom/bust structure; 4) impact of Brexit on the Irish economy; 5) public- and private-sector deleveraging and lingering vulnerabilities; 6) Irish nominal GDP data issues; 7) financial stability and vulnerabilities; and 8) peers comparison.

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OPEC, U.S. oil firms expect subdued shale rebound even as crude prices rise

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OPEC, U.S. oil firms expect subdued shale rebound even as crude prices rise 1

By Alex Lawler and Jennifer Hiller

LONDON/HOUSTON (Reuters) – OPEC and U.S. oil companies see a limited rebound in shale oil supply this year as top U.S. producers freeze output despite rising prices, a decision that would help OPEC and its allies.

OPEC this month cut its 2021 forecast for U.S. tight crude, another term for shale, and expects production to decline by 140,000 barrels per day to 7.16 million bpd. The U.S. government expects shale output in March to fall about 78,000 bpd to 7.5 million bpd. [OPEC/M]

The OPEC forecast preceded the freezing weather in Texas, home to 40% of U.S. output, that has shut wells and curbed demand by regional oil refineries. The lack of a shale rebound could make it easier for OPEC and its allies to manage the market, according to OPEC sources.

“This should be the case,” said one of the OPEC sources, who declined to be identified. “But I don’t think this factor will be permanent.”

While some U.S. energy firms have increased drilling, production is expected to remain under pressure as companies cut spending to reduce debt and boost shareholder returns. Shale producers also are wary that increased drilling would quickly be met by OPEC returning more oil to the market.

‘MORE DISCIPLINE’

“In this new era, (shale) requires a different mindset,” Doug Lawler, chief executive of shale pioneer Chesapeake Energy Corp, said in an interview this month. “It requires more discipline and responsibility with respect to generating cash for our stakeholders and shareholders.”

That sentiment would be a welcome development for the Organization of the Petroleum Exporting Countries, for which a 2014-2016 price slide and global glut caused partly by rising shale output was an uncomfortable experience. This led to the creation of OPEC+, which began cutting output in 2017.

OPEC+ is in the process of slowly unwinding record output curbs made last year as prices and demand collapsed due to the pandemic. Alliance members will meet on March 4 to review demand. For now, it is not seeing history repeat itself.

“U.S. shale is the key non-OPEC supply in the past 10 years or more,” said another OPEC delegate. “If such limitation of growth is now expected, I don’t foresee any concerns as producers elsewhere can meet any demand growth.”

Still, OPEC is no rush to open the taps. Saudi Arabian Energy Minister Prince Abdulaziz bin Salman said on Feb. 17 oil producers must remain “extremely cautious.”

$60 OIL HELPS

Shale output usually responds rapidly to price signals and U.S. crude has this month hit its highest level since January 2020, topping $60 a barrel.

While shale companies have added more rigs in recent weeks, a tepid demand recovery and investor pressure to reduce debt has kept them from rushing to complete new wells.

“At this price point, any oil production is profitable, especially the relatively high-cost U.S. shale patch,” said Stephen Brennock of broker PVM Oil Associates.

“Yet despite these positive growth signals, U.S. tight oil production is far from recovering its pre-COVID mojo.”

The chief executive of shale producer Pioneer Natural Resources Co, Scott Sheffield, recently said he expects small companies to increase output but in the aggregate U.S. output will remain flat to 1% higher even at $60 per barrel.

PRODUCTION FREEZE

Last week’s severe cold will wreak havoc on oil and gas production as companies deal with frozen equipment and a lack of power to run operations. The largest U.S. independent producer, ConocoPhillips, on Thursday said the majority of its Texas production remained offline.

But J.P. Morgan analysts said in a Feb. 18 report rising oil prices might prompt a quicker shale revival.

“As long as operators have sufficient drilled but unfracked well inventory to complete, they should be able to easily grow production while keeping capex in check,” the bank said, using a term for drilling spending.

Forecasts for 2022 such as from the U.S. Energy Information Administration are for more U.S. supply growth [EIA/M], although perhaps not enough to cause problems for OPEC+ for now.

“U.S. oil output will not go back to pre-COVID levels any time soon,” said PVM’s Brennock. “But that is not to say that U.S. shale will not one day return as a thorn in OPEC’s side.”

(By Alex Lawler in London and Jennifer Hiller in Houston; Editing by Gary McWilliams and Matthew Lewis)

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Boeing recommends airlines suspend use of some 777s after United incident

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Boeing recommends airlines suspend use of some 777s after United incident 2

By Jamie Freed and David Shepardson

(Reuters) – Boeing Co said it recommended suspending the use of 777 jets with the same type of engine that shed debris over Denver at the weekend after U.S. regulators announced extra inspections and Japan suspended their use while considering further action.

The moves involving Pratt & Whitney 4000 engines came after a United Airlines 777 landed safely at Denver International Airport on Saturday local time after its right engine failed.

United said the next day it would voluntarily and temporarily remove its 24 active planes, hours before Boeing’s announcement.

Boeing said 69 of the planes were in service and 59 were in storage, at a time when airlines have grounded planes due to a plunge in demand associated with the COVID-19 pandemic.

The manufacturer recommended airlines suspend operations until U.S. regulators identified the appropriate inspection protocol.

The 777-200s and 777-300s affected are older and less fuel efficient than newer models and most operators are phasing them out of their fleets.

Images posted by police in Broomfield, Colorado showed significant plane debris on the ground, including an engine cowling scattered outside a home and what appeared to be other parts in a field.

The National Transportation Safety Board (NTSB) said its initial examination of the plane indicated most of the damage was confined to the right engine, with only minor damage to the airplane.

It said the inlet and casing separated from the engine and two fan blades were fractured, while the remainder of the fan blades exhibited damage.

Japan’s transport ministry ordered Japan Airlines Co Ltd (JAL) and ANA Holdings Inc to suspend the use of 777s with P&W4000 engines while it considered whether to take additional measures.

The ministry said that on Dec. 4, 2020, a JAL flight from Naha Airport to Tokyo International Airport returned to the airport due to a malfunction in the left engine about 100 kilometres north of Naha Airport.

That plane was the same age as the 26-year-old United Airlines plane involved in the latest incident.

United is the only U.S. operator of the planes, according to the Federal Aviation Administration (FAA). The other airlines using them are in Japan and South Korea, the U.S. agency said.

“We reviewed all available safety data,” the FAA said in a statement. “Based on the initial information, we concluded that the inspection interval should be stepped up for the hollow fan blades that are unique to this model of engine, used solely on Boeing 777 airplanes.”

Japan said ANA operated 19 of the type and JAL operated 13 of them, though the airlines said their use had been reduced during the pandemic. JAL said its fleet was due for retirement by March 2022.

Pratt & Whitney, owned by Raytheon Technologies Corp, was not available immediately for comment.

A spokeswoman for South Korea’s transport ministry, speaking before Boeing recommended suspending operations, said it was monitoring the situation but had not yet taken any action.

Korean Air Lines Co Ltd said it had 16 of the planes, 10 of them stored, and it would consult with the manufacturer and regulators and stop flying them to Japan for now.

In February 2018, a 777 of the same age operated by United and bound for Honolulu suffered an engine failure when a cowling fell off about 30 minutes before the plane landed safely. The NTSB determined that incident was the result of a full-length fan blade fracture.

Because of that 2018 incident, Pratt & Whitney reviewed inspection records for all previously inspected PW4000 fan blades, the NTSB said. The FAA in March 2019 issued a directive requiring initial and recurring inspections of the fan blades on the PW4000 engines. (This story corrects number of Korean Air 777s in service and stored in paragraph 18)

(Reporting by Jamie Freed in Sydney and David Shepardson in Washington; additional reporting by Eimi Yamamitsu and Maki Shiraki in Tokyo, Joyce Lee in Seoul and Tim Hepher in Paris; Editing by Sam Holmes and Christopher Cushing)

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Oil gains as U.S. production slowly returns after freeze

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Oil gains as U.S. production slowly returns after freeze 3

TOKYO (Reuters) – Oil prices rose on Monday as the slow return of U.S. crude output that was cut by frigid conditions raised concerns about supply just as demand is coming back from the depths of the coronavirus pandemic.

Brent crude was up 76 cents, or 1.2%, at $61.67 a barrel by 0104 GMT, after gaining nearly 1% last week. U.S. oil rose 74 cents, or 1.3%, to $59.98 a barrel, having fallen 0.4% last week.

Abnormally cold weather in Texas and the Plains states forced the shut down of up to 4 million barrels per day (bpd) of crude production along with 21 billion cubic feet of natural gas output, analysts estimated.

Oilfield crews will likely take several days to de-ice valves, restart systems and begin oil and gas output. U.S. Gulf Coast refiners are assessing damage to facilities and may take up to three weeks to restore most of their operations, analysts said, with low water pressure, gas and power losses hampering restarts.

“With three quarters of fracking crews standing down, the likelihood of a fast resumption is low,” ANZ Research said in a note.

“Longer term, the fall in capital expenditure at U.S. shale oil companies this year will keep drilling activity subdued, leading to output remaining below pre-pandemic levels,” ANZ said.

For the first time since November, U.S. drilling companies cut the number of oil rigs operating due to the cold and snow enveloping Texas, New Mexico and other energy producing centres. [RIG/U]

(Reporting by Aaron Sheldrick; Editing by Shri Navaratnam)

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