OREANDA-NEWS. 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 says. It is unlikely to have any immediate implications for Ireland's sovereign rating in the near term, but a medium-term rating impact would be possible if the economic dislocation of Brexit were to prove severe.

Ireland's economy is highly exposed to Brexit. According to the Central Statistics Office (CSO), the UK accounted for 12.6% of Ireland's total goods exports in January-April 2016, and 24% of total goods imports. The UK also accounted for 20% of total services exports in 2014. Total goods and services exports to the UK are equivalent to around 17% of GDP. There could be significant sector-specific fall out. For example, the UK accounts for 49% of Irish agricultural exports.

A UK slowdown, sterling depreciation and potential future trade barriers between Ireland and the UK would weigh on Irish exports, economic growth and employment; although the full impact will only become clear as EU-UK negotiations develop. We think the most important near-term impact will be through reduced domestic confidence.

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, but this is highly uncertain.

Brexit would represent a symbolic moving apart of the UK and Ireland that could weaken confidence in the peace process in Northern Ireland and potentially impair cross-border relations and trade.

Ireland's minority government, which was formed in May after February's inconclusive election, has outlined its 'Contingency Framework' that will guide its policy response. This identifies priorities including UK-EU negotiations, UK-Irish relations, trade and investment, and Northern Ireland. It remains to be seen how effective this will be, and some domestic political uncertainty persists given the relatively loose agreement between Fine Gael and Fianna Fail.

Lower economic growth would reduce the tax intake, reducing the medium-term fiscal space that the government identified in its recent Summer Economic Statement. Ireland's commitment to fiscal consolidation during and after its EU-IMF programme leads us to think an increase in fiscal risks would be met with a policy response to continue meeting fiscal targets and limiting the impact on public debt dynamics.

Our upgrade of Ireland to 'A' from 'A-' in February reflected the marked fall in government debt to 93.8% of GDP in 2015 from 120% in 2013 driven by strong and broad-based growth and fiscal consolidation. While negative, Brexit is unlikely to undermine the progress that Ireland has made in these areas. Fitch expects debt/GDP to fall in the medium term, helped in part by lower nominal interest rates.