Jukebox: the songs rating agencies want to hear in the 2017 State Budget

When rating agencies look at the 2017 Portuguese State Budget draft, they have a playlist in mind. More measures to promote growth, compliance with fiscal goals, reducing economic debt and stabilizing the financial system: these are the songs requested by the analysts assessing Portugal for international investors – Standard&Poor’s, DBRS, Moody’s and Fitch.

Loud growth in economy

In their last assessment report on the Portuguese economy, Standard&Poor’s (S&P) points out a sharp decline in the rhythm of economic activity can lead to credit rating cuts. That is why the four agencies ask for measures that will stimulate growth and emphasize the need to implement structural reforms.

S&P suggest simplifying the process of redundancy and creating a contract for employment– not in government’s plans for now –, as well as improving the efficiency of Public Administration and address carefully any increases in minimum national wages.

In his interview to ECO, Fergus McCormick from DBRS explained that, in the short term, “concentrating on domestic demand and increasing public investment tends to be quite effective in bolstering domestic demand”, pointing out to the need to promote structural changes in the medium term that will allow for a raise in potential GDP: “It would be wise if the government would attract more immigrants to Portugal”.

Commitment to fiscal targets

The four rating agencies want to see a State Budget that maintains the fiscal consolidation rhythm and that is in tune with the European Commission.

"In terms of the Budget that is going to be introduced on October 15th, we [DBRS] expect the Portuguese authorities to continue this firm commitment to the Stability and Goal Pact target.”

S&P is clear when warning that “a considerably more negative fiscal position” than the agency’s predictions (2.8% deficit for 2016 and 2.4% for 2017) can lead to a “drop in the rating position”. To meet Brussel’s terms, the agencies anticipate the government should resort to measures both in revenue and expenditure.

"The European Commission recommended, for example, a broadening of the VAT base, however, this is at odds with actual government policies […]. Nor do pension reforms seem likely, although Portugal spends relatively more on public pensions than most peers, with the exception of Italy.”

Economic debt relief

The agencies consider public investment very important, but understand the government has little room to improvise, given the European demands of deficit consolidation and the high government debt.

Rating agencies’ forecasts for 2017

Fitch considers debt in the private sector one of the main structural constraints in the Portuguese economy, with serious impact in investment. To improve Portugal’s rating, S&P mentions “an orderly deleveraging, to significantly reduce family and private sector debt”, also suggesting diversifying sources of financing to companies, “especially from external sources”, should be a priority in government’s economic policy.

Banks are singing the Blues

In an interview to Bloomberg, Mário Centeno, minister of Finance, has already confirmed the government is preparing a legislative package to help banks sell assets from non-performing loans. This new vehicle is music to the ears of the agencies, since they consider it will help enhance the sector’s availability to finance economy and, on the other hand, turn down the volume on the fragilities of the Portuguese system.

Fitch considers the financial sector represents “the greatest risk” for fiscal performance and debt.