The 2018 Budget “could complicate future consolidation” for Portugal, Moody’s warns

  • ECO News
  • 20 October 2017

The rating agency Moody's believes the measures inscribed in the Portuguese 2018 State Budget have very high costs.

Even though a better than expected economic growth and low interest rates will contribute to a reduction of the country’s debt in the next couple of years, the 2018 State Budget “could complicate future consolidation” for Portugal, considering the costly measures that will have an impact throughout the years. This is Moody’s first assessment of the Portuguese 2018 State Budget draft handed in Parliament last week.

The North-American agency believes the measures concerning spendings inscribed in the Budget will have a 427 million euros’ cost, which “far exceeds” the revenue-increasing measures assessed in around 55 million euros.

Although the Government hopes to reduce the deficit to 1.4% in 2017 and 1% in 2018, the agency has a “more conservative” perspective, since it considers that “further material reductions in spending will be difficult to achieve in the short term”. The agency further adds that “the precise measures supporting savings from the spending review remain unclear”.

There are also differences in growth forecasts. The Government anticipates a 2.6% GDP increase for this year and 2.2% in 2018; Moody’s sees a 2.5% growth in 2017 and 1.7% in 2018. Moody’s forecasts for the deficit reduction are, therefore, less optimistic: 2% for 2017 and 1.8% next year. 

Nonetheless, Moody’s believes public debt will continue declining “and reach just above 124% of GDP by 2018, supported by the favorable growth outlook and savings on interest costs”.

"The government will continue to successfully navigate the difficult balancing act of maintaining a prudent fiscal position while retaining the broad support of its parliamentary alliance. ”

Moody's

Moody’s concludes the relief granted by the Government in some areas, in this Budget, “could complicate future consolidation given its multi-year spending commitments”, eventually leading to more strict Budgets in the future. In the medium term, “this may “increase pressure on the government’s balance sheet, especially if growth under-performs”.

However, Moody’s foresees, “the government will continue to successfully navigate the difficult balancing act of maintaining a prudent fiscal position while retaining the broad support of its parliamentary alliance“.