Fitch increases Portugal’s rating by two levels. The country is no longer “junk”

  • ECO News
  • 15 December 2017

The rating agency decided to remove the Portuguese public debt from the junk status. Fitch joins Standard & Poor’s and DBRS by granting Portugal a quality investment grade.

After Standard & Poor’s decision in September, Fitch has also decided this Friday to improve the Portuguese Republic’s rating to an investment grande. The Portuguese public debt now has a positive evaluation from three financial rating agencies: DBRS, S&P and Fitch. The Portuguese rating is no longer in the “junk” status (BB+) and has a quality investment grade (BBB) — which means that Portugal climbed two levels in Fitch’s grading. The outlook is stable.

In the report accompanying the decision, Fitch hopes the Portuguese public debt will decrease three percentage points this year, falling below 127% of GDP — “the first debt ratio decrease since the sovereign debts’ crisis”, the rating agency highlights, signaling that this is a trend to be continued for the upcoming years. There are three favorable elements that point to a debt reduction: last year’s “structural” budgetary measures, the recent cycle of economic recovery and a “substantial” improvement of the financing conditions.

Fitch also took the opportunity to make an upward revision of their estimates for the 2017 and 2018 economic growth. This year, the rating agency hopes to have a 2.6% GDP variation, similar to the Government’s forecast, but for next year, Fitch is expecting a more accentuated deceleration to 1.9%. Fitch also highlights the reduction of the deficit, the good performance of the labor market and the significant plunge of the unemployment rate. However, the agency continues to foresee a low potential GDP (of 1.5%).

As for the banking sector, the analysis is positive for the recapitalization of CGD and BCP and for the sale of Novo Banco, but negative for the amount of NPL that continues harming the Portuguese economy. Even so, Fitch writes that “the economic recovery, sustained by a strong economic sentiment and an increase in employment, creates a favorable environment for the normalization of the country’s banking sector”. The rating agency also highlights Portugal’s favorable financing conditions in the markets in the past few months.

Nonetheless, Fitch also identifies potentially negative matters, especially now that Portugal stands at a BBB level and is comparable to countries with a better economic and financial performance. The median of countries Fitch classifies as BBB is 41% of GDP, while Portugal’s debt should remain above 100% of GDP for the next upcoming years, more than double that median. Furthermore, Portugal’s openness to trade is lower than the median of countries who share a BBB rating. 

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