S&P maintains Portugal’s rating and outlook

S&P has maintained Portugal’s sovereign rating at a BBB- and has also kept a stable outlook. In order to have increased the rating, Portugal would have had to reduce public debt quicker or achieve more significant improvements on the financial stability of the country.

The financial rating agency reinforces the expectation for a “strong economic growth” — the forecast is that until 2021, there will be a 2% average growth — and the pursue of a “fiscal consolidation throughout the next two years”, but the agency also underlines that high debt brings “vulnerabilities” to the country, as well as NPL levels.

On the report that explains the decision of not moving neither the rating nor the country’s outlook, S&P explains that it could “increase Portugal’s rating if it had observed a faster progress in external deleveraging and in reducing public debt than what is currently expected”. The agency foresees a 122.3% debt to GDP in 2018, and a 119.8% debt to GDP for 2019. Only in 2021 will the Portuguese debt stand at 114.3% of GDP.

But there are more factors that could could have caused a rating increase. “S&P might have considered increasing its ratings to reflect potential improvements in financial stability”, the document states.

S&P might have considered increasing its ratings to reflect potential improvements in financial stability.

On the other hand, “a steep weakening of economic growth caused by significant deviations from policies” in force or “the lack of progress in implementing structural reforms that could boost growth” could have caused S&P to re-classify Portugal as ‘junk’. A decrease in the country’s rating could also be caused by a “considerable deterioration in the fiscal position” — although that is not S&P’s expectation, as highlighted by the agency — or an “inversion in the current external adjustment Portugal is making”.

S&P’s forecasts are that the fiscal deficit will stand at 1.1% this year, “in spite of the foreseen increase in expense”, with the “increase in social transfers and remove the freeze on civil servants career promotions”, for example, and the reduction of revenue due to changes in IRS. For 2019, the forecast is that there will be a 0.8% deficit, stabilizing then at 0.7% of GDP in the next two years.

Reacting to S&P’s decision, the Finance ministry assured, in a press release sent to newsrooms, that “the Government will move forward with policies that assure a solid economic model, cemented in the implementation of the National Reform Programme, in a balanced management of public accounts and in the promotion of a sustainable and inclusive growth”.