Growth, debt and banking are blocking Portugal’s rating, Moody’s says

Although Moody’s acknowledges the economic progress made in Portugal, the agency continues to consider that moderate growth, high debt and weak banking sector are halting an improvement in the Republic’s rating to an investment grade. Moody’s has not yet changed Portugal’s rating from the “junk” status last month.

“Portugal’s economic growth, together with spending controls and declining interest costs, has supported a marked improvement in the country’s budget position,” said Evan Wohlmann, Moody’s vice president and co-author of the annual report from the rating agency. “Portugal’s return to private capital markets, the economy’s diversification, and relatively high average level of wealth compared to Ba1 peers also support [the country’s] creditworthiness“, he adds.

However, there are still some challenges to overcome, which prevent the agency from improving the rating to an investment grade, namely a “moderate potential growth, still elevated debt and a weak banking sector”, Moody’s states, reinforcing an idea that had been expressed by the agency after it decided to maintain Portugal’s “junk” status.

The debt ratio retrieved substantially to 125.7% of GDP. But it should remain high in the next couple of years — the agency foresees that it will stand at 117% in 2021. Banks also have a lot of work ahead of them. “Despite improvements, the banking sector remains the key event risk for Portugal’s credit profile. This assessment takes into consideration the system’s relatively large size, its high level of non-performing loan levels and still weak profitability”, the agency highlights.

To increase Portugal’s rating, Moody’s must conclude that “the positive economic and fiscal trends are likely to be sustained and the rating agency is confident that the very high debt burden will move to a steady, downward trend”.