Fitch model “gives Portugal an A rating”. Problem is indebtedness

  • ECO News
  • 30 January 2020

The high indebtedness and the prospect of a drop in economic growth lead the financial rating agency to be conservative in relation to Portugal. The rating is three levels below the model.

Portugal already has an A rating in the models that Fitch uses to assess country risk. However, the potential for economic growth, the weight of public debt in the economy and high external indebtedness prevent Portugal from being, for now, higher on the quality investment scale. The “positive” outlook leads, nevertheless, to the country being one of those in line for improvement.

“Our model gives Portugal an A rating, so three levels above the current rating,” says Michele Napolitano, senior sovereign director at Fitch Ratings, this Thursday in Lisbon.

Finance Minister Mario Centeno said in October that the trajectory of recovery and financial stabilization will not be interrupted and that Portugal’s rating may soon move to higher levels. In the last two years, public debt has ceased to be classified as a speculative investment and has gone up in ratings, but none sees Portugal as A rating investment.

Fitch evaluates national public debt at “BBB”, the second investment grade level, with a “positive” outlook. But then why doesn’t the rating go up? Although “the Portuguese economy is more resilient than expected”, the outlook is for average growth to slow down, according to Napolitano, who said the agency’s estimate is for a 1.7% expansion of GDP this year due to moderation in private consumption.

Public debt and external debt also continue to weigh on the country, but Fitch expects that it will continue to decline steadily. Finally, banking is seen as a potential risk trigger still due to the scars of the financial crisis.

On the other hand, “the government’s commitment to have a budget surplus makes Portugal stand out from peers like Spain or Italy,” Fitch also says about the public accounts surplus of 0.2% that the Government foresees for this year. “This is a very positive aspect for our rating,” the rating agency adds.