Fall in tourism goes beyond summer, but Portugal’s rating is “resilient”

Moody’s admits that southern European countries, including Portugal, are more vulnerable to the fall in tourism, a sector with significant weight in these economies. However, this should not, for the time being, affect the financial ratings of sovereigns as their credit profile “remains resilient,” the rating agency wrote in a report released this Friday.

“The coronavirus pandemic has led to a sharp drop in tourism, which is likely to last beyond the 2020 summer season. Some Southern European sovereigns are most vulnerable to this development because of the importance of tourism to their economies,” Moody’s said, noting that this is the case for Portugal, Croatia, Greece, Malta, Spain, Cyprus and Italy.

The problem is more significant for the countries most dependent on air transport, as is mostly the case with Portugal. “intercontinental tourism will be particularly slow to recover in the wake of the current pandemic,” while “countries with a relatively high share of domestic tourism are relatively less exposed in the current crisis,” the report says.

However, for Moody’s, although the shock had a “considerable negative” impact on employment, public debt and economic growth, “countries maintain other strengths in the [credit] profile that were rebuilt in the years following the Eurozone sovereign debt crisis.”

One such strength is the “significant help” being given by the monetary policy of the European Central Bank (ECB), as well as, in the future, by the budgetary policy of the European Union under the European Recovery Fund. Together they will “dissipate some negative effects caused by the pandemic and its impact on tourism”, conclude the authors of the report, Moody’s Vice-President Sarah Carlson and analyst Petter Bryman.

“Risks from the tourism sector are concentrated in some of Europe’s lowest-rated sovereigns. However, many of these countries have sources of economic, institutional, and fiscal resilience that allow for ratings stability despite the economic and fiscal impact of the pandemic; Portugal, Cyprus, and Croatia even have positive outlooks on their ratings,” the agency explains.

But not everything is lost in South European tourism, although Moody’s predicts that the problems in the sector will last beyond the summer. “That said, a large percentage of tourist arrivals by car mitigate the risks for Croatia and a relatively high percentage of domestic tourists mitigate the risks for Italy and Spain,” the report points out.

It should be noted that in July the financial rating agency decided not to comment on Portugal’s rating on the indicative date. Moody’s forecast for the Portuguese deficit is 9.2% in 2020, well above the government’s estimated 7%, and 4.3% in 2021.