DBRS says political crisis will not put pressure on Portugal rating

Morningstar DBRS, a Toronto-based credit ratings agency, on Wednesday ruled out negative pressure from the current political crisis in Portugal on the country’s sovereign ratings, arguing that its “commitment to reducing public debt” and “strong fiscal situation” should serve to “mitigate risks” in that area.

“Unless the commitment to fiscal discipline weakens and leads to a significant increase in Portugal’s public debt ratio over the medium term, which is not our current expectation, we do not expect this political crisis to generate negative pressures on sovereign credit ratings”, said Javier Rouillet, Senior Vice President, Morningstar DBRS, Global Sovereign Ratings, quoted in a statement.

Recalling that Portugal is preparing for its third legislative elections in less than four years, the rating agency says that this situation “increases political uncertainty in Portugal at a time when external risks have increased significantly and pressures to spend more on defence are building up”.

It adds: “The absence of a fully functioning Government could lead to some delays in the implementation of Portugal’s recovery and resilience plan [for spending European Union post-pandemic funds] and postpone TAP’s privatisation plans”.

Even so, in its report on the situation, Morningstar DBRS anticipates that the current political impasse “will not lead to a deterioration in Portugal underlying credit strengths will not lead to a deterioration in Portugal’s underlying creditworthiness” and notes: “Despite the turbulent political situation in Portugal in recent years, we have seen a high degree of policy continuity and strong support towards public debt reduction”.

“There seems to be a consensus among the main political parties that this constitutes a key anchor for macroeconomic stability and for fostering economic growth over time”, the text continues. “Unless the political stalemate becomes protracted and starts impacting growth or confidence towards the country, we do not expect this to have a material impact on Portugal’s economic performance or fiscal accounts”.

It summarises: “The commitment of the main political parties to reducing public debt and Portugal’s strong fiscal position and growth outperformance mitigate the risks.”

The political crisis in Portugal was sparked several weeks ago by reports about a family company, Spinumviva, set up by the prime minister before he became leader of the opposition, that some argue point to conflicts of interest. This ultimately led to the tabling of two motions of censure by far-right Chega and the Communist Party (PCP), both of which were rejected.

In the face of the doubts that opposition parties continued to express, the prime minister last week announced that the government would table a motion of confidence, which was rejected on Tuesday, toppling the government.

On Wednesday, Portugal’s president, Marcelo Rebelo e Sousa, is to receive all the political parties with seats in parliament, one by one, at his palace in Belém, Lisbon, to discuss the political situation and the possibility of snap legislative elections.

The head of state had already indicated that if the motion of confidence were rejected, causing the government to fall, he was minded to dissolve parliament, adding that the “electoral calendar” would point to mid-May.

He has never explicitly said that he would schedule elections, but having dissolved parliament about a year ago after the then, Socialist prime minister, António Costa, resigned due to his name coming up in the Operation Influencer criminal investigation (though Costa has not been named as a suspect), the president let it be known that he would opt for the same solution this time around.