Government should stay focused on cutting debt – DBRS

Morningstar DBRS expects the next government to “maintain its commitment” to prudent fiscal policies and debt reduction, but warns of greater external challenges and instability resulting from parliamentary fragmentation.

“The next government will face greater challenges, especially on the external front, and may not last due to a still fragmented parliament. However, we expect it to maintain its commitment to prudent fiscal policies and further reduction of Portugal’s debt burden”, Morningstar DBRS senior vice president Javier Rouillet said in a statement.

For the financial rating agency, implementing the new government’s policy priorities, resulting from the victory of the Democratic Alliance (AD) in Sunday’s elections, and the increase in defence spending must follow “a gradual approach that takes into account the budgetary space available each year”.

According to DBRS Morningstar, the government will face “challenges similar to those of previous years” in the next legislative term, namely, implementing reforms and investments linked to the recovery and resilience plan, the shortage of affordable housing, and the management and integration of internal migration flows.

“In addition, Portugal faces a more complex external environment due to growing protectionism and increased geopolitical tensions,” it said, noting that “budgetary pressures are increasing, particularly due to the need to increase defence spending”.

Even so, the rating agency expects the new government to “maintain its commitment to reduce Portugal’s public debt ratio, in line with previous governments over the last decade, and to implement its political agenda and gradually increase defence spending without compromising Portugal’s commitment to fiscal responsibility”.

In its analysis released today, DBRS states that, given the AD’s victory without an absolute majority, “the most likely scenario” is “a new minority government led by AD Prime Minister Luís Montenegro, potentially supported by the Liberal Initiative in the form of a broader coalition or parliamentary support”.

It also notes that “traditional centrist parties no longer hold a two-thirds majority in the Portuguese parliament” due to “new electoral inroads by the anti-immigration party Chega.”

“More generally, Portugal, rated A (high), stable trend, has shifted further to the right, with the combination of AD, Chega and the Liberal Initiative (IL) on track to win two-thirds of the seats in parliament, following the poor results of the Socialist Party (PS) and other smaller parties on the left,” it added.

Morningstar DBBRS states, “although the results give AD more strength for the new legislature, the next government will still need the support or abstention of third parties to govern and legislate”.

“Therefore, the stability of the government could be called into question and lead to early elections. However, Portugal will only be able to hold legislative elections in May 2026,” it concludes.

The AD won Sunday’s legislative elections with 89 MPs, while the PS and Chega tied in the number of seats won in parliament, with 58 each.

The Liberal Initiative remains the fourth political force, with one more MP (9) than in 2024. Livre, which went from four to six elected representatives, takes fifth place.

The CDU lost one seat and now has three MPs, while the Left Bloc has been reduced to one representative, as has PAN, which retained one MP. The JPP, from Madeira, managed to elect one MP.

These results do not yet include voters residing abroad, whose participation and choices will be known on 28 May.