Moody’s Investors Service, the last of the major credit rating agencies to keep Portugal’s debt in “junk” territory, considers it on the verge of regaining investment grade thanks to the country’s economic and fiscal improvements.
Moody’s vice-president Evan Wohlmann told Reuters that since the agency set the rating outlook at positive in September, Portugal has performed in line with its expectations, making an upgrade more likely than not this year.
Moody’s next reviews of Portugal’s sovereign rating are in April and October.
Moody’s holds Portugal one notch into speculative or “junk” status.
The country lost the investment grade in 2012 during its debt crisis and bailout, but Fitch and Standard & Poor’s have lifted it back up from speculative grade in the past few months.
An upgrade from Moody’s would represent a major victory for Portugal after its economy rebounded rapidly in the past couple of years after a 2011-14 debt crisis, which forced it to seek a bailout from the European Union and IMF.
Last year it grew at its fastest rate in at least a decade and it has slashed its budget deficit.
Wohlmann would not comment on the likelihood of an upgrade in April, saying the agency first wants to see “further confirmation that those economic and fiscal developments can be sustained and will support a continued but gradual downward trend in the debt burden.”
He said that since September, Portugal enacted a relatively prudent 2018 budget, 2017 expenditure was lower than planned, while a slight economic deceleration was within expectations.
“We see the risks to the upside,” he said, pointing to strong business and consumer morale, retail trade growth accelerating, while in the banking sector contingent liability risks have abated.
One of the key factors behind the positive outlook was that Moody’s finally saw “investment, which was the missing piece of the puzzle, starting to contribute to the recovery,” and that the fiscal performance exceeded its expectations.
The government projects to have achieved a budget deficit of below 1.3% last year — the lowest in the country’s democratic history — while growth accelerated to 2.6%.
An official confirmation that public debt had indeed fallen to the projected 126% of GDP last year from around 130% would be one ingredient in taking the rating decision, he said, but growth needs to remain broad-based, with fiscal consolidation maintained and supported by structural measures.
The expected reduction of the European Central Bank’s monetary stimulus programme and higher interest rates this year should have only limited impact on Portugal as the ECB had already drastically reduced the purchases of Portuguese bonds last year, yet its yields fell sharply anyway.
Many investors expect the ECB to wind down its €2.55tn bond purchase scheme this year if Europe’s economy continues to hum along, while a 10 basis point rise in interest rates from record lows is seen as likely by the money markets.
“The risk from higher interest rates is relatively low,” Wohlmann said, lauding Portugal’s measures to improve the resilience of the debt profile by lengthening maturities, replacing expensive debt such as IMF loans and crisis-time bonds with new bonds and maintaining cash buffers.
But in an event of an economic or fiscal shock, Portugal’s legacy problems of a high debt burden — third-highest in the eurozone after Greece and Italy — weak banks and limited economic growth, would still make it more vulnerable than most other eurozone countries.
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