London, 09 May 2014
Moody’s Investors Service has today upgraded Portugal’s government bond rating to Ba2 from Ba3. In addition, the rating agency placed the Ba2 rating on review for possible further upgrade.
The rating action was triggered by the following key factors:
- Portugal’s fiscal situation has improved more rapidly than initially targeted and the public debt ratio will start declining this year, albeit from a very high level. The budget deficit was reduced a full percentage point of GDP more than envisaged last year, indicating the government’s strong commitment to fiscal consolidation.
- The country will conclude its three-year EU/IMF support programme in the near future, without the need for a precautionary credit line from the European Stability Mechanism (ESM). Portugal has regained access to the public debt markets and in addition the government has built up sizeable cash buffers.
- Portugal’s economic recovery is gaining momentum, with signs of broadening beyond exports, which continue to perform strongly. Moody’s believes that economic growth will be sustained over the medium-term because the Portuguese authorities have implemented a wide range of structural reforms.
The review for possible upgrade reflects Moody’s view that Portugal’s creditworthiness can improve further in the short term, if the rating agency were to conclude that Portugal will likely manage to bring its very high public debt ratio (currently close to 130% of GDP) onto a clear downward path in the coming years. During the review, Moody’s will assess the upcoming decisions of Portugal’s Constitutional Court on key measures of the 2014 budget. Moody’s considers these decisions to be important because the contested measures affect the key government expenditure items of public-sector wages and pensions. In Moody’s view, achieving and maintaining low budget deficits over the medium term is difficult without addressing these key spending areas. In addition, the rating agency plans to evaluate the medium-term fiscal plan recently presented by the government and seek greater clarity about the possibility for a broad consensus to emerge on the need to maintain strict fiscal policies beyond the end of the current parliament.
Portugal’s short-term debt rating remains unchanged at Not-Prime. The domestic and foreign-currency country ceilings for long-term debt and deposits have been raised to Baa1/P-2 from Baa3/P-3. The ceilings reflect a range of undiversifiable risks to which issuers in any jurisdiction are exposed, including economic, legal and political risks. The ceilings act as a cap on ratings that can be assigned to the foreign and local-currency obligations of entities domiciled in the country.
Concurrently, Moody’s has upgraded the senior debt rating of Parpublica Participacoes Publicas (SGPS) SA to Ba2 from Ba3 and initiated a review for possible further upgrade. Despite the lack of an explicit guarantee, Moody’s rates SGPS at the same level as the Portuguese government to reflect the company’s 100% government ownership as well as the very close links between the company and the government and strong evidence of government financial support for the company.
RATIONALE FOR UPGRADE TO Ba2
— IMPROVING FISCAL PERFORMANCE AND PUBLIC DEBT ON DOWNWARD TREND
The first driver behind the upgrade is the improvement in the country’s fiscal situation. Last year, the government managed to reduce the general government budget deficit a full percentage point of GDP more than the target (deficit of 4.9% of GDP versus a target of 5.9% of GDP), due to both stronger-than-budgeted tax revenues and very strict expenditure control. This strong performance also improves the starting point for 2014 when the government aims to reduce the budget deficit further to 4% of GDP, which we consider to be feasible. The better-than-targeted fiscal performance underlines the strong commitment of the Portuguese authorities to fiscal consolidation.
Moody’s expects the public debt ratio to decline this year for the first time in many years, albeit from a very high level of close to 130% of GDP. Under its base case growth and fiscal assumptions, the rating agency expects the debt ratio to gradually decline in the coming years to around 115% of GDP by 2018.
— EXIT FROM EXTERNAL SUPPORT PROGRAMME AND REGAINED MARKET ACCESS
The second driver underlying the upgrade is the successful exit from the external support programme in the near future, without the need for a precautionary credit line from the ESM. The last review under the programme has just been completed, with the last disbursement of EUR2.6 billion scheduled for June. The government has regained market access, issuing a total of EUR7 billion in medium- to long-term debt so far this year and has assembled a large cash buffer of EUR15 billion (excluding dedicated resources for possible further banking-sector capital needs of EUR6.4 billion), which amply cover debt maturities in 2014.
— IMPROVING ECONOMIC OUTLOOK
The third driver is Portugal’s improving economic outlook, with the economy expanding faster than expected towards the end of 2013. The recovery is increasingly broad-based with business investment and private consumption also contributing positively to growth in the fourth quarter of 2013. Moody’s expects exports to continue to perform well, with Portugal’s exporters continuing to gain market share. The broad structural reforms implemented over the past several years should help improve Portugal’s medium-term growth outlook. Moody’s forecasts for real GDP in 2014 and 2015 are in line with IMF and European Commission projections of 1.2% and 1.5% in 2014 and 2015 respectively.
RATIONALE FOR REVIEW FOR UPGRADE AND FOCUS OF THE REVIEW
During the review, Moody’s will (1) assess the prospects for an expenditure-focused and sustainable reduction in the budget deficit, against the background of upcoming rulings on several fiscal measures by the country’s Constitutional Court. Moody’s considers these decisions as important because the contested measures affect the key government expenditure items of public-sector wages and pensions. In our view, achieving and maintaining low budget deficits over the coming years is difficult without addressing these key spending areas. At the same time, the rating agency acknowledges that the current Portuguese government has previously managed to implement alternative measures when confronted with past unfavourable rulings by the Constitutional Court.
During the review, Moody’s also plans to (2) evaluate the medium-term fiscal plan that the government recently presented; and (3) seek greater clarity about the possibility for a broad consensus to emerge on the need to maintain strict fiscal policies beyond the end of the current parliament.
WHAT COULD MOVE THE RATING UP/DOWN
If the review leads to an upgrade of Portugal’s rating, it would likely be a one-notch adjustment to Ba1. An upgrade of the rating beyond Ba1 at the conclusion of the review is unlikely given the vulnerabilities associated with the very high public debt ratio. Moody’s also considers Portugal’s very high external debt as a key credit weakness. The country’s net external debtor position of 119% of GDP (2013) is among the highest in Moody’s sovereign rating universe. A downgrade is unlikely over the medium term given the current review. However, Moody’s would confirm Portugal’s sovereign rating at its current Ba2 level if the rating agency concluded that the likely path of fiscal consolidation was not sufficient to bring the public debt ratio onto a clear downward trend.
GDP per capita (PPP basis, US$): 23,068 (2013 Actual) (also known as Per Capita Income)
Real GDP growth (% change): -1.4% (2013 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0.2% (2013 Actual)
Gen. Gov. Financial Balance/GDP: -4.9% (2013 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 0.5% (2013 Actual) (also known as External Balance)
External debt/GDP: [not available]
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 06 May 2014, a rating committee was called to discuss the rating of the Portugal, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have materially improved. The issuer’s fiscal or financial strength, including its debt profile, has improved. The issuer has become less susceptible to event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on http://www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this rating action, if applicable.