Financial rating agency Moody’s maintained Portugal’s rating at Baa2, but raised its outlook from stable to positive.
“Moody’s decision to change the outlook to positive reflects the growing likelihood that a prolonged period of economic and financial reforms, deleveraging of households and non-financial corporations, and a recovery in the banking sector will lead to further improvement and support the credit profile, particularly the economy and financial strength.” , says Moody’s report on Portugal’s public debt.
The affirmation of the Baa2 rating reflects the country’s “significant economic diversification” as well as “relatively high levels of wealth” and “high institutional strength with a still high debt burden and moderate exposure to events related to the banking sector and geopolitical risks.”
In its assessment, Moody’s assumes a scenario in which it expects gross domestic product (GDP) growth of 2.2% in 2023, reflecting a significant slowdown in domestic demand, and 2% in 2024.
Average growth 2%
The agency estimates that the economy will grow by an average of 2% over the next five years.
The agency also highlights last year’s decline in the deficit as well as the government debt-to-GDP ratio, noting that it was below pre-pandemic 2019 levels and two years earlier than Moody’s predicted in its latest Political Action Rating.
“Moody’s expects policymakers to remain committed to prudent fiscal policies and energy-related measures that will be tapered over 2023-24,” he notes, predicting the debt burden will fall to 103% of GDP in 2024.
The agency may upgrade the country’s rating if “new evidence emerges that sovereign debt metrics will continue to improve at a sustained pace, that economic growth will remain resilient, and that the impact of economic shocks on debt will be mitigated and quickly reversed.” .
“A more positive impact of the implementation of investment projects and new macroeconomic reforms linked to the Next Generation EU (NGEU) on Portugal’s growth potential would support this assessment.”
On the other hand, the agency notes that the outlook “is likely to return to stability if the debt burden resumes its upward trend,” which it explains could “manifest itself” through “declining political support for prudent budgets, including stronger calls for increased spending or economic growth materially below Moody’s current forecasts.”
Moody’s last commented on Portugal on September 17, 2021, when it upgraded Portugal’s debt rating from ‘Baa3’, above junk, to ‘Baa2’, with a stable outlook.
In the second half of the year, DBRS will again be the first agency to issue an opinion on Portuguese sovereign debt on July 21.
Source: The Portugal News