Fitch Affirms Portugal at 'BB+'; Outlook Negative

Wed Oct 23, 2013 11:50am EDT

LONDON, October 23 (Fitch) Fitch Ratings has affirmed Portugal's 'Long-term foreign and local currency IDRs at 'BB+' with a Negative Outlook. The 'B' Short-term foreign currency IDR and the 'A+' Country Ceiling have also been affirmed. KEY RATING DRIVERS The affirmation reflects continued progress under the IMF-EU programme to date and the government's demonstrated commitment to fiscal discipline in spite of several political and institutional setbacks. Moreover, the economy has picked up recently and Fitch expects growth in 2014. However, political and implementation risks remain high and warrant, in our view, the maintenance of the Negative Outlook. The affirmation of Portugal's 'BB+' rating reflects the following key rating drivers: -Portugal is characterised by large fiscal imbalances, high indebtedness and has suffered from weak economic performance over the last six years. These factors make Portugal particularly vulnerable to adverse shocks. This explains Portugal's rating level despite its high per-capita income relative to its 'BB' category peers. -The Portuguese economy is making progress with its external adjustment process. The current account is likely to reach a surplus of 0.5% of GDP in 2013 from a deficit of 11% of GDP in 2009. -The 2014 draft budget, if fully implemented, would imply a significant fiscal deficit narrowing to 4% from 9.9% in 2010, albeit Fitch forecasts some slippage to a deficit of 4.5% for 2014. Moreover, planned measures consist mainly of expenditure cuts and should have a less detrimental effect on GDP than in previous budgets. -Economic growth surprised on the upside in the first half of the year. Following 10 consecutive quarters of contraction, real GDP grew 1.1% qoq in Q213. In annual terms, real GDP declined 2.1% versus a 4.1% decline in the previous quarter. Fitch revised its 2013 forecast to negative 1.8% of GDP from negative 2.6% of GDP in June and projects growth of 0.2% in 2014. -Portugal's EUR78bn financial assistance programme and the government's commitment to its conditions alleviate short-term liquidity risks, thereby supporting the sovereign ratings. -Structural reforms to achieve improvement in productivity have been central to the adjustment programme. The number of measures already implemented is extensive, considering both the fragile underlying macroeconomic environment and compared with eurozone peers. -The long-term fiscal cost of an ageing population is one of the most stable in the EU, due to past reforms. -The intensity of the eurozone crisis has eased over the past 12 months reflecting progress with the country's fiscal and reform plans and policy enhancements at the EU level, including the ECB's outright monetary transactions and gradual steps towards banking union. Nevertheless, in Fitch's view the eurozone crisis is not over and the risk of further market volatility remains material. The Negative Outlook on Portugal's foreign and local currency IDRs reflects the following factors: -There are implementation risks to the 2014 budget. In this respect, potential rulings by the Constitutional Court are the biggest risk. Although the government has committed to reformulate the budget law in the event that measures are deemed unconstitutional by the Court, such an outcome is likely to delay or weaken fiscal consolidation. -Political risk remains significant. Cross-party commitment to the programme has somewhat waned in 2013. The opposition Socialist party has taken a strong stance against the fiscal consolidation programme, but will likely be involved in negotiations regarding further official support when the current programme ends as elections are due in 2015. Any lack of cross-party support for additional official sector assistance could undermine investor confidence and reduce the likelihood of such assistance being provided. Such an outcome would be negative for the ratings. -Public debt dynamics are worsening, reflecting a slower consolidation path than previously anticipated and some one-off factors. Fitch now forecasts general government gross debt (GGGD) to peak in 2014-15 at around 130% of GDP before declining gradually from 2016, and stabilising at 116% of GDP by 2022. This compares with Fitch's previous projections in November 2012 of GGGD peaking at 124% in 2014 and declining to 116% of GDP by 2020. -Despite the large external adjustment, net external debt remains high at an estimated 82% of GDP in 2013. This is the legacy of over-borrowing in the decade to 2009, particularly in the non-financial corporate sector. Portugal may only achieve a more marked decline in external debt ratios from larger current account surpluses. RATING SENSITIVITIES The Negative Outlook reflects the following risk factors that may, individually or collectively, result in a downgrade of the ratings: -Political crisis or institutional gridlock that threatens material fiscal slippage and undermines successful completion of the adjustment programme -Material deviation from the adjustment programme that threatens the provision of additional official support in the event that full market access is not regained by the end of the current programme -Material upward revision in Fitch's forecast for the peak in the GGGD/GDP ratio Future developments that may, individually or collectively, lead to the Outlook being revised to Stable include: -Sustained return to economic growth and evidence that public debt is stabilising -Securing a credible precautionary programme from June 2014 and/or regaining market access on sustainable terms KEY ASSUMPTIONS Fitch assumes that fiscal consolidation is maintained beyond the programme period to ensure an exit from the Excessive Deficit Procedure (EDP) by 2015, in line with the government's stability programme. Fitch assumes that Portugal will gradually regain market access, supported by a post programme precautionary agreement with the troika. In its debt sustainability analysis, Fitch assumes an average primary surplus of 3% of GDP, potential growth of 1.5%, a GDP deflator of 1.7% over 2016-22 and gradual regaining of market access from 2014 reflected in higher marginal cost of funding. Should the Constitutional Court reject part of the measures in the 2014 draft budget law, Fitch assumes that the government will adopt necessary alternative measures to comply with the IMF-EU programme. Fitch assumes there will be progress in deepening fiscal and financial integration at the eurozone level in line with commitments by policy makers. It also assumes that the risk of fragmentation of the eurozone remains low. Contact: Primary Analyst Michele Napolitano Director +44 20 3530 1536 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Enam Ahmed Director +44 20 3530 1624 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:; Pilar Perez, Barcelona, Tel: +34 93 323 8414, Email: Additional information is available on Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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