April 11, 2014 / 4:04 AM / 3 years ago

Fitch Revises Outlook on Portugal to Positive; Affirms at 'BB+'

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(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Portugal - Rating Action Report here LONDON, April 10 (Fitch) Fitch Ratings has revised the Outlook on Portugal's Long-term foreign and local currency Issuer Default Rating (IDRs) to Positive from Negative and affirmed the IDRs at 'BB+'. The agency has also affirmed Portugal's Short-term foreign-currency IDR at 'B' and Country Ceiling at 'A+'. KEY RATING DRIVERS The revision of the Outlook on Portugal's IDRs to Positive reflects the following key rating drivers and their relative weights: High Portugal is making good progress in reducing its budget deficit. The 2013 fiscal performance exceeded Fitch's expectations and outperformed the IMF-EU programme targets, even excluding one-off factors. The general government deficit stood at 4.5% of GDP, well below the programme's target of 5.5% of GDP (excluding the recapitalisation of Banif). The stronger fiscal position is likely to carry over into 2014 and puts Portugal in a better position to achieve the 2014 fiscal deficit target of 4% of GDP. The Portuguese economy is recovering. Real GDP grew by 0.6% qoq in 4Q13, which was the third consecutive quarter of positive real GDP growth. On an annual basis, the economy grew (by 1.6%) for the first time since 4Q10. For 2013 as a whole, the economy contracted by 1.4%, less than the agency's projection at the time of the last rating review (negative 1.8%). Fitch has revised its growth projections for the Portuguese economy. The agency forecasts real GDP growth of 1.3% in 2014 and 1.5% in 2015 (from 0.2% and 1% previously). The revision for 2014 reflects a stronger carry over from end-2013 and a less severe fiscal drag as a result of stronger fiscal performance in 2013. Labour market conditions, pent-up investment demand and buoyant confidence indicators will support domestic demand. The recovery in the eurozone should support export performance. Portugal's fiscal financing conditions have improved markedly since Fitch's previous rating review in October 2013 and the sovereign has effectively regained market access. Moreover, the government has built a sizeable deposit buffer (around 9% of GDP in March 2014). The authorities are therefore in a position to decide whether to opt for a "clean" exit from its IMF-EU programme or ask for a precautionary credit line. Despite the improved financing conditions, Fitch believes that securing a precautionary credit line would be beneficial in protecting against downside risks, although that is not the agency's expectation and not a key rating driver. First, Portugal will have high financing needs in the coming years despite the path of deficit reduction. Shocks could arise from adverse constitutional court rulings or unexpected costs arising from continued restructuring of SOE's for example. Second, conditionality attached to the credit line would increase confidence that Portugal will continue to undertake fiscal policies aimed at reducing the level of public debt, regardless of who is in power. Medium The Portuguese authorities have kept the IMF-EU programme on track despite significant institutional hurdles, such as the several constitutional court rulings that deemed some elements of the consolidation plan unconstitutional. The authorities' policy strategy has targeted some key credit weaknesses, notably labour market rigidities, inefficiencies at state-owned enterprises and the structural fiscal deficit. Public debt has marginally improved from the previous rating review. Fitch expects gross general government debt (GGGD) to have peaked at 129% of GDP in 2013 (130% of GDP in 2014-15 in the previous review) and to gradually decline to 115% of GDP by 2020. The improvement is due to better growth projections and lower fiscal deficit forecasts in 2014-15. The agency assumes general government primary surpluses of 2.6% of GDP on average between 2015 and 2020. Portugal's balance of payments adjustment within the eurozone is proceeding at a faster pace than expected. The improvements in price and non-price competitiveness indicators are reflected in export performance (the strongest in the eurozone in 2013) and a shift in the current account to a surplus of 0.4% of GDP from a deficit of 12.6% of GDP in 2008. Portugal's 'BB+' ratings also reflect the following key rating drivers: Portugal's ratings are lower than those of other large advanced economies, reflecting the large risks to creditworthiness posed by its economic and financial adjustment within the eurozone. Medium-term growth prospects have improved but remain weak, all sectors of the economy remain very indebted and unemployment is high. Despite the large external adjustment external debt remains high, particularly in the non-financial corporate sector and the net international investment position (NIIP) is the worst in the eurozone. It will take years of sizeable current account surpluses to trigger a decline in external debt ratios and an improvement in the NIIP. Following the government reshuffle in July 2013, short-term political risks have eased. However, Fitch believes they remain significant in the post-programme world. Cross-party commitment to fiscal consolidation seems to have waned and this is a downside risk for the rating. Whether or not Portugal will ask for a precautionary credit line, continued fiscal adjustment will be required to place debt on a downward path. RATING SENSITIVITIES Future developments that could individually or collectively result in an upgrade to investment grade include: - Deficit reduction remaining on track and consistent with a decline in the public debt ratio. - Continued economic recovery and evidence that private debt peaks and starts to gradually decline. - Securing a track record of market access on terms consistent with long-term public debt sustainability. - Sustained current account surpluses consistent with a reduction in external debt ratios. The Outlook is Positive. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a negative rating change. Future developments that could individually or collectively result in a stabilisation of the Outlook include: - Material divergence from the fiscal consolidation path, resulting in a higher debt ratio. - A failure to sustain economic recovery and macroeconomic rebalancing. - Adverse shocks from domestic politics and/or market financing. KEY ASSUMPTIONS Fitch assumes that fiscal consolidation is maintained beyond the programme period to ensure an exit from the Excessive Deficit Procedure by 2015. Should the Constitutional Court reject other measures included in the 2014 budget, Fitch assumes that the government will adopt necessary alternative measures. Fitch assumes that implementation of ESA 2010 accounting changes will result in limited upward revisions in GGGD. Revisions are likely to be well below the overall level of debt of public corporations not included in the general government perimeter (11.8% of GDP in December 2013). Fitch assumes the eurozone will avoid long-lasting deflation, such as that experienced by Japan from the 1990s. An extended period of deflation, resulting in no growth in nominal incomes would slow down balance-sheet adjustment in the Portuguese corporate sector and increase the risk of debt deflation. Fitch assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key macroeconomic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. 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 Ed Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL 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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