Nov 12 - Fitch Ratings has affirmed Portugal's Long-Term foreign and local
currency Issuer Default Ratings (IDRs) at 'BB+'. The Outlooks are Negative.
Fitch has simultaneously affirmed Portugal's Country Ceiling at 'AAA' and
Short-term foreign currency IDR at 'B'.
The affirmation reflects the progress made under the IMF-EU programme to date,
but rising political, implementation and macroeconomic risks warrant the
maintenance of a Negative Outlook. Although the programme remains on track, it
is going through a delicate phase. Cross-party commitment to its implementation
and social cohesion are being tested by the 2013 budget, while institutional
constraints could limit the government's room for manoeuvre. Institutional
gridlock leading to policy paralysis would be negative for the rating.
The current account has declined to 3.7% of GDP in 2012 from a peak of 12.6% of
GDP in 2008, according to Fitch's estimates. External competitiveness measures
are improving. The flipside is that domestic demand is contracting and the
unemployment rate is increasing at a faster pace than anticipated. This
"internal devaluation" is a painful process but remains, in the agency's view,
necessary to restore Portugal's competitiveness within the eurozone.
Fitch expects real GDP to contract by 1.5% in 2013 before gradually recovering
in the medium-term. There are significant downside risks to this forecast. The
recently adopted 2013 budget, which includes measures worth around EUR5.3bn
(3.2% of GDP), is strongly reliant on revenue-raising measures and thus likely
to exert further negative pressure on economic growth. Moreover, difficult
economic conditions in Spain, Portugal's main trading partner, could also hamper
GDP growth in 2013.
The weak economic outlook will continue to challenge the government's deficit
reduction plan. Given the sharp revenue shortfalls in 2012, the Troika has
already agreed to revise the fiscal deficit targets to 5% of GDP in 2012 and
4.5% of GDP in 2013, from 4.5% and 3% previously. The 2014 target remains
unchanged at 2.5% of GDP.
Fitch judges the government's commitment to the programme to be strong. The
agency's baseline is that the programme targets will be met. Still, despite the
strong commitment to the programme, fiscal adjustment still has some way to go
and the risk of slippage remains large. In the event of slippage caused by a
deeper economic contraction, Fitch believes the Troika will allow further target
revisions as long as Portugal remains on track with programme implementation.
Portugal is still at an early stage of its adjustment. A sizeable effort is
required to achieve sustainable public finances in the medium-term. Portugal
will have to maintain primary surpluses of 3% of GDP a year from 2013 to
stabilise public debt at 116% of GDP by 2020, with risks to the downside should
a reformed economy fail to outperform the long-term growth rate of barely 2% in
However, the social cohesion and political consensus that has facilitated
implementation of the government's austerity measures has started to wane,
raising concerns about reform fatigue. The IMF-EU programme supports Portugal's
sovereign rating. While the macroeconomic adjustment takes place, external
funding support remains crucial to underpin confidence. Portugal's EUR78bn
financial assistance programme and government commitment to its conditions
alleviate short-term liquidity concerns. It also helps accelerate the pace of
structural reforms which will underpin productivity growth and competitiveness
in the medium-term.
The recent bond-exchange has improved Portugal's funding profile as the
operation cuts the EUR9.6bn repayment due in September 2013 to EUR5.8bn.
However, Fitch's base case remains that further official support will be needed
and provided over the medium term. The weak economic outlook in Portugal, the
size of the fiscal adjustment and fragile nature of the eurozone sovereign debt
market means there would need to be a significant improvement in sentiment for
it to return to the market in full next year.
Political uncertainty or material slippage in fiscal consolidation could put
negative pressure on the ratings. Weaker than expected GDP growth, leading to a
significantly higher peak in public debt would also be a trigger for negative
Conversely, evidence that the adjustment is working as planned (with the
continued reduction of current account and fiscal deficits) and the moderation
of the eurozone crisis would stabilise the rating Outlook.
Additional information is available at www.fitchratings.com.
The ratings above were unsolicited and have been provided by Fitch as a service
Applicable criteria, 'Sovereign Rating Methodology', dated 13 August 2012, is
available on www.fitchratings.com.
Applicable Criteria and Related Research:
Sovereign Rating Methodology