Fitch Raises Portugal Rating Outlook but Keeps A-

Fitch Ratings has revised its outlook on Portugal's credit rating from “stable” to “positive”. In the same move, it maintained the Portuguese Republic's rating at “A-” (investment grade).

The rating refers to the long-term IDR (issuer default rating).

Fitch justifies that the positive outlook reflects the continued progress in reducing public debt, the record and commitment to prudent fiscal policy and the continued reduction of external debt, which reduces Portugal's vulnerabilities. In other words, debt reduction reduces the risks to the country.

Fitch expects moderate economic growth and a modest budget surplus to reduce Portugal's public debt to 95.8% of GDP by end-2024, compared to 99.1% at end-2023.

“We expect debt to continue to decline to 88.1% in 2026, against the “A” average of 56.6% and to 82.5% in 2028. This will be driven by high primary surpluses and sustained growth. Portugal’s debt profile is supported by its large cash reserves and a high proportion of fixed-rate debt.

Fitch expects Portugal’s fiscal outperformance relative to peers and most EU countries to continue, supported by prudent policies. “We forecast a budget surplus of 0.2% of GDP in 2024, down from a surplus of 1.2% in 2023, versus an average deficit of 2.9%.”

The government has implemented spending and revenue measures aimed at addressing some long-standing social demands, but remains committed to maintaining modest surpluses over the medium term. Fitch expects the fiscal deficit to be unchanged in 2025-26 at 0.2% of GDP.

On the other hand, external debt reduction continues. “Portugal’s external position has improved rapidly in recent years, with public and private debt reducing, a trend that is expected to continue throughout the forecast period. We expect the current account balance to remain in surplus at 1.7% this year, 1.6% in 2025 and 1.5% in 2026, partly reflecting strong tourism receipts and structural changes in the energy sector.

The agency notes that despite the economic slowdown, the unemployment rate remained stable at 6.4% in the second quarter.

“We expect a slight increase to 6.6% in 2024, followed by a decline to an average of 6.4% in 2025-26, supported by the economic recovery. Furthermore, we expect inflation to decline to an average of 2.6% in 2024, compared to 5.3% in 2023, and stabilize at around 2% in 2025 and 2026.

Fitch sees low risk of early elections

Fitch addresses the political uncertainty. “The minority position of the center-right Social Democratic government creates political uncertainty, including regarding the approval of the 2025 budget. Although our basis is a budget, it is possible that the government will have recourse to the “twelfth-month system” (allocating a twelfth of the previous year’s budget each month, in the absence of a new budget), which would require a tighter fiscal policy than the 2025 proposal, but could also mean a delay in policy implementation. “At the moment, we see the risk of early elections next year as low,” he adds.

The private sector continues to deleverage, Fitch highlights. Portugal’s private sector has been deleveraging since 2013, with the exception of the Covid-19 period.

Non-financial corporate debt to GDP fell to 108.9% in Q2, compared to 142.0% in Q1 2021. Lower unemployment and higher household income mitigated financial risks arising from higher interest rates for households.

As of the second quarter, the household debt-to-income ratio fell to 76.1%, compared to 84.9% in the first quarter of 2021.

Banking sector flexibility

Higher interest rates and private sector debt costs have not yet translated into asset quality pressures for Portuguese banks.

The non-performing loan ratio stood at 2.7% at the end of March. Bank earnings per share reached 15.5% in the first quarter, supported by strong growth in net interest income, compared to the EU average of 9.7%.