More NewsMoody’s Upgrades Portugal’s Bond Rating to Ba2 and Predicts Further Improvements

Moody's Upgrades Portugal's Bond Rating to Ba2 and Predicts Further Improvements

Moody’s Investors Service has upgraded Portugal’s government bond rating to Ba2 from Ba3 and placed the country on review for possible further upgrades. The move is in recognition of Portugal’s improving economic situation and its recent decision to make a clean exit from its International Monetary Fund-European Union (IMF-EU) bailout programme shortly, aided by its successful return to capital markets at favourable yields.

The ratings action from Moody’s is a crucial step in Portugal’s slow recovery from its high debt levels post-crash and the subsequent eurozone crisis which made it impossible for the government to finance itself on global capital markets, as with Greece, Ireland and other European countries that required a bailout.

Moody’s says its improved Ba2 government bond rating for Portugal was triggered by three key factors:

(1) Portugal’s fiscal situation has improved more rapidly than initially targeted and the public debt ratio will start declining this year in 2014, albeit from a very high level. The Portuguese government’s budget deficit has reduced by a full percentage point of gross domestic product (GDP) more than was envisaged last year, indicating the government’s strong commitment to fiscal consolidation is real and on-going.

(2) The country will conclude its three-year EU/IMF support programme in the near future, without the need for a precautionary credit line from the European Stability Mechanism (ESM). Portugal has regained access to the public debt markets and, in addition, the government has built up sizeable cash buffers.

(3) Portugal’s economic recovery is gaining momentum, with signs of broadening beyond exports, which continue to perform strongly. Moody’s believes that economic growth will be sustained over the medium-term because the Portuguese authorities have implemented a wide range of structural reforms.

The possibility of further upgrades for Portugal’s government bond rating, and Moody’s decision to launch such a review simultaneously to its Ba2 upgrade, is reflective of the country’s creditworthiness improving still further in the short term, says the credit reference agency (CRA). According to Moody’s Portugal will likely bring its very high public debt ratio (currently close to 130% of GDP) onto a clear downward path in the coming years.

The CRA also added that it will assess the upcoming decisions of Portugal’s Constitutional Court on key measures in the 2014 budget, such as cuts to public sector wages and pensions, and how this might impact government expenditure moving forward. A medium-term threat exists if no such measures are taken, concludes Moody’s, potentially imperilling Portugal’s improving economic situation. Whether the nation can take more austerity measures, however, has to be up for debate. Portugal’s short-term debt rating remains unchanged at Not-Prime.

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