By Nick Mann | 7 March 2013
Standard & Poor’s has improved its outlook on Portugal’s credit rating from ‘negative’ to ‘stable’ on the likelihood that the country will be given more time to rebalance its economy and pay off its debts.
The move follows a meeting of European Union finance ministers earlier this week, which discussed the possibility of extending Portugal’s loan repayment period. A decision is expected to be made at the next meeting, to be held in April. The ministers also praised the Portuguese authorities’ ‘strong commitment’ to adjusting the economy.
Any increase in the maturity of Portugal’s loans would reduce the country’s refinancing risks, S&P said in a note published late yesterday.
Portugal is also expected to be given more time to reduce its deficits and debt as a result of weaker-than-expected economic activity. ‘In our opinion, this makes Portugal’s adjustment process more sustainable, both economically and socially, and reduces the risk that it will not comply with the programme,’ S&P said.
The ratings agency explained that its stable outlook on Portugal’s ‘junk’ BB/B rating balanced its view between the country’s near-term fiscal and economic challenges against the continued multilateral support it is receiving and its government’s ‘strong commitment’ to reform.
Portugal’s economy is expected to shrink by 1.5% this year while the government deficit is expected to reach 5% of gross domestic product – slightly less than last year’s 6.1%. Government debt is therefore expected to peak at almost 120% of GDP by the middle of the decade.
The country also faces ‘significant’ risks from the €4bn programme of spending cuts it is implementing this year and next. Falling incomes, wages and employment levels combined with rising taxes could threaten the social contract, S&P warned.
Despite this, the country’s credit rating could be raised if export performance turns out better-than-forecast or if investment picks up significantly.
‘This would, in our view, support Portugal's recovery and contribute to job creation, thereby strengthening the social contract,’ S&P said. ‘A more robust recovery would also contribute to a faster fiscal consolidation and debt reduction path, improving Portugal's fiscal indicators.’
