London, 12 October 2018 -- Moody's Investors Service has today upgraded the Government of Portugal's
domestic and foreign long-term issuer, domestic and foreign
senior unsecured and domestic senior unsecured MTN programme ratings to
Baa3/(P)Baa3 from Ba1/(P)Ba1, and the foreign commercial paper and
domestic other short-term ratings to P-3/(P)P-3 from
NP/(P)NP. The outlook has been changed to stable from positive.
The drivers of the change in the rating to Baa3 are:
1. Portugal's elevated general government debt has moved
to a sustainable, albeit gradual, downward trend, with
limited risks of reversal; and
2. The broadening of Portugal's growth drivers and a structurally
improved external position has increased economic resilience.
The stable outlook on Portugal's Baa3 rating reflects a balance
of risks at the higher rating level. While a continuation of the
favourable external conditions could support growth in excess of Moody's
forecasts, the eventual moderation in growth prospects reflects
ongoing structural constraints in the economy. Furthermore,
the achievement of significantly higher primary budget surpluses which
support an accelerated decline in the debt burden will face headwinds
from ongoing pressure to increase public wages and recover the significant
cuts in capital expenditure.
In a related rating action, Moody's has upgraded Parpublica-Participacoes
Publicas (SGPS), SA's domestic senior unsecured and domestic senior
unsecured MTN programme ratings to Baa3/(P)Baa3 from Ba1/(P)Ba1,
and the outlook has been changed to stable from positive. Moody's
rates SGPS at the same level as the Portuguese government to reflect (1)
the company's 100% government ownership; (2) the very close
links between the company and the government; and (3) strong evidence
of government financial support for the company, even though SGPS
lacks an explicit guarantee from the government.
Portugal's local and long-term foreign currency bond and deposit
ceilings have been raised to Aa3 from A1. The short-term
foreign currency bond and deposit ceilings are unaffected and remain at
P-1.
RATINGS RATIONALE
RATIONALE FOR THE UPGRADE TO Baa3
FIRST DRIVER: GOVERNMENT DEBT HAS MOVED TO A SUSTAINED DOWNWARD
TREND
The first driver of the upgrade is Moody's view that the general
government debt burden has moved to a sustainable, albeit gradual,
downward trend, with the expected improvement in the shock absorption
capacity of the government's balance sheet over the coming years
consistent with an investment grade rating for the sovereign.
Portugal's general government debt-to-GDP ratio declined
by 4.5 percentage points (pp) in 2017 to reach 124.7%
of GDP, the first material reduction in debt following a succession
of bank recapitalisations in recent years. The decline was driven
by strong economic growth and a healthy primary surplus, and Moody's
expects the debt burden to reach around 116% of GDP by 2021,
around 13pp lower than at the end of 2016. This is around 4pp lower
than Moody's debt forecast one year ago when assigning the positive
outlook, in light of the recent stronger than anticipated growth
and fiscal consolidation effort.
Moody's confidence that a downward trajectory for the debt burden
can be sustained reflects the significant fiscal improvement in recent
years, with the headline deficit having been at or below 3%
since 2016. Furthermore, Moody's sensitivity analysis
shows that, based on its forecasts for growth and budget outturns
which are more conservative than the authorities', the downward
debt trajectory remains relatively robust to most likely shocks,
including a modest rise in interest rates.
Moreover, the progress made in restructuring some of the weakest
banks has, in Moody's view, materially reduced the fiscal
risks posed by the banking sector. In particular, potential
further capital injections into the Resolution Fund, following the
state's injection of €430 million (0.2% of GDP)
in 2018, are limited by the contingent capital mechanism agreed
as part of the partial sale of Novo Banco S.A. (long-term
senior debt at Caa2 positive/long-term deposits at Caa1 developing,
BCA caa2) to Lone Star in 2017 and full use of this mechanism would not
materially alter the downward trajectory of the government debt burden.
Indeed, Portugal's fiscal consolidation effort since 2014
(when the deficit reached more than 7%) has been one of the largest
in the European Union (EU), which reflects significant cuts in expenditures,
mainly through lower capital spending, a lower wage bill and contained
intermediate consumption. While the favourable cyclical conditions
have supported the consolidation in recent years, Moody's
assesses that part of the budget adjustment has been structural,
reflected in the close to 1.3pp improvement in the European Commission's
(EC) assessment of Portugal's structural deficit over the last two
years, exceeding the EC's requirements, in comparison
to regional peers such as Spain (Baa1 stable) and France (Aa2 positive)
where the required structural adjustment fell short.
Furthermore, since the positive outlook was assigned just over one
year ago, the consolidation effort has been sustained, with
the primary budget balance maintaining its surplus at the end of 2017
for the third year in a row, which was sufficient to absorb the
costs related to bank recapitalisation (2% of GDP), and the
favourable budget outturns (on a cash basis) through to August 2018 point
to a continued prudent budget despite the pressures on expenditure ahead
of the elections next year. This is further supported by the independent
Public Finance Council's latest assessment that the government's
deficit for 2018 will likely outperform the Stability Programme's
target.
SECOND DRIVER: BROADENING OF GROWTH DRIVERS AND IMPROVED EXTERNAL
POSITION HAS INCREASED RESILIENCE
The second driver of the decision to upgrade Portugal's rating to
Baa3 is the increased resilience of Portugal's economy, benefitting
from a sustained contribution from investment spending and the material
improvement in the country's external account.
Portugal's economy has benefitted from the broader upturn in Europe,
reaching 2.8% real GDP growth in 2017, the highest
in 17 years, and GDP is now back to pre-crisis levels in
real terms. Importantly for the composition of growth, investment
has made a sustained contribution since mid-2016, with evidence
that the recovery extends beyond construction to include spending on machinery
and equipment. Furthermore, the job-rich recovery,
benefitting in part from previous reforms to improve flexibility in the
labour market, will help ensure a consistent contribution from consumption
in the coming years.
Moody's expects that stronger confidence on the part of firms,
reflected in the ongoing strength in surveys of investment intentions,
improved stability in the banking system and reduced political uncertainty,
will continue to support firms' investment decisions over the rating
horizon, such that this broadening in the drivers of growth will
be sustained.
Portugal's growth outlook is also supported by steadily improving
exports. The widening export base, with exports now accounting
for 43% of GDP at the end of 2017, 13pp higher than in 2010,
has helped re-orientate the economy towards tradable sectors,
which are helping to drive the improvements in employment and investment.
Portugal's export market share gains relative to regional peers
in both goods and services add resilience to the export outlook.
Exports of goods have benefitted from a shift away from traditional sectors
and towards markets outside the EU, while services exports have
been supported by an ongoing boom in tourism helping to offset investment
related imports. As a result, Portugal's external position
has structurally improved with consistent current account surpluses since
2013, averaging 0.6% of GDP, compared to an
average deficit of around 10% between 2001 and 2010.
In Moody's view, the recovery in investment spending,
the rebalancing of the economy towards tradables and the improved political
and banking sector stability has raised potential growth in Portugal to
around 1.5%, stronger than in recent years (0.3%
between 2010 and 2017).
RATIONALE FOR THE STABLE OUTLOOK
The risks to Portugal's credit profile are balanced at the Baa3
rating, reflecting Moody's expectation that the country's
adverse stock positions will weigh on further upward credit pressure over
the rating horizon.
While a continuation of the favourable external conditions could support
real GDP growth in excess of Moody's forecasts (1.9%
in 2018-19), the eventual moderation in growth prospects
reflects ongoing structural constraints in the economy. For example,
further improvements to the country's potential rate of growth will
be restrained by high corporate indebtedness, which remains above
the euro area (EA) average, limiting the investment capacity of
a sizeable share of domestic firms which continue to focus on deleveraging.
At the same time, Portugal's higher incidence of low-skilled
workers relative to the rest of the EA will weigh on efforts to reduce
the productivity gap with regional peers, while the country's
adverse demographics, with the fourth-highest old age dependency
ratio in the EU in 2017, will constrain growth in the labour force.
High corporate indebtedness is mirrored in the public sector. Even
if Portugal's public debt does indeed fall gradually over the coming
years as Moody's expects, the government will remain very
highly indebted, relative to regional and global peers, for
many years to come. The achievement of sufficiently higher primary
surpluses to support a decline in the debt burden in excess of Moody's
forecasts is unlikely, given ongoing pressure to increase public
sector wages and recover the significant cuts in capital expenditure to
safeguard the quality of public services. These challenges will
likely intensify as the interest rate cycle normalizes and the benefits
from refinancing expensive programme-era debt abates. Furthermore,
Moody's expects that, despite the improvements to government
liquidity, Portuguese government bond yields will remain more sensitive
than most regional peers to a confidence shock given the still elevated
economy-wide leverage.
Nevertheless, Moody's expects the commitment to keeping headline
deficits below 3% of GDP to remain steadfast, and the forthcoming
elections pose a limited risk of any significant policy reversal,
helping to sustain the gradual downward debt trend.
Lastly, the stable outlook incorporates Moody's view that
the progress to date in the restructuring of the largest banks has materially
reduced the contingent liability risks for the sovereign. However,
despite improvements in the sector's aggregate capitalization since
end 2016, profitability remains weak and the elevated non-performing
loans, which remain well above the EU average, will continue
to weigh on its ability to more strongly contribute to the economy's
growth potential.
WHAT COULD MOVE THE RATING UP
Positive rating pressure on Portugal's rating would emerge if sustained
economic and fiscal improvements were sufficient to support an acceleration
in the decline in the debt burden to bring it closer to the median of
Baa-rated peers. Such improvements would likely need to
be supported by robust implementation of macroeconomic reforms to address
structural bottlenecks in the economy, which would raise its potential
above its current moderate estimate and help to offset the considerable
drag from the country's adverse demographics. Furthermore,
fiscal policy measures which help to increase the resilience of budget-setting
to future shocks, reflected in a material and consistent decline
in the structural deficit, would provide upward rating pressure.
WHAT COULD MOVE THE RATING DOWN
The rating could come under downward pressure if there were indications
that the commitment of the government to fiscal consolidation and debt
reduction were to wane or that the needed political support for prudent
fiscal policies was not forthcoming following next year's elections.
This would put at risk the sustainability of the public debt trend.
Weaker than expected economic growth, a sharp rise in interest costs,
including from a negative confidence shock, or the need for unforeseen
material capital support to the banking sector, would require further
fiscal measures to achieve a consistent reduction in the debt burden,
which, if not forthcoming, would be negative for the rating.
Finally, a reversal of previous reforms -- including pension
or labour market reforms -- would also place downward pressure
on Portugal's rating.
GDP per capita (PPP basis, US$): 30,487 (2017
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2.8% (2017 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.6%
(2017 Actual)
Gen. Gov. Financial Balance/GDP: -2.9%
(2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 0.5% (2017 Actual) (also
known as External Balance)
External debt/GDP: [not available]
Level of economic development: High level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 09 October 2018, a rating committee was called to discuss the
rating of the Government of Portugal. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have materially increased. The issuer's
institutional strength/ framework, have not materially changed.
The issuer's fiscal or financial strength, including its debt profile,
has not materially changed. The issuer has become less susceptible
to event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2016. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Evan Wohlmann
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
