Axesor maintains the unsolicited rating of the Republic of Portugal at BBB with a stable outlook

10th January of 2022

In its January review, Axesor Rating maintains Portugal's unsolicited rating at BBB with a stable outlook, due to the recovery observed in 2021 that will boost the country's growth during the next biennium.

The European credit rating agency’s emphasis is on the recovery of domestic demand, which, in the first nine months of last year, was close to reaching pre-pandemic levels (98.7% compared to 91.6% recorded by Spain in the same period). Likewise, the recovery of tourism activity and the impact of the more than 16.6 billion euro of the European Funds will contribute to the extension of the growth path through 2022, raising the GDP of the Republic of Portugal to 5.8%, almost one point above the forecast in the July review.

The credit rating of BBB with stable outlook again assesses the strength of the Portuguese labour market which closed the financial year 2021 with an unemployment rate of 6.9%, half a point below the forecast in the July review. By 2022, this downward trend is anticipated to continue and a further correction of two tenths, to 6.7%, is expected.

However, Axesor Rating continues to warn of the duality of the Portuguese labour market as the main weakness "especially among qualified and unqualified people", as well as of the high temporary employment rates. Both factors imply "a reduction in the potential for future growth while encouraging the exodus of workers, mainly younger workers, to other European markets. This fact exacerbates the demographic problem".

Demography is exactly one of the factors that constrain qualification. Portugal has forecasts of negative vegetative growth of 0.17% in 2021- and a dependency rate of 64.6% of the population between 20 and 64 years, with a tendency to worsen in the coming decades, because of the declining birth rate and the increase in life expectancy to 81 years. "A challenge for the growth potential of the economy, both because of the lower propensity of older people to consume and because of the pressure that welfare expenditure will put on public finances".

The BBB rating with a stable outlook granted to the Republic of Portugal is constrained by the decreased tourism activity and the high dependence of the external energy sector, which has had an impact on the evolution of the current account balance that in 2021 registered a deficit of -0.8%. In this respect, and despite the expected recovery for the next two years (-0.2% for both 2022 and 2023), positive values are not expected to recover until 2024. Similarly, as explained in the July report, Portugal maintains a “high dependence on external financial flows” with an external debt amounting to 106.4% of GDP in 2020 and 101.4% of GDP last year. All of this "accentuates the sensitivity of the Portuguese economy to possible financial shocks from abroad".

Controlled inflation compared to the main European countries

Given the current situation in the rating, the evolution of the price level in the Portuguese country has been assessed. Despite a projected worsening in comparison with 2020 (a year in which a negative of -0.1% was recorded), the outlook for 2021 and 2022 is set at 0.8% and 1.6% well below the forecasts expected for the main European countries, including Spain, where price growth is estimated at around 3% in both years.

Regarding the public deficit, the European credit rating agency considers it feasible for the deficit to be reduced to levels of -3.4% and -2.8% in 2022 and 2023 respectively, continuing the trend initiated last year and towards convergence with the limits established by the Maastricht Treaty.

That said, Axesor Rating warns of the "high" level of public debt, with an end-of-year forecast for 2021 that will exceed 128% and say that "we do not expect it to reach pre-crisis levels until 2025", the report states. However, the rating considers the improvement in the profile of this debt, with reductions in the average life up to 7.7 years and in the average cost up to 2.2%.

The report also highlights that one more year, debt issues remained the main source of funding for the Portuguese government (68% of total debt), mainly fixed-rate bonds (150 billion), as well as the fact that almost all of it is issued in euros (only 3 billion correspond to other currencies). On the other hand, the rating assesses that, after having paid in advance the tranche of the IMF bailout in previous years, the outstanding debt corresponding to the bailout remains at EUR 98 billion.

At the same time, the rating assigned to Portugal by Axesor Rating has taken into account the "intense clean-up exercise" of the financial statements of the banking industry since the crisis of 2008. In fact, the Portuguese financial system closed the second quarter of 2021 with a ROA of 0.4%, improving by four-tenths the one reached at the end of 2020.

Appropriate institutional framework

Portugal registers the best governance rankings in the European Union and shows an adequate institutional framework which is recognised by its leading position in the World Bank's transparency and monitoring and control rankings.

Despite the uncertainty surrounding the elections called for January 30, the rating considers the climate of understanding and coordination of the different political parties in the face of the new economic recovery. This is reflected in the approval of the Additional Budgets for 2020 and the budget plan for 2021. However, Axesor Rating considers membership to the European Union -which the country presided during the first half of 2021- as favourable, being the economy encouraged by the use of a single currency, economic cooperation between the different member powers and access to aid before situations of imbalance such as the current economic crisis due to COVID-19.