Axesor confirms Portugal's unsolicited BBB rating and updates its trend from stable to positive

15th July of 2019

Sovereign Rating of the Republic of Portugal

The unsolicited credit rating of BBB with tendency positive reflects the good economic performance, the dynamism of the labour market and the progress made in the fiscal consolidation process, together with weaknesses such as population aging, inequality and one of the highest levels of private and public debt in the Euro zone.

Lisbon/Madrid, July 15th, 2019

Axesor Rating informs that it has revised its unsolicited rating on Portugal and confirms the rating of BBB, updating its outlook from stable to positive.

This credit rating reflects the dynamism of Portugal's economy, which we estimate will grow by around 1.7% in 2019 and 2020, and the positive impact it has had on the labour market. For the second year in a row, the employment rate grew on an interannual basis at a rate above its potential GDP growth rates. Unemployment reached the lowest level in the past 15 years: 7.5% in 2018 and we expect a further reduction to 6.2% by the end of 2019.

The progress made in the fiscal consolidation process, has allowed the country to reach the highest primary surplus in the Eurozone in 2018 (3% of GDP, above the 2.7% rate we had forecast), placing Portugal only behind Greece in this respect. This effort contributed to the early repayment of the IMF bailout and to a sustained, albeit still insufficient, reduction in debt, which stood at 121.5% of GDP in 2018, a figure we expect to decrease to 119% in 2019.

High public and private indebtedness, growing external sector imbalances - with one of the highest levels of external debt of the Eurozone countries - penalizes the credit rating granted. Portugal also continues to be constrained by the challenges of population aging, with an increasing dependency rate that reached 54.7% in 2018, and that we expect will continue to deteriorate in the coming years, and the low income-per-inhabitant figures. The proximity of new elections also constrains the Government's capacity to maintain a reformist path to underpin the adequate levels of economic growth.

"Despite the cooling of expectations for 2019 and 2020 due to the external environment and the weakening of domestic demand, we estimate that the Portuguese economy will continue to exceed its potential growth. We consider that the progressive consolidation of the financial sector will have a positive impact, which, despite its fragility due to the still high levels of defaults, we hope will benefit public finances by mitigating certain contingencies that have negatively affected the public deficit in recent years, mainly the capital mechanism approved for Caixa Geral and Novo Banco in 2017 and 2018 respectively”, says Antonio Madera, Head of Sovereign and Sub-sovereign in Axesor.