Austerity measures introduced by Portugal’s socialist prime minister, Antonio Costa, is expected to be enough for the country to retain its remaining investment grade rating and maintain its place in the European Central Bank’s (ECB) asset purchase scheme.
Canadian ratings firm DBRS is conducting the review of Portugal’s only non-junk rating, which makes the government’s debt eligible for the ECB bond-purchase programme. In April, DBRS kept the rating at BBB (low), its lowest investment grade, and maintained the stable trend. Portugal is rated junk by other credit rating agencies (CRAs) Fitch Ratings, Moody’s Investors Service and S&P Global Ratings.
Earlier this year Portugal pledged to introduce a spending freeze and on July 27 the government avoided a penalty from European Union (EU) authorities for missing past budget targets.
Despite this, at 3.2% Portugal’s 10-year bond yield is about 80 basis points higher than a year ago and even with the ECB’s purchases, the country has been the euro region’s worst-performing sovereign-bond market during 2016.
In its 2017 budget proposal released a week ago, the government forecast that Portugal’s economy will grow 1.2% this year and the budget deficit will be 2.4 percent; still within a 2.5% limit set by the European Commission (EC). Debt will rise to 129.7 percent of gross domestic product (GDP) in 2016 as the government injects capital in state-owned bank Caixa Geral de Depositos, then ease to 128.3% in 2017.
In August, DBRS warned of risks to Portuguese creditworthiness, caused by slowing growth, the weakness of the banking sector and concerns over rising friction between Lisbon and the EC over its budget plans, which have unsettled investors.
Most analysts and investors are now confident that Portugal will avoid a downgrade, but believe that its rating outlook could change from stable to negative. “We expect the trend to be lowered to negative, which should cap the upside in Portuguese government bonds medium-term, and we stick with our cautious strategic stance,” Commerzbank strategist David Schnautz said.
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