Scope confirms and publishes Portugal’s credit rating of BBB, changes Outlook to Stable
Euro area membership, improving fiscal performance, commitment to structural reforms, and a favourable public-debt profile support the rating; high private and public debt, structural rigidities and challenges in the banking system are constraints.
Scope Ratings AG today confirms the Portuguese Republic's long-term local-currency issuer rating at BBB, following the release of its revised sovereign rating methodology, and converts its status from subscription to public. The agency also assigns a long-term foreign-currency issuer rating of BBB, along with a short-term issuer rating of S-2 in both local and foreign currency. The sovereign’s senior unsecured debt in both local and foreign currency was also rated at BBB. All Outlooks are Stable.
The ratings are underpinned by Portugal’s euro area membership with a large common market, a strong reserve currency, an independent European Central Bank effectively acting as a lender of last resort, and an economic governance and macro prudential framework that supports credible macroeconomic policies and provide access to financial facilities from European institutions. Scope believes these are important developments that reflect better protection of the euro area from adverse shocks, underpinning sovereign creditworthiness of member states.
Portugal’s real GDP growth has accelerated since the second half of 2016, on the back of strong private consumption, a pick-up in exports and investment. For 2016 real GDP growth stood at 1.4%, slightly below the 2015 level of 1.6%. The relatively job-rich recovery continued over 2014-2016, with unemployment falling to 9.4% in May 2017, from 17.3% in April 2013. Scope expects the positive momentum to continue, with real GDP growth set to rise to around 2% in 2017 before easing slightly in 2018. Private consumption will continue to drive growth, bolstered by gains in employment. Investment is also gathering pace, albeit from a relatively low level. While Portugal’s external position has improved thanks to stronger exports, resulting in a modest current-account surplus, the country’s negative net international investment position remains high at -105% of GDP in 2016.
Although the short-term growth outlook for Portugal has improved, long-term growth prospects are held back by constraints in the form of unfavourable demographics, low investment and productivity. However, reform efforts during 2011-2016 were substantial and have helped to improve Portugal’s competitiveness. A number of reforms to product and labour markets to increase growth potential have also yielded positive results. Scope believes that the successful ongoing implementation of planned structural reforms will be crucial for long-term growth prospects.
Portugal has progressed with fiscal consolidation. The primary surplus in 2016 stood at 2.2% of GDP, one of the highest in the euro zone. Improvements in fiscal performance led the country to overshoot budgetary targets, resulting in an overall deficit of 2% of GDP. This is the first time this ratio has fallen below 3% since Portugal entered the euro area (from 11.2% of GDP in 2010), closing the Excessive Deficit Procedure applied to Portugal since 2009.
The fiscal progress is reflected by a significant reduction of government expenditure, from 51.8% of GDP in 2014 to 45.1% of GDP in 2016. Fiscal improvement in 2016 also benefited from lower interest expenses, delays in investment spending related to postponed absorption of EU funds. Scope expects the government to revive its fiscal consolidation effort over the medium term, underpinned by good cyclical momentum, including the containment of current expenditure and in line with its commitments to the EU Stability and Growth Pact.
Portugal has a favourable public-debt structure, resulting from active debt management and improving market financing conditions. Average residual maturity, excluding EU-IMF loans, has been extended from 5.3 years in 2012 to 6.5 years in 2016 (8.3 years if EU-IMF loans are included). This ensures a smooth maturity profile over coming years. Borrowing requirements for 2017 have almost been covered by the end of May. Relatively high and stable central government deposits equivalent to around 9% of GDP at the end of 2016 partially mitigate refinancing risks.
Scope assesses Portugal’s public-debt dynamics as adequate because of their relative robustness across a number of scenarios over a projection period until 2021 and a relatively low implicit debt, i.e. future debts arising from unfunded government commitments, largely based on implemented pension reforms. However, Portugal’s elevated level of public debt to GDP continues to limit fiscal flexibility. The economic recovery, contained interest costs and balanced primary accounts have helped stabilise the public debt to GDP at 129% in 2015. In 2016 public debt rose slightly to 130.4% of GDP, mainly as result of the ongoing recapitalisation of state-owned bank Caixa Geral de Depósitos.
Scope expects Portugal’s debt-to-GDP to decrease to 128.5% of GDP in 2017 on the back of continued good fiscal results and non-existence of additional stock-flow adjustments. Over the medium term, Scope expects a gradual decreasing trend of public debt to GDP on the back of continued economic growth and primary surpluses which act as a buffer against cyclical volatilities. The trajectory is subject to several risks, including less positive fiscal results, lower economic growth, potential reclassifications of off-balance sheet items and entities into general government debt, stabilising interventions in the financial sector, and higher financing costs. Maintaining fiscal discipline and structural reforms to sustain balanced economic growth will remain important for more robust public-debt dynamics.
The overly indebted private sector (consolidated private debt of 172% of GDP at the end of 2016), high non-performing loans (12.6% of total loans in 2016Q3 according to IFS), particularly in the corporate sector, and envisaged cost-cutting amidst low interest rates are complicating credit conditions in the economy and hindering higher growth. Measures have also been taken to strengthen and reform the banking sector’s access to finance. The banking sector’s funding structure has become more stable, thus reducing the need for market financing. Further structural initiatives are underway to facilitate debt restructuring and improve efficiency of insolvency frameworks. While asset risk has broadly stabilised, profitability among Portuguese banks remains weak.
Sovereign rating scorecard (CVS) and qualitative scorecard (QS)
Scope’s Core Variable Scorecard (CVS), which is based on relative rankings of key sovereign credit fundamentals, signals an indicative “BBB” (bbb) rating range for the Republic of Portugal. This indicative rating range can be adjusted by the Qualitative Scorecard (QS) by up to three notches depending on the size of relative credit strengths or weaknesses versus peers based on analysts’ qualitative analysis.
For Republic of Portugal the following relative credit strength is identified: 1) market access and funding sources. Relative credit weaknesses are signaled for: 1) macroeconomic stability and imbalances, 2) financial sector performance and 3) macro-financial vulnerabilities.
Combined relative credit strengths and weaknesses generate no adjustment and signal a sovereign rating at “BBB” for Portugal. A rating committee discussed and confirmed these results.
For further details please see the Appendix 2 of the rating report.
Outlook and rating-change drivers
The confirmation of the Stable trend reflects Scope’s view that the risks for the ratings remain broadly balanced.
The ratings could be downgraded if: i) primary surpluses were eroded, undermining public-debt dynamics, ii) Portugal´s market access materially weakened or iii) economic growth was notably lower.
The ratings could be upgraded if i) sustained consolidation were to lead to a steady reduction in debt, ii) strong structural reforms were resumed, iii) economic growth proved to be balanced and sustained.
For the detailed research report please click HERE.
The main points discussed during the rating committee were: (1) short-term vs. long-term economic outlook, (2) fiscal performance, (3) external accounts fragilities, (4) structural reforms, (5) financial sector performance and outlook, (6) political developments, (7) peers consideration.
Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/governance-and-policies/regulatory/esma-registration. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default, definitions of rating notations can be found in Scope’s public Credit Rating methodologies on www.scoperatings.com.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.
This credit rating and/or rating outlook is issued by Scope Ratings AG.
Rating prepared by Jakob Suwalski, Lead Analyst
Person responsible for approval of the rating Dr Stefan Bund, Chief Analytical Officer
The ratings /outlook was first assigned by Scope as subscription rating on January 2003. The subscription ratings/outlooks were last updated on 05.05.2017.
The senior unsecured debt ratings as well as the short term issuer ratings were assigned by Scope for the first time.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Republic of Portugal are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Sovereign Ratings Calendar of 2017" published on 30.06.2017 on www.scoperatings .com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case the deviation was due to the recent revision of Scope’s Sovereign Rating Methodology and the subsequent putting the ratings under review, in order to conclude the review and disclose these ratings in a timely manner, as required by the Article 10(1) of the CRA Regulation1.
1Editor's note: The above paragraph was corrected on 17 July 2017 following the publication of the credit rating action on 30 June 2017. The original wording was: Deviation of the publication of sovereign ratings or related rating outlooks from the calendar shall only be possible where necessary for the credit rating agency to comply with its obligations under Article 8(2), Article 10(1) and Article 11(1) and shall be accompanied by a detailed explanation of the reasons for the deviation from the announced calendar. It was replaced with the following: As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Republic of Portugal are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Sovereign Ratings Calendar of 2017" published on 30.06.2017 on www.scoperatings .com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case the deviation was due to the recent revision of Scope’s Sovereign Rating Methodology and the subsequent putting the ratings under review, in order to conclude the review and disclose these ratings in a timely manner, as required by the Article 10(1) of the CRA Regulation.
Solicitation, key sources and quality of information
The rating was initiated by Scope and was not requested by the rated entity or its agents. The rated entity and/or its agents did not participate in the ratings process. Scope had no access to accounts, management and/or other relevant internal documents for the rated entity or related third party.
The following material sources of information were used to prepare the credit rating: public domain and third parties. Key sources of information for the rating include: the Ministry of Finance of the Republic of Portugal, Agência de Gestão da Tesouraria e da Dívida Pública (IGCP), Bank of Portugal (BoP), European Commission, European Central Bank (ECB), Statistical Office of the European Communities (Eurostat), IMF, OECD, and Haver Analytics
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to publication, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds upon which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.
Conditions of use / exclusion of liability
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