Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Portuguese Republic (long-term local- and foreign-currency issuer and senior unsecured debt ratings: A-/Stable; short-term local- and foreign-currency issuer ratings: S-1/Stable) on 1 September 2023.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com

Key rating factors

The Portuguese Republic’s long-term ratings of A- reflect the following credit strengths: i) the country’s institutional strength, bolstered by the membership in the EU and euro area which reinforce the resilience to shocks; ii) a strong commitment to prudent fiscal policy and good record of implementing structural reforms; and iii) a favourable debt profile and high cash buffer.

Portugal's economy expanded strongly by 6.7% in 2022, outperforming the Euro Area average of 3.3%. Driven by strong private consumption and robust external demand, particularly from the tourism sector, this momentum continued into the first months of 2023. Scope forecasts a slowdown to 2.6% growth in 2023 and 2.0% in 2024 due to inflation curbing consumption and global uncertainties impacting exports.

The overall fiscal deficit improved to 0.4% of GDP in 2022 from 2.8% in 2021, driven by robust revenue growth amid high inflation and a strong economy. Despite increased government spending, including 1.2% of GDP for inflation-related support in 2022, Portugal's swift primary balance recovery surpassed peers, achieving a 1.6% of GDP surplus last year. This trend is expected to continue, supported by prudent fiscal policy. Further improvements, such as a projected 2.0% of GDP primary surplus and eventual overall surplus in 2023, bolster fiscal sustainability by enhancing the ability to manage financial pressures.

The public debt-to-GDP ratio declined from its 2020 peak of 134.9% to 113.9% in 2022. This trend is expected to continue as the return to primary surpluses is projected to lower the ratio to 107.6% in 2023, well below the pre-pandemic level of 116.6%. In 2024, it is anticipated to further decrease to 102.8%, converging to around 88% of GDP by 2028.

Challenges relate to: i) an elevated stock of public debt; ii) a moderate growth potential with adverse demographic trends, impacting the labour force and placing long-term pressure on public spending; and iii) vulnerability to external shocks, given the open economic structure.

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced over the next 12 to 18 months.

The ratings/Outlooks could be upgraded if, individually or collectively: i) substantial improvements in fiscal fundamentals lead to a notable reduction in public debt levels, accompanied by further significant progress in the external position (Net International Investment Position); and/or iii) medium-term growth prospects improved materially, supported by growth-enhancing structural reforms.

Conversely, the ratings/Outlooks could be downgraded, if individually or collectively: i) protracted fiscal deterioration resulted in weaker debt sustainability; and/or ii) there was a fading commitment to or reversal of structural reforms, leading to markedly lower GDP growth prospects.

For the updated rating report accompanying this review, click here.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 27 September 2022) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Jakob Suwalski, Senior Director

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