Sovereign debt rating upgraded to ‘positive’

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US credit ratings agency Moody’s has raised the outlook for Portugal’s sovereign debt rating from ‘stable’ to ‘positive’, while keeping the rating itself Baa3 – just one notch above ‘junk’.

In a statement Moody’s notes that the better outlook for the rating is due to two factors: the steady reduction in the burden of public debt and the prospect of sustained improvements in the health of the country’s banking sector.

Moody’s also expects that Portugal’s public debt as a ratio of gross domestic product drops below 110 percent in 2022, from 114 percent in the last assessment, the agency says in a statement announcing the change. It notes that Moody’s projections continue to be more conservative than those of the government.

“The political pressures to increase public sector wages and health expenditures will continue,” it states, adding that it believes that the government will be able to resist the spending pressures enough to keep the budget deficit very small – below 1 percent of GDP – in the coming years.

That, in combination with a strong tax take, employment growth, falling interest costs – as more expensive outstanding debt is replaced with new debt with lower yields – and tight spending restrictions will ensure that the deficit continues to fall.

Moody’s also warns of the risks of high levels of private indebtedness, which although it has fallen by 29 percentage points of GDP in the last three years, remains very high given “the low savings rate and the prevalence of variable-rate debt.”

On Portugal’s banks, the agency notes that although “some institutions continue to have an impact on public finances, the system as a whole is becoming more robust” with a greater capacity to absorb losses, and a gradual reduction in non-performing loans. It sees the latter continuing in the coming years, partly through the sale of asset portfolios.

Moody’s has rated Portugal’s debt as Baa3 since 12 October last year, with a stable outlook. It was the last of the major international agencies to promote it to investment grade from speculative or ‘junk’ rating.

Currently, Fitch and Standard & Poor’s of the US and DBRS of Canada rate Portugal’s debt as BBB, the second-lowest investment category.

Source: https://www.theportugalnews.com/news/sovereign-debt-rating-upgraded-to-positive/50827

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