EthiFinance Ratings affirms the rating of the Republic of Portugal at “BBB+”, but changes the outlook from Stable to Positive

EthiFinance Ratings has maintained the rating of the Republic of Portugal at “BBB+” but has revised up its outlook to Positive from Stable.

The fiscal surplus that the country achieved in 2023 is expected to continue and contribute to the further reduction of the public debt/GDP ratio. Additionally, Portugal’s unemployment rate is decreasing and its GDP per capita is gradually converging with that of the European Union average.

The primary obstacle to an improvement in the rating of Portugal is the high level of debt. Although there has been some progress, there are still certain risk factors that could affect public finances, such as social challenges that arise from an aging population, governance issues, and the fragmentation of the political landscape after the 2024 elections. These circumstances could make it difficult to implement the necessary structural reforms. However, economic fundamentals and continued fiscal prudence could lead to a credit rating upgrade within the next 12 months, hence the adjustment to the outlook.

The Portuguese economy slowed in 2023, with growth for the year of 2.3%. This was due to factors such as high inflation, the tightening of financing conditions, and the weakness of the economies of its main trading partners. The Bank of Portugal, for its part, forecasts growth of 2.0% for 2024 and 2.3% in 2025.

Despite the challenges faced by Portugal, the country has made significant progress on several fronts. It has significantly reduced the unemployment rate (from 16.4% in 2013 to 6.5% in 2023), which is expected to remain stable at around the current level in the coming years. In addition, the financial sector has undergone a remarkable restructuring, resulting in a significant reduction in non-performing loans, from 17.2% in 2015 to 2.7% in 2023, and an increase in the profitability of banks. Furthermore, Portugal achieved a budget surplus in 2023, which is expected to continue in the future, although at lower levels due to various factors such as a moderation in the pace of revenue growth and the implementation of new spending measures. Public debt has fallen below 100% of GDP in 2023, and this trend is also expected to continue.

Our analysis regarding the ESG profile of the Republic of Portugal highlights the increase in renewable energy consumption (34.6% of total energy consumed in 2022) and highlights its upward trend. Similarly, on the social aspect levels of wealth and well-being have improved in recent years and the country is converging towards the European Union average level of GDP per capita, although it is still below (68% in 2023). However, again the country faces the problem of an aging population, with high dependency rates, which is likely to hamper further convergence.

Regarding the external sector, Portugal has managed to correct external imbalances in recent years. Specifically, the country has managed to generate surpluses in its current account, which has enabled it to reduce its debt position. As a result, Portugal’s external debt has fallen to 150% of GDP in 2023.

In summary, for EthiFinance Ratings the outlook for Portugal is positive. The country’s strong fiscal position, characterized by budget surpluses, has had a positive impact on its credit rating, with a significant reduction in public debt. While Portugal still faces challenges, such as high levels of debt and social and governance issues, EthiFinance Ratings sees the potential for a credit rating upgrade within the next 12 months.

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