EthiFinance Ratings affirms Portugals "BBB+" rating for its fast economic recovery


EthiFinance Ratings has affirmed the BBB+ rating with a stable trend to the Republic of Portugal. The rating agency's assessment reflects the country's rapid economic recovery seen in 2021 and 2022, which in 2023 has persisted at a more moderate pace.

The rating also considers the positive impact of the NGEU Funds on medium-term growth potential, although it highlights the need to address public debt, which still remains at high levels.

Similarly, it highlights that the Portuguese economy has strengthened its post-COVID-19 recovery, with a +6.9% y-o-y growth in 2022 and reaching pre-pandemic GDP levels. Furthermore, it notes that despite a robust start to the year in 2023, domestic demand and tourism experienced a slowdown in the second and third quarters due to inflation, tighter financing conditions, and weakness in the economies of its major trading partners.

For 2023 and 2024, EthiFinance Ratings foresees a slowdown in Portugal's economic growth of +2.3% and +1.5%, respectively, based on IMF forecasts. On the other hand, regarding the social situation in Portugal, it states that it is stable. Nevertheless, expectations are that unemployment will increase and structural problems will persist, such as the population aging and low levels of GDP per capita.

On the external sector, EthiFinance Ratings notes an improvement driven by tourism, normalization of energy prices, and a slowdown in imports due to weak domestic demand. However, high dependence on external financial flows remains a limiting factor and a potential risk due to the considerable stock of external debt.

In terms of inflation, although it has a declining trend since 2022, the agency expects it to persist at elevated levels, with the IMF estimating +5.3% in 2023 and +3.4% in 2024. Along these lines, EthiFinance considers that financing conditions will benefit price adjustments. Likewise, the agency points out that Portugal has carried out a notable consolidation of its financial system in recent years.

In terms of public finances, EthiFinance Ratings positively highlights the rapid correction of post-pandemic imbalances, with deficit levels below those set by the Maastricht Treaty and public debt on a downward trend, albeit still high. However, it notes that the adoption of structural measures within the framework of the NGEU Funds could be complex given the persistence of downside risks, such as inflation and deteriorating governance.

EthiFinance Ratings, integrating ESG (Environmental, Social, and Governance) principles into its assessment methodology, has also observed a positive evolution in Portugal in recent years in these aspects. Regarding ESG matters, the agency considers progress has happened. However, the country is still below the European average in several social aspects. In the first place, due to the notable dependence on energy with 66.9 percent of the energy consumed arriving from other countries. On a positive note, EthiFinance Ratings highlights the role of the Recovery and Resilience Plan, which will facilitate the country's further improvement in this area according to expectations.

Finally, regarding the country's governance, the agency recognizes a deterioration in governance due to the recent corruption scandals that led to the resignation of the Prime Minister. Similarly, the agency considers that the call for elections in 2024 could affect the dynamics of power and decision-making within the parliament and political stability.