Portugal’s slow and stuttering economic recovery has long been a blight on the eurozone, but things may finally be on the up for the former bailout country.
In its latest assessment of Portugal’s economic fortunes, rating agency Moody’s highlights the steady gains the country has made to rein in its public finances and boost growth in recent months.
According to Moody’s forecasts, Portugal’s debt to GDP ratio – which is the second highest in the eurozone after Greece – should finally begin to fall this year from over 130 per cent.
The country also ended last year below the 3 per cent of GDP deficit limit imposed by the EU for the first time since the start of monetary union in 1999 (see chart above). Economic growth meanwhile is expected to accelerate to 1.8 per cent this year – the best rate since Portugal requested an EU-IMF financial rescue in 2010, according to the European Commission.
A tightening of the government’s purse strings and a falling debt trajectory would lay the ground for Portugal to become an investment grade sovereign again, said Moody’s:
Much stronger economic growth would also be beneficial for the rating, as it would indicate that the extensive structural reforms implemented over the past years are bearing fruit, allowing a higher sustained growth path with positive effects on the debt trend.
Having junked Portugal at the height of its crisis seven years ago, Moody’s currently ranks Portugal’s debt at Ba1 – one level below investment grade.
An upgrade would give another boost to the country’s bonds, which have been some of the biggest beneficiaries of the European Central bank’s stimulus policies over the last two years.
Portugal’s brightening recovery under its Socialist government has helped the bonds rally to a 2017 high earlier this month. The 10-year yield has hit a seven month low of 3.15 per cent today, declining from a peak of over 4.25 per cent earlier this year.
But risks persist. The burdensome debt pile is expected to stay elevated at 125 per cent of GDP in 2020 while growth will slip back to 1.4 per cent next year, according to Moody’s’ forecasts.
The banking sector is also a drag on the country’s future economic prospects, with non-performing loans inching up 2.5 percentage points to 19.5 per cent over the last two years.
“The [banking] sector remains burdened by high non-performing loan levels, low levels of profitability and weak capital buffers which continues to hinder the provision of credit to productive investment opportunities” said Moody’s.