Fitch lifts Portugal two grades from ‘junk’ to ‘quality investment BBB’

Fitch Ratings has taken Portugal out of its embarrassing ‘junk’ rating category, lifting it two grades to ‘lower medium investment grade, BBB.’

This is the best rating of the four key agencies and largely is based on the long-overdue decline in Portugal’s public debt and the expectation that this will continue to fall.

An upgrade was widely expected but not a two point shift that has delighted the government and its Finance Minister, Mario Centeno.

“Fitch’s assessment is that the debt path is firmly downward and that the decline in the public debt/GDP ratio is expected to continue in the medium term. This favourable dynamic is driven by a combination of previous structural budgetary measures, the recent cyclical recovery and the substantial improvement in financing conditions,” reads the Fitch Ratings report.

Despite the Bank of Portugal choosing a US vulture fund as the new controlling shareholder of Novo Banco, ‘greater bank stability’ was an important factor for Fitch Ratings, as were lower financing costs achieved by swapping Troika debt for lower interest borrowings.

According to the agency, the markets may react positively next week due to this two-level upgrade, but it does not expect a big move as it is the year-end when funds close their positions.

As for deficit estimates, Fitch Ratings is going for 1.4% this year and 1.2% next year with growth at 2.6% this year and 1.9% in 2018.

Normally, countries with the same rating as Portugal’s ‘BBB’ have 41% of public debt to GDP. Portugal is expected to end the year with a ratio of 127%, but Fitch has overlooked this as other indicators are pointing in the right direction – a vote of confidence in the government and Centeno’s deft handling of the economy.

Of the three rating agencies, S & P was the first to lift Portugal from ‘rubbish’ to ‘investment’ with an upgrade in mid-September.

In October, Moody’s kept Portugal at ‘junk, but with a positive outlook’ and it was expected that Fitch Ratings would improve its rating by one level, so two is a big bonus.

Ever-faithful Canadian rating agency, DBRS, was the only one of the big four to assess Portugal above ‘junk’ during the debt crisis.

The Finance Minister welcomed Fitch Rating’s decision to raise Portugal’s debt rating two levels, “Never before has one of the top three rating agencies decided to increase the assessment of Portuguese sovereign debt by two steps. This classification reflects the path of control of public expenditure and the improvement of the current account. This is the recognition of the Portuguese Government’s economic policy options.”

Mario Centeno attributed the rise to “recent positive and structural inflection in key areas: robust growth since mid-2016, the dynamism of job creation and falling unemployment to 8.5%, the recent strengthening of the financial sector, the constant meeting budgetary targets and the firm and sustainable reduction of public debt that began to be registered this year.”

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