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S&P upgrades outlook for Portugal debt rating

Standard & Poor’s upgraded the outlook for Portugal’s creditworthiness on Friday, citing the bailed-out nation’s unexpectedly strong economic and deficit-cutting performance.

The agency delivered the good news five days after Portugal announced it would exit a 78-billion-euro ($108 billion) international financial rescue programme on May 17, making a clean break from three years under the supervision of its bailout creditors.

Standard & Poor’s said it had raised the outlook to “stable” from “negative” for Portugal’s long-term sovereign debt, which is rated at a junk-bond equivalent BB, and its short-term sovereign debt, which is rated at B.

“The economy and the labour market are recovering faster than we projected, with better-than-expected budgetary performance,” the New York-based rating agency said in a statement.

Portugal’s recession in 2013 had been shallower than expected, helping Lisbon to curb the general government deficit to the equivalent of 4.9 percent of economic output in 2013, unexpectedly beating its 5.5-percent target, Standard & Poor’s said.

Lisbon snatched an economic lifeline from the European Union and International Monetary Fund in 2011 in return for enacting budget-slimming austerity measures, which sparked mass popular protests.

“The government has fully implemented the terms of the EU-International Monetary Fund economic adjustment program,” Standard & Poor’s said.

In addition, the agency said, Portugal’s surplus in its balance of payments with the rest of the world was large enough to gradually reduce the economy’s large stock of net external debt.

Nevertheless, Standard & Poor’s said, Portugal’s net general government debt ratio, equal to 118 percent of annual economic output, was among the highest of all rated sovereigns.

The agency said it expected Portugal’s economy to grow on average by about 1.4 percent a year during 2014-2015, largely because of sustained export growth.

“We also expect a gradual recovery in domestic demand as private sector hiring continues to recover,” it said, citing labour market reforms and falling unit labour costs.

Standard & Poor’s warned of risks, however, with high corporate and household debt, along with declining nominal incomes, reining in demand. Low employment levels would restrain the economy over the longer term, it added.