Download ARC Ratings, S.A. ARC Affirms BBB

ARC Affirms BBB- Rating of Portugal
ISSUER
RATINGS DATE
Republic of Portugal
October 30, 2015
ISSUER RATINGS - FOREIGN CURRENCY
ISSUER RATINGS - LOCAL CURRENCY
BBB-
A-3
Medium and Long Term
(BBB--, with stable outlook)
(BBB
Short Term
(A(A -3)
COUNTRY CEILING - FOREIGN CURRENCY
A
Foreign Currency
(A)
BBB-
A-3
Medium and Long Term
Term
(BBB--, with stable outlook)
(BBB
Short Term
(A(A -3)
COUNTRY CEILING - LOCAL CURRENCY
A
Local Currency
(A)
London, October 30, 2015, ARC Ratings, S.A. (ARC), a global rating agency, has affirmed Portugal’s “BBB-“ long-term
foreign and local currency issuer ratings of the Republic of Portugal (Portugal). The outlook on both ratings is stable. In
addition, the agency affirmed Portugal’s foreign currency and local currency country ceilings of “A” and short-term
sovereign ratings of "A-3.” All ratings assigned are unsolicited.
ARC’s rating affirmations are part of the agency’s on-going review of its sovereign ratings. ARC Ratings’ full credit
analysis on Portugal is available on the agency’s website, at www.arcratings.com.
RATING RATIONALE
The key rating drivers supporting Portugal’s “BBB-” investment-grade foreign and local currency ratings are:
1. Institutional strengths that have underpinned Portugal’s crisis management successes in stabilizing its economy.
2. An economic recovery that is more reliant on exports as Portugal is slowly becoming more productive and
competitive.
3. A history of stable politics and policy continuity, with the main parties having broadly similar policy platforms,
although the recent elections introduces uncertainties.
4. Proactive debt management that contains the risks associated with Portugal’s large government debt of 128.7% of
GDP (2q15).
5. Falling unemployment (11.9% at 2Q15), and rising employment, although not to pre-crisis levels.
6. A policy environment in the Eurozone that is increasingly responsive to deflation risks. The quantitative easing
program by the European Central Bank is likely to be expanded. It has been critical to countering growth-retarding
deflationary pressures in Portugal as well as in other Eurozone economies.
7. Eurozone membership that provides the institutional framework for economic management, and also has been a
proven source of emergency liquidity.
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The key constraints on Portugal’s credit ratings are:
1. A history of lackluster growth performance even in the pre-crisis period when liquidity (and borrowing) was buoyant.
2. A generally uncompetitive economy that has manifested itself in large current account deficits in the years leading
up to the crisis period. Portugal’s current account deficits have been eliminated, thanks initially to the recession but
increasingly because of the improved performance of the export sectors.
3. A large government debt that renders the country vulnerable to swings in market confidence.
4. New uncertainties about the economic policy environment posed by the outcome of the recent elections. While
ARC’s baseline expectation is that the reforms implemented to date will not be reversed, question marks do exist
about future policy action and political stability. The Eurosceptic rhetoric coming from the left-wing parties threatens
the policy thrust. ARC has been encouraged by the breadth of the reform initiative (and the gains in competitiveness
realized) to date, although it remains incomplete.
5. An over-leveraged economy with high levels of corporate indebtedness and a bias towards debt accumulation
rather than equity financing. Corporate indebtedness and the rising level of non-performing loans (21% of the total
among corporate loans in 2Q15) dampen prospects for investment, and in turn, growth.
6. Contagion risks associated with a possible Greece exit from the Eurozone, or about the durability of the Eurozone
project itself, which could cause a renewal of formidable liquidity pressures. Notably, Portugal’s government debt
market has weathered the recent stresses in Greece well.
Portugal is on target to realize a real GDP growth rate of 1.6% this year, substantially higher than 0.9% rate achieved in
2014, and slightly higher than the average Eurozone growth rate of 1.5% anticipated for 2015. Portugal posted seven
consecutive quarters of positive GDP growth, with the last two quarters revised to 1.6% each. This pace of expansion
has been realized thanks to improved performance of the export sectors (growing at an accelerated rate of 7% and
7.4% in 1q15 and 2q15, respectively), and despite continued fiscal restraint and weak credit conditions, which are a
drag on growth. Notably, Portugal’s economic expansion has occurred despite the deteriorating macro environment in
Angola, one of Portugal’s main extra-European export markets. Portugal’s ability to sustain a growth rate in the range of
1.5-2.0% is a key rating issue, critical to the country’s ability to grow out of its large debt load.
The government is also on target to exit this year the European Union’s Excessive Deficit Procedure, the rules-based
framework for EU countries that post outsized, sustained deficits in excess of 3% of GDP. The fiscal deficit is expected
to register 2.7% of GDP this year, according to the authorities. Thanks to the healthier fiscal position and accelerating
real and nominal GDP growth, government debt is expected to fall to 125.2% of GDP at the end of this year
(depending upon IMF prepayments and proceeds from the sale of Novo Banco, which has been delayed) from 130.2%
of GDP in 2014.
The outcome of the recent elections poses risks to the policy thrust. Failure to ratify the policy program of the new
center-right minority government led by PM Pedro Passos Coelho could lead to a scenario including a new round of
voting as early as by the end of the first semester 2016, unless the Portuguese Constitution is changed. This scenario
could introduce a period of policy paralysis in the near term and perhaps beyond. The left-of-center Triple Alliance
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being formed, led by Socialist Party leader Antonio Costa, has a majority of parliamentary seats with more Eurosceptic
and anti-reform parties.
RATING OUTLOOK AND KEY TURNING POINTS
Portugal’s ratings carry stable outlooks.
The trigger for an upgrade would come from sharply improved competitiveness of the real economy, whereby much
faster paced growth would be achieved, also contributing to the rapid reduction in the country’s government debt
burden. Such a scenario would likely involve a transformation the structure of the economy, including corporate sector
consolidation, as well as sharply improved prospects for investment. The corporate sector in Portugal is characterized to
a significant extent by small and fractured SMEs, many of which are overleveraged, not very profitable, and which do
not generate gains from scale.
Triggers that could prompt a rating downgrade would include a deflationary environment due to the importance of
economic dynamism for growing out of the country’s large debt burden. Fractured politics would also exert downward
pressures on the ratings to the extent they could impede the completion of the country’s incomplete structural reform
program and continued fiscal consolidation necessary to reduce the country’s large government debt burden. A rise in
fiscal arrears – they have fallen to about 0.6% of GDP at 3Q2015 – would trigger rating pressures given the impact on
the payments system economy-wide and also the negative signal provided about honoring commitments.
Moreover, should Grexit (Greek exit) rise and/or should membership in the Eurozone for countries including Portugal
come under pressure, ARC would revisit the rating. Possible conduits of transmission of risks could be financial markets
closure or repricing, and/or deposit flight, which would heighten liquidity risks, perhaps across all Eurozone periphery
countries.
ABOUT ARC RATINGS
ARC is a global ratings agency based in London and Lisbon that was formerly known as Companhia Portuguesa de
Rating, SA. ARC has partnered with rating agencies in India (CARE Ratings), Malaysia (MARC), Brazil (SR Ratings), and
South Africa (GCR). ARC is focused on carving out a niche based on the local knowledge and expertise of its partners
across the globe. ARC is registered with European Securities and Markets Authority (ESMA). Please visit
www.arcratings.com for further details.
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THIS DISCLOSURE IS FOR INFORMATION PURPOSES ONLY AND DOES NOT
DISPENSE THE READING OF THE RESPECTIVE RATING REPORT.
ARC Ratings, S.A.
180 Piccadilly
London W1J 9HF
UNITED KINGDOM
Phone:
+44 (0) 203 282 7594
E -mail:
[email protected]
Site:
www.arcratings.com
Key Contacts:
Joan FeldbaumFeldbaum-Vidra
EmmaEmma-Jane Fulcher
Head of Sovereigns
Panel Chairperson / CRO
+1 201 574574 -5783
+44 (0) 203 282 7594
E-mail: [email protected]
E-mail: [email protected]
Registered as a Credit Rating Agency with the European Securities and Markets Authority (ESMA), within the scope of the
REGULATION (EC) Nº 1060/2009 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL, of 16 September, and recognised as
External Credit Assessment Institution (ECAI) for Corporates by the Bank of Portugal. Ratings do not constitute a recommendation to
buy or sell, but only one of the factors to be weighted by investors. ARC’s Ratings are assigned based on information collected from a
wide group of sources. ARC Ratings uses and treats this information with due care and attention. Although all due care was taken in
the collection, cross-checking and processing of the information for the purposes of the rating analysis, ARC Ratings cannot be held
liable for its truthfulness. ARC Ratings must make sure that the information has a minimum level of quality prior to assigning a rating
based on such information.
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