Download ARC Ratings, SA ARC Affirms BBB- Rating of Portugal

ARC Affirms BBB- Rating of Portugal
ISSUER
RATINGS DATE
Republic of Portugal
April 1, 2016
ISSUER RATINGS - FOREIGN CURRENCY
ISSUER RATINGS - LOCAL CURRENCY
BBB-
A-3
Medium and Long Term
(BBB--, with stable outlook)
(BBB
Short Term
(A--3)
(A
COUNTRY CEILING - FOREIGN CURRENCY
A
Foreign Currency
(A)
BBB-
A-3
Medium and Long Term
(BBBBBB-, with stable outlook)
Short Term
(A--3)
(A
COUNTRY CEILING - LOCAL CURRENCY
A
Local Currency
(A)
London, April 1, 2016, ARC Ratings, S.A. (ARC), 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 affirmations are part of the agency’s on-going review of its sovereign ratings. The next scheduled review of the
rating is 9 September 2016. The conclusions and discussion of the panel are highlighted in this press release.
Portugal’s credit ratings were accorded based on ARC’s sovereign methodologies as available on our website
(www.arcratings.com). The methodologies utilized are “ARC’s Sovereign Rating Methodology” dated June 19, 2015
and “Criteria for Assessing Country Ceilings” dated May 18, 2015. ARC’s full credit analysis on Portugal is also available
on the agency’s website.
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, although growth performance remains weak.
3. Continued commitment to fiscal consolidation by the new government.
4. A proven willingness and somewhat improved capacity to safeguard the stability of a financial system plagued by
legacy of crisis and years of imprudent credit policies.
5. Proactive debt management that helps contain the risks of Portugal’s large government debt of 128.8% of GDP.
6. Falling unemployment and rising employment, although below pre-crisis levels.
7. Continued access to liquidity from the ECB and financial markets.
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8. A Eurozone and ECB policy environment that is cognizant of deflation risks.
9. Eurozone membership that provides the institutional framework for economic management, and also has been a
proven source of emergency liquidity.
The key constraints on Portugal’s credit ratings are:
1. A long history of lacklustre growth performance.
2. A generally uncompetitive economy marked by large current account deficits in the years leading up to the crisis
period. Portugal’s current account deficits have been eliminated, thanks to recession, low oil prices, and also the
improved performance of the export sectors, but economic dynamism is not entrenched.
3. A large government debt that renders the country vulnerable to swings in market confidence. The combination of a
large debt and weak growth prospects keep vulnerability high.
4. An over-leveraged economy with high levels of corporate indebtedness and an historical bias towards debt
accumulation rather than equity financing. Corporate indebtedness and rising NPLs (16.2% of corporate loans in
February 2016) dampen investment prospects.
5. Contagion risks associated with a possible Grexit or Brexit or about the durability of the Eurozone project, which
could cause a renewal of formidable liquidity pressures.
Portugal’s growth accelerated in 2015 to 1.5% from 0.9% rate in 2014. Second quarter electoral uncertainty combined
with a weakening global economy led 2H15 growth to slacken. The performance was based on the recovery in
employment and the fall in savings to an historical low, and export growth (5.1% 2015 annual average), in the context of
fiscal restraint and weak credit conditions. Portugal’s economic expansion 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.
Portugal’s 2015 fiscal deficit of -4.4% of GDP included an unanticipated 1.4% of GDP expense for the BANIF resolution.
Without extraordinary expenses, Portugal still missed its -2.7% of GDP budget deficit target and the -3% of GDP
Maastricht threshold that would have allowed the country to exit EU’s Excessive Deficit Procedure. This represented an
improvement from the outsized deficit posted in 2014 of -7.2% of GDP, although that figure reflected the failed attempt
to sell Novo Banco, and the related EUR 3.9 billion loan to the resolution fund. Excluding all one-offs in both years, the
deficit narrowed just 0.4% of GDP in 2015, underscoring a weak correction effort in the election year. The cancelation of
the Novo Banco sale minimized planned government debt reduction. The year-end government debt to GDP ratio
stood at 128.8% of GDP.
The agency notes that the outcome of the recent elections poses risks to the policy thrust. The new government
cancelled concessions award to private companies for the Lisbon and Oporto public urban transport companies. It also
made agreement with TAP (the main Portuguese airline) investors to raise its stake in the company to 50% with veto
power over key strategic decisions. While some smaller privatizations are proceeding, these moves indicate a more
populist tone being followed by the new minority government.
On the fiscal front, the government has approved a 5% increase in statutory minimum wage starting a reversal of civil
servants pay cuts, sliced personal income taxes and increased social transfers. Indeed, some of those measures were
required by the Constitutional Court decision that called for a reversal of government spending cuts but others
measures were new. After negotiations, the European Commission approved the government’s fiscal deficit target of
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2.2% of GDP for 2016, but it remains concerned about the viability of the target and has requested an outline of
supplementary measures. Both the planned fiscal deficit target and the resolution process of Banif, which involved the
support of the opposition Social Democrats, underscore the pragmatism of Portugal’s policymakers. However, the
scope for increased political instability due to the formation of a minority government combined with the possibility of a
significant derailment of a market-friendly policy agenda are being monitored by ARC.
RATING OUTLOOK AND KEY TURNING POINTS
Portugal’s ratings carry stable outlooks.
The trigger for an upgrade would come from sharply improved competitiveness that would create room for faster
paced growth, thereby assisting deleveraging. Such a scenario would likely involve a more rapid transformation of the
structure of the economy, including corporate sector consolidation, and sharply improving prospects for investment.
Portugal’s corporate sector is dominated by small and fractured SMEs, many of which are overleveraged, not very
profitable, and which do not generate gains from scale. The structural transformation is underway but still nascent.
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. More fractured politics would also exert ratings
pressures should they impede the completion of the country’s incomplete structural reform program and the fiscal
consolidation efforts necessary to reduce the large government debt burden.
Rising Grexit (Greek exit) or Brexit (Great Britain exit) risk or heightened existential questions about Eurozone
membership would prompt ARC to revisit the rating.
Exclusion from participation in the ECB’s bond buying and quantitative easing program would exert downward pressure
on the rating.
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.
THIS DISCLOSURE IS FOR INFORMATION PURPOSES ONLY AND DOES
NOT DISPENSE THE READING OF THE RESPECTIVE RATING REPORT.
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Key Contacts:
Joan FeldbaumFeldbaum-Vidra
Vítor Figueiredo
EmmaEmma-Jane Fulcher
Head of Sovereigns
Senior Analyst
Panel Chairperson / CRO
+1 201 574574 -5783
+351 21 304 1110
+44 (0) 203 282 7594
E-mail: [email protected]
E-mail: [email protected]
vitor.figueiredo@arcratin gs.com
E-mail: [email protected]
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REGULATION (EC) Nº 1060/2009 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL, of 16 September, and recognised as
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processing of the information for the purposes of the rating analysis, ARC Ratings cannot be held liable for its truthfulness.
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