Moody's: Portugal benefits from structural reforms and accelerating economic growth, but debt burden remains high

Portugal (Ba1 stable) is set to benefit from broad structural reforms and accelerating economic growth in the coming years, but its large, albeit declining debt burden continues to form a challenge, says Moody's Investors Service in its annual Portugal Credit Analysis, published today.

"We expect Portugal's real economic growth to accelerate to 1.7% and 1.8% in 2015 and 2016, respectively, from 0.9% in 2014, on the back of stronger domestic demand and renewed strength in exports. The implementation of broad structural reforms over the past several years should support a stronger economic growth path, while fiscal consolidation measures will help gradually reduce the country's debt burden. However, Portugal's debt levels still remain very high," says Kathrin Muehlbronner, a Vice President - Senior Credit Officer at Moody's.

According to Moody's, the economic recovery of Portugal's main trading partners in the euro area, coupled with structural improvements in competitiveness and a sustained broadening of the country's export base, will likely result in higher demand for its exports.

Portugal's fiscal consolidation track record has been also strong, and Moody's expects the public debt ratio to start declining from this year onwards to below 125% of GDP by end-2016, from a peak of 130.2% in 2014. Furthermore, the rating agency forecasts that Portugal's budget deficit will continue to decrease, to close to 3% of GDP this year. This marks a significant improvement, but in contrast to the past several years, will likely mainly be the result of the strengthening economy rather than structural measures, says Moody's.

However, Moody's notes that the country's public debt ratio remains high, and public debt forecasts are susceptible to potential shocks, in particular lower economic growth or a slower-than-forecast fiscal consolidation path. Further permanent expenditure adjustments have been made more difficult following a series of rulings by the country's Constitutional Court, says Moody's.

In addition, Portugal's external vulnerability remains high, given its high external debt levels, and the country would be susceptible to a scenario wherein investor confidence were to be hit should Greece decide to exit the euro area, although this is not Moody's base case scenario. Banking-sector risks also remain material, in Moody's view, as reflected by the banking sector's persistently high stock of problem loans and low profitability.