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DBRS reiterates Portugal's rating three levels above rubbish and with a stable outlook - Bonds

DBRS reiterates Portugal’s rating three levels above rubbish and with a stable outlook – Bonds

On Friday, DBRS reiterated Republic’s rating at BBB High (three levels above rubbish), with a stable outlook (a credit quality improvement perspective).

“The pandemic left the Portuguese economy in the second quarter of this year still 4.6% below levels at the end of 2019. The magnitude of the shock reflects the small and open nature of the economy, as well as the weight of tourism,” he asserts, the report of the Canadian Financial Rating Agency.

“Improvement in sectors that depend on physical presence, such as tourism, depends on the evolution of the epidemic and recovery is not expected to occur until mid-2022. However, growth prospects have improved, and with vaccination progressing in Portugal and Europe, the economy should recover in the second half of year and in the period covered by the perspective,” he adds.

The DBRS justifies the decision to reaffirm the stable outlook while balancing a “sudden shock to health and the economy” with improvements in several key rating indicators in the years prior to the crisis. More investment, export diversification toward higher quality products and services and more value added point to strong growth prospects over the medium term, the financial rating agency notes.

The document also emphasized that years of primary fiscal surpluses and a low debt-to-GDP ratio gave the government room to move forward with temporary fiscal stimulus to mitigate the pandemic’s impact on the economy.

However, not everything is “pink,” DBRS warns. Weaknesses remain including high public debt, stress on the financial system and “relatively low” growth potential.

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The agency notes that the rating could be improved if the macroeconomic outlook improves and the government is able to return the debt-to-GDP ratio to a downward trajectory.

As risk factors for a possible decline in the assessment of the quality of Portuguese sovereign debt, the DBRS points to the possibility that the crisis will significantly reduce growth prospects or weaken political commitment to pursuing sustainable macroeconomic policies.

The agency does not forget the European bazooka. The roughly 64 billion euros that Portugal will receive from the EU by 2029 “should accelerate the recovery”. The DBRS warns that the greatest danger comes from external demand, that is, spending by tourists

The agency also hinted at the risk of an increase in bad debt (NPL) in banks’ balance sheets towards the end of the rallies, scheduled for the end of September.

(news updated at 22:50)