Fitch downgrades Portugal economic outlook over virus pandemic

The ratings agency Fitch has lowered Portugal’s outlook rating from “positive” to “stable”.

The US agency has maintained its overall rating as “BBB” but foresees an interruption in recent positive trends for the Portuguese economy and the country’s debt because of the Covid-19 pandemic.
“The review of the outlook reflects the significant impact of Covid-19 on the Portuguese economy and the country’s budget situation,” states the agency in a bulletin posted on its site.
“The shock will be likely to interrupt the trend in the improvement of economic growth, in terms of debt ratio against GDP, but also the resilience of the financial sector,” it adds.
The news is hardly surprising given that Portugal’s finance minister Mário Centeno has admitted that Portugal’s economy could fall by over 20% of GDP in this quarter.
Fitch says Portugal’s lockdown will have an expressive impact on GDP taking into account the economy’s dependence on tourism that contributes to 16.5% of product and 18.6% of employment.
It points to a 3.9% contraction of GDP in 2020, foreseeing a strong fall in the second quarter of the year, “Before a gradual return to activity in the second half of 2020 and in 2021.”
The contraction expected by the agency could, however, be more acute if a “second wave of infections, a period of longer lockdown or a deterioration in the health situation in other European countries happens and would lead to an even sharper fall in 2020 and a potentially weaker recovery in 2021”.
Fitch states that when GDP falls, debt rises and after Portugal’s surplus in 2019, the agency calculates that Mário Centeno will have a black hole in public accounts of 4% of GDP because of the extraordinary expenditure caused by the pandemic with the cost of lay-offs bringing the greatest pressure to bear.
At the end of last year Portugal’s debt ratio was 117.7% but by the end o this year will rise to 124.9%.
It also says that the widespread loans freezes for companies and families will lead to a deterioration in the quality of bank assets in the short term while a more prolonged crisis could actually threaten the sector’s sustainability.