Fitch maintains Portugal rating but improves outlook

Fitch kept Portugal’s rating at ‘A’ unchanged on Friday but improved the outlook from stable to positive. The decision comes after in March the North American rating agency did not change the valuation of Portugal’s sovereign debt.

On September 29 last year, Fitch upgraded Portugal’s rating from ‘BBB’ to ’A’, keeping the outlook stable. A year later, in a statement, it praises the Portuguese government’s continued progress in reducing the public debt ratio, the commitment to prudent fiscal policy, and ongoing external deleveraging, which it considers vital to reduce the country’s vulnerabilities.

The agency predicts “a low risk of early elections next year.” However, it warns that the Government’s minority position “results in political uncertainty,” including “in relation to the approval of the State Budget for 2025 (OE2025)”.

Although it expects the outline budget to be approved, it admits that it is possible that the Government may have to resort to management in ‘twelfths,’ which “would require a stricter budgetary policy compared to the 2025 proposal”. For Fitch, this “would also imply delays in the implementation of policies.”

The twelfths regime, which was used in 2022 due to the extension of the 2021 State Budget, limited the monthly execution of the budget by dividing it into 12 monthly parts until a fresh budget could be agreed in parliament.

The agency forecasts that moderate economic growth and a “modest” budget surplus, from 0.2% of GDP this year, will reduce Portugal’s public debt to 95.8% of Gross Domestic Product (GDP) by the end of 2024, from 99.1% at the end of 2023. For this year, Fitch estimates a “slight increase” in the unemployment rate to 6.6%, followed by a reduction to 6.4% between 2025 and 2026.

inflation is expected to fall from 5.3% to 2.6% in 2024 and stabilize around 2% over the next two years.