Portugal’s Outlook Raised by Moody’s on Growth Prospects

(Bloomberg) -- Portugal’s government bond rating outlook was raised by Moody’s Investors Service, citing improved medium-term growth prospects.

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The outlook was revised to positive from stable, the New York-based credit rating company said in a statement on Friday. Moody’s affirmed the Baa2 rating.

The change “reflects the increasing probability that a long period of economic and fiscal reforms, deleveraging of households and non-financial corporations and banking sector repair will result in continued and sustained improvement of the credit profile, in particular in economic and fiscal strength,” Moody’s said in the statement.

The country’s economy is expected to slow this year, after bouncing back following the pandemic. For Portugal, which has the third-highest debt ratio in the euro area behind Greece and Italy, tourism represents about 15% of the economy. Moody’s now estimates that the economy will grow by around 2% on average in the next five years.

The Bank of Portugal in March raised its 2023 economic growth forecast to 1.8%, citing an improved performance in the tourism industry. Government debt fell to 113.9% of gross domestic product in 2022. The government aims for a budget deficit of 0.4% of GDP in 2023.

Near term, Moody’s expects Portugal’s GDP growth at 2.2% in 2023, materially higher compared to the euro area, thanks to a buoyant tourism sector. This year, elevated consumer price inflation and higher interest rates caused by the further tightening of monetary policy will significantly slow domestic demand, while external demand weakens, Moody’s said.

Faster-than-expected potential growth in coming years will be supported by reforms and investments in the context of the National Recovery and Resilience Plan, Moody’s said. Still supported by solid nominal GDP growth, Moody’s expects the debt-to-GDP ratio to continue on its downward path falling to 103% of GDP in 2024.

Portugal’s 10-year bond yield was at about 3.2% on Friday. It peaked at 18% in 2012 at the height of the euro region’s debt crisis.

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