Portugal Keeps Credit Rating That Ensures Eligibility for QE

(Bloomberg) -- Portugal’s credit rating was retained at investment grade by DBRS Ltd., securing eligibility of the country’s debt for the European Central Bank’s bond purchase program.

The Toronto-based company kept Portugal’s rating at BBB (low), its lowest investment grade, and maintained the stable trend. For Portugal’s bonds to qualify for purchase under the ECB’s quantitative-easing plan, the nation must be rated investment grade by at least one major ratings company.

“The rating reflects Portugal’s euro zone membership and its adherence to the EU economic governance framework, which helps foster credible macroeconomic policies,” DBRS said in a statement on Friday. “However, Portugal faces significant challenges, including elevated levels of public sector debt, low potential growth, ongoing fiscal pressures, and high corporate sector indebtedness.”

Prime Minister Antonio Costa was sworn in at the end of November and his minority Socialist government is reversing state salary cuts faster than the previous administration proposed, while increasing indirect taxes to narrow the budget deficit. Costa’s government has been propped up in parliament by the Left Bloc, Communists and Greens, which haven’t followed the Socialists in backing European budget rules in the past.

“Despite the fact that we were expecting instability in the government, that hasn’t been the case,” Nichola James, co-head of sovereign ratings at DBRS, said by telephone. The budget deficit should be less than 3 percent of gross domestic product this year, James said.

Debt, Growth

Portugal’s growth outlook was cut in the 2017 budget proposal released last Friday, when the government also said the budget deficit and debt ratio will be higher than previously forecast.

“Ideally we would like to see a more stable budgetary framework supporting business and growth in the longer term, with more permanent measures perhaps on the expenditure side,” James said.

The economy will grow 1.2 percent in 2016 and the budget deficit will be 2.4 percent, which is still within a 2.5 percent limit set by the European Commission. Debt will rise to 129.7 percent of GDP in 2016 as the government injects capital in state-owned bank Caixa Geral de Depositos SA, before falling to 128.3 percent in 2017. The government is counting on a higher dividend from the central bank to help narrow the deficit to 1.6 percent in 2017.

The decision by DBRS to maintain the rating “increases our own and the markets’ confidence in the policies chosen for the country,” the Finance Ministry said in an e-mailed statement.

Even with the ECB’s purchases, Portugal is the euro region’s worst-performing sovereign-bond market this year through Thursday, according to Bloomberg World Bond Indexes. The nation’s securities have lost 1.1 percent, compared with gains for everywhere else in the bloc.

“On balance the higher yields recently haven’t altered our view of debt sustainability,” said James of DBRS.

Portugal’s 10-year yield was at 3.2 percent on Friday, up from 2.4 percent 12 months ago. It peaked at 18 percent in 2012 at the height of the euro region’s debt crisis. The nation’s debt is rated junk by Fitch Ratings, Moody’s Investors Service and S&P Global Ratings.

To contact the reporter on this story: Joao Lima in Lisbon at jlima1@bloomberg.net. To contact the editors responsible for this story: Vidya Root at vroot@bloomberg.net, Henrique Almeida