Portugal Gains Fitch Investment Grade Rating as Debt Ratio Falls

(Bloomberg) -- Portugal’s credit ranking was raised two levels by Fitch Ratings, which restored the nation’s investment grade status amid improving debt dynamics.

The rating was revised to BBB, two levels above speculative grade, from BB+, with a stable outlook, Fitch said in a statement Friday. Fitch cut Portugal’s credit rating to junk in late 2011, when the country was going through a bailout program provided by the European Union and the International Monetary Fund. S&P Global Ratings ranks the country one notch lower at BBB-, while Moody’s rates it two grades lower at Ba1.

“The favourable debt dynamics are driven by a combination of previous structural fiscal measures, the recent cyclical recovery and a substantial improvement in financing conditions,” Fitch said in the statement.

Tourism and exports have been boosting the economy, with the government forecasting growth will accelerate to 2.6 percent this year. The faster growth is helping the country’s minority Socialist government manage the budget deficit, which last year was the narrowest as a percentage of gross domestic product in four decades of Portuguese democracy.

The government forecasts economic growth will now slow to 2.2 percent in 2018 as exports decelerate. It aims to cut the deficit to 1 percent of gross domestic product in 2018 from 1.4 percent this year.

Prime Minister Antonio Costa took office at the end of 2015 and has increased indirect taxes while reducing the working week for state workers as he aims to reverse some measures introduced during the bailout program. While Portugal exited that three-year international aid program in 2014, it’s still dealing with pending issues including bad loans at banks.

Portugal’s debt burden remains high. The European Commission forecasts government debt will drop to 124.1 percent of GDP in 2018 from 126.4 percent in 2017. The debt ratio increased last year as Portugal raised funds for the 2.5 billion euro capital injection in state-owned bank Caixa Geral de Depositos SA.

Portugal’s 10-year bond yield was at 1.84 percent on Friday, down from as high as 4.33 percent earlier this year. It peaked at 18 percent in 2012 at the height of the euro region’s debt crisis.

©2017 Bloomberg L.P.