Portugal’s miracle: Moody’s brings it back to the “A” series of ratings

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On 7 April 2011, Portugal, in the midst of the European spread crisis, was forced to ask for help from the European Union and the Monetary Fund. Just over a decade later, Portugal was brought by the rating agency Moody’s even into the A rating range. On Friday night, with the markets closed, a double promotion arrived for Lisbon: the rating rose in a single step two steps, from «Baa2» (which was one step above the Italian rating) to “A3”. That is two votes above. It’s like going from 6 to 8 in one fell swoop at school.

The reasons for this double promotion are clearly explained by Moody’s in the press release: the decision derives from the support given to debt sustainability in the medium term «by a series of economic and fiscal reforms, by the reduction of private sector indebtedness and by the continuous strengthening of the banking system”. Portugal’s medium-term prospects – continues Moody’s – are supported «by significant public and private investments and the implementation of further structural reforms, both linked to the Pnrr».

Furthermore, for the next few years, «Moody’s believes that the negative economic impact resulting from the aging of the population will be mitigated by immigration, greater participation in the labor market and productivity growth».

Moody’s notes that «the pandemic shock only temporarily interrupted the reduction of the debt burden. Robust growth and essentially balanced budgets mean that the debt burden continues to decline at one of the fastest rates among advanced economies, albeit from high levels.” The positive trends – continues the agency – «are balanced by recent signs of political risks. The corruption investigations led to resignation of Prime Minister Antonio Costa, following which President Marcelo Rebelo de Sousa called early elections. While there is evidence so far that Portuguese institutions are enabling the country to address the issue effectively, these political developments could slow progress in investments and reforms related to Portugal’s NRRP.

Another unrelated source of downside risks arises from Portugal’s exposure to physical climate risks that could have a more substantial negative impact on growth and fiscal metrics than Moody’s currently assumes.