Portugal’s credit rating, once classified as ‘junk’, has climbed to near the highest levels by major financial rating agencies after significant debt reduction and fiscal balance achievements.
For several years, Portugal’s sovereign debt was rated at some of the lowest levels following a crisis that eroded investor and market confidence.
Under the leadership of António Costa and later Luís Montenegro, a primary focus has been the reduction of public debt and achieving positive or near-positive budget balances, enhancing Portugal’s investment image.
How do rating agencies evaluate Portugal?
Portugal’s credit rating has mirrored improvements in public financial management. DBRS now rates Portuguese sovereign debt as A (high), Moody’s as A3, while Fitch holds an A- rating pending review on Friday, September 12.
S&P recently upgraded its rating on August 29, moving from ‘A’ to ‘A+’, just six months after a previous upgrade, surpassing analysts’ expectations.
“Despite a highly uncertain commercial and geopolitical environment, Portugal is expected to register moderate surpluses and continue improving its external financial metrics, characterized by significant economic deleveraging,” stated the financial rating agency, justifying its decision.
In a statement following S&P’s rating upgrade, the Finance Ministry highlighted that the agency clearly attributes the improvement to Portugal’s prudent and solid fiscal policy, aligning with the government’s anticipation of a budget surplus this year.
The government also noted that “currently, in S&P’s rating, only nine eurozone countries have a higher rating than Portugal (Germany, Luxembourg, Netherlands, Austria, Finland, France, Ireland, Belgium, and Slovenia),” with “countries like Spain and Italy now having a lower rating.”
According to BPI Research, “the expectation of continued fiscal consolidation was a key reason for the S&P upgrade,” with the review based on “improved Portugal’s external position (even amid high uncertainty from U.S. tariffs) and the commitment to fiscal consolidation, despite persistent fragmentation in the Portuguese parliament.”
“S&P also states that the public debt ratio should continue to decrease in the coming years, expecting it to reach 84% of GDP by 2028,” it reads.
Portugal’s rating now stands near the highest levels, approximately eight years after exiting the ‘junk’ category.
Each rating agency uses its own evaluation scale, but all have AAA as the highest rating, while C or D denotes speculative or ‘junk’ status.
In September 2017, Standard and Poor’s (S&P) elevated Portugal out of the ‘junk’ category, improving its sovereign debt rating from ‘BB+’ to ‘BBB-‘, the first level of investment grade.
In December that year, Fitch also lifted Portugal from ‘junk’ status, upgrading its public debt rating by two notches, from ‘BB+’ to ‘BBB’, the second level of investment grade.
Meanwhile, Moody’s only removed the ‘junk’ label from Portugal in October 2018, upgrading the rating to ‘Baa3’.
In 2017, the public debt ratio stood at 126% of GDP, beginning a reduction trend only briefly halted by the pandemic in 2020 before resuming.
During this time, public accounts were in deficit, with Portugal reporting a budget deficit of 3% of GDP in 2017.
Currently, according to the most recent available data, public debt was at 96.3% of GDP in the first quarter of the year, with a budget surplus of 0.2% during this period.
Ratings are credit risk assessments assigned by financial rating agencies evaluating the credit risk (ability to repay debt) of an issuer, which can be a country or a company.
