Portugal’s Rating Outlook Raised to Positive by S&P on Growth

The outlook on Portugal’s bond rating was raised by Standard & Poor’s as the economy recovers and the government narrows its budget deficit.

The rating outlook was revised to positive from stable, S&P said in a statement Friday. S&P on May 9 had revised the outlook to stable from negative. The debt is rated BB, or two levels below investment grade, by the New York-based credit ranking company.

“The outlook revision reflects our view of the gradual recovery of Portugal’s real and nominal growth prospects, alongside policymakers’ commitment to consolidating public finances over the medium term,” S&P said. It forecasts Portugal’s gross domestic product will grow on average about 1.8 percent per year in 2015 and 2016.

Portugal, which received a 78 billion-euro ($84 billion) rescue from the European Union and the International Monetary Fund in 2011, followed Ireland in May when it exited the aid plan without the safety net of a precautionary credit line. The government now plans to make an early repayment of about 14 billion euros of its IMF loan after borrowing costs dropped and the European Central Bank announced a bond-buying plan.

The government’s debt is also rated below investment grade by Fitch Ratings and Moody’s Investors Service. Portugal’s 10-year bond yield is at about 1.6 percent after reaching more than 18 percent in January 2012.

Export Performance

Prime Minister Pedro Passos Coelho said on March 16 that he hopes the economy will grow more this year than the 1.5 percent pace forecast by the government, according to comments broadcast by television channel SIC Noticias. The government aims to narrow the budget deficit to less than the EU’s limit of 3 percent of GDP in 2015. Coelho faces elections in September or October.

“While a firming of domestic demand is likely to continue to drive import growth, the positive impact of the euro zone economic recovery, coupled with a significant decline in oil prices since the second half of 2014 and the depreciation of the euro, should support Portugal’s net export performance during 2015,” S&P said in the statement. It projects Portugal’s net government debt will drop to 113 percent of GDP in 2018 from 118 percent in 2014.

Investors often ignore ratings and outlook changes, as evidenced by the rally in Treasuries after the U.S. lost its top grade at S&P in 2011.

From the start of last year, Fitch, Moody’s, S&P and DBRS Inc. have had to release announcement schedules for ratings decisions under EU rules introduced in the wake of the region’s debt crisis.

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