Moody's Raises Portugal's Credit Rating -- Update

By Maria Armental 

Moody's Investors Service Inc. on Friday upgraded Portugal's credit rating by one notch to Ba1, citing the country's improved fiscal condition and an expected, continued gradual reduction in the country's very high public debt burden.

The outlook is stable, Moody's said. Ba1 is one notch below investment-grade territory.

"Moody's believes, however, that Portugal's credit metrics remain inconsistent with an investment-grade rating," the company said, noting that the action concluded the review for upgrade it had initiated on May 9.

Portugal's credit profile is now aligned with its Ba1-rated European peers, including Slovenia and Croatia, though the latter has a negative outlook.

Unlike those countries, however, Portugal's economy is growing again, with the recovery broadening beyond exports, the ratings firm said.

Portugal exited its EUR78 billion ($106.7 billion) three-year bailout in May without asking for a precautionary credit line, and ratings firms have praised the country's fiscal achievements. On May 9, Moody's raised the country's rating one notch to Ba2, citing improved economic and market conditions. On the same day, Standard & Poor's Ratings Services revised Portugal's outlook to stable from negative but kept the country's rating at double-B, also two levels into junk.

On Friday, Moody's said the Portuguese government had shown a strong commitment to reducing budget deficits despite adverse rulings from the country's Constitutional Court. The ratings firm also pointed to the country's "sizable fiscal cushion," noting that last year's budget deficit was lower than originally budgeted. For the current year, Moody's said it expects Portugal to achieve its general government deficit target of 4% of gross domestic product, which would yield the government's first primary surplus since 1997. Further, Moody's noted, Portugal's budget deficit would be lower than that of higher-rated Spain and Ireland.

The rating agency said uncertainties surrounding Banco Espírito Santo shouldn't affect the nation's credit profile.

Moody's and Standard & Poor's Ratings Services this month downgraded the Portuguese bank's ratings amid a financial upheaval involving the bank's holding company, Espírito Santo Financial Group SA.

Portugal's public debt ratio stands around 120% of GDP, Moody's said.

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