Portugal has recently been the subject of sovereign bond speculation. It was one of the so-called ’PIGS’ of Europe alongside Spain, Italy and Greece due to its macroeconomic weaknesses but today Fitch took the step of downgrading the nation to AA- from AA.
Fitch sovereign team associate director Douglas Renwick says: “A sizeable fiscal shock against a backdrop of relative macroeconomic and structural weaknesses has reduced Portugal’s creditworthiness. Although Portugal has not been disproportionately affected by the global downturn, prospects for economic recovery are weaker than EU15 peers, which will put pressure on its public finances over the medium term.”
The ratings agency says Portugal’s budget “significantly” underperformed in 2009. It has a deficit of 9.3 per cent of GDP against a prediction of 6.5 per cent deficit in September 2009. Fitch says its gross national debt will reach 90 per cent of GDP by 2013.
Fitch admits that the long-term refinancing needs of Portugal are not high with an average debt stock maturity of 6.5 years.
Renwick says that while the Portuguese government’s recently announced consolidation plans are “broadly credible”, the planned deficit adjustment is “back-loaded and the risk of macroeconomic disappointment is significant”.
He says: “Further fiscal and/or economic underperformance in 2010 and 2011 could lead to another downgrade. Conversely, evidence that Portugal is entering a sustained recovery and that budgetary targets are being met, along with further structural reforms to enhance the productivity and competitiveness of the economy, would ease downward pressure on the rating.”