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Standard and poor's revises outlook on Portugal to stable from negative. Affirms unsolicited 'BB / B' longand short-term foreign and local currency sovereign credit ratings on Portugal. Outlook revision reflects views that economy and labor market are recovering faster than we projected.
Standard and poor's revises outlook on Portugal to stable from negative. Affirms unsolicited 'BB / B' longand short-term foreign and local currency sovereign credit ratings on Portugal. Outlook revision reflects views that economy and labor market are recovering faster than we projected.
Standard and poor's revises outlook on Portugal to stable from negative. Affirms unsolicited 'BB / B' longand short-term foreign and local currency sovereign credit ratings on Portugal. Outlook revision reflects views that economy and labor market are recovering faster than we projected.
Stable From Negative On Economic And Fiscal Stabilization; 'BB/B' Ratings Affirmed Primary Credit Analyst: Marko Mrsnik, Madrid (34) 91-389-6953; marko.mrsnik@standardandpoors.com Secondary Contact: Benjamin J Young, London (44) 20-7176-3574; benjamin.young@standardandpoors.com Table Of Contents Overview Rating Action Rationale Outlook Key Statistics Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 9, 2014 1 1314829 | 301112013 Research Update: Outlook On Portugal Revised To Stable From Negative On Economic And Fiscal Stabilization; 'BB/B' Ratings Affirmed Overview Portugal's economic and budgetary performance has outpaced our expectations. The Portuguese government has fulfilled its key commitments under the EU-International Monetary Fund Economic Adjustment Program, which it is scheduled to exit on May 17, 2014, without further official support. We are therefore revising our outlook on Portugal to stable from negative and affirming our 'BB/B' ratings. The stable outlook incorporates our view that Portugal's credit metrics are stabilizing and that we currently see less than a one-in-three probability of developments occurring that could lead to an upgrade or downgrade over the next year. Rating Action On May 9, 2014, Standard & Poor's Ratings Services revised its outlook on the Republic of Portugal to stable from negative. At the same time, we affirmed our unsolicited 'BB/B' long- and short-term foreign and local currency sovereign credit ratings on Portugal. Rationale The outlook revision reflects our views that: The economy and the labor market are recovering faster than we projected, with better-than-expected budgetary performance; The government has fully implemented the terms of the EU-International Monetary Fund (IMF) Economic Adjustment Program; and The combined current and capital account surplus is sufficiently large to enable Portugal's economy to gradually reduce its large stock of net external debt (which includes Eurosystem financing). At an estimated 317% of current account receipts for 2014, Portugal's narrow net external debt (excluding private nonbank-sector external assets) is the fourth-largest among the 129 sovereigns we rate. By lending at maturities of 20 years via the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) and at low nominal interest rates averaging 2.5%, Portugal's official European creditors have improved the central government's financing profile. In our view, the official financing has also prompted WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 9, 2014 2 1314829 | 301112013 commercial creditors to increase their exposure to Portuguese government debt, facilitating Portugal's "clean exit" from the EU/IMF program. Portugal's budgetary performance has strengthened more than we anticipated. In our baseline scenario, we think Portugal will move ahead with further fiscal consolidation measures in 2014. In our view, risks to our baseline fiscal and debt projections include a pending Constitutional Court decision on the legality of this year's planned personnel and social expenditure cuts. Even without this negative risk materializing, Portugal's gross and net general government debt ratios--at about 129% and 118% of GDP, respectively, in 2014 by our estimates--are among the highest of all rated sovereigns. We think Portugal's real GDP will likely grow on average about 1.4% per year during 2014-2015, chiefly on the back of sustained export growth, after a 1.4% contraction in 2013. We also expect a gradual recovery in domestic demand as private sector hiring continues to recover. We base our confidence in prospective employment growth partly on the 0.7% year-on-year increase in the workforce in the final quarter of 2013, and on other signs that the government's labor reforms are succeeding. In particular, recent European Commission data confirm that unit labor costs have fallen to below 2000 levels. We consider that the recent positive investment trends indicate that the capital destocking process (visible in the historically very low levels of investment as a percentage of GDP) has likely reached its end, mainly given the 10.5% year-on-year increase in spending on equipment and machinery during the final quarter of 2013. In our view, this development points to a potential future increase in the economy's export capacity. We continue to see risks to real and nominal GDP performance. We think that domestic demand remains constrained by high stocks of corporate and household debt, and we see risks to servicing this debt because of declining nominal household and corporate earnings. Data from the Portuguese central bank, Banco de Portugal, indicate that resident public and private non-financial sector gross debt was still at a very high 445% of GDP at year-end 2013, down only 0.5% from a year earlier and still 22% above levels before the 2008 crisis. We regard this debt as very high, especially taking into account Portugal's continuous credit contraction and currently negative headline inflation. Despite the recent pick-up in the labor market, we expect that the employment ratio as a percentage of the resident population will remain depressed at close to 43% for the next three years, compared with more than 49% in 2007-2008. Over the medium- to long-term, we think that the low employment rate--coupled with an unfavorable demographic profile--will likely restrain the economy's longer-term growth potential. Between 2010 and 2013, exports increased to an estimated 41% of GDP from 31% on solid growth in export volumes, while imports, consumption, and investment all declined. Consequently, the current account shifted to a small surplus in 2013 from a deficit of more than 10%. We believe that the surplus will widen further in the coming years--toward 2% of GDP--although the gradual recovery in domestic demand will likely hold it in check. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 9, 2014 3 1314829 | 301112013 Research Update: Outlook On Portugal Revised To Stable From Negative On Economic And Fiscal Stabilization; 'BB/B' Ratings Affirmed Despite improved external flows, we consider that the economy's external vulnerabilities persist, given Portugal's large external debt. What's more, external borrowing costs for the economy's private sector are still relatively high. According to European Central Bank data, Portuguese corporate borrowers pay significantly more on new loans than the eurozone average, pointing in our view to an impaired monetary transmission mechanism. The difficult and expensive funding conditions for the real economy, combined with deflationary pressures, are constraints which appear unlikely to subside in the near term. These challenging conditions may yet jeopardize the gradual and orderly deleveraging process and could, in turn, weaken the pace of economic recovery. The government's medium-term strategy includes measures aiming to improve the business environment, in addition to preparing a plan to facilitate corporate debt restructuring and the development of instruments that would support capitalization of the corporate sector. The continuation of the so-far successful privatization process and restructuring of the state-owned companies, simplification of labor market legislation and the tax code, cutting of red tape, improving the regulatory environment, and fostering of competition in services and product markets are also on the agenda. Portugal's shallower-than-expected recession in 2013, together with the government's budgetary consolidation measures, have contributed to a smaller-than-anticipated general government deficit at 4.9% of GDP in 2013, including the 0.4% of GDP banking sector recapitalization. We previously expected the government would meet but not outperform its 2013 target of 5.5%, excluding the recapitalizations (see "Portugal 'BB/B' Ratings Affirmed; Outlook Negative On Policy Uncertainty," published Jan. 17, 2014, on RatingsDirect). This was achieved despite several rulings by the Constitutional Court, which we consider have constrained the government's fiscal policy leeway. We think the general government deficit will be slightly less than 4% of GDP this year and then continue falling thereafter, owing to the slowly improving economic backdrop and favorable labor market developments. Despite future potential Constitutional Court rulings, the government will, in our view, find alternative measures to meet its budgetary targets, if necessary. We project net general government debt at about 118% of GDP during 2014-2015, before declining to about 113% of GDP in 2017, as a result of narrowing budget deficits, economic recovery, and the gradual use of existing cash deposits that we estimate represented at 10% of GDP at year-end 2013. The implementation of the new EU accounting framework, or European System of National and Regional Accounts, ESA 2010, as of September this year, will not have a significant impact on government debt levels, in our view. In its 2014-2018 Fiscal Strategy, the government estimates gross government debt in 2014 at 130.2% of GDP (under the existing ESA 95) or 127.5% of GDP (under ESA 2010). We anticipate general government interest expenditure to general government revenues at about 10.2% on average over 2014-2017. We expect that the government will continue reducing the budget deficit and implementing structural reforms after Portugal exits the EU/IMF program. Such efforts, in our view, would positively contribute to mitigating domestic shocks and WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 9, 2014 4 1314829 | 301112013 Research Update: Outlook On Portugal Revised To Stable From Negative On Economic And Fiscal Stabilization; 'BB/B' Ratings Affirmed gradually decrease the economy's vulnerability to external shocks. Outlook The stable outlook incorporates our view that Portugal's credit metrics are stabilizing and that risks to the ratings are broadly balanced over the next year. We could raise the ratings on Portugal if we observed that: The government continues to implement structural reforms beyond the termination of the EU/IMF program, to effectively improve the economy's growth potential and contribute to its ongoing rebalancing; and Orderly private sector deleveraging is accelerated by a pronounced and sustained improvement in credit conditions, coupled with a restoration of an effective monetary transmission mechanism. We could lower the ratings if, all other things being equal, we observed that: Reform implementation wanes after the exit from the EU/IMF program, for example due to policy complacency; Eurozone policies fail to support--directly or indirectly--government borrowing costs at sustainable levels and to stem potential capital outflows; and The government's budgetary position deviates significantly from our current expectations on the back of weakening growth or currently unexpected one-off expenses that would push up debt (that is, excluding the impact of ESA 2010 implementation, which in itself will not affect the ratings). Key Statistics Table 1 Republic of Portugal - Selected Indicators 2008 2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f Nominal GDP (US$ bil) 252 234 229 238 212 221 221 226 234 242 GDP per capita (US$) 23,872 22,164 21,652 22,499 20,122 21,062 21,110 21,613 22,332 23,120 Real GDP growth (%) (0.0) (2.9) 1.9 (1.3) (3.2) (1.4) 1.1 1.6 1.8 2.0 Real GDP per capita growth (%) (0.2) (3.0) 1.8 (1.2) (3.0) (0.8) 1.3 1.6 1.7 1.9 Change in general government debt/GDP (%) 4.4 10.5 12.4 13.3 11.8 5.2 (0.2) 2.2 1.3 0.9 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 9, 2014 5 1314829 | 301112013 Research Update: Outlook On Portugal Revised To Stable From Negative On Economic And Fiscal Stabilization; 'BB/B' Ratings Affirmed Table 1 Republic of Portugal - Selected Indicators (cont.) General government balance/GDP (%) (3.6) (10.2) (9.8) (4.3) (6.4) (4.9) (3.8) (2.7) (2.1) (1.8) General government debt/GDP (%) 71.7 83.7 94.0 108.2 124.0 128.8 126.4 125.6 122.8 119.4 Net general government debt/GDP (%) 67.6 80.2 90.1 98.8 114.2 118.6 118.5 118.4 116.1 113.2 General government interest expenditure/revenues (%) 7.5 7.2 7.0 9.7 10.6 9.8 10.0 10.3 10.2 10.3 Oth dc claims on resident non-government sector/GDP (%) 167.4 174.6 169.8 168.6 162.6 153.2 146.0 141.8 137.1 134.3 CPI growth (%) 2.6 (0.8) 1.4 3.7 2.8 0.3 0.4 1.0 1.3 1.5 Gross external financing needs/CARs + usable reserves (%) 293.1 295.4 288.5 257.8 241.2 218.8 220.8 209.0 198.9 187.8 Current account balance/GDP (%) (12.7) (10.9) (10.6) (7.0) (2.0) 0.5 1.1 1.3 1.5 1.9 Current account balance/CARs (%) (28.7) (29.2) (25.0) (15.0) (4.2) 1.1 2.3 2.6 2.8 3.4 Narrow net external debt/CARs (%) 290.0 407.6 347.0 285.4 338.1 331.5 317.0 290.6 267.5 240.4 Net external liabilities/CARs (%) 207.2 306.6 256.3 209.2 246.7 241.3 228.7 210.5 191.2 171.3 Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. e--Standard & Poor's estimate. f--Standard & Poor's forecast. CPI--Consumer price index. CARs--Current account receipts. The data and ratios above result from S&P's own calculations, drawing on national as well as international sources, reflecting S&P's independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 9, 2014 6 1314829 | 301112013 Research Update: Outlook On Portugal Revised To Stable From Negative On Economic And Fiscal Stabilization; 'BB/B' Ratings Affirmed Related Criteria And Research Related Criteria Sovereign Government Rating Methodology And Assumptions, June 24, 2013 Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers, May 7, 2013 Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009 Related Research Sovereign Defaults And Rating Transition Data, 2013 Update, April 18, 2014 In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. Ratings List Ratings Affirmed; Outlook Action To From Portugal (Republic of) (Unsolicited Ratings) Sovereign Credit Rating BB/Stable/B BB/Negative/B Transfer & Convertibility Assessment AAA AAA BANIF Banco Internacional do Funchal S.A. Comboios de Portugal E.P.E Metropolitano de Lisboa E.P. Caixa Geral de Depositos S.A. Banco Espirito Santo S.A. Senior Unsecured* BB BB *Guaranteed by the Republic of Portugal. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 9, 2014 7 1314829 | 301112013 Research Update: Outlook On Portugal Revised To Stable From Negative On Economic And Fiscal Stabilization; 'BB/B' Ratings Affirmed Additional Contact: SovereignEurope; SovereignEurope@standardandpoors.com This unsolicited rating(s) was initiated by Standard & Poor's. It may be based solely on publicly available information and may or may not involve the participation of the issuer. Standard & Poor's has used information from sources believed to be reliable based on standards established in our Credit Ratings Information and Data Policy but does not guarantee the accuracy, adequacy, or completeness of any information used. Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. 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