Fitch downgrades Portugal from BBB- to BB+
Baku, November 24 (AZERTAC). Fitch Ratings downgraded Portugal`s sovereign rating by one notch from BBB- to BB+ on Thursday and changed the outlook to negative, citing the country`s "large fiscal imbalances, high indebtedness across all sectors, and adverse macroeconomic outlook."
The downgrade was expected by the markets and concludes Fitch`s review of Portugal`s sovereign rating, resolving the "ratings watch negative" in place since April 2011.
Portuguese bonds came under pressure following the downgrade announcement, with the 10-year yield spread reversing earlier tightening versus German Bunds. The 10-year OT yield spread was last 1 basis point wider at +1018bps.
The full text of the report follows: Fitch Ratings has downgraded Portugal`s Long term foreign and local currency Issuer Default Ratings (IDR) to `BB+` from `BBB-` and Short-term IDR to `B` from `F3`. The Rating Watch Negative (RWN) on the long-and short-term ratings has been removed. The Outlook is Negative. The agency has also affirmed its Country Ceiling at `AAA`. Fitch has also downgraded Portugal`s senior unsecured debt to `BB+` and commercial paper to `B`, and removed both from RWN.
Fitch has concluded its fourth-quarter review of Portugal`s sovereign rating, resolving the RWN in place since April 2011. The country`s large fiscal imbalances, high indebtedness across all sectors, and adverse macroeconomic outlook mean the sovereign`s credit profile is no longer consistent with an investment-grade rating.
Fitch has lowered Portugal`s growth forecasts in light of the worsened European outlook. The agency now expects GDP to contract by 3% in 2012. Significant structural reforms expected under the programme should leave Portugal in a more competitive position in the long term.
The 2012 budget contains significant expenditure reductions, mainly on pensions and civil service pay. The budget is well-designed and is based on reasonable GDP assumptions. Fitch therefore expects the 4.5% deficit target for 2012 to be met. However, the risk of slippage - either from worse macroeconomic outturns or insufficient expenditure control - is large. Fitch`s base case is that general government debt will increase from 93.3% of GDP at end-2010 to around 110% at end-2011 and peak at around 116% at end-2013.
The state-owned enterprise sector is another key source of fiscal risk and has been responsible for several upward revisions to the general government debt and deficit figures over the past year. Given these downside risks, Fitch sees a significant likelihood that further consolidation measures will be needed through the course of 2012.
The current account deficit (CAD) was 9.9% of GDP in 2010, near its (exceptionally high) 10-year average, and net external debt was 78% of GDP. The return to recession in 2011 marks the start of a long-delayed external adjustment, with resources shifting away from consumption towards exports. Fitch expects the CAD to narrow to 7.5% in 2011.
The sovereign crisis poses significant risks to the banking system, which lends to one of the most indebted private sectors in Europe and is highly reliant on wholesale financing (access to which is now closed off). Recapitalization and increased emergency liquidity provision from the ECB to Portugal`s banks will, in Fitch`s view, be needed and provided.
Successful economic and fiscal rebalancing under the IMF/EU programme would ease downward pressure on the rating. Improvement in Portugal`s potential growth rate would improve the sovereign`s credit profile over the long term.
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