Outlook is stable

By CHRIS GRAEME

chrisgraeme@sapo.pt

FINANCIAL ANALYSTS, Standard&Poors (S&P), have released two documents praising the Portuguese government for their fiscal reform on economic and spending fronts.

However, the reports suggest that weak trend growth and the absence of convergence in terms of Gross Domestic Product (GDP) per capita remain a problem that affects the medium term outlook for the country’s finances.

Together with the weak deficit position it means that S&P do not see a decline in debt to GDP ratio before the end of the decade.

In its reports, S&P said: “We see little chance of rating action (from negative stable to positive) this year, but will watch carefully the discussions for next year’s budget that should start in the spring and summer. We see negligible chance of Portuguese debt rating being lifted to ‘positive’ in the next six to12 months.”

Standard&Poors, which rates all countries economically, gave Portugal a ‘stable’ rating.

However, that rating would be under pressure if the government were unable to implement the tough fiscal package it first presented in 2005, which included dramatic reforms and cuts to the public administration.

Although Portugal has initiated more reforms than any other country in the European Union it is still not tackling essential public administration overhaul head-on, which would prove unpopular with unions and generate high unemployment.

“The government has clearly shown a commitment to continue fiscal reforms in 2007 and beyond, and its majority in parliament should ensure that it will have these reforms approved,” the report stated.

On the other hand, in order for the rating to be lifted, the government would need to bring Portugal’s fiscal and economic indicators more in line with those typical for AA rated sovereigns (countries such as Belgium, Sweden).

Any measures to cut fiscal spending faster and improve productivity growth over and above what has been presented so far, would allow the debt to GDP ratio to start declining more rapidly than currently expected, and would be welcomed by S&P.

In other words S&P does not believe that Portugal will be able to fulfil its stated aim to reduce the public deficit to the three per cent of GDP by 2008, which Brussels insists on, according to the EU’s growth and stability pact.

According to S&P analyst Trevor Cullinan, the ‘stable’ classification attributed to Portugal in the study was limited by the insufficient level of necessary reforms to reverse the deterioration in the country’s public finances.

The Portuguese government estimates that the public deficit will fall to 4.6 per cent by the end of 2006, against seven per cent in 2005, largely thanks to cuts in public and state spending.

In 2007, the government also expects an additional reduction of 0.9 per cent in the GDP, a reduction which would depend on the efficiency of public administration reforms.

However, the ambitious nature of the government’s financial package of reforms and the probability of realising further savings below what analysts expect, means that Portugal will probably only manage to bring the deficit within three per cent by 2009.

S&P assigns sovereign risk ratings to the countries that issue debt on global markets.

These ratings from C to AAA assess the probability that a country will default on its debts. Portugal has an overall ‘A- (minus)’ rating, Lisbon and Oporto were awarded AA in their creditworthiness stakes, whereas the UK has an ‘AAA’ rating.