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Rating Action:

Moody's changes outlook on Portugal's Ba3 rating to stable from negative

Global Credit Research - 08 Nov 2013

London, 08 November 2013 -- Moody's Investors Service, ("Moody's") has today changed the outlook on the Ba3 government bond rating of Portugal to stable from negative. Concurrently, Moody's has affirmed Portugal's Ba3 rating.

The key drivers of the outlook change are the following:

(1) The improving trend in Portugal's fiscal position and the government's commitment to fiscal consolidation, as confirmed in the recently presented 2014 budget. Moody's expects that the general government debt ratio will start to decline, albeit slowly, from an elevated level of close to 129% of GDP (2013F) from 2014 onwards.

(2) The slowly improving economic outlook, both in the short and medium term. Recent data releases indicate a stabilization of the economy, with exports continuing to grow and the unemployment rate declining from its very high level. The broad structural reforms that the Portuguese authorities have undertaken in the context of the Troika support programme should support the country's economic growth in the medium term.

(3) The reduced risk of a debt restructuring given the marked improvement in Portugal's liquidity position and its likely access to official creditor support beyond the end of the current programme in June 2014. More specifically, Moody's expects that Portugal would be able to obtain a credit line from the European Stability Mechanism (ESM) to support its market access if required.

RATIONALE FOR OUTLOOK CHANGE

--- PROGRESS IN REDUCING BUDGET DEFICIT AND STABILISING GENERAL GOVERNMENT DEBT

The first driver behind Moody's change in Portugal's rating outlook is the government's progress in restoring its financial solvency, as reflected by its ongoing fiscal consolidation. The government's recently presented 2014 budget envisages a reduction in the general government deficit to 4% of GDP, in line with the country's commitment to its international creditors. Based on the government's budget execution record up until September, this year's budget target (deficit of 5.5% of GDP under the Troika support programme definition, 5.9% of GDP according to Eurostat's definition) is also likely to be within reach.

Portugal's significant fiscal effort under its external support programme has led to a near-halving of the budget deficit since 2009. Moreover, the primary balance is likely to record a surplus in 2014 for the first time since 1997. As a result, Moody's expects that the general government debt-to-GDP ratio will start to decline next year for the first time since 2007.

--- MORE POSITIVE GROWTH PROSPECTS THAN PREVIOUSLY EXPECTED

Moody's decision to change Portugal's rating outlook to stable is also informed by the signs of stabilization in the Portuguese economy after nearly three years of recession. The rating agency expects moderate but positive GDP growth of 0.7% in 2014. Unemployment has also started to decline over the past few months and stood at 16.3% in September 2013, down from a peak of 17.7% in January 2013. Moreover, the external sector continues to perform well, with goods and services exports increasing by 4% year-on-year from January to August. The current account has moved into surplus, which Moody's expects to increase further to 1% of GDP in 2014. An important part of the country's success lies in the exploitation of export markets outside the EU. That being said, Portugal is also expected to benefit from the recovery in Spain, its key trading partner, and the euro area as a whole. Over the medium term, the broad structural reforms that the Portuguese authorities have been implementing in the context of the support programme, are likely to have a positive impact on economic growth, although this is difficult to quantify at this stage.

--- STRENGTHENED LIQUIDITY POSITION AND CONTINUED SUPPORT FROM PORTUGAL'S OFFICIAL CREDITORS REDUCE RISK OF A DEBT RESTRUCTURING

The third driver is Portugal's improved liquidity position and access to private sector funding, which also partially reduces the country's risk of contagion from negative events elsewhere in the euro area. The government's liquidity position has been boosted by the successful issuance of medium- and long-term debt this year as well as by continuing disbursements under the EU/IMF programme.

While Portugal's borrowing requirements will be relatively large in 2014 and even more so in 2015, Moody's expects the government's market access to be supported by the availability of further official funding, if needed. In fact, the Troika of international lenders (EU, IMF and ECB) has repeatedly stressed that it would continue to provide financial support as long as Portugal continues to meet the targets under its adjustment programme.

Moody's also notes that the extension earlier in 2013 of maturities on EFSF and EFSM loans by seven years has significantly improved Portugal's maturity profile over the coming years and is a further indication of external support. In light of this, Moody's considers the risk of a restructuring of private-sector debt to have receded.

WHAT COULD MOVE THE RATING UP/DOWN

Upward pressure would develop on Portugal's sovereign ratings if the government was able to regain full access to private capital markets, with or without an official backstop, and if the government was to continue to meet its fiscal consolidation targets such that its very high government debt ratio would clearly indicate a declining trend. Conversely, downward pressure would develop on Portugal's government rating and/or rating outlook if the country's fiscal-consolidation process was to slow down significantly and led to an increase in its debt.

GDP per capita (PPP basis, US$): 23,047 (2012 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -3.2% (2012 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.9% (2012 Actual)

Gen. Gov. Financial Balance/GDP: -6.4% (2012 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -2% (2012 Actual) (also known as External Balance)

External debt/GDP: [not available]

Level of economic development: Moderate level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 05 November 2013, a rating committee was called to discuss the rating of the Portugal, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/ framework, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has improved somewhat. The issuer has become somewhat less susceptible to event risks. Other views raised included: The issuer's governance and/or management, have not materially changed. The systemic risk in which the issuer operates has not materially changed.

The principal methodology used in this rating was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Kathrin Muehlbronner
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Bart Jan Sebastian Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's changes outlook on Portugal's Ba3 rating to stable from negative
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