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Rating Action:

Moody's upgrades Portugal's government bond rating to Ba1 and assigns stable outlook

25 Jul 2014

London, 25 July 2014 -- Moody's Investors Service has today upgraded Portugal's government bond rating to Ba1 from Ba2. The outlook on the rating is now stable. Portugal's short-term debt rating remains unchanged at Not-Prime. Today's rating action concludes the review for upgrade that Moody's initiated on 9 May 2014.

The rating action reflects the following key factors:

1) Moody's expectation that fiscal consolidation will remain on track despite unfavourable rulings by Portugal's Constitutional Court. This should support a gradual reduction in the very high public debt burden in the coming years. In addition, Moody's does not expect that the current uncertainties surrounding Banco Espirito Santo will have a material impact on the government's balance sheet.

2) The government's comfortable liquidity position, with regained access to the public debt markets and sizeable cash buffers. Moreover, Portugal concluded its three-year EU/IMF support programme in June.

As a consequence of these improvements, Portugal's credit profile is now aligned with its Ba1-rated EU peers, such as Slovenia (Ba1 stable) and Croatia (Ba1 negative). Moody's believes, however, that Portugal's credit metrics remain inconsistent with an investment-grade rating.

Concurrently, Moody's has upgraded the senior debt rating of Parpublica Participacoes Publicas (SGPS) SA to Ba1 from Ba2 and assigned a stable outlook. Despite the lack of an explicit guarantee, Moody's rates SGPS at the same level as the Portuguese government to reflect (1) the company's 100% government ownership; (2) the very close links between the company and the government; and (3) strong evidence of government financial support for the company.

In addition, Portugal's local-currency and foreign-currency country risk ceilings have been raised to A3 from Baa1. The short-term foreign-currency country ceilings on debt and deposits remain unchanged at P-2. The ceilings reflect a range of undiversifiable risks to which issuers in any jurisdiction are exposed, including economic, legal and political risks. Portugal's ceilings also incorporate the low probability of a euro area exit and redenomination risk in the unlikely event of a sovereign default, consistent with our treatment of other sovereigns in a currency union. The ceilings act as a cap on ratings that can be assigned to the foreign and local-currency obligations of entities domiciled in the country.

RATINGS RATIONALE

RATIONALE FOR UPGRADE

--FIRST DRIVER: STRONG GOVERNMENT COMMITMENT TO FISCAL CONSOLIDATION

The first driver behind the upgrade is Moody's view of the government's strong commitment to fiscal consolidation, despite repeated set-backs stemming from the adverse rulings of the country's Constitutional Court. In fact, the government has already announced measures to at least partly compensate for the negative impact of the Court's latest ruling, the fiscal impact of which the Portuguese independent Fiscal Council estimates at around 0.4% of GDP. In addition, the government benefits from a sizeable fiscal cushion, given that last year's budget deficit was ultimately 1% of GDP lower than budgeted.

According to the Fiscal Council, the fiscal effort required in the remainder of 2014 is smaller than both that achieved in Q1 2014 and that realized last year. As a result, Moody's expects that Portugal will achieve its general government deficit target of 4% of GDP for the year, which would yield the government's first primary surplus since 1997. Portugal's budget deficit will be lower than the deficits of higher-rated Spain (Baa2 positive) and Ireland (Baa1 stable).

Moody's does not expect the current uncertainties surrounding Banco Espirito Santo (BES) to have a material impact on the government's credit profile. The government has EUR6.4 billion in cash available that is already accounted for in Portugal's public debt statistics. These funds were obtained from the official sector for bank recapitalisation as part of the external support package, but have not been used so far. Having said that, a public equity injection would be a credit negative as it would use up a portion of an important liquidity buffer.

Against this generally positive developments, Portugal's overall debt burden remains quite high and constrains its rating. Netting out the government's sizeable cash buffers (around 13% of GDP as of May), the public debt ratio stands at around 120% of GDP (gross debt: 133% of GDP). While this is a very high debt burden that severely restricts Portugal's room for fiscal manoeuvre, Moody's expects the ratio to decline slowly in the coming years as the budget deficit is reduced and cash buffers are run down. In gross terms, Moody's expects the debt ratio to decline to just below 130% of GDP in 2015.

--SECOND DRIVER: COMFORTABLE LIQUIDITY POSITION, REGAINED MARKET ACCESS, AND EXIT FROM SUPPORT PROGRAMME

The second driver underlying the upgrade is Portugal's exit from the external support programme coupled with its return to public debt markets and the already mentioned large cash buffers, all of which reduce the sovereign's vulnerability to unfavourable market conditions. The government's borrowing costs have declined further since Moody's initiated the review of the rating in May, with current rates at historically low levels.

The government has issued EUR11.8 billion so far this year in medium and long-term bonds, and its cash buffer stood at more than EUR22 billion (13% of GDP) as of end-May 2014, a key consideration for not requesting a precautionary credit line from the European Stability Mechanism (ESM). Portugal's cash buffers cover the government's borrowing requirements for the next 12 months, which puts Portugal in a similar situation as Ireland was at the end of its programme. In addition, the government's borrowing requirements in the coming years are manageable.

Despite the country's high debt burden, Moody's believes Portugal's credit profile is now aligned with its Ba1-rated EU peers, such as Slovenia and Croatia. In contrast to those two countries, Portugal's economy is growing again, with the recovery broadening beyond exports. Also, the Portuguese authorities' have shown a strong determination to reduce the budget deficit and to bring the public debt on a declining trend. These factors compensate for Portugal's higher public debt level compared to Slovenia and Croatia and most other peers in the Ba rating category.

RATIONALE FOR STABLE OUTLOOK

The stable outlook on Portugal's Ba1 rating reflects evenly balanced upside and downside risks. The growth outlook probably has more upside risks in light of the extensive structural reforms that have been implemented over the past few years.

At the same time, Moody's considers Portugal's very high external debt as a key credit weakness besides the high public debt. The country's net external debtor position of 119% of GDP (2013) is among the highest in Moody's sovereign rating universe, and reducing the external debt burden implies continuous large current account surpluses in the coming years.

WHAT COULD MOVE THE RATING UP/DOWN

An upgrade into the investment-grade rating category requires (1) greater visibility over the fiscal policy stance of the next government; and (2) a clearly established downward trend in the public debt ratio. A significantly stronger growth performance would also be beneficial for the rating, as it would indicate that the extensive structural reforms implemented over the past three years are bearing fruit and allow a higher sustained growth path with consequent positive effects on the debt trend.

Conversely, the rating could come under downward pressure if the commitment of the current or the next government to fiscal consolidation was waning significantly, putting at risk the downward trend of the public debt ratio.

In Moody's assessment, the conclusion of the review, which began in May 2014, necessitates this rating action being released on a date not listed for this entity on Moody's 2014 sovereign release calendar.

GDP per capita (PPP basis, US$): 23,068 (2013 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -1.4% (2013 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.2% (2013 Actual)

Gen. Gov. Financial Balance/GDP: -4.9% (2013 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 0.5% (2013 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 22 July 2014, 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 fiscal or financial strength, including its debt profile, has improved. The issuer has become less susceptible to event risks.

The principal methodology used in these ratings 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 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 upgrades Portugal's government bond rating to Ba1 and assigns stable outlook
No Related Data.
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