Portugal retains investment-grade rating at DBRS

A Canadian rating agency has upheld Portugal’s only investment-grade credit rating in a decision that ensures the former bailout country’s continued access to the European Central Bank’s government bond-buying programme.

Dominion Bond Rating Service on Friday confirmed Portugal’s BBB (low) rating with a “stable” outlook, saying “the 2016 fiscal deficit came in well below the target set by the European Commission, demonstrating the government’s commitment to comply with EU fiscal rules.”

However, DBRS added that: “Portugal faces significant challenges, including elevated levels of public sector debt, low potential growth, fiscal pressures, and high corporate sector indebtedness.”

The “anti-austerity” socialist government of Prime Minister António Costa is expected to use the DBRS decision to press better known rating agencies, including Fitch, Moody’s and Standard & Poor’s, to upgrade Portugal above junk status.

After delivering the lowest budget deficit in more than 40 years, and tackling problems in the country’s fragile banking sector, Mr Costa is urging the EU and other rating agencies to give Portugal more credit for the scale of its economic turnaround.

Ricardo Mourinho Félix, secretary of state for finance, earlier this week told CNBC that rating agencies would face “increasing difficulties” in explaining why they continued to hold Portugal at below investment grade.

DBRS said public debt remained “very high at 130.4% of gross domestic product in 2016 and is projected to decline only gradually”, the agency said.

Despite higher than expected growth of 1.4 per cent last year and a forecast 1.8 per cent in 2017, it described Portugal’s longer-term growth prospects as “modest” with estimates of potential growth at about 1 per cent.

“Low levels of public and private investment, and low labour productivity continue to constrain potential growth. Reforms to raise education levels and efficiency in the public administration are being implemented, but these could take time to yield results,” the agency said.

Lesser-known DBRS is the only ECB-recognised rating agency to rate Portugal above junk status. Its rating, which has remained at investment grade since 2011, has safeguarded the country’s eligibility for the ECB’s bond-buying programme, which has played a crucial role in holding down government borrowing costs.

Fitch, Moody’s and S&P have all rated Portugal at below investment grade since 2011 when the country negotiated a €78bn bailout and a three-year adjustment programme with the EU and the International Monetary Fund.