“Moody's decision to change the outlook to positive reflects the growing likelihood that a long period of economic and fiscal reforms, deleveraging of households and non-financial corporations and repair of the banking sector will result in a continued and sustained improvement in the credit profile, in particular in the economy and budgetary strength”, says Moody's, in the report on Portuguese sovereign debt.

The affirmation of the 'rating' at Baa2 reflects “the significant diversification of the country's economy”, as well as a “relatively high level of wealth” and a “high institutional solidity, with a still high debt burden and a moderate exposure to risks of events related to the banking sector and geopolitical risks”.

In the assessment, Moody's starts from a scenario in which it forecasts a growth of 2.2% in Gross Domestic Product (GDP) in 2023, reflecting a significant slowdown in domestic demand, and 2% in 2024.

Average growth of 2%

It also estimates that the economy will grow by an average of 2% over the next five years.

The agency also highlights the decrease in the deficit last year, as well as in the public debt ratio, stressing that it was below the pre-pandemic level of 2019 and two years earlier than expected by Moody's in the last rating action.

"Moody's expects the authorities to remain committed to prudent fiscal policies and that energy-related policy measures will be reduced throughout 2023-24", it notes, projecting that the debt burden will fall to 103% of GDP in 2024.

The agency may raise the country's rating if "new evidence emerges that sovereign debt metrics will continue to improve at a steady pace, economic growth will remain solid and that the impact of economic shocks on debt will be moderate and quickly reversed" , indicates.

“A more positive impact of the implementation of investment projects and new macroeconomic reforms linked to the Next Generation EU (NGEU) on Portugal's growth potential would support such an assessment”.

On the other hand, he mentions that the outlook "would probably return to being stable if the debt burden resumed an upward trend", which he explains could "manifest" through a "decrease in political support for prudent budgetary policies, including a greater demand for higher spending or materially lower economic growth than Moody's current forecasts”.

The last time Moody's had commented on Portugal was on September 17, 2021, when it raised the rating of the Portuguese debt from 'Baa3', above 'trash', to 'Baa2', with a stable outlook.

In the second half, DBRS will again be the first agency to issue an opinion on Portuguese sovereign debt, on July 21.