Reuters: Financial Services and Real Estate: TEXT-Fitch publishes special report on economic rebalancing in Portugal

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TEXT-Fitch publishes special report on economic rebalancing in Portugal May 14th 2012, 12:28 Mon May 14, 2012 8:28am EDT (The following statement was released by the rating agency) May 14 - Fitch Ratings has published a Special Report on Portugal ('BB+'/Negative Outlook), examining the economic rebalancing and reforms achieved to date, as well as challenges that remain. According to Fitch, a number of factors suggest that the adjustment effort is off to a promising start. The current account is shrinking and the country is broadly on track with its reform agenda, as set by the European Commission (EC), European Central Bank (ECB), and International Monetary Fund (IMF), Portugal's official creditors. However, challenges remain and the risks to Portugal's economic and structural adjustment are significant. The agency noted that downside revision to Fitch's 2012 GDP forecast, which it now expects to contract by 3.7%, mainly reflects a fall in domestic demand appearing in Q411 as a result of a sizeable decline in private consumption and investment. Fitch projects a further contraction in 2013, albeit a more moderate negative 1.5%. This weaker economic outlook challenges the government's deficit-reduction plan, with Fitch considering the risk of slippage from fiscal targets to be large. However, judging by fiscal performance in H211 and government commitment to consolidation, the agency believes that the official target of a 4.5% deficit this year can be met. On the external front, the current account has declined from a peak of 12.6% of GDP in 2008 to 6.5% of GDP in 2011. Part of the adjustment has come through lower domestic demand, reflecting the weak macroeconomic environment. Fitch projects the current account deficit to further decline to 4.3% in 2012. Still, net external debt remains high at around 85% of GDP in 2011 according to Fitch estimates, due to the legacy of over-borrowing in the previous decade. Bringing down external debt to around 50% of GDP in the medium term will require a significant adjustment, including halving the current account deficit by 2015. The number of structural measures already implemented is impressive taking into consideration both the fragile underlying macroeconomic environment and compared to eurozone peers. However, the challenge remains large when considering administrative capacity constraints, with the most significant area where Portugal is falling behind being the liberalisation of the services sector. Fitch believes it is most likely that Portugal will be granted further programme financing on similar terms if market access is not restored in 2013, provided the programme remains on track (which is Fitch's baseline expectation). This view is supported by public declarations at the European level. Fitch last reviewed Portugal's sovereign country ratings on 24 November 2011. At that time, the agency downgraded Portugal's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'BB+' from 'BBB-' with Negative Outlook and Short-term IDR to 'B' from 'F3'. The ratings were removed from Rating Watch Negative (RWN). The Country Ceiling was affirmed at 'AAA'. Link to Fitch Ratings' Report: Portugal: On Track So Far But Challenges Remain here Link this Share this Digg this Email Reprints

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