The report supports the 5,8% growth forecast by the European Commission for the Portuguese economy, a figure already advanced in the January review by the European credit rating agency.
In his June review EthiFinance Ratings maintains the unsolicited rating of the Republic of Portugal at BBB with a Stable trend, due to the recovery observed in 2021 and which has continued during the first quarter of 2022, in which a quarter-on-quarter growth of 2,6% has been recorded, exceeding GDP levels prior to the pandemic.
The European credit rating agency supports the growth forecasts of the portuguese economy for this exercise, set by the European Commission at 5,8%, with the economy of the Eurozone with greater growth expected for 2022. Figure already advanced by the European credit rating agency in the review of the month of January.
In this context, EthiFinance Ratings highlights the greater control of the Portuguese electricity market, the lower direct energy dependence of Russia and Ukraine as well as the recovery of the tourism sector - which last April recorded a new high with 2,4 million guests and six million overnight stays - as some of the main differentiating factors with respect to its European partners.
Another of the strengths that Portugal presents is its labor market. In the first three months there has been an improvement of four tenths in the unemployment rate compared to the last quarter of 2021, standing at 5,9%. However, “we continue to warn of the persistence of the problem of duality in the labor market -mainly between qualified and low-skilled employees-, and of the greater incidence of temporary employment. Both reduce the potential for future growth while encouraging the exodus of workers to other European markets, thus aggravating the demographic problem,” the report highlights. It should be noted that vegetative growth closed last year in negative.
Added to the above is a high dependency rate (64,6% among the population between 20 and 64 years old), which represents “one of the most important risks for the Portuguese economy. Not only because of the lower propensity to consume among older people, but also because of the pressure that health spending will exert on public finances.”
In this last area (public finances), the rating reflects the corrections of recent years with a reduction in the deficit in 2021 to -2,8% of GDP, compared to -4,5% in the last report. Results that are due to the important effort of fiscal consolidation which will continue throughout this year and which will contract the aforementioned level of deficit by almost one point (-1,9%).
Likewise, the approval of the General State Budgets for 2022, which will come into force on July 1 and foresee an impact of 0,5% of GDP despite the additional spending measures approved to address the increase in inflation.
However, EthiFinance warns that, despite the reduction in public debt last year, it will not fall below 120,7% of GDP in 2022, which "becomes the main condition for our rating."
The rating values the positive evolution of the Portuguese labor market with a decrease in the unemployment rate during the first quarter to 5,9%
Iinflation and the foreign sector
Despite the good prospects, since EthiFinance Ratings They warn of the risk that, as for the rest of the economies, inflation poses to the growth of Portuguese GDP. The CPI in Portugal rose to 7,2% (underlying up to 5,0%) in March, levels that “could endanger private consumption.”
On the other hand, "the increase in energy prices in recent months has already begun to affect the industrial sector, which has shown a certain tendency towards contraction since the first quarter of 2022." This circumstance has been transferred to the industrial price index and could increase inflationary pressures in the coming months.
At this point and with the aim of alleviating the effects of the rise in prices on consumers, the Government of Portugal has launched a package of measures, such as tax reductions and direct aid for fuel consumption and the purchase of food (in this last case aimed at households most vulnerable to rising prices). Aid, both fiscal and direct, has also been approved to alleviate the increase in costs in the transport sector.
With regards to foreign sector, the report points to a worsening of the current account balance due to the impact of the war between Russia and Ukraine in energy and import prices.
Counteracting the effect positive of the recovery of the tourism sector, "this situation is not expected to improve in the medium term, which poses a risk for the Portuguese foreign sector, increasing its external debt and its financial vulnerabilities."
It is also warned of the “considerable” dDecrease in the net international investment position which went from -104% of GDP in 2020 to -95,9% in 2021. Percentage that is expected to improve throughout the next biennium due to the recovery of tourism, GDP growth and subsidies from the Recovery and Resilience Mechanism.
Financial sector and monetary policy
The actions announced by the ECB to curb the impact of inflationary pressures, which EthiFinance considers “adequate” and among which are the gradual rise in interest rates, “will not significantly jeopardize the economic growth of the Eurozone".
In this regard, the report highlights the improvement of the Portuguese financial system in recent years, whose default rate in 2021 was 4,3% compared to 6,2% in 2019. However, the report emphasizes the “low profitability” of Portuguese banks, with an average ROA in 2021 of 0,3%, “a situation that could be reversed
if the rise in interest rates materializes.”
Institutional framework, Governance and ESG
Portugal registers the best governance ranks in the European Union and shows an adequate institutional framework that is recognized with its leading position in the rankings of transparency and supervision and control prepared by the World Bank.
Likewise, the absolute majority obtained by António Costa, who is facing his third term, is favorably valued and will allow him to implement his policies without depending on his former partners the Bloco de Esquerda (BE) and the Portuguese Communist Party (PCP).
Finally, EthiFinance Ratings considers membership in the European Union - which it presided over during the first half of 2021 - favorable, seeing the economy favored by the use of a single currency, economic cooperation between the different member powers and access to aid before situations of imbalance such as those that economies are currently going through.
Regarding ESG (Environmental, Social and Governance) principles, despite the improvement in recent years, Portugal continues to be below the European average. In fact, it has not yet issued any sovereign green bonds. However, it is expected that the Recovery and Resilience Plan will be an incentive for the country to continue improving in this area.
Despite the poor indices in the recycling rate, high energy dependence or exposure to the physical risks of climate change, the report highlights the progress made by Portugal in significantly reducing the number of people at risk of poverty and dropping out of school, as well as of renewable energy production (34,0% compared to 22,1% of the European average).
