Portugal’s credit rating upgraded to ’A’ on sustained debt reduction: S&P Global

Investing.com -- S&P Global Ratings has upgraded Portugal’s long-term foreign and local currency sovereign credit ratings from ’A-’ to ’A’, citing ongoing external and government deleveraging. The short-term ratings were also raised to ’A-1’ from ’A-2’, with a positive outlook. The credit rating agency announced these changes on February 28, 2025.

The upgrade reflects Portugal’s consistent external deleveraging as a share of GDP and current account receipts (CAR), which has improved the country’s external profile. Portugal is projected to post small budget surpluses over 2025-2028, reducing its government debt as a share of GDP faster than most other European countries have since the pandemic.

S&P Global Ratings expects the Portuguese government to implement policies smoothly, focusing on fiscal prudence, despite a fragmented parliament. The positive outlook indicates the possibility of a further positive rating action in the next 24 months, given the government’s strong policy track record, trends supporting the economy’s external position, and declining government debt as a share of GDP.

However, the outlook could be revised to stable if external and government deleveraging trends stall or reverse, or if fiscally prudent policies are reversed. On the other hand, the rating could be raised within the next 24 months if Portugal continues to pursue its fiscally prudent policies, resulting in further significant declines in government debt as a share of GDP, or continues to display persistent current account surpluses.

The upgrade also reflects the expectation of continued improvements in Portugal’s external financial balance sheet and a corresponding reduction in external liquidity risks. Despite trade and geopolitical uncertainty, notably related to potential tariffs imposed by the new U.S. administration on the EU, Portugal is expected to post moderate current account surpluses.

Since 2019, Portugal has significantly reduced its gross general government debt from 134% of GDP in 2020 to about 96% of GDP in 2024. This reduction outpaces many peers still burdened by pandemic-related debt.

The upgrade also takes into account resilient economic growth, partially fueled by quicker implementation of NextGen EU funds. Real GDP growth is expected to hover around 2% over 2025-2028, higher than the estimated 1.2% for the eurozone average. This growth is contingent on accelerated execution of the NextGen EU funds, which the Portuguese authorities are currently reallocating to meet the 2026 deadline.

Despite potential risks to the economic, trade, and political outlooks, positive pressures on Portugal’s institutional, external, and government debt profiles are still growing. Despite global trade uncertainty, Portugal’s strong policy track record and limited political risks until 2026 will support budgetary consolidation and NextGen EU project execution.

Economic growth is set to outperform the eurozone’s average over 2025-2028, thanks to robust net exports and strong investments tied to NextGen EU funds. The labor market is expected to remain robust, with unemployment averaging 6.3% over 2025-2028.

Portugal’s external position has improved significantly, and barring a severe trade shock, positive trends are still developing following the country’s return to a current account surplus in 2023. Government debt as a share of GDP will continue its downward trajectory thanks to small budget surpluses over 2025-2028.

Despite these positive trends, Portugal, like other European countries, faces age-related spending pressure. The government has established a commission on pension sustainability, but concrete proposals are still pending and a report is expected in 2026.

Portugal is also under pressure to increase defense spending in the wake of the Russia-Ukraine war and uncertainty over U.S. NATO policy. Portugal plans to raise defense spending to 2% of GDP by 2029 from 1.5% currently, but this remains well below the U.S. president’s proposed 5% target for NATO members.

Banking sector risks in Portugal are limited. Portuguese banks are set to maintain solid profitability in 2025, with the system’s domestic return on common equity estimated to be about 12% in 2025. Portuguese banks’ capitalization is now stronger, with the system’s common equity Tier 1 standing at 17.7% at Sept. 30, 2024, and should consolidate around current levels.

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