Portugal: Fitch hails government commitment to narrow deficit, notes other risks

Page created: Wednesday, 26 October 2016 8:47 GMT

2017budget  Economic Growth  Financial Sector  Fitch   Public Deficit

Lisbon, Oct. 25 (Lusa) – The draft state budget for 2017 tabled by Portugal’s minority Socialist government confirms its commitment to budgetary consolidation but does not fully deal with the risks resulting from weak economic growth and the problems in the financial sector, Fitch Ratings said in a note issued on Tuesday.

“Portugal’s draft budgetary plan for 2017 underscores the government’s commitment to fiscal consolidation, but does not fully address the fiscal risks posed by weak growth and legacy problems in the financial system,” the US-based credit rating agency said. “The plan accords with our view that the Portuguese authorities will continue to narrow the budget deficit, despite the anti-austerity rhetoric of the government and some high-profile policy measures such as increasing public-sector pay and a hike in pensions.”

The draft budget that the government laid before parliament on Friday and sent to the European Commission on Saturday foresees a 2017 public sector deficit equivalent to 1.6% of gross domestic product, against the 2.4% projected for this year.

Fitch stresses that the reduction is proposed to be achieved through increasing revenue by an amount equivalent to 0.5% of Portugal’s GDP while cutting spending by 0.4% of GDP. It also notes that the budget foresees a reduction in the structural budget deficit of 0.6% of GDP, to 1.1%, so meeting European Union rules.

“The draft budget is also more realistic about the trends in the very high level of general government debt, which is projected at 128.3% of GDP at end-2017, compared to 122.3% in the April 2016 Stability Programme,” the report saying, adding that the “difference is explained by the inclusion of EUR2.7bn as part of the capitalisation of Caixa Geral de Depositos and the exclusion of potential windfall gains from the sale of the financial assets of Banif and Novo Banco.

“Overall, the plan extends the minority Socialist Party government’s track record of prudent fiscal policy-making,” Fitch argues, also adding a reference to the minority Socialist governments apparently precarious parliamentary base. “The risk of political clashes between the Socialists and the more radical Communist Party and Left Bloc parties appears to have receded significantly, assuring more policy stability.”

On that basis, the note argues: ” The biggest risk to fiscal consolidation is subdued growth, as this weighs heavily on revenue intake.”

Fitch analysts note that the budget “balances deficit reduction with measures to stimulate growth, including some tax cuts and new social benefits” but warns that “while this may support private consumption, it does little to incentivise investment, which is struggling.”

Moreover, it adds, “prospects for the banking sector remain weak.” While it notes that the government is said to be examining “a systemic solution” to clean up bank balance sheets that officials maintain would be “attractive to private investors,” they have as yet provided no details.

While slowing economic growth has already prompted the government to increase its forecast for this year’s budget deficit to 2.4% of GDP from the original 2.2%, Fitch takes an even more cautious view, projecting a deficit of 2.7%.

The agency is maintaining its credit rating for Portugal’s sovereign debt of BB+, with a “stable” outlook, stressing that the room for improvement is constrained by high indebtedness and weak economic growth.