Fitch threatens Portugal and reduces rating outlook from positive to stable

It was not planned, but the rating agency Fitch decided to reduce the Portuguese debt quality outlook from “positive” to “stable”, the company announced on Friday night. Reason: the devastating effects of the greedy on the economy and, possibly, on the quality of the debt.

The debt note remains at BBB (above garbage), but now threatens effective degradation in a matter of weeks. Fitch reevaluates the country on May 22, and if nothing improves, the rating will drop, which could seriously disrupt the Republic’s interest rates.

“The outlook revision reflects the significant impact of the global covid-19 pandemic on the Portuguese economy and on the sovereign’s budgetary position. The shock is likely to disrupt previously predicted improvement trends for economic growth, the public debt-to-GDP ratio and the resilience of the banking sector. ”

“A small and open economy like Portugal, with its high dependence on tourism, is exposed to negative risks due to the severity of the pandemic, especially if the country’s blockade continues beyond what is estimated in the Fitch reference scenario. “

As mentioned, Fitch had only scheduled an assessment here a little over a month ago, on May 22, but it now justifies this action with the fact that we are experiencing a “situation where there is a significant change in the credit quality of the transmitter”. [Portugal] which, we believe, makes it inappropriate to wait until the next scheduled review date to update the country rating. ”

“Fitch believes that events in the country justify this deviation in the calendar,” the agency insists.

3.9% recession, 4% deficit, if not worse

Fitch now expects the economy to experience a 3.9% recession in 2020, i.e. a downward revision of 5.6 percentage points (pp) compared to the last action on the Portuguese rating, which took place in November 2019.

The deficit, as is already known, is approaching. These evaluators consider that it can reach 4% of GDP in its central (base) scenario. It can be worse in an adverse scenario.

The agency also claims that “since March 18, 2020, there has been a national blockade, which closed non-essential sectors, educational institutions, and applied border restrictions.”

“Services and industries related to the tourism sector will be the most affected. According to the World Tourism Council, the general contribution of tourism to GDP and employment is around 16.5% and 18.6%, respectively.

In this sense, “we expect a deep contraction in the economy in the second quarter of this year, before a gradual resumption of activity in the second half and in 2021.” But this is only in the scenario where the blocking measures are being lifted until the end of June.

“Fitch estimates that the final budget balance will fall to a deficit of 4% of GDP in 2020, this after a surplus of 0.2% in 2019.” This deficit figure already “explains the automatic stabilizers [mais dinheiro automaticamente gasto em subsídios de desemprego e outros apoios sociais porque as situações de carência disparam] and the budgetary measures announced in response to covid-19, “says the agency.

In any case, Fitch does not disarm. He says that “there are significant negative risks in our predictions, given the uncertainty regarding the extent and duration of the coronavirus outbreak. A second wave of infections, a longer period of economic blockade and / or a worsening of the crisis in Health in other European countries, would lead to much larger declines in the Portuguese economy in 2020 and a potentially weaker recovery in 2021. This scenario could exacerbate negative effects on the labor market, the banking sector and public finances. ”

IMF says it could be even worse

It must be remembered that this week, the International Monetary Fund (IMF) pointed out that a storm is brewing that could eliminate, again, the Portuguese debt (and not only) and sovereign interest rates.

The IMF is even more pessimistic than Fitch. He said the world will experience the worst recession in almost 100 years, since the Great Depression of the 1920s.

And that Portugal, like almost all countries, is dragged and should experience one of the worst recessions in history (the IMF projects a fall of 8% in the national economy in 2020) and the unemployment rate can reach 13.9 % of the active population, more than double compared to 2019. The deficit reappears and reaches 7.1%.

(updated 10:15 pm)