World Economy

Portugal Sees Scanty Growth

Fitch is maintaining its cautious deficit forecast of 2.7% of GDP for this year.Fitch is maintaining its cautious deficit forecast of 2.7% of GDP for this year.

Economic activity in Portugal rose slightly in July, ending a downward trend, whilst consumer spending fell, according to figures published by the Bank of Portugal.

According to figures from the central bank the economic activity indicator for July rose to 0.5% from 0.3% in June, News online reported.

This rise brings an end to a downward cycle recorded since the end of 2015, despite growth stabilizing at 0.3% in June.

The consumer spending indicator continued on its downward trajectory, which it began in February of this year, after stabilizing in mid 2015, falling from 1.8% in June to 1.6% in July.

Portugal’s bond sell-off has picked up pace as a looming ratings decision could exert further pressure on the former bailout country struggling with weak growth and a fragile banking system.

Rising another 8 basis points (0.08 percentage points) on Friday, the yield on 10-year benchmark Portuguese bonds has climbed 31 basis points this week and is heading towards 3% Saturday–its highest level since the aftermath of the UK’s Brexit vote.

Yields are at 2.98%, the fourth consecutive day of rises and marking the single worst week for 10-year bonds since early April. Portugal is also bucking the trend among its peers in Italy and Spain, where bond prices have rallied to fresh records.

The country has come back into focus for bond investors after DBRS, the only recognized rating agency to hold an investment grade status on Portuguese bonds, said “pressure” was mounting on the economy.

   Outlook Stable

Fitch Ratings has affirmed Portugal’s Long-Term Foreign and Local Currency Issuer Default Ratings at ‘BB+’ with a Stable Outlook. The issue ratings on Portugal’s senior unsecured foreign- and local-currency bonds are also affirmed at ‘BB+. The country ceiling has been affirmed at ‘A+’ and the Short-Term Foreign and Local Currency IDRs at ‘B’.

Portugal’s ‘BB+’ ratings are constrained by high indebtedness, weak economic growth and legacy problems in the financial system. Government debt, at 129% of GDP at end-2015, is almost three times the ‘BB’ median. Positively, the ratings are supported by high GDP per capita compared with rated peers, a solid institutional framework and a strong business environment.

Fiscal figures for 1H16 have been broadly consistent with the government’s original expectations. Nevertheless, risks to the 2.2% deficit target for 2016 persist, including uncertainty as to the full effect of various fiscal policy measures to be implemented throughout the year and the impact of weaker growth. In this context, Fitch is maintaining its cautious deficit forecast of 2.7% of GDP for this year.