Tue Aug 19, 2014 6:28am EDT
(The following statement was released by the rating agency) LONDON, August 19 (Fitch) The latest ruling by Portugal's constitutional court partially approving expenditure measures reduces a key near-term risk to consolidation and keeps the sovereign on track to hit its fiscal targets this year, Fitch Ratings says. It limits future fiscal flexibility, although the consequences for debt reduction will partly depend on whether Portugal can sustain its return to economic growth. The court said 14 August that temporary pay cuts for some public sector workers proposed for this year and next year are constitutionally acceptable, but that they should not be extended beyond 2015. It said a levy on some public sector pensions would be unacceptable. Temporary pay cuts have already been used in Portugal to cut expenditure. The ruling reinforces our view that Portugal will hit its 2014 fiscal target of a general government deficit of 4% of GDP, down from 4.5% last year. We forecast a further reduction to 2.7% in 2015, when the government plans another sharp reduction in expenditure. This is marginally above the government's 2.5% target due to more conservative growth assumptions. This view is also supported by Portugal's solid fiscal performance so far in 2014 and by the authorities' track record of finding offsetting measures to previous rulings. (The general government provisional balance adjusted for one-off items to June was in deficit EUR3.9bn, down from a deficit of EUR4.8bn in the same period last year, according to UTAO, the parliamentary technical unit for budget support.) The ruling highlights the capacity of the court to constrain fiscal policy. It concerns provisions in the 2014 supplementary budget that were specifically designed to replace other measures that the court had previously struck down. Indeed, the wage reductions envisaged for 2016-2018 now cannot be implemented. According to its fiscal strategy for 2014-2018, the government plans to cut public expenditure to 43% of GDP in 2018 (from over 48% last year), through employee compensation and headcount reduction measures (the latter may ultimately be more significant given that the planned wage cuts are temporary). Political risk to consolidation remains significant following Portugal's 'clean exit' from its EU-IMF programme in May. The next government - elections are due by October 2015 - may be more reliant on tax increases, which are increasingly politically contentious, if it wants to maintain consolidation consistent with falling public debt ratios. We forecast a gradual reduction from 129% of GDP to 110% by 2023. Continued improvement in macroeconomic performance may make this constraint less burdensome. 2Q14 GDP rose by 0.6% qoq, continuing the return to growth that has improved public debt dynamics. This was a key driver of our Outlook revision on Portugal's 'BB+' sovereign rating to Positive from Negative in April. Nevertheless, risks to growth remain, including deflation (annual inflation was negative 0.7% in July), which could slow corporate balance-sheet adjustment as well as threatening public debt reduction targets. Contact: Michele Napolitano Director Sovereigns +44 20 3530 1536 Fitch Ratings Limited 30 North Colonnade London E14 5GN Mark Brown Senior Director Fitch Wire +44 203 530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: Portugal here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
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