Portugal: Risk Assessment

Country Risk Rating

A4 A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behavior. Corporate default probability is still acceptable on average.

Business Climate Rating

A2 The business environment is good. When available, corporate financial information is reliable. Debt collection is reasonably efficient. Institutions generally perform efficiently. Intercompany transactions usually run smoothly in the relatively stable environment rated A2.


  • Quality infrastructure
  • Tourist attractiveness
  • Sector and geographic diversification initiated, research and innovation capacities
  • Declining labor unit costs and reforms


  • Limited scale of the manufacturing industry, specialization in sectors with low added value (textile-clothing, mineral products and metal ores, metals, food products)
  • High level of public and corporate debt
  • Rigid labor market and limited domestic competition, low investment
  • Deteriorating bank asset quality and profitability

Current Trends

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Growth steadies

After three years of recession, Portugal returned to growth in 2014 and should record its third successive year of growth in 2016. This growth however is likely to slow slightly. Although the country is feeling the benefits of a favorable economic environment thanks to the weak euro, low oil prices and accommodative monetary policy of the ECB, its economy continues to be burdened by the scale of its public and private debts. Household consumption, the main driving force for the economy, should slightly weaken. In the context of subdued growth of nominal wages, high unemployment and low energy prices, price pressures would remain weak. Inflation is expected to remain stable in 2016, in the context of commodity prices still moderated and headline inflation near 1%. Private demand however will weaken as a result of a slight decline in confidence with the rise in political instability and investments are expected to contract again because of reduced credit. In effect, investor confidence, after reaching a peak in April 2015, its highest point since 2008, has been slipping ever since. Therefore, despite the increased production capacity utilization rate and lower corporation tax investment is expected to decelerate in 2016. After the negative contribution of exports to growth in the first quarter of 2016, the latter is likely to remain weak reflecting the modest recovery expected in the Euro Area (leading trading partner), the impact of Brexit, as well as the sharp slowdown of Angola’s growth.

Corporate debt remains high and the rise in non-performing loans is hitting bank profitability

Insolvencies which mainly involved domestic market oriented SME sector, rose slightly in 2015 after falling significantly in 2014. This upward trend is continuing on the first months of 2016.

Whilst slightly lower, corporate debt remains high (125% of GDP at the end of 2014) and is a drag on investment. The banking sector has improved its solvency and is benefiting from better financing terms, but the growth in non-performing loans is undermining its profitability and limiting its ability to lend to viable companies. Moreover, a small bank (Banif) that is majority owned by the state recently failed, which has cost the public treasury more than €2bn, contributing to widen the public deficit to 4,4% of GDP in 2015, while the government was supposed to bring it to 2.5 % (excluding one-off expenditures the deficit is at 3%). Although it registered an excessive budget deficit in 2015, the European Commission will not fine Portugal, but the country could be sanctioned by a reduction in European aids. However, the public deficit should decrease in 2016, as the government implemented consolidation measures in the budget, in order to be consistent with the Stability and Growth Pact.

Finally, public debt remains high, debt to GDP ratio is expected to moderately decline, and the burden of public debt and the scale of the financing needs of the government continue to pose significant risks for the viability of this debt, with a dynamic that remains highly sensitive to macro-economic shocks.

In 2015, ECB stress tests highlight that Novo Banco does not own the sufficient level of capital requirements. To address this issue the Central Bank of Portugal announced the sale of Novo Banco, which must be done before August 2017, or should be liquidated, but the central bank struggles to find buyers. However the closer we get to this date, the more difficult it will be to negotiate a reasonable price. Furthermore, the Portugal negotiates with European authorities in order to recapitalize the biggest Portuguese bank, Caixa, for at least 2 billion of euros.

An increasingly fragile political context

The Social-Democrat Party (SDP) won the parliamentary elections on 4 October 2015 but without an absolute majority. After negotiations lasting a number of weeks, the previous President, Anibal Cavaco Silva (SDP) confirmed the Prime Minister, Pedro Passos Coelho (SDP), in office. However the left (Socialist and Communist Parties and the left block) united for the first time in 40 years and placed a censure motion before Parliament, leading to the fall of the government on 10 November.

On 24 November, after asking the Socialist Party (SP) for guaranties on the stability of a future government as well as clarifications on compliance with the country’s budgetary commitments, the President was obliged to name the leader of the SP, Antonio Costa, as Prime Minister. However, the parliamentary left-wing coalition does appear fragile, with the allies of the SP calling for the end of the austerity policies (end of the freeze on pensions and a gradual raising of the minimum wage over four years). Marcelo Rebello de Sousa, conservative candidate, was elected on the first round of the presidential election, in January 2016. The new President rejected the possibility of dissolving the Parliament. Nevertheless, disagreements over the 2017 budget could trigger a return to the polls in 2017, resulting in a new period of political instability.

Finally, Portugal will be weakened by structural limitations (low level of investment, high level of debt and bottlenecks) that make it necessary to continue with reforms. Although progress has been made in this area, Portugal continues to lag behind relative to its peers in terms of labor flexibility and internal competition. The efficiency and the discipline of the public sector in terms of payments needs improving, as well as the operation of the insolvency process and the procedures for restructuring corporate debts.


Coface (09/2016)