Wednesday, 27 January 2016

Fitch threatens a down-"rating" of Portugal, if António Costa fails a deficit reduction - back to the disastrous years just before an international bailout

António Costa, the unelected PM, 
with a draft of the 2016 State budget, 
which is considered over-optimistic and unrealistic

Moody's, the credit rating agency, 
highly critical of the State Budget of 2016

The "rating" agency Fitch, 
considers that the socialist government´s State budget,
 is based on growth assumptions that are "unrealistic", 
which raises the risk of failing to reduce the deficit to 2.6%. 
It also says that there are lots of accounts that are unexplained.


The "draft" of the 2016 state budget 
presented by the Socialist government, 
are based on "optimistic" and even "unrealistic" assumptions, 
on the evolution of the economy,  
which increases the risk of the promised deficit reduction to 2, 6% of GDP, 
not being achieved. 
If this scenario materializes, 
Fitch warns of the the likelihood of lowering the "rating" of the country, 
reversing the notable upward trajectory, 
which remains below the investment grade.

"The State budget proposals of the Portuguese government for 2016, 
aim at maintaining fiscal consolidation, 
but are based on projections that may prove unrealistic," 
writes the credit rating agency, 
referring to the growth prospects of the economy, revenue and spending plans 
announced last week by Finance Minister Mario Centeno.

Since the public finances and the fiscal stance are "key variables" 
in assessing the "rating", 
"any resulting relaxation of a less favorable trajectory of the debt ratios 
could trigger a negative 'rating' action, 
as well as a weaker growth 
that has a negative impact on public finances", 
warns the risk rating agency.

In a note sent to investors, 
Fitch´s economists, point out that the socialist government 
now wants to achieve a more ambitious deficit reduction, 
by the end of 2016 - at 2.6% instead of 2.8% as in the autumn forecast, 
following talks with the Communist Party and the radical BE - 
confirming the expectation of trying to comply with the European rules 
and that there may be "political space for the consolidation."

However, it adds, this amount is above the previous government ´s target 
(a deficit of 1.8% of the GDP by the end of 2016)
 while based on "optimistic" growth assumptions. 
As international institutions and the Council of Public Finance, 
Fitch also foresees the economy growing at around 1.7%, 
while the government of António Costa believes it will grow by 2.1%, 
partly due to the stronger than expected growth in exports - 
which, according to Fitch, only comes from an excessively  optimistic prediction, 
in view of the economic cooling off in emerging markets 
and the prospect of a tenuous economic growth across the Eurozone.

For Moody's, the government of António Costa is overconfident 
and risks putting Portugal back on the path of past mistakes. 
Speaking to the Economic newspaper, 
the financial rating agency, 
shows skepticism about the socialist Executive's plans 
and warns that the deficit target could prove more difficult than expected.

"The growth projections underlying the budget are far too optimistic, 
standing above 2%", criticizes Kathrin Muehlbronner, 
a Moody's analyst responsible for following the Portuguese economy. 
"In our view, Portugal is likely to achieve 
a growth, closer to the rate of 1.6% or 1.7%" she said.

The range estimated by Moody's is in line with the latest projections 
from the European Commission, which point to 1.7%, 
and moves away from the projection used by the government 
in the state budget draft for 2016 of 2.1%. 
"Therefore, we believe that reducing the budget deficit to 2.6% of the GDP, 
will prove to be a challenge," stresses Muehlbronner. 
If the GDP grow less than expected, 
the deficit will have to be lower, 
so for this ratio to be met, 
makes it an extremely demanding goal.

In addition, Moody's analyst said that it shared 
the concerns of the Board of Public Finance (CFP), 
the body responsible for monitoring the accounts of the Portuguese economy. 
"We also agree with the CFP's point of view, 
that an economic strategy focused on private consumption and wage increases, 
above productivity growth, 
may result in the return to the old imbalances of the Portuguese economy, 
with current account deficits and loss of international competitiveness", 
argued the specialist of the credit rating agency.

Sent to the European Commission and the Parliament, 
along with the 'draft' of the state budget for this year, 
the opinion of the CFP, 
is quite critical of the macroeconomic scenario of the Socialist Government. 
The experts call into question, especially, 
the projections considered for the increase in external demand 
and the price variation. 
Also, noting that "the growth based on domestic demand, 
particularly on private consumption, 
is a well-documented trend of a disastrous past", 
referring to the loss of competitiveness and external borrowing.



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