The rating agency said the decision to ease the terms of the fiscal consolidation programme for the next three years will reduce the drag on growth. But Moody’s casts doubts on the country’s ability to reach its new targets without further austerity measures.
The decision to ease the terms of Portugal’s fiscal consolidation programme for the next three years is credit positive Moody’s Investors Service said Monday.
The revisions are credit positive because they will keep financial support flowing while reducing the drag on growth from budget tightening on an already-weak economy,” Moody’s said in a regular credit outlook.
In its fifth quarterly review the so-called troika of international lenders – European Commission, European Central Bank and International Monetary Fund – gave the country the widely claimed extra-time to reach its deficit goals. The new targets say Portugal will have to reach a budget deficit of 5% of gross domestic product in 2012, instead of the previous 4.5%. For the following year the goal was revised to 4.5%, against the initial 3%, and for 2014 the new goal was set at 2.5% from the previous 2.3%.
However, the rating agency casted doubts on the country’s ability to reach its new targets without further austerity measures.
Portugal’s economic and fiscal adjustment remains highly challenging and fraught with downside risks” wrote Moody’s.
On the new measures recently announced by Prime Minister Pedro Passos Coelho – which aim to increase employee social security contributions from 11% to 18%, while company contributions would drop from just under 24% to the same level – the credit rating agency highlighted the lack of consensus between the government and the main opposition Socialist Party. But Moody’s also “expect that intense negotiations to take place over the next few weeks will reach a broad budget agreement and avert another political crisis.”
Moody’s report did not take into account the weekend’s developments regarding the divergence between the two political parties that form the coalition government.