Portugal’s economic recovery will decelerate in 2016, primarily due to a slowdown in exports and investment activity, according to Standard & Poor’s.
The rating agency has kept the Portuguese debt rating at BB+, and gave it a stable outlook.
Despite economic growth during 2014-2015, S&P expects real GDP growth in Portugal to weaken to about 1.2% in 2016.
The drop is linked to the decline in external demand from non-EU markets, the destination for 27% of Portuguese goods exports. This has contributed to a lull in export activity, partially offset by the strong tourist season.
Fragility in the banking sector, by highly leveraged private-sector balance sheets, as well as domestic policy uncertainty, have ebbed investment activity since mid-2015, the rating agency said.
“The private-sector debt overhang is in our view a key impediment to a more dynamic recovery, as resources that would otherwise be spent on consumption or investment are being used for improving households’ and companies’ balance sheets,” S&P said.
“A more important increase in equity financing (especially from external sources and in particular into the banking sector), which is one of the government’s economic policy priorities, would be positive, in our view, and would facilitate deleveraging in the economy,” it said.
In the absence of stepped up deleveraging measures or structural reforms, including improvements in the business environment, high private-sector debt will continue to strain growth prospects over the next few years, reads the &P report.
According to S&P forecast, the government will post a deficit of about 2.8% of GDP in 2016, down from 3.2% of GDP in 2015 (or 4.4% of GDP including the December 2015 bail-out of Banif).