Lisbon — Portugal hopes to cut its total debt to 120% of GDP by 2019 from 130% in 2016, finance minister Mario Centeno said — a change that could help boost the country’s creditworthiness.
Portugal’s total debt is the third-highest in the eurozone, after Greece and Italy, and is seen as one of the economy’s biggest weaknesses. The country took a three-year bailout from its eurozone peers in 2011, during the bloc’s debt crisis.
In its 2018 draft budget presented last Friday, the Socialist government promised to continue cutting the debt, to 123.5% of GDP from 126.2% in 2017. Centeno said the administration would go further in its remaining term.
"If we manage to cut gross debt below 120% of GDP at the end of the legislature [in 2019] it would be an excellent indicator," said Centeno. "I think that sustained trajectory is what Portugal should aim for and implement."
Such a reduction could help rating agencies Fitch and Moody’s follow S&P Global Ratings’ decision in September to upgrade Portugal’s creditworthiness to investment grade, taking it out of "junk" status for the first time in five-and-a-half years.
"We hope Fitch and Moody’s will do it [follow S&P]" said Centeno.
The minister said he hoped Portugal could follow the sustained debt reduction achieved by Belgium, which cut its debt to 85% of GDP in 2007 from 130% in 1985.
Portugal’s debt crisis led to huge challenges for its financial sector, which remains lumbered with nonperforming loans. But measures to clean up its banks could raise the country’s potential growth by 0.5 percentage points, to 2%, the minister said.
Portugal finally sold state-rescued Novo Banco on Wednesday and its leading banks have agreed on a scheme to reduce nonperforming loans.
Centeno said that with the gains from improvements for its banks and if exports and Europe continue growing, Portugal "could grow 2% [per year] during the next five years." Portugal’s exports now represent about 43% of GDP, up from 31% in 2008.
International observers, including the International Monetary Fund (IMF), have consistently said in recent years that Portugal’s potential growth remains low, hobbled by high debts, bad loans and an inflexible labour market. Portugal was one of the slowest growing economies in the eurozone after it adopted the single currency.
The country is also grappling with wildfires that have killed more than 100 people and burnt about 350,000ha of land in 2017, and which prompted the interior minister to resign on Wednesday.
While the government sees slightly lower economic growth in 2018, 2.2% after 2017’s projected 2.6%, Centeno said 2018’s rate would still be the third-highest since 2000. If growth turns out higher, the government would use it to reduce debt faster, he said.
Asked about the risks of a reversal of quantitative easing by the European Central Bank (ECB), Centeno said he was not worried as the ECB already held the limit of Portuguese bonds that it could own under its asset purchase programme.
"Technically, this is already priced into our debt as we haven’t had the support of the ECB for a year," he said. "As such, this is a point which gives us comfort going forward."