High public and private indebtedness remains Portugal's main challenge at a time of economic growth and consolidation of rating. Fitch warns on Monday, Oct. 15, that the accelerated pace of post-crisis deleveraging is slowing and the high volume of bad credit continues to pose a problem for the banking sector and for growth in the country.
"The net flow of lending to households has turned positive in 2017, for the first time since 2011, boosted by consumer lending and mortgages. Household and corporate debt (relative to GDP) remains above average levels in the euro zone, "the agency said in an analysis of sovereign debt developments in Western European economies.
The non-performing loan ratio was 13% in the first quarter of 2018, compared to 16.3% in the same period of the previous year. The coverage ratio increased to 52.2% from 45.3% at the end of 2016.
"Investors' appetite for troubled assets is increasing, but Fitch believes banks will have to book more impairments for troubled assets to increase volumes."
The impact of bad debt on the devaluation of banks' assets has penalized the returns. Caixa Geral de Depósitos (CGD), for example, recorded impairments of 408.263 million euros in the accounts of last year, due to the devaluation of its holdings in banks in Brazil, Spain and South Africa, financial institutions that are for sale.
The New Bank, which received a capital injection from the Resolution Fund earlier this year due to the impairments recorded last year, should again need another recapitalization in 2019.
"In the first half of the year, the non-performing loan ratio improved to 28.7% (-3.4% compared to the same period last year), which was 63.0% (+ 11.8%). The ratio of NPL net of impairments decreased from 15.7% in June 2017 to 10.6% in the first half, a reduction of around 33%, "the statement said. Between January and June, impairments totaled 248.4 million, compared to 413.1 million in the first half of 2017.
"High private indebtedness jeopardizes growth potential"
Fitch thus warns of the impact of high private sector indebtedness to the country. Alongside this, it points out that there are risks to fiscal consolidation, although the strong cyclical recovery, restrictive fiscal policies and the Government's commitment to prudent fiscal management have led to a significant improvement in the budgetary situation.
"The slowdown in GDP growth [Produto Interno Bruto] and pressures on capital investment may make fiscal consolidation more challenging in the coming years, "the statement said.
The financial rating agency confirmed in June that the rating of Portugal at 'BBB', two levels above rubbish, with a 'stable' outlook. Along with Canada's DBRS, Fitch is the agency that currently assigns the Republic's highest rating. The report is known only days after Moody's – the only one of the top agencies holding the national debt rating to a speculative degree – has taken Portugal out of 'junk'.
The analysis also included considerations on the Italian, Spanish, Greek, Cypriot, British, French, Austrian and Finnish economies. Fitch points out the "risks" to European economies as "the prospect of higher interest rates and economic slowdown, which will challenge the dynamics of debt in the most indebted economies."
"The composition of the fiscal adjustment may change, with interest and capital spending rising," and predicts that "from 2018 additional fiscal efforts will be needed in heavily indebted countries." Finally, Fitch notes that "growing political uncertainty in the face of the European Parliament elections could jeopardize the growth momentum."