Seven years after requesting a joint bailout from the EU and IMF, Portugal is now poised to repay the remaining portion of its debt to the IMF. In an address to parliament on November 29th, Prime Minister Antonio Costa, stated that Portugal would make an early payment of 4.6 billion euros by the end of the year. This represents a remarkable turnaround that has seen the country move from a position of financial vulnerability, to sustained economic expansion.
During the financial crisis, Portugal’s economy was dealt a particularly harsh blow, resulting in a precipitous rise in borrowing costs. Between 2010 and 2011, Moody’s, S&P, and Fitch, the three main credit ratings agencies, downgraded Portuguese sovereign debt to junk status. Ultimately, the country was forced to apply for a 78 billion euros bailout package from the EU and IMF. However, the bailout came with strings attached. The Portuguese government was required to introduce a series of austerity measures, with the goal of reducing the government deficit.
Impressively, this isn’t the first time Portugal has made an early loan repayment. Last year, the government paid off 9 billion euros worth of the 26.3 billion euros owed to the IMF, ahead of schedule. Portugal’s timely approach to loan repayments is a key part of the government’s commitment to putting its fiscal house in order.
In a statement released by the IMF, after its seventh post-program monitoring mission to Portugal on November 30th, the IMF praised Portugal’s debt repayment efforts. It stated that “Early repayments to the IMF reflect Portugal’s favourable market access conditions and send a positive signal to investors and markets. These operations are financially advantageous because they improve the public debt maturity profile and generate interest bill savings.”
Market reaction to the news has been broadly positive. Portugal’s 10-year bond yield fell to 1.831% the day after the announcement, and has continued to decline since. The fall in the cost of borrowing is indicative of investors’ confidence in the economic fundamentals underlying Portugal’s early debt repayments.
This news is just the latest in a string of positive economic developments for Portugal. In October, Moody’s upgraded Portugal’s sovereign credit rating from Ba1 to Baa3. Moody’s is the last of the three main credit rating agencies to move Portuguese debt back into investment-grade territory. This threshold is important, as it means institutional investors such as pension funds, can now buy Portuguese debt. The expected uptick in demand for Portuguese bonds is expected to help maintain a relatively low cost of borrowing for the country.
Explaining its decision to upgrade Portugal’s sovereign debt rate, Moody’s stated that “Portugal’s elevated general government debt has moved to a sustainable, albeit gradual, downward trend, with limited risks of reversal. The broadening of Portugal’s growth drivers and a structurally improved external position has increased economic resilience.”
Portugal’s economic revival has astonished many observers, who worried that the left-wing anti-austerity coalition, formed under the leadership of Socialist Prime Minister Costa in 2015, would impede growth. Instead, the government followed a path marked by both increased spending and budgetary restraint. As a result, unemployment in September had dropped to 6.6% with the economy expected to expand by 2.2% this year. Furthermore, Portugal’s 2019 budget has been crafted in order to fully eliminate the country’s deficit. While the debt-to-GDP ratio remains high, it is expected to fall to 103% by 2023.
Portugal has become a poster child for fiscal reform in Europe. Although it still has several challenges to overcome, the repayment of IMF loans is a sign that the country is well and truly on the path of economic recovery.
