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Growth key risk in Portugal's state budget plan for 2017: Fitch

Xinhua, October 26, 2016 Adjust font size:

Portugal's budget plan for 2017 underscored the government's commitment to fiscal consolidation, but does not fully address the fiscal risks posed by weak growth and legal problems in the financial system, rating agency Fitch said in a statement on Tuesday.

"The plan accords with our view that the Portuguese authorities will continue to narrow the budget deficit, despite the anti-austerity rhetoric of the government and some high-profile policy measures such as increasing public-sector pay and a hike in pensions," Fitch said.

"Overall, the plan extends the minority Socialist Party government's track record of prudent fiscal policy-making. The risk of political clashes between the Socialists and the more radical Communist Party and Left Bloc appears to have receded significantly, assuring more policy stability."

However the biggest risk to fiscal consolidation is "subdued growth", Fitch said.

"The 2017 budget plan balances deficit reduction with measures to stimulate growth, including some tax cuts and new social benefits. But while this may support private consumption, it does little to incentivise investment, which is struggling," Fitch warns, adding "prospects for the banking sector remain weak."

The 2017 budget plan gives no details as to the government's solution to cleaning up bank balance sheets that would be attractive to private investors, Fitch said.

Fitch maintains a more cautious outlook than the government and expects the deficit to end at 2.7 percent of GDP this year.

The agency concludes that Portugal's BB+ Stable sovereign rating is constrained by high debt and weak growth.

Prime Minister Antonio Costa's government came into office in November, after being backed by the Left Bloc and Communist party in parliament.

Portugal's draft plan submitted to the European Commission last week targets a general government budget deficit of 1.6 percent of GDP in 2017, down from a forecast 2.4 percent in 2016.

The budget plan projects general government debt to be 128.3 percent of GDP at the end of 2017. Endit