Portugal: Election Outcome Will Not Materially Challenge Public Finance Trends

Portugal ("A", Stable trend) will hold parliamentary elections on March 10, 2024. The latest opinion polls suggest a tight race between Portugal's two main centrist groups, the Socialist Party (PS) and the Democratic Alliance (AD) - a coalition of centre-right parties led by the Social Democratic Party (PSD). Neither group are likely to achieve an absolute majority in parliament. Chega's rise in opinion polls could give them the opportunity to join a right-wing coalition led by AD or facilitate an AD minority government. In any case, we do not expect the next government, whether led by AD or PS, to deviate from a decade-long commitment to prudent fiscal policy and debt reduction. The most immediate challenge for the next administration will remain the full and timely implementation of Portugal's Recovery and Resilience Plan, especially in the context of a slowing economy and lurking geopolitical risks. In this sense, a prolonged period of negotiations to form a government or possible political instability could hinder the effective implementation of the plan.

Key Highlights
-- The electoral race is still open but right leaning parties have gained momentum.
-- We don't expect the election result to affect Portugal's commitment to sound fiscal policy and public debt reduction.
-- A prolonged period of political stalemate or instability could complicate the implementation of Portugal's Recovery and Resilience Plan.

“We see limited risks to Portugal’s public debt reduction efforts in coming years regardless of which party leads the next government,” said Javier Rouillet, Senior Vice President, Morningstar DBRS, Global Sovereign Ratings. “The most tangible near-term risk is a potential delay in the implementation of Portugal’s Recovery and Resilience Plan, especially if the formation of the government drags on over time or the next administration proves short-lived and triggers snap-elections relatively soon”.