Fitch Ratings raised Portugal's long-term foreign and local currency issuer default ratings to BBB from BB+ with a stable outlook, citing an expected decline in the country's gross general government debt, or GGGD.
Portugal's GGGD ratio of 127% of GDP is the third-highest in the eurozone, Fitch said, but it is projected to drop by more than 3 percentage points of GDP in 2017, the first decline since the country's debt crisis.
The rating agency said Portugal's debt trajectory is on a firm downward trend, with the decline in the GGGD ratio expected to continue through the medium term.
"The favorable debt dynamics are driven by a combination of previous structural fiscal measures, the recent cyclical recovery and a substantial improvement in financing conditions," Fitch said. It added that Portugal's external deleveraging continues to progress at a gradual pace.
The country's budget deficit is forecast to narrow to 1.4% of GDP in 2017 from 2% in 2016 and 7.2% in 2014, boosted by tax revenue. The budget deficit is expected to remain unchanged in 2018 before shrinking to 1.2% in 2019.
Fitch said this budget deficit projection "paves the way for a firm decline in the GGGD path over the medium term as the primary surplus is expected to stabilize at around 2.5% of GDP."
The Portuguese economy's short-term outlook has also improved, with Fitch raising its GDP forecast to 2.6% and 1.9% in 2017 and 2018, respectively, amid strong labor market performance.
As part of the rating action, Fitch also upgraded Portugal's short-term foreign- and local-currency issuer default ratings to F2 from B.
Issue ratings on long-term senior unsecured foreign and local-currency bonds were raised to BBB from BB+ and issue ratings on short-term senior unsecured local-currency bonds were upgraded to F2 from B.