Portuguese Municipal Sector: Very Strong Financials, Manageable Downside Risks

The sub-sovereign government sector in Portugal includes the Autonomous Region of the Azores (BBB (low), Stable), the Autonomous Region of Madeira (BBB (low), Stable) and 308 municipalities. While the fiscal performance of the two outermost regions was hit hard by the COVID-19 pandemic due to their specific healthcare responsibilities, the Portuguese municipal sector maintained a very solid budgetary performance in recent years and continued to reduce its debt burden. Portuguese municipalities' consolidated debt burden was very low at year-end 2022, accounting for only 33% of the sector's operating revenues and their consolidated debt-to-operating surplus stood below 2x. DBRS Morningstar believes this very strong financial position and the central government support make current downside risks manageable for the Portuguese municipal sector. We take the view that those downside risks could stem from the slowdown of the real estate market, high, although currently reducing inflation and higher interest rates.

Key highlights include:
-- The Portuguese municipal sector maintained a very solid budgetary performance in recent years and showed very strong consolidated debt metrics at year-end 2022.
-- Portuguese municipalities benefit from the strong central government financial support and a tight budgetary and debt framework.
-- The Portuguese municipal sector is well-placed to weather the challenges commonly faced by various European sub-sovereign governments, including the slowdown of the real estate market, inflation and higher interest rates.

“We believe that the very strong financial position and the favorable liquidity situation of the Portuguese municipal sector offer it a strong capacity to absorb likely negative budgetary effects related to the slowdown of the real estate market and inflation,” said Mehdi Fadli, Senior Vice President in the Global Sovereign Ratings Group. “The very low debt burden of the sector should also strongly mitigate the financial impact of higher interest rates.”