"The rating upgrade reflects Morningstar DBRS's view that Portugal's notable public debt reduction, supported by strong fiscal performance, has strengthened its credit quality".

DBRS also pointed to "the significant reduction in external vulnerabilities over the last decade and a more resilient banking system."

Morningstar DBRS also upgraded Portugal's short-term ratings to R-1 (mid) from R-1 (low), with the trends for all ratings moving from positive to stable.

“Portugal’s public debt ratio has declined sharply from 116.1% of GDP in 2019 to 97.9% in 2023 and could fall below the 90.0% of GDP threshold in the next two to three years,” DBRS noted.

According to the agency, the Government expects that “the public debt ratio will decrease to 95.9% of GDP in 2024 and continue its downward trend to 93.3% in 2025 and 83.2% in 2028, driven by large primary surpluses and moderate growth in nominal GDP.”

According to DBRS, “Portugal’s current budgetary situation is among the strongest in the eurozone”, recalling that “Portugal recorded an overall budget surplus of 1.2% of GDP in 2023 and is expected to record small surpluses in 2024 and 2025”.

For the agency, the “approval of the 2025 budget bodes well for the durability of the current Government in the short term”, warning that “fiscal uncertainty will likely increase over time”.

“However, Morningstar DBRS considers that the risk of Portugal deviating significantly from its commitment to prudent fiscal policy is relatively low,” it assured.

The stable outlook reflects the agency's opinion that “the risks to credit ratings are balanced”, an opinion supported “by the fact that the country belongs to the euro area and by its adherence to the EU economic governance framework”, combined with “Portugal’s strong fiscal performance since 2016 and the strengthened position of the Portuguese banking system also support the country’s credit rating”

For the agency, the “main vulnerabilities include the high level of public debt, the high external debt and the relatively low economic growth potential”, and “the management of these issues may become more difficult if interest rates remain high for a prolonged period,” he warned.

The agency is the first to pronounce on Portugal's rating this year, followed by S&P, on February 28, Fitch on March 14 and Moody's, on May 16, according to the calendars published by the agencies.