Portugal's Fiscal Resilience: A Growing Attraction for European Sovereign Debt Investors?

In 2025, Portugal has emerged as a standout performer among Eurozone peripheral economies, with its sovereign credit rating upgraded by three major agencies—S&P, Moody's, and Fitch—reflecting robust fiscal discipline and economic resilience. This shift has sparked renewed interest from European sovereign debt investors, who are increasingly viewing Portugal as a safer bet compared to its neighbors. But what drives this transformation, and how does it position Portugal within the broader context of fiscal sustainability in the Eurozone periphery?

Fiscal Policies and Economic Resilience: A Foundation for Creditworthiness

Portugal's fiscal narrative in 2025 is defined by sustained debt reduction, prudent budget management, and structural reforms. S&P upgraded Portugal's long-term sovereign rating to A+ from A in August 2025, citing a public debt-to-GDP ratio projected to fall to 85.6% by 2029S&P upgrades Portugal's rating to 'A+' on economic resilience^[1], down from 94.9% in 2024Economic and Fiscal Outlook 2025-2029 (update) - cfp.pt^[3]. This trajectory is underpinned by primary budget surpluses and the Recovery and Resilience Plan (RRP), which has accelerated public investment in green energy and digital infrastructureEconomic and Fiscal Outlook 2025-2029 (update) - cfp.pt^[3]. Moody's, meanwhile, affirmed its A3 rating with a stable outlook, highlighting Portugal's ability to maintain a small budget surplus and reduce debt to 90% of GDP by 2026What is Portugal’s credit rating in 2025?^[2].

The economy's resilience is further bolstered by a thriving tourism sector and strong service exports. Fitch's September 2025 upgrade to A emphasized Portugal's improved external position, including a narrowing energy deficit and rising service exportsFitch Upgrades Portugal to 'A'; Outlook Stable^[4]. These factors, combined with GDP growth projections of 1.8–2.3% (outpacing the eurozone average of 0.9%)Economic forecast for Portugal - European Commission^[5], have reinforced confidence in Portugal's ability to navigate global trade tensions and geopolitical risks.

Comparative Analysis: Portugal vs. Spain and Italy

Portugal's fiscal trajectory contrasts sharply with its Eurozone peers. While Spain has also shown progress—reducing vulnerabilities and achieving robust growth driven by tourism and renewable energy—its public debt-to-GDP ratio remains higher at 100.9% in 2025Economic forecast for Spain - European Commission^[6]. Italy, by contrast, lags significantly, with a debt-to-GDP ratio of 135%Debt to GDP Ratio by Country 2025^[7], compounded by structural inefficiencies and political volatility.

Portugal's balanced budget in 2025 (headline deficit of 0.0% of GDP)Economic and Fiscal Outlook 2025-2029 (update) - cfp.pt^[3] contrasts with Spain's projected primary deficits until 2027 and Italy's delayed return to primary surplusesPortugal: fiscal prudence and robust growth^[8]. The European Commission's 2025 forecasts underscore Portugal's superior fiscal sustainability, noting that its debt reduction is supported by favorable growth-interest rate differentials and primary surplusesEconomic and Fiscal Outlook 2025-2029 (update) - cfp.pt^[3]. Meanwhile, RBC Wealth Management highlights that while Spain and Portugal are poised for improved debt levels, Italy and France remain high-risk for fiscal sustainability2025 Midyear Outlook: Europe - RBC Wealth Management^[9].

Structural Reforms and Policy Frameworks: A New Era of Flexibility

The revised Stability and Growth Pact (SGP), effective April 2024, has provided Portugal and Spain with greater fiscal flexibility. Under the new framework, countries can adjust expenditure paths for defense spending (up to 1.5% of GDP annually) while maintaining medium-term fiscal plansMedium-term fiscal-structural plans under the revised Stability and Growth Pact^[10]. Portugal's adherence to these reforms, alongside its RRP-driven investments, has positioned it as a model for balancing growth and fiscal prudence.

In contrast, Italy's historical reliance on austerity measures post-2012 crisis has left it with a weaker fiscal foundation. While the revised SGP offers some relief, Italy's high debt levels and structural challenges—such as low productivity and demographic pressures—continue to deter investorsMedium-term fiscal-structural plans under the revised Stability and Growth Pact^[10].

Investment Implications: A Shift in Sovereign Debt Appetite

The growing confidence in Portugal's fiscal health is evident in capital flows. Bond fund managers have increased allocations to Portuguese government debt, attracted by its improving credit ratings and risk-adjusted returnsWhy European Bond Fund Managers Now Back Italy, Greece, Spain^[11]. This trend mirrors similar shifts toward Spain and Greece, which have also seen credit upgrades and stronger growth outlooksWhy European Bond Fund Managers Now Back Italy, Greece, Spain^[11].

For investors, Portugal's combination of low debt growth, stable political environment, and strategic RRP investments offers a compelling case. However, risks remain, including potential fiscal deterioration post-2026 due to planned public expenditure increasesEconomic and Fiscal Outlook 2025-2029 (update) - cfp.pt^[3].

Conclusion

Portugal's fiscal resilience in 2025 has redefined its position in the Eurozone periphery, offering a blueprint for sustainable growth and debt reduction. While challenges persist, its credit upgrades and structural reforms have made it a magnet for sovereign debt investors seeking stability in an uncertain global landscape. As the Eurozone's economic dynamics evolve, Portugal's story underscores the potential for peripheral economies to transform from risk perils to growth engines.