By Sergio Goncalves
LISBON (Reuters) - Ratings agency Standard & Poor's (S&P) upgraded Portugal's long-term issuer rating to 'BBB+' from 'BBB', seeing further improvement in the country's public finances, and good economic prospects despite external headwinds.
After a sharp economic contraction of 8.4% in 2020, Portugal's recovery has been strong; gross domestic product (GDP) grew 4.9% last year and the European Union Commission sees it growing 6.5% this year.
"Despite higher energy costs and rising interest rates, Portugal has continued to post strong growth," S&P said in a statement late on Friday.
"The upgrade reflects the resilience of Portugal's economy, public finances, and largely foreign-owned financial sector to various external shocks."
S&P said the rating outlook was stable.
It added investment was set to rise on the back of an expected 61.2 billion euros, or 26% of GDP, in EU funding between 2022 and 2027, which would "provide a strong boost to the economy, regardless of external conditions."
The government expects Portugal's debt-to-GDP ratio, which finished last year at 127.4% -- slightly below 2020’s record highs of 135.2% -- to end this year at 120.8%.
Portugal envisages deficit reduction of 1.9% of gross domestic product this year, compared with 2.8% in 2021.
S&P said that "strong tax collection during 2022, boosted by higher growth and inflation and the government's caution on expenditure", would bring the deficit below target in 2022 and into balance by 2025.
Portugal's Finance Minister Fernando Medina welcomed the move, saying it would translate into lower borrowing costs not just for the government but also for companies and families.
(Reporting by Sergio Goncalves; Editing by Christina Fincher)