November 13, 2015 / 7:24 PM / in 2 years

DBRS keeps Portugal's last non-junk rating, warns of political risks

LISBON (Reuters) - Canadian ratings agency DBRS kept Portugal's credit standing at the lowest investment grade level, with a stable outlook, on Friday, leaving the country one last non-junk rating to qualify its bonds for ECB purchases.

Still, DBRS warned that political uncertainty has increased since an inconclusive election last month that ultimately led to the ousting of a newly-appointed center-right government this week. This could lead to a reversal of reforms in the past few years intended to strengthen the economy and public finances.

"With weak investment and still high long-term unemployment, the contributions from capital accumulation and labor supply to medium-term economic growth appear limited. Therefore, we would be concerned if reforms are reversed," DBRS said, also citing Portugal's heavy debt burden as a major challenge.

It said it "does not currently expect a return to large fiscal imbalances and believes that risks remain broadly balanced", but the ratings could come under pressure if the political commitment to sustainable economic policies and reforms weakens, or if political uncertainty persists.

For the European Central Bank to be able buy a government's bonds under quantitative easing (QE), either Moody's, Standard & Poor's, Fitch or DBRS must rate its debt at investment grade, or the country must be compliant with a bailout program. Portugal completed an international bailout last year.

The other three international rating agencies mark Portugal one notch below investment grade and Fitch warned on Wednesday it could act if it sees fiscal relaxation by a new government capable of throwing Lisbon off its course of debt reduction.

Left-wing parties are now trying to form a Socialist government backed by a leftist parliamentary majority. Some analysts had said that raised the risk of a downgrade by DBRS.

DBRS said earlier it was taking recent political developments into consideration in its review of Portugal.

Reporting by Andrei Khalip; Editing by Ruth Pitchford

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