The trend of these ratings, meanwhile, has been changed from Positive to Stable.

The main factors considered by the Rating Committee “include the regional economy’s situation and Madeira’s financial performance, 2023 budgetary execution, liquidity, debt metrics, and the relationship between the central government and the Autonomous Region,” DBRS Morningstar explained in their report.

“The upgrade of Madeira’s ratings primarily reflects the ongoing rebalancing of Madeira’s fiscal performance,” the report said. “The mid-year 2023 budgetary execution confirms the commitment of the region to structurally strengthen its fiscal performance through expenditure control. The improvement of the budgetary performance is supported by growing revenues, thanks notably to the extremely strong performance of the regional tourism sector.” The Portuguese central government, whose credit rating has also been upgraded, now being rated A and Stable, invests in the region heavily, “especially through guarantees on its long-term funding,” the report elaborates, “as granted again in 2023 on a €275 million bond issuance and a €25 million loan. At year-end 2022, 82% of Madeira’s direct debt was either guaranteed or directly held by the Portuguese central government.”

DBRS Morningstar’s assessment indicates that the risks to Madeira’s credit rating have been balanced out, earning them the Stable trend label. The hospitality sector particularly has been performing very well, which gives the regional government more resources to consolidate their finances. “The region’s direct debt exposure to variables rates has been reduced to 43% at year-end 2022 from 75% at year-end 2019,” the assessment continues. “However, given the very high debt level of the region, a continuous rise of interest rate could be a source of pressure on the region’s fiscal performance.”

Between January and May 2023, overnight stays had increased by 13% over their 2019 level in Portugal. In Madeira specifically, that increase rises to 23%. “This contributes to the good performance of the regional economy and its labour market,” DBRS Morningstar surmised, “with an unemployment rate at 6.5% in Q1 2023, which is now standing slightly below the national unemployment of 7.2%, versus 11.4% on average during 2015-2019.”

Madeira’s tax revenues grew 16% through 2022 thanks to the favourable economic factors. “The region was able to post last year its first operating surplus since 2013 accounting for around 0.8% of its operating revenues,” DBRS commended, “versus operating deficits accounting for 17.3% of its revenues in 2021 and 8.5% in 2020. Similarly, the financing deficit decreased to 9.7% of operating revenues in 2022, from 24.9% in 2021 and 14.2% in 2020. Based upon the favourable mid-year 2023 budgetary execution, the region is likely to be able to record a low financing deficit or even a financing surplus this year.” DBRS Morningstar considers it key for the region to structurally rebalance its finances, as it still carries a very large debt burden, and has declared they’ll be paying “particular attention to the fiscal strategy of the next regional government,” which is elected in September.

“The region pre-funded its COVID-19 related measures through a large €458 million bond in 2020 and was, therefore, able to use its excess cash to fund its deficits in 2021 and 2022 and decrease its DBRS Morningstar’s adjusted debt stock in the last two years,” the report explains. With the return of tourism income in 2021 and 2022, the archipelago went from a debt-to-operating revenues ratio of 504% in 2020 to 431% in 2022, and it’s expected this year to drop below 400%.

At the end of 2022, the region’s average interest rate rose to 2% from 1.6% the previous year, still being deemed as “relatively low” by DBRS. “The national government’s support via the explicit guarantees provided by the Portuguese Treasury and Debt Management Agency (IGCP) and the General Directorate of Treasury and Finance (DGTF) continues to support the region’s cost of financing,” they state.

These explicit guarantees and DBRS Morningstar’s expectations of them continuing “are positive credit features, critical for Madeira’s rating. Any indication that the central government’s support to the region is weaker than currently foreseen would mean negative credit for Madeira.”

According to DBRS Morningstar, Madeira’s rating can be upgraded further under any single or combination of these conditions: “Madeira is able to accelerate its deleveraging path; Madeira’s economic outlook outperforms current expectations, and the region enhances its economic resilience and diversification; there are indications of a further strengthening of the relationship between the region and the central government; or the Portuguese sovereign rating is upgraded.”

On the other hand, Madeira’s rating can be downgraded if any of the following happen: “there is a structural reversal in the region’s fiscal consolidation leading to new debt accumulation; indications emerge that the financial support and oversight currently provided by the central government weaken; or the Portuguese sovereign rating is downgraded.”

“The Passed-through Social credit considerations have a relevant effect on the ratings, as the social factors affecting the Republic of Portugal’s ratings are passed-through to Madeira,” the report stated in relation to considering the social element of ESG (Environment, Social, Governance) factors in their analysis.

DBRS Morningstar doesn’t recognise any Environmental factors as having a relevant effect on the credit analysis, however, considers “the Institutional Strength, Governance and Transparency factor” to “affect the ratings,” saying that “Madeira has implemented public administration management reforms in recent years and is willing to continue to do so. This was particularly the case through the re-centralisation of its reclassified public entities’ debt onto its own balance sheet and the subsequent enhanced transparency and oversight over their operations and finances. The strengthening of the region’s Governance in recent years was significant to the region’s credit rating.”