Rating agency Fitch raised its outlook on Portugal's debt rating to "positive" from "negative" on Friday, citing the country's strong progress in cutting its budget deficit, regaining market access and improving economic growth.
The agency, however, also said Portugal should go for a precautionary line of credit from its lenders when it exits its international bailout.
Fitch left Portugal's rating unchanged at BB+, which is just one notch into junk territory. Fitch has the highest rating that any of the main agencies have for the country and the outlook move puts Portugal closer to regaining investment grade.
Fitch upgraded its growth forecasts for Portugal and said the country has now regained debt market access as it prepares to exit its international bailout in May.
"Portugal's fiscal financing conditions have improved markedly since Fitch's previous rating review in October 2013 and the sovereign has effectively regained market access," Fitch said.
"Portugal is making good progress in reducing its budget deficit. The 2013 fiscal performance exceeded Fitch's expectations and outperformed the IMF-EU (International Monetary Fund-European Union) programme targets, even excluding one-off factors," it said.
Portugal's bond yields have fallen sharply in the past few months on improving prospects of a smooth exit from the bailout on strong economic prospects. Benchmark Portuguese bond yields were little changed at around 3.91 percent after the Fitch news.
Analysts at Rabobank said in a note the change in the outlook had been expected by the market.
"Given this and that there was still no actual upside change to the rating we expect this news to support continuation, rather than acceleration, of the tightening of Portuguese spreads," Rabobank said.
On the precautionary credit line, Fitch said Portugal should opt for one when the bailout ends to protect against risks.
"Despite the improved financing conditions, Fitch believes that securing a precautionary credit line would be beneficial in protecting against downside risks, although that is not the agency's expectation and not a key rating driver," it said.
Portugal's government has said it will decide shortly before the bailout ends in May whether to seek a precautionary loan from creditors.
The rating agency upgraded its forecasts for Portugal's economic growth to 1.3 percent this year and 1.5 percent for 2015, from 0.2 percent and 1 percent previously. The government expects growth of 1.2 percent this year.
Fitch's outlook is more positive than Moody's, which in November only raised its outlook on Portugal to "stable" from "negative" and rates Portugal Ba3 - three notches into junk territory. Standard & Poor's rates Portugal two notches into the junk territory with negative outlook.