LISBON, Dec 15 (Reuters) - Fitch Ratings on Friday lifted Portugal's credit standing by an unprecedented two notches, meaning the once bailed out country now holds an investment grade from two of the three major rating agencies and could soon return to major bond indices.
Fitch, which had rated the country BB+ with a positive outlook, shifted position to BBB, two notches into investment grade territory and with a stable outlook, citing a diminishing debt to GDP ratio, which it saw on a firm downward trend in the medium-term.
"The favourable debt dynamics are driven by a combination of previous structural fiscal measures, the recent cyclical recovery and a substantial improvement in financing conditions," it said in a statement.
The upgrade came even though Fitch expects the budget deficit to remain unchanged in 2018 at 1.4 percent of GDP, which is higher than the Socialist government's 1.1 percent forecast in the 2018 budget.
The finance ministry said the two-notch move was the first-ever for Portugal and a recognition of its efforts to control finances and promote growth.
"This positive evaluation widens the investor base for Portugal's debt and will allow for the bonds to enter into more sovereign debt indices," it said, reiterating its commitment to a sustainable budget consolidation along with economic growth.
Most major indices, such as the Markit iBoxx euro benchmark index and the Bloomberg/Barclays euro aggregate index, use the average ratings of Moody's, S&P and Fitch.
Standard & Poor's in September was the first of the "Big Three" raters to lift Portugal back to investment grade, which the country lost at the height of its debt crisis in early 2012.
Earlier on Friday, Portuguese bond yields hit their lowest levels since early 2015, pushing them briefly below Italian yields for the first time in almost eight years on expectations of the upgrade.
The loss of the investment grade in January 2012 after an S&P move made Portugal's benchmark 10-year bond yields blow out to a record of over 17 percent. The yield has since come down to around 1.8 percent, helped by Portugal's economic and fiscal improvements and European Central Bank bond-buying.
Lisbon last year churned out the lowest budget gap since 1975 and expects to cut it further this year and next.
Moody's Investor Service still holds Portugal's rating unchanged at Ba1, or one notch into speculative territory, but it upgraded the outlook to positive from stable in September. (Reporting By Andrei Khalip; Editing by Andrew Hay)