LISBON, Oct 12 (Reuters) - Moody's Investors Service on Friday upgraded Portugal's credit rating by one notch back to investment grade, giving the once bailed-out country's debt full eligibility to key bond indices and a wider investor base.
Moody's, the last of the major credit rating agencies to have kept Portugal's debt in "junk" territory after upgrades last year by Fitch and Standard & Poor's, shifted Portugal to the lowest investment-grade mark of Baa3, with stable outlook, citing the country's economic and fiscal improvements.
"Portugal's elevated general government debt has moved to a sustainable, albeit gradual, downward trend, with limited risks of reversal. The broadening of Portugal's growth drivers and a structurally improved external position has increased economic resilience," Moody's said in a statement.
Moody's said Portugal's recent economic growth and fiscal consolidation effort was stronger than it expected a year ago and saw the decline in the debt levels to be "relatively robust to most likely shocks, including a modest rise in interest rates" expected to begin in Europe next year.
Moody's change from speculative status will put Portugal's bonds back into JP Morgans investment-grade bond indices, completing its index eligibility.
Earlier upgrades by other raters had enabled its return to several key indices used for portfolio purchases by buyers such as pension funds and insurance firms.
"The positive evaluation by the ratings agencies contributes to a wider and diversified investor base and helps to lower financing costs for households, companies and the state," the finance ministry said in a statement, vowing to keep strengthening the resilience of public accounts and the economy.
S&P and Fitch rate Portugal's debt one and two notches into investment grade territory, respectively.
S&P last month affirmed its rating, but improved the outlook to positive, saying that a rating upgrade was possible if the country's stays the course of reducing public and private debt while improving its financial stability.
Portugal's economy grew at its strongest pace since the turn of the century last year, continuing its recovery from a deep recession in 2011-13, and the government expects to slash the budget deficit to just 0.7 percent this year, the lowest mark in more than four decades of the country's democratic history.
It plans to narrow the budget gap further to around 0.2 percent next year and eliminate the deficit by 2020.
Portugal's government debt fell by 4.5 percentage points in 2017 to just below 125 percent of GDP, driven by strong economic growth and a healthy primary surplus, and Moody's expects the debt burden to reach around 116 percent by 2021. (Reporting By Andrei Khalip)