OREANDA-NEWS. The outcome of Portugal's general election supports our view that major policy changes are unlikely but political instability could reduce fiscal consolidation and reform implementation, Fitch Ratings says.

Prime Minister, Pedro Passos Coelho's ruling centre-right coalition won 104 seats in Sunday's poll, beating the opposition Socialist party but losing its majority in the 230 seat Assembly (four seats are still to be decided). Mr Passos Coelho has offered to form a minority government (the Socialists are unwilling to join forces with more left-wing parties). This lessens the near-term political uncertainty associated with drawn-out negotiations to form a cohesive new government.

The common ground shared by the incumbent and main opposition parties, and the absence of a strong anti-euro or populist anti-austerity party, meant that we did not expect the election to lead to major changes in fiscal and macroeconomic policy. The mainstream centre-right and centre-left parties are committed to fiscal prudence. Amendments to the budget-framework law that sets out fiscal objectives should improve transparency and compliance.

Nevertheless, fiscal consolidation has slowed this year, and the structural fiscal deficit is set to widen. Medium-term fiscal challenges include making revenue collection more efficient and reforming the entitlement system to fund the planned gradual reversal of some spending cuts.

The 2016 budget and the year-end expiry of some revenue-raising items may indicate the political scope for further fiscal measures in the face of some consolidation fatigue. The medium-term fiscal outlook depends on continued economic recovery as well as the government's fiscal policy measures.

The advent of a minority government increases the risk that fiscal consolidation and structural reforms stall due to political disagreement. A minority government requires opposition support in confidence votes and most of Portugal's previous minority governments were unable to complete their terms. A weaker government, conscious of the possibility of early elections, may be cautious on implementing difficult or unpopular reforms that would give investment and growth an additional boost (Portugal's 2011-2014 EU/IMF programme saw numerous measures to improve productivity and competitiveness).

We affirmed Portugal's 'BB+'/Positive sovereign rating in September, reflecting the economy's gradual rebalancing.