Portugal: Risk Assessment
Country Rating1
Rating: B
Business Climate Rating1
Rating: A2
Risk Assessment2
A recession which is expected to worsen as a result of austerity and slowing European demand
The economy plunged back into recession in 2011 because of the fall in domestic demand, itself largely caused by the hardening of fiscal austerity measures. The contraction in imports and the continued growth of exports, however, made it possible to limit the decline in GDP.
The recession is expected to deepen in 2012. Consumption is expected to contract further due to the higher tax burden and further spending cuts, in a context already marked by high household debt and high unemployment (14% of the labour force). Flagging demand, sluggish credit, low profitability and companies' poor cash flow raise fears of a further fall in investment. Moreover, demand from the European Union (75% of exports) is expected to shrink appreciably, which will adversely affect sales abroad. Nevertheless, with imports continuing to decline, the contribution of foreign trade to growth, though falling, will remain positive. The current account deficit is thus likely to have declined sharply in 2012.
Large imbalances which have forced the country to seek international aid
During the decade before the crisis, the loss of competitiveness and the allocation of resources at the expense of the tradable sector led to a growing imbalance in the external accounts. Public debt increased appreciably as a result of an expansionary fiscal policy. Low interest rates and easy access to finance led to a sharp rise in private sector debt (260% of GDP). Despite the rapid introduction of the initial fiscal consolidation measures and the absence of a property bubble, such as to inflict heavy losses on the banking sector, pressure on the debt market escalated sharply and Portuguese bond yields reached record levels. After Greece and Ireland in 2010, Portugal was forced to resort to aid from the EU and the IMF in May 2011 (€78 billion). The country is sticking to the objectives of its rescue plan but further aid, even a restructuring of its debt, cannot be totally ruled out. The lack of growth feeds concerns about the viability of the public debt and the lack of investor confidence, if it continues, could compromise the country's return to the bond market within the time foreseen, before an important repayment date (September 2013).
Meanwhile, there is need for improvement on many fronts, among them the implementation of reforms aimed at getting rid of rigidities and bottlenecks responsible for sluggish growth. What is needed in particular is to counter rigidities in the job market (reforms already ongoing), excessive red tape, insufficient competition and a lack of skilled labour, which explain the low productivity. Moreover, after the outbreak of the sovereign debt crisis, the banking sector saw its domestic sources of finance dry up and it became very dependent on cash injections from the ECB. The sector is also greatly exposed to sovereign debt, mainly Portuguese, having, for this reason, significant capital needs.
Businesses having a tough time
Payment failures recorded by Coface shot up in 2011. At the same time, company insolvencies increased sharply. The sectors most affected were those of manufacturing, construction and services including wholesale and retail trade. Turnover growth in the manufacturing industry gradually declined and the contribution of the domestic segment even became negative. The best performing export sectors were the subsectors of base metals, chemicals, automotives, foodstuffs and textiles. Mining exports grew. Construction and services declined with the exception of hotels, air transport and logistics, whose growth was spurred by foreign demand.
Strengths
- Good logistics and communications infrastructure
- Attractive tourist destination
- Beginning of sectoral and geographic diversification
- Absence of a property bubble
Weaknesses
- Specialisation in low value-added sectors, highly exposed to international competition
- Productivity and competitiveness eroded
- Heavily dependent on European economic conditions
- Weak government finances
- High level of public and private debt