Portugal: Risk Assessment
Country Risk Rating
Business Climate Rating
- High-quality infrastructures
- Tourist destination
- Beginning of sectoral and geographic diversification of exports, research and innovation capacities
- Lower labor costs and reforms implemented
- Limited size of its manufacturing industry, specialization in low and medium added value areas (fuels, food products, chemical products, vehicles, clothing, and metals)
- High levels of public and private debt
- Inflexibility of labor market and lack of internal competition, low levels of investment
- Decline in the quality of bank portfolios
- Youth unemployment rate at 25%
- Slow-functioning legal system
Slight Slowing of Growth in 2018
The positive eurozone economic situation continues to help boost the Portuguese economy, which benefited from increased external demand and a recovery in investment in 2017. Companies have replaced capital equipment in order to satisfy the growth in demand, while the production capacity utilization rate returned to close to that of 2008. The growth in exports was confirmed during the year and there was an increase in the market share captured by equipment exports. Exports of services were in turn boosted by a rise in the numbers of tourists. These two growth drivers have made up for the reduced contribution to growth from household consumption which, whilst positive, has tended to slow since 2016.
Activity will likely gradually slow during 2018. The increase in employment and the reduction in taxes on middle-class households will help sustain consumption, while investments by companies will be restrained by higher corporation taxes. Public investment is, however, expected to take the strain: the 2018 budget forecasts a +0.4 GDP point increase in this. Despite the slowdown expected in the United Kingdom and Spain, exports should remain strong, – notably automotive exports, which will be boosted by the increase in production capacity at Autoeuropa. The company should reach a production capacity of 200,000 units in 2018 (85,000 in 2016). Unemployment should continue downwards to reach 8.6% in 2018.
The uptick in growth in 2017 was positive in terms of company insolvencies, which - despite recording a significant reduction – remain at pre-crisis levels. The deleveraging process for the private sector is continuing, but the level of company indebtedness is no lower (137% of GDP in September). The banking sector is also extremely fragile. Low profitability, as a result of the high level of bad debt, will continue to slow the internal recapitalization of the banks. This will restrict their abilities to lend to viable companies. While the credit situation for companies remains weak, with companies preferring self-financing, the situation for households is improving.
Continuation of Budgetary Consolidation
The improved economic situation, the reduction in the cost of servicing the debt, and reduced public investments made it possible to reduce the public deficit to 1.4% in 2017, 0.6 percentage points below that in 2016. With the public accounts under control, the country was able to officially end the excessive debt procedure initiated by the European Union in 2009. In addition, the favorable market borrowing conditions and investment spending below the level forecast in the budget enable the government to make an early reimbursement of an installment of USD3bn to the IMF. In 2018, budget policy is expected to be more expansionary which earned the Portuguese government a rebuke from Brussels with the presentation of the budget. The government plans to cut taxes for middle-income households and raise taxes on companies. The differential will also be made up by means of new taxes on consumption (taxes on cured products). Capital expenditure is expected to rise whilst current spending should contract. The public deficit will stabilize whilst remaining above the 2% mark. Although the primary balance is expected to remain in surplus, the reduced cost of debt made possible thanks to low interest rates (2.8% in 2018) should help reduce the cost of the debt servicing.
As a consequence of the upgrading of the country by Standard and Poor’s (S&P) from “BB+” to “BBB-”, Portugal was taken out of the “junk” investment category in which it had been placed back in January 2012 and should see a reduction in the yields of government bonds. The level of the public debt, however, remains high but is on a downward trajectory that is expected to accelerate in 2018 and reach 124.1% (6 pp less than in 2016). In addition, whilst under control, the scale of the debt gives rise to concerns about its viability which depends in part on its eligibility for the European Central Bank’s purchase programme. The announcements from the Central Bank seem to be indicating a gradual reduction in the volume of asset purchases. In 2018, this should drop from EUR 60 bn to EUR 30 bn.
The current account balance will remain at equilibrium, underpinned by the vitality of manufactured exports and tourism which will offset the increase in energy and capital goods imports.
The Leftist Coalition Holds Firm
The municipal elections of 2017 confirmed the strength of the Portuguese left following a difficult year for the government of António Costa. The leftist coalition which includes the Socialist Party, the Communist Party, and the Green Party, was shaken by a number of scandals involving several of the government’s Secretaries of State. The Galpgate scandal named after the oil company that had invited three Secretaries of State to Paris to watch European Championship football matches brought about a ministerial reshuffle. At the same time, the tragedy of the Pedrogão fire that resulted in the death of 64 people and more than 250 injured, also damaged the government’s popularity. The Prime Minister has however so far succeeded in managing people’s expectations by ending the austerity programme, whilst continuing to comply with the commitments made to the European Commission, although his politics are pressing for a negotiated debt reduction, which could make the job of the executive much more complicated.