Portugal: Risk Assessment
Country Risk Rating
Business Climate Rating
- High-quality infrastructure
- Tourist destination
- Beginning of sector and geographical diversification of exports, research and innovation capacities
- Lower labor costs; reform efforts
- Small manufacturing industry; specializing in low and medium value added sectors (fuels, food products, chemicals, vehicles, clothing, metals, footwear)
- High levels of public and private debt
- Inflexible labor market; lack of domestic competition; insufficient investment
- Youth unemployment at 25%
- Slow-functioning legal system
- Poor quality of bank portfolios; high bad debt rates
Further slowdown in 2019
Portugal’s economic expansion slowed in 2018, keeping step with the other eurozone economies. Although growth in household consumption moderated somewhat, domestic demand remained on a positive trend, supported by increased investment. External demand made a smaller positive contribution than in 2017. The slowdown in activity is expected to continue in 2019. Household consumption is set to stagnate as higher inflation and slower wage growth limit the increase in disposable income. At the same time, public spending should continue to be constrained by fiscal consolidation. Investment is poised to drive growth once again, reflecting the resumption of several infrastructure projects financed by European funds, as well as strong demand for housing, which will support the construction sector. Meanwhile, strong demand on the real estate market, driven in particular by the rebound in tourism, should continue to push house prices higher. Conversely, despite still-accommodative financing conditions, business investment is expected to falter on cooler external demand. Although deleveraging continues, corporate credit has increased for the first time since 2010, and company debt levels remain high. Portugal’s bad debt ratio decreased from 16% in 2017 to 12.4% in the second quarter of 2018, but remains well above the European average (3.6%). Although Portuguese banks are better capitalized and their net earnings have improved, the banking sector remains fragile. Following a loss of €1.4 billion in 2017, which took it below the regulatory capital requirement, Novo Banco, a structure created in 2014 following the bankruptcy of Banco Espírito Santo (BES), required a €792 million capital injection from the country’s resolution fund in 2018. The State is expected to contribute a further €400 million in 2019.
Further fiscal consolidation
Despite the cost of recapitalizing Novo Banco, estimated at 0.4% of GDP in 2018, increased budgetary revenues, lower debt service and reduced public investment mean that the government deficit was reduced by more than targeted in the 2018 budget. To build on the fiscal consolidation efforts, the 2019 budget presented to the European Commission in October 2018 aims to achieve balanced public accounts, with a public balance of -0.2%. This target would also allow the authorities to meet the commitment to reduce the primary deficit by 0.4% made in the Stability and Growth Pact. However, according to the European Commission’s estimates, the government deficit may be slightly higher than expected. On the one hand, the slight economic slowdown expected in 2019 is expected to constrain the growth of budgetary revenues. On the other, the impact of measures such as wage increases (€50 million) and the end of the freeze on career progressions (€152 million) in the public sector is expected to be greater than expected. Finally, the State’s contribution to recapitalizing Novo Banco will probably be larger than forecast. Although significantly lower than in previous years, a deficit of 0.6%, which would result in a structural deficit of 0.9%, would still be in breach of the commitments made under the Stability Pact, knocking the country slightly off the path towards the medium-term budgetary objectives. However, the Portuguese authorities have in the past kept to the budgetary trajectory, despite disagreements with the Commission. Despite fears in October 2018 of a possible contagion effect from Italian sovereign rates to other countries on the eurozone periphery, Portugal seems to have been spared. In 2019, sovereign rates are expected to remain low and will continue to support a decline in debt service to 3.4% of GDP. Public debt still remains high, but is on a downward path that is expected to accelerate.
The slowdown in exports in 2018 led to the emergence of a current account deficit. While export growth is expected to remain weak in an unfavorable international environment, robust performances in the tourism sector should help to narrow the deficit slightly in 2019.
Parliamentary elections in 2019
Since 2015, Portugal has been led by a coalition between the Socialist Party (PS), of which the current Prime Minister, Antonio Costa, is a member, and three other parties: the Left Bloc (BE), the Portuguese Communist Party (PCP) and the Greens (ENP). The coalition is in a unique position in Europe in that it has so far managed to lift its austerity policies while upholding commitments made to the European Commission. Despite several scandals involving members of the government, including mismanagement of the Monchiques fires and the theft of rockets from the Portuguese army, the coalition continues to enjoy strong support. With the center-right losing ground, the parliamentary elections of October 2019 will probably return the coalition to power.