Portugal Economic Outlook

The economy appears to be on track to record the best yearly performance since before the crisis.

The economic activity indicator, a proxy for GDP, showed another robust increase for fixed investment in July, as well as the strongest growth in the construction sector so far this year.

Construction has been propelled by demand from a vibrant tourism industry, which posted strong revenues throughout the summer. On 15 September, S&P Global Ratings upgraded the country’s credit rating from junk to investment grade, based on improvements in the economy and public finances.

 Portugal’s deficit dropped below 3% of GDP earlier this year and is no longer considered excessive by the European Commission.

The credit rating upgrade, an important turning point for the economy, should attract investment, which would improve financing conditions and lower borrowing costs.

 Since the upgrade, 10-year bond yields have been trading at their lowest level since January 2016.

Standard & Poor’s takes the Portuguese debt out of the junk status

The rating agency Standard & Poor’s was the first out of the three largest rating agencies to change their outlook on the Portuguese debt from a junk level (BB+) to BBB-, meaning they upgraded the Portuguese debt status to investment grade.

 

Even after Fitch and Moody’s upgraded the outlook of the Portuguese debt (although continuing to consider it “junk”), it was not expected that Standard & Poor’s would choose to change their opinion on the sovereign debt this soon. Six months ago, the agency had decided not to change the outlook given to the Portuguese debt, meaning they continued to grade the country’s debt at BB+ with a stable outlook. Therefore, five years after first grading the Portuguese debt as junk, this increase to BBB- with a stable outlook was unexpected.

 

This means that Standard & Poor’s now joins DBRS as the only other rating agency acknowledged by the European Commission which considers the Portuguese debt at the investment grade status.

S&P’s report states: “The stable outlook balances our expectation of solid economic growth and further budgetary consolidation, as well as receding external financing risks over the next two years, against the risks of a weakening external growth environment and vulnerabilities emanating from high, albeit falling, private-and public-sector debt”.

The Portuguese Finance ministry has already reacted to S&P’s decision stating that “the Government never doubted” that their effort would be acknowledged by rating agencies.
 In a press release sent to newsrooms, the Finance ministry considers that S&P’s decision “is based on the acknowledgement of a recent structural change in the financial sector, in the comprehensive economic growth, supported by a strong investment and exports dynamic, and in the control of expense and public debt”.

IMF Executive Board Concludes 2017 Article IV Consultation with Portugal


On September 13, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation  with Portugal.
Portugal has made notable progress over the past year in reducing uncertainty over near-term risks. The exit from the Excessive Deficit Procedure this year, together with a marked improvement in stability and confidence in the banking system, have helped bolster investor confidence and contributed to a sharp narrowing in sovereign debt spreads since mid-March.
The near-term growth outlook has also improved considerably as the ongoing recovery continues to gain momentum, with a pickup in exports and investment alongside the continued growth in private consumption. Tourism remains a key driver of growth, but has also been accompanied by a broad-based pickup in exports of goods in recent quarters, while domestic confidence indicators have strengthened significantly and employment continues to rise.

Executive Board Assessment 
Executive Directors agreed with the thrust of the staff appraisal. They welcomed the authorities’ progress in reducing uncertainty over near term risks. Strong efforts to contain spending and meet last year’s headline fiscal deficit target allowed Portugal to exit the EU Excessive Deficit Procedure in 2017, while stability and confidence in the banking system have improved following successful efforts to raise capital. The recovery has also gained momentum, with a pickup in exports and investment alongside continued growth in private consumption, as well as a rise in employment. Nonetheless, the elevated public debt in the context of a modest medium term growth outlook leaves Portugal vulnerable to shocks. Directors encouraged the authorities to take advantage of the current benign macroeconomic conditions to further improve financial sector resilience, ensure durable fiscal consolidation, and raise potential growth.
Directors welcomed the improvement in financial sector stability after recent capital augmentations. However, they cautioned that the large stock of NPLs could limit banks’ ability to finance productive investment. They called for comprehensive efforts to strengthen bank balance sheets by removing impediments to NPL resolution and boosting internal capital generation to maintain appropriate buffers, including in view of upcoming regulatory hurdles.
Directors commended the authorities’ strong efforts to reduce the headline fiscal deficit in 2016, and noted that this year’s headline target also appears well within reach. They emphasized the importance of keeping public debt on a firmly downward trajectory over the medium term, and encouraged the authorities to take advantage of the favorable cyclical conditions to make progress on more ambitious structural fiscal consolidation. They recommended focusing on durable expenditure reform to improve the efficiency of public spending while protecting public investment.
Directors emphasized that raising Portugal’s productivity and growth potential remains central to reducing the vulnerabilities that weigh on the medium term outlook. Addressing impediments to higher investment is key in this regard. Directors highlighted the need to focus on issues that affect investors’ perceptions of the business environment, including reducing rigidities in the labor market, improving the efficiency of judicial processes, and enhancing the predictability of the regulatory environment. In this context, they welcomed the focus of the authorities’ National Reform Program on developing human capital and fostering innovation.

Portugal: Selected Economic Indicators
(Year-on-year percent change, unless otherwise indicated)
				Projections
			2016	2017	2018
Real GDP			1.4	2.5	2.0
Private consumption			2.3	2.2	1.8
Public consumption			0.5	0.6	0.5
Gross fixed capital formation			0.1	6.9	5.7
Exports			4.4	7.6	5.2
Imports			4.5	7.3	5.1
Contribution to growth (Percentage points)
Total domestic demand			1.5	2.6	2.2
Foreign balance			-0.1	-0.1	-0.1
Resource utilization
Employment			1.2	1.6	0.9
Unemployment rate (Percent)			11.1	9.7	9.0
Prices
GDP deflator			1.6	2.2	1.7
Consumer prices (Harmonized index)			0.6	1.6	2.0
Money and credit (End of period, percent change)
Private sector credit			-3.7	-1.5	0.1
Broad money			-0.4	4.3	3.3
Fiscal indicators (Percent of GDP)
General government balance			-2.0	-1.5	-1.4
Primary government balance			2.2	2.6	2.7
Structural primary balance (Percent of potential GDP)			3.0	2.7	2.5
General government debt			130.3	125.7	122.5
Current account balance (Percent of GDP)			0.8	0.6	0.5
Nominal GDP (Billions of euros)			184.9	193.8	201.1
Sources: Bank of Portugal; Ministry of Finance; National Statistics Office (INE); Eurostat; and IMF staff projections.

	VARIAÇÕES HOMÓLOGAS
	HOMOLOGOUS CHANGE
Empréstimos de Outras Instituições Financeiras Monetárias a Particulares
Loans of Other Monetary Financial Institutions to Private Individuals
					Milhões de Euros
					Millions of Euros
Crédito		Concedido		Cobrança Duvidosa
Banking Credit	Installment Credit			Uncertain Collection
Habitação	JUN.16	96.426			2.629
Mortgage	JUN.17	93.767			2.101	-20,08%
Consumo	JUN.16	11.657			967
Consumption	JUN.17	12.718	9,10%		702	-27,40%
Outros Fins	JUN.16	9.278			1.527
Another Finality	JUN.17	8.540	-7,95%		2.028	32,81%
Total	JUN.16	117.361			5.123
Total	JUN.17	115.026	-1,99%		4.831	-5,70%
Fonte: Boletim Estatístico do Banco de Portugal
Source: Portugal Central Bank

	VARIAÇÕES HOMÓLOGAS
	HOMOLOGOUS CHANGE
Empréstimos de Outras Instituições Financeiras Monetárias a Empresas Não Financeiras
Loans of Other Monetary Financial Institutions to Non-Financial Corporations
					Milhões de Euros
					Millions of Euros
	Crédito Concedido				Cobrança Duvidosa
Installment Credit				Uncertain Collection
	JUN.16	80.727			12.879
	JUN.17	75.096	-6,98%		10.618	-17,56%
Fonte: Boletim Estatístico do Banco de Portugal
Source: Portugal Central Bank

"Opinion Maker" at Portuguese Television. Banking, Finances, Strategy and Analisys Risk Management.

Portugal Economic Outlook

The economy has a spring in its step, with both consumer confidence and the economic climate indicator rising in June to their highest levels in well over a decade.

In addition, the unemployment rate dropped in May, and is now almost half that reached during the depths of the crisis, while industrial production rose in the same month.

This comes after the quickest growth in seven years in Q1 due to a dynamic export sector, booming tourism and greater domestic investment.

After the EU recommended that Portugal leave the Excessive Deficit Procedure earlier this year, the strong economic performance should help the government come close to meeting its 2017 budget deficit target, which would help trim the onerous public debt burden.

In this regard, the significant decline in bond yields this year, if lasting, should provide a helping hand.