Download Portugal: The country`s modest recovery becomes robust

ECONOMIC AND FINANCIAL RESEARCH
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Portugal: The country’s modest recovery becomes robust
March 2017
José Miguel Cerdeira
+351 21 310 10 82
[email protected]
Reform momentum is weaker but the economy provides several reasons for optimism
GDP was stronger in the end of 2016, and some of that acceleration might spread to 2017. Economic activity was
still below 2008 levels (mostly domestic demand, in particular investment), but exports are already well above
those levels. Investment might be recovering again after 3 quarters of year-on-year drops.
On the external front, an improvement in the trade balance of goods and services (boosted by oil prices and
tourism) brought extra resilience to the current account balance. Although oil prices won’t help this year, a better
economic situation in Angola probably will.
In the labour market, unemployment keeps dropping while employment increases, and at a faster rate than what
would be expected from the performance of the GDP. It is possible that the average rate for 2017 drops to a
single digit.
Government accounts showed further consolidation in 2016, even if there are doubts regarding the sustainability
of some expenditure-curbing measures. In 2017, a stronger economy will give a hand, together with some
extraordinary measures, and the budget deficit will certainly decrease once more.
Despite another increase in 2016 – again due to funds needed to deal with a banking problem -, public debt will
most likely decrease in 2017 as a percentage of the GDP. Although the financing costs will increase (and the ECB
will play a part here), these still do not pose a problem for the Government’s financing strategy.
1. GDP
Growth has picked up pace in the final quarter of 2016, growing 2.0% yoy – The second estimate for the
GDP in Q4 2016 entailed a 0.1 p.p. upward revision of year-on-year growth towards 2.0%, as it expressed a
stronger-than-expected dynamic in various components of aggregate demand. In addition, this economic
vigor will likely spread towards 2017, even if only by a statistical effect: the carry-over effect from 2016 onto
2017 is positive in 0.94 p.p., according to our own calculations, meaning that null quarterly growth in the 4
quarters of 2017 would still translate into an average expansion of 0.94% for this year. The nominal increase of
the GDP was 3.1%.
However, last year’s economic activity was still about 4% below what was recorded in 2008, mostly
due to a contraction of domestic demand (10.5% lower than in 2008); in particular, investment is 34% less than
before the international financial crisis. On the other hand, exports played the leading role in this recovery,
The real GDP is still 4% below its 2008 level
(EUR billio n)
T hous ands

The banking sector is slowly getting healthier: while the NPL problem will probably be dealt with individually by
each bank (which means a slower solution to the problem), various outstanding issues pending in 2016 were
already settled or are on the verge of being solved in the near term (including the CGD capital raise and the Novo
Banco sale).
190.0
Exports are now 40% larger than in 2007
(index in vo lume, 100 = 2007)
1 8 1 .5
150
180.0
135
170.0
120
160.0
105
150.0
90
75
140.0
60
130.0
45
120.0
30
Jun-07
110.0
100.0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Sourc es: I N E, BPI c alc.
Sep-09
Dec-11
Investm ent
Private consumption
Public spending
Mar-14
Jun-16
GCFC construction
Exports
Sourc es: I N E, BPI c alc.
Portugal: The country’s modest recovery becomes robust March 2017
now 34.6% higher than in 2008. This illustrates the point that the Portuguese economy is achieving an
increasing level of openness, while also showing the transition of production from the non-tradable sector towards
tradable goods and services. For the whole year, exports increased 4.4% in volume, keeping with an already
consistent and robust performance observed over the course of various years. Private consumption posted an
expansion of 2.3% on the year, accelerating in the last quarter, but it is worth to notice that it has
only recently recorded levels similar to those before
Economic outlook for 2017
the financial crisis.
A 2.6% yoy increase in gross capital formation
allowed for a fall of only 0.9% in total investment,
less than what was expected lately. Moreover, when
excluding the buildup of inventories, investment
decreased a mere 0.3% in 2016, as a 3.9% yoy surge in
gross fixed capital formation interrupted a string of 3
quarters with year-on-year decreases.
In 2017, we expect growth to mildly accelerate to
1.5%, mostly on the back of a recovery of
investment. Still, the country’s performance may very
possibly surpass this target, and our prediction may be
subject to an upward review.
Growth rate
GDP
1.5
Private consumption
2.0
Public consumtpion
0.6
Investment
3.9
Exports
4.0
Imports
5.0
C ontribution in percentage points
Domestic demand
2.0
Net external demand
-0.5
2. Current and capital account
2016 was the 4th consecutive year in which the current account balance posted a surplus (and the 5th
year with a positive balance in the current & capital account), confirming so far the robustness of the positive
transformation occurred in the Portuguese external accounts. The current account balance was 0.8% of the GDP
(0.1% in 2015), while the current and capital account posted a surplus of 1.7% (1.2% in the previous year).
This was mainly the product of an improvement in the trade balance of goods and services, whose
surplus expanded to EUR 4.1 billion, EUR 0.9 billion larger than in 2015. The trade balance of goods saw its deficit
decrease 2.1%, while the surplus in the trade of services improved 5.7%.
Last year, oil prices were an important part of this improvement (the trade balance of energy goods
contributed with 35.5 p.p. out of a 28.4 p.p. total gain), a scenario which will be at least partly reversed in
2017; notwithstanding, other factors might compensate for this – the recovery (or at least stabilization) of exports
to Angola, the further strengthening of touristic activity, and a more moderate growth of private consumption of
imported goods, namely cars -, thus ensuring the endurance of an equilibrium in the external accounts.
Current account balance
Trade balance of goods and services
(EUR million, % of GDP)
Secondary Income
Primary Income
Services
Goods
Curr. Acc. Balance, %GDP (RHS)
2016
2015
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
- 1 2 .1%
0.04
0 .8 %
0.02
0
0 .1 %
-0.02
-0.04
-0.06
-0.08
-0.1
-0.12
-0.14
2014
1 .6 %
2003
2002
2001
2000
20,000
15,000
10,000
5,000
0
-5,000
-10,000
-15,000
-20,000
-25,000
-30,000 - 1 0 .8%
-35,000
Source: Bank of Portugal
2015
2016
yoy
Contribution
for growth
(p.p.)
(EUR million)
Goods and services 3,165 4,065 28.4%
Goods
-9,270 -9,076
2.1%
Excl. energy
-5,022 -5,952 -18.5%
Energy
-4,248 -3,124 26.5%
Services
Excl. Tourism
Tourism
12,435 13,141
4,734 4,501
7,702 8,639
5.7%
-4.9%
12.2%
6.1
-29.4
35.5
22.3
-7.3
29.6
Source: Bank of Portugal, BPI calc.
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Portugal: The country’s modest recovery becomes robust March 2017
3. Labour market
The last quarter of the year showed a strong
performance in the labour market as the
unemployment rate stood at the same level as in
Q3 (10.5%): normal seasonality in the Portuguese
economy would hint at an increase in the rate, something
which has occurred in 8 out of the 10 previous years. In
comparison with the same quarter of 2015, the
unemployment rate decreased by 1.7 percentage points
(p.p.), which translates into -90.7k jobless people.
Employment rose 1.8% yoy, only slightly slower than in
the previous quarter (+1.9%), accounting for an extra
82.1k jobs. The unemployment rate stood at 11.1%
in 2016, the lowest level since 10.8% in 2010.
Unemployment
(tho usands)
200
1000
900
800
700
600
500
400
300
200
100
0
Dec-16
150
100
50
0
-50
-100
-150
-200

Jun-09
Dec-10
Jun-12
Dec-13
Jun-15
Thus, the current labour market dynamics is a solid
indicator of a continued economic recovery, and while we
Annual change
Unemployed (RHS)
still forecast an unemployment rate of 10.1% for 2017,
Source: INE
it is certainly possible that this year will see the
rate coming down to single digits: it will certainly drop below 10% in the second half of the year.
4. Public finance
According to the Portuguese Parliament’s Technical Budget Unit (UTAO), the budget deficit for 2016
will be between 2.1% and 2.5%, translating to a central value estimate of 2.3% of the GDP. As
previously mentioned by us and other entities, this was partly the result of an extra curb in spending (namely in
public investment and the purchase of goods and services) to compensate for revenues below what was expected.
Without one-off measures, the same figure would rise to a value between 2.4% and 2.8% (central value of 2.6%).
This difference (of about EUR 570 million) derives mostly from 2 measures taking effect in December
2016: revenue from an extraordinary tax debt repayment scheme, worth 0.2% of the GDP; the
repayment by the EFSF of the prepaid margin retained at the disbursement of the troika loan, worth
0.15% of the GDP.
2016 budget deficit - estimates vs target
Fiscal consolidation
% of GDP
% of GDP
With one-offs
Without one-offs
2015
0.0
1.0
-0.5
0.0
-1.0
-1.0
-1.5
-2.0
-3.0
-2.0
-2.5
-3.0
-4.0
E uropean c ommission target: 2 .5 %
2016
E D P limit: 3 .0%
-2.3
-4.4
-5.0
E D P limit: 3 .0 %
Lower
Upper
Source: Min.Fin. UTAO
Without one-offs
One-offs
Total
Source: Min.Fin. UTAO
These numbers reflect an improvement of 2.1 percentage points (p.p.) of the GDP in comparison with
the 4.4% deficit posted in 2015. However, when accounting for one-off measures in both years (besides the
already discussed effects in 2016, in 2015 the deficit was worsened in 1.4 p.p. due to these factors, in particular
due to the Banif resolution, worth EUR 2460 million in expenditure), the improvement was more modest, around
0.4 p.p.. The present estimates allow us to state that the budget deficit will indeed stay at or below
the 2.5% limit allowed by the EC, and clearly below 3%.
In 2017, while a 1.6% deficit (the Government goal) might seem overly optimistic, a reasonable
reduction is expected, in part also due to extraordinary measures but also due to a more dynamic
economy. If the Government predictions for 2017 are considered, there will be a net improvement of 0.8 p.p.
Still, these predictions expected a 2.4% budget balance without the extraordinary tax repayment scheme,
meaning that the 2017 budget would bring about a slightly higher deficit, around 1.8%. Overall, all factors
considered, it should be possible to reach a deficit for 2017 well below the expected level for 2016
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Portugal: The country’s modest recovery becomes robust March 2017
(excluding any impact from the CGD capital raise, financed by the State in EUR 2.7 billion), even if
larger than what the Executive expects.
5. Debt and financing
Public debt according to Maastricht criteria stood at 130.5% of the GDP in the end of 2016, 1.5 p.p.
above what was observed in December 2015, an increase of EUR 9.5 billion. Nevertheless, part of this rise results
from a shoring up of State deposits, by about EUR 4 billion, now back to amounts close to those recorded in
during the troika period: EUR 17.2 billion. In particular, the EUR 2.7 billion to be spent by the State in CGD’s
capital raise this year were already financed in 2016, influencing these amounts. Thus, public debt net of State
deposits saw a slight decline when accounted as a percentage of the GDP: 121.0%, 0.6 p.p. lower
than in 2015. Gross financing needs were also lower in 2016, of about EUR 42.8 billion (52.2 billion 2015), and
are expected to decrease again in 2017, to EUR 36.2 billion.
Aside from the broad effort of fiscal consolidation, the Portuguese debt dynamics are also benefitting
from lower financing costs. The average cost of debt issuance in 2016 was 2.5%, only mildly above the cost
in 2015 (2.4%). What is more, this slightly higher cost was still below the average cost of debt outstanding,
allowing it to drop from 3.4% in 2015 to 3.2% last year. In 2017, despite a foreseen rise in the average cost of
issued debt, there should be no reason to worry at the current yields, as the average interest rate paid by the
Portuguese State is well-anchored below 4%.Even assuming a hypothetical cost of 5.5% in future debt issued
(annual average), it would take until 2019 for the average interest rate paid to reach above 4%. The ECB is
Public debt according to Maastricth criteria
State direct debt financing cost
(% of GDP)
(%)
1 3 0 .5
140
130
5 .7
6
5.5
120
1 2 1 .2
110
100
5
4.5
90
4 .2
80
4 .1
3.5
70
3
Gross
Jun-16
Dec-16
Jun-15
Dec-15
Jun-14
Dec-14
Jun-13
Dec-13
Jun-12
Dec-12
Jun-11
Dec-11
Jun-10
Dec-10
Jun-09
Dec-09
Jun-08
Dec-08
Dec-07
60
Net of deposits
Source: Bank of Portugal
4
4 .2
3 .6
4
3 .9
3 .5
3 .4
3 .2
3 .6
2 .4
2 .5
2015
2016
2.5
2
2010
2011
Stock
2012
2013
2014
Issued debt
Source: IGCP
likely to play a part in this rise in yields, due to a decrease in purchases of Portuguese debt: according
to our calculations, there are EUR 6.3 billion of eligible Portuguese debt for the ECB to acquire, of which EUR 1.3
billion have already been purchased in the first two months of the year. This is a steep decrease from the EUR
13.4 billion bought in 2016, entailing a monthly pace of about EUR 0.5 billion (to ensure that the ECB does not
run out of eligible debt to buy until the end of the year).
6. Banking sector
In the banking sector, solutions are slowly emerging to solve various existing problems. On the one
side, the more vast and global problem of non-performing loans might not be approached through a sector-wide
plan. This is because the extent of the problem differs considerably among the Portuguese banks, and also due
to the fact that the shareholders of some banks do not feel that it is necessary (or in their best interest) to support
a global solution where the costs are shared by all.

However, individual problems and doubts on the situations of several banks are being sorted out
progressively: BPI’s shareholder structure is now stable with Caixabank as its main owner, after a long process
that took almost 2 years; Millennium BCP concluded its capital increase, also adding a new stock-holder, the
Chinese Fosun, also reinforcing impairments and proceeding to a restructuring; CGD’s capital increase is well
underway, with expectations that the first EUR 500 million of private subordinated debt are issued during this
month; Novo Banco is still the largest problem on the table, but even its problems are on the course of being
solved – the Bank of Portugal is now negotiating solely with the American Lone Star fund, and talks are expected
also to end within the month.
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Portugal: The country’s modest recovery becomes robust March 2017
This document is only for private circulation and only partial
reproduction is allowed, subject to mentioning the source. This
research is based on information obtained from sources which
we believe to be reliable, but is not guaranteed as to accuracy
or completeness. At any time BPI or any affiliated companies
(or employees) may have a position, subject to change, in these
markets. Unless otherwise stated, all views (including estimates
or forecasts) herein contained are solely expression of BPI
Economic and Financial Research and subject to change without
notice.
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Largo Jean Monnet, 1 – 9º 1269-067 LISBOA
Telef.: (351) 21 724 17 00 Telefax: (351) 21 353 56 94
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