Barclays turns positive on Portugal’s brightening recovery
The former bailout economy, which underwent a €78bn rescue in 2011, is enjoying its best period of economic growth in a decade and has seen a sustained fall in its government borrowing costs this year.
In a research note titled “Portugal’s got talent”, economists at Barclays note a number of reasons for optimism over the country’s medium-term prospects.
“The socialist minority government has proven resilient… The banking sector has been recapitalised… Fiscal performance in 2016 has beaten the European Commission’s fiscal target” they write.
Portugal’s accelerating recovery comes amid a broader uptick in growth and falling unemployment in the eurozone. But the country’s debt to GDP ratio – the second highest in the bloc at 130 per cent – and a perceived vulnerability to cutbacks in central bank stimulus have been red flags for its longer-term fortunes.
Barclays however is more sanguine on Portugal’s ability to prosper without ECB bond-buying. They calculate that any move to taper QE would be “less harmful for Portugal than for other periphery countries”.
“If the ECB cuts [its purchase programme] to €35bn-€40bn per month in the first half of 2018, as we expect, the total monthly amount of PGB purchases will probably not fall much, unlike for Italy or Spain”, said Apolline Menut, economist at the bank.
Bond investors have also buying the growth story, driving Portugal’s 10-year bond yields to the lowest since last August. Having peaked at 4.3 per cent in February, the benchmark yield is back below 3 per cent for the first time in nearly a year this month (yields fall when a bond’s price rises).
Economic growth is on the up. The economy has been accelerating at an average year on year rate of 2.2 per cent over the last three quarters, more than double that over the same period the previous year. Quarterly expansion hit 1 per cent at the start of the year – the best rate since before the financial crisis hit in 2007 (see chart above).
Barclays has now hiked its 2017 GDP growth forecast to 2.9 per cent from 1.4 per cent last year.
“Domestic demand, and in particular private consumption, has remained the key growth driver, but the recent pickup has also been fuelled by a welcome rebound in investment and stronger export growth”, adds Ms Menut.
The bank also singles out the country’s Socialist-led minority government for praise, calling its performance on reforms and fiscal restraint “one of the biggest surprises over the past year”.
Prime minister Antonio Costa has managed to bring down the budget deficit to successfully steer Lisbon out of the EU’s budgetary sanctions procedure.
At 2.1 per cent of GDP, the deficit is at its lowest in more than 40 years and forecast to fall further, boosting Mr Costa’s poll ratings after a difficult start to life in government. A measure of the country’s fiscal balance hit 2 per cent last year, exceeding a Brussels target of 0.5 per cent, on the back of reduced spending.
The government is now fighting to reclaim its investment grade borrower status among the world’s major rating agencies as the final seal of approval for its turnaround from crisis.
But Barclays estimate any ratings hikes from Moody’s, S&P and Fitch could be as much as two years away. They also caution that the banking sector and its ratio of bad loans are still a “weak spot” for the economy.