Why don’t markets and Portuguese PM António Costa see eye to eye?

  • ECO News
  • 6 February 2017

What does the weather forecast tell us about the Portuguese economy? The government is anticipating sunny days, yet markets worry there are still clouds on the horizon.

costa-jardineiro

The Portuguese prime minister António Costa believes the sun shines in Portugal: the economy accelerates, the deficit shrinks and unemployment decreases. Yet, public debt investors still see Portugal as wintry: they say rain is here to stay and since the 2015 Summer have been requesting higher interests. Someone is looking at the wrong weather forecast.

By the end of 2016, GDP should be over 1.2%, which was the government’s last estimate. The deficit should remain under the 2.3%, which means it is highly likely the February goal of 2.2% will be met — clearly surpassing the 2.5% threshold established by the European Commission. The labor market continues to improve: the unemployment rate is decreasing and the employment levels are rising. Many economists have been warning that this tendency may not be sustainable, but, for now, it has not been reversed.

In spite of this, public debt interests are still over 4% — in fact, they have been higher than 3.7% since 2017 begun. Portugal is a country in which gross debt surpasses 130% GDP, which means this is clearly a reason to be concerned. Also to be concerned are the statements made by Klaus Regling, for example: the managing director of the European Stability Mechanism warned “markets are concerned about Portugal”.

This Friday, Fitch is preparing to evaluate the Portuguese economy after it acknowledged, last week, that in spite of some defects, it has been making good progress. Which one is it — should we take out our raincoat, or our sun glasses?

The sun shines

Over the past weeks, the Government has been ditching the umbrella. During the inauguration ceremony of the new Lisbon headquarters of the bank Santander Totta, the Portuguese prime minister stated: “In the third quarter of 2016, Portugal had the largest rhythm of all members of the European Union”. And he assured the sunny weather was here to last: it is possible to ascertain from the data available that the fourth quarter of 2016 “might have slightly accelerated in comparison to the data from the third quarter”, the PM stated.

The third quarter of 2016 had, in fact, a surprising GDP increase: the Portuguese economy had a 0.8% growth, the highest percentage in the Euro Area. With this number alone, the 1.2% goal for 2016 set by the government was assured. But ECO ascertained that the Ministry of Finance is already working with a percentage between 1.3% and 1.4% of GDP growth last year.

GDP surprises in the third quarter

2016nov15_pib-estimativa-r-01-1
Source: Statistics Portugal – INE (percentage values)

But the economic activity is not the only one showing good signs. According to António Costa, “companies are investing” and “data on employment are very clear”, which indicates an improvement. According to the Statistics Portugal (INE), the November unemployment rate is 10.5% and they also anticipate a new reduction for December: the estimate is to end 2016 with a 10.2% rate. It would be a consistent decrease, since the 2016 January rate was 12.4%.

Additionally, the deficit is indeed decreasing. The PM has been repeatedly stating that 2016 will be the year with the lowest deficit since the beginning of the Portuguese democracy. And both António Costa and the minister of Finance Mário Centeno have promised the European Commission they will remove Portugal from the Excessive Deficit Procedure.

2017fev2_defice-01-1
Source: Statistics Portugal (INE)

António Costa stated in Parliament the deficit “will not surpass the 2.3% threshold”. ECO was able to ascertain that the Ministry of Finance is pointing to a 2.2% deficit; the government is still debating with the European Commission the amount of the extraordinary measures used in 2016.

Careful with the waterspouts

“I see no inconsistencies with the data” concerning growth, says João Loureiro, economist and professor on the University of Minho, to ECO. This means that although growing more than 1.2% is a good percentage, the initial goal was to have a 1.8% growth, and the economy hasn’t grown more than 2% since 2007.

The same goes for the deficit: the results are positive, and leaving the EDP would be an historical event. But the numbers are still not to be trusted, states the economist. “We are lacking structural measures”, says the professor, recalling there are several variables whose numbers are not sustainable in the medium and long run, such as the mount of public investment.

Public Investment reaches minimums

2016dez15_despesa-e-investimento-04-1
Source: Statistics Portugal – INE (investment in GDP percentage)

This means the deficit decreased as the government promised, but the effort made to achieve it was different than planned, in order to comply with the goals — such as transforming appropriations in permanent expense cuts, a cutoff in investment and the fiscal amnesty programme (PERES), through which the government aimed to improve the deficit. The truth is that it represents almost three GDP decimals and that without its help, the 2.4% goal would probably not be met.

Difficult measures to maintain or repeat

2017fev2_pib-e-cenas-02-1
Sources: DGO and CFP

In terms of the labor market, although improvements are clear, João Loureiro emphasizes that employment is being created with “activities of little increased value, which can be ascertained from the limited correlation between the increase in employment and the GDP growth“.

So which is the right weather forecast?

Both the government and investors are looking at the same country, but assessing the economy in different timings: the government regards the small improvements in the data of the past 12 months, while investors regard what the recent past has been saying about Portugal’s future.

Investors see that, for example, the Portuguese republic has an accumulated debt of 241.1 billion euros — which surpasses 130% GDP –, and that in net deposits, it is close to 121% GDP.

Public debt over 240 billion

2016dez15_despesa-e-investimento-05-1
Source: Bank of Portugal (values shown in billion euros)

At the same time, investors are anticipating a progressive removal of the European Central bank’s incentives — those that in 2012 allowed the Portuguese Treasury Bond interests to decrease, even when the economy was sunk in recession.

PUB