ECO had access to a part of the Economist Intelligence Unit's report on the Portuguese economy outlook, and we talked to the economist in charge of the analysis from the British magazine.
In 2017, Portugal presented a government deficit of 3% of the GDP mostly due to the demand from Brussels regulators to take into account the cost of the recapitalization of the country’s bank Caixa Geral de Depósitos (CGD). If this extra transaction hadn’t been added to the report, the government budget deficit would have reached a much lower percentage in 2017: 1% of GDP.
Accordingly to the government, there will be a decrease of deficit to 0,7% of GDP, but the Economist’s Intelligence Unit (EIU) is far more pessimistic, expecting the deficit do decrease this year to 1% of GDP instead.
Also, the EIU expects the deficit to keep worsening. The spendings shall progressively reduce, alongside which there will be a relaxation of the revenue growth rate, accompanying the expectation that the country will witness a shift towards a more moderate economic growth.
“During the first two years, the gap [between the government’s predictions and the EIU’s prospects] is significantly low. But towards the end of the observed period, the difference is much more noticeable, as the government is expecting a budgetary surplus, whereas EIU is still predicting a deficit” the analyst explained to ECO.
“Even though the deficit prediction from EIU is low, the unit considered that in a country like Portugal, in the long run, it will become unbearable to have a budgetary surplus, as that would also mean there would be a 4% GDP surplus” she justified.
From 2019 we expect the deficit to widen gradually, to 2% in 2022, as spending is progressively relaxed and revenue growth slows in line with more moderate economic growth.
The EIU disagrees with the government predictions in regards to GDP and public debt as well as in terms of the deficit. 2017 there was a registered growth of 2,7% and the EIU is expecting the GDP to grow by 2,3% in 2018, and afterwards, it shall “in average, increase by 1,6% each year between 2019-2022, mostly due to investment in fixed capital and private consumption”. “The real growth rate of the economy shall decrease to 1,3% in 2020, which is 0,7% lower than the government’s expected 2%”, she explained.
For the analyst, this prediction is connected not only with issues regarding the national economy, as ultimately the slowdown in the global economy, and global oil markets prices that can indeed have toxic risks for all economies, and central banks will try to curb inflation by applying interest rates.
Steel and aluminium tariffs between US and EU might as well have a large impact on the markets, and this will also have huge implications on the Portuguese steel industry. According to INE, 86% of our steel and aluminium exports went to the US.
Although there is a slowdown in the economy, the EIU is confident that the debt trajectory will follow a downward movement. “After reaching a peak of 130,6% of GDP, in 2014, the public debt will lower to 114% of GDP in 2022, mostly due to a focus on pursuing budget balance and budget containment — including the 2% budget surplus — but also given a solid GDP nominal growth.”
“It is highly likely that 2019’s State Budget will be backed up”
The budget containment measures have transformed “the investment deficit all the more evident”, the analyst confirms.
We asked EIU’s economist to give us a comment regarding Mário Centeno’s blockage of investment in order to control the public budget, but the analyst said she wouldn’t comment on the choices of politicians.
“State funds used to recapitalize struggling banks inflated the general government deficit in both 2014 and 2015. Similarly, the state’s capital injection in CGD widened the 2017 deficit from 0.9% of GDP to 3%.”
“This year we expect the deficit to narrow to 1%, slightly larger than the government’s revised target of 0.7%, owing to slowing growth and slight fiscal slippage as the 2019 election season approaches” she added.
The EIU also predicts António Costa’s PS will most likely win the elections unless something extremely unexpected happens. For the analyst, Ana Luís Andrade, the negotiations regarding the 2019 State Budget will be mostly easy for the ruling party, as at the moment opinion polls indicate that the public finances consolidation is going to be backed up. The remaining question is until when this will be a feasible solution. For now, however, the finance minister still has the leverage to apply any of his modernizations, she added.
The left party will probably back the State Budget, as they don’t want political instability to grow, according to Andrade’s standpoint.