geopolitical risk ratings firm

Portugal – Hard Choices Yet to Be Made

Prime Minister António Costa remains quite popular more than 18 months into his four-year term, benefiting from Portugal’s strongest economic performance in a decade, which has boosted employment and created room for an easing of fiscal austerity. However, both Costa’s high approval rating and the absence of strife between the governing PS and the two further-left blocs on which the government depends for its majority on confidence and supply issues are in part attributable to the lack of attention to tackling the structural reforms that will be required to boost economic competitiveness and reduce a public-sector debt burden that currently amounts to about 130% of GDP.
Talks later this year to formulate the annual budget for 2018 may prove to be more contentious than has been the case to date. If the results of local elections scheduled for early October provide confirmation of recent poll data showing weakening support for the BE and the CDU, it is highly doubtful that Costa will be able to convince the support parties to endorse unpopular reform measures. However, a further delay in addressing the large debt burden would risk triggering a negative shift in market sentiment that short-circuits the nascent economic recovery.
A corruption investigation into allegations of illegal payments involving top officials of REN, the national grid operator, and EDP, the former state-owned power utility, does not pose a risk of political damage to the current administration, but the case highlights the degree to which graft contributed to Portugal’s debt problems, a consideration that increases the potential for moves to reduce the debt burden to generate a resentment-fueled public backlash.
At the same time, a combination of elevated levels of private debt, very low interest rates, and tighter regulation of lending practices will complicate efforts to shore up a banking sector that remains vulnerable following the bailout of the country’s largest lender in 2014. Despite the added costs stemming from bank recapitalization, the general government deficit was held to 2% of GDP last year, and is projected to narrow further this year, as real GDP growth ticks up to 1.7%. However, the improvement is partially attributable to the one-off recovery of a state guarantee to one of the banks, and it is doubtful that incremental gains in growth will be enough to sustain the trend without fiscal consolidation and structural reforms.
Since 1979, The PRS Group Inc., has been a global leader in quant-based political and country risk ratings and forecasts. For more information on The PRS Group and its wide range of risk products, go to: www.prsgroup.com, or contact us at (315) 431-0511 and sales@prsgroup.com

PRS INSIGHTS

Moving beyond current opinions, a seasoned look into the most pressing issues affecting geopolitical risk today.

EXPLORE INSIGHTS

Interested in More Information?

The form is loading