Portugal is struggling to escape from its economic woes

Late on Friday (at least for those of us mere mortals who do not get the 24 hour warning) came the news that the ratings agency DBRS had reduced Italy to a BBB rating. These things do not cause the panic they once did for two reasons the first is that the ECB is providing a back stop for Euro area bonds with its QE purchases and the second is that the agencies themselves have been discredited. However there is an immediate impact on the banks of Italy as the Bank of Italy has already pointed out.

Italy’s DBRS downgrade: a manageable increase in funding costs…..Haircuts on collateral posted by Italian banks: the value of the government bonds collateral pool alone would increase by ~8bn. ( h/t @fwred )

However this also makes me think of another country which is terms of economics is something of a twin of Italy and that is Portugal.

When we do so we see that Portugal has also struggled to sustain economic growth and even in the good years it has rarely pushed above 1% per annum. There have also been problems with the banking system which has been exposed as not only wobbly but prone to corruption. Also there is a high level of the national debt which is being subsidised by the QE purchases of the ECB as otherwise there is a danger that it would quickly begin to look rather insolvent. In spite of the ECB purchases the Portuguese ten-year yield is at 3.93% or some 2% higher than that of Italy which suggests it is perceived to be a larger risk. Also more cynically perhaps investors think that little Portugal can be treated more harshly than its much larger Euro colleague.

The state of play

This has been highlighted by the December Economic Bulletin of the Bank of Portugal.

Over the projection horizon, the Portuguese economy is expected to maintain the moderate recovery trajectory that has characterised recent years . Thus, following 1.2 per cent growth in 2016, gross domestic product (GDP) is projected to accelerate to 1.4 per cent in 2017, stabilising its growth rate at 1.5 per cent for the following years.

So it is expecting growth but when you consider the -0.4% deposit rate of the ECB, its ongoing QE programme and the lower value of the Euro you might have hoped for better than this. Or to put it another way not far off normal service for Portugal. Also even such better news means that Portugal will have suffered from its own lost decade.

This implies that at the end of the projection horizon, GDP will reach a level identical to that recorded in 2008.

This is taken further as we are told this.

In the period 2017-19, GDP growth is expected to be close to, albeit lower than, that projected for the euro area, not reverting the negative differential accumulated between 2010 and 2013

You see after the recession and indeed depression that has hit Portugal you might reasonably have expected a strong growth spurt afterwards like its neighbour Spain. Instead of that sort of “V” shaped recovery we are seeing what is called an “L” shaped one and the official reasons for this are given below.

This lack of real convergence with the euro area reflects persisting structural constraints to the growth of the Portuguese economy, in which high levels of public and private sector indebtedness, unfavourable demographic developments and persisting inefficiencies in the employment and product markets play an important role, requiring the deepening of the structural reform process.

After an economic growth rate of 0.8% in the third quarter of 2016 you might have expected a little more official optimism as they in fact knew them but say their cut-off date was beforehand, but I guess they are also looking at numbers like this.

According to EUROSTAT, the Portuguese volume index of GDP per-capita (GDP-Pc), expressed in purchasing power parities represented 76.8% the EU average (EU28=100) in 2015, a value similar to the observed in 2014.

It is at the level of the Baltic Republics, oh and someone needs to take a look at the extraordinary numbers and variation in the measures of Luxembourg!

House Prices

Here we see some numbers to cheer any central banker’s heart.

In the third quarter of 2016, the House Price Index (HPI) increased by 7.6% when compared to the same period of 2015 (6.3% in the previous quarter). This was the highest price increase ever observed and the third consecutive quarter in which the HPI recorded an annual rate of change above the 6%. When compared to the second quarter, the HPI rose by 1.3% from July to September 2016, 1.8 percentage points (p.p.) lower than in the previous period.

What is interesting is the similarity to the position in the UK in some respects as we see that house price growth went positive in 2013 although until now it has been a fair bit lower than in the UK. Of course whilst central bankers may be happy the ordinary Portuguese buyer will not be so pleased as we see yet another country where house price rises are way above economic performance. Indeed a problem with “pump it up” economic theory in Portugal is the existing level of indebtedness.

the high level of indebtedness of the different economic sectors – households, non-financial corporations and public sector – ( Bank of Portugal )

The debt situation

In terms of numbers Portuguese households have been deleveraging but by the end of the third quarter of last year the total was 78.6% of GDP, whilst the corporate non banking sector owed some 110.8% of GDP. At the same time the situation for the public-sector using the Eurostat method was 133.2 % of GDP.

Going forwards Portugal needs new funding for businesses but seems more set to see property lending recover if what has happened elsewhere after house price rises is any guide. Also the state is supposed to be reducing its debt position but we keep being told that.

The banks

It always comes down to this sector doesn’t it? Portugal has had lots of banking woe summarised by The Portugal News here just before Christmas.

The Portuguese state provided €14.348 billion in support to the banking sector between 2008 and 2015, according to a written opinion submitted by the country’s audit commission, the Tribunal de Contas, last year and made public on Tuesday.

That’s a tidy sum in a relatively small country and we see that the banking sector shrunk in size by some 3.4% in asset terms in the year to the end of the third quarter of 2016. In terms of bad debts then we are told that “credit impairments” are some 8.2% of the total although the recent Italian experience has reminded us again that such numbers should be treated as a minimum.

Last week the Financial Times reminded us that the price of past troubles was still being paid.

Shares in Millennium BCP fell by more than 13 per cent in early trading on Tuesday after Portugal’s largest listed lender approved a capital increase of up to €1.33bn in which China’s Fosun will seek to lift its stake from 16.7 per cent to 30 per cent.

Oh and this bit is very revealing I think.

The rights issue, which is bigger than BCP’s market value,

Comment

Let us start with some better news which is from the labour market in Portugal.

The provisional unemployment rate estimate for November 2016 was 10.5%

This represents a solid improvement on the 12.3% of 2015 although as so often these days unemployment decreases comes with this.

These developments in productivity against a background of economic recovery fall well short of those seen in previous cycles……. Following a slight reduction in 2016, annual labour productivity growth is projected to be approximately 0.5 per cent over the projection horizon.

Also there is the issue of demographics and an ageing population which the Bank of Portugal puts like this.

the evolution of the resident population,
which has presented a downward trend,

I like Portugal and its people so let us hope that The Portugal News is right about this.

Portugal has been named as the cheapest holiday destination in the world for Britons this year. The country’s Algarve region came top in the Post Office’s annual Holiday Costs Barometer, which takes into account the average price of eight essential purchases, including an evening meal for two, a beer, a coffee and a bottle of suncream, in 44 popular holiday spot around the world.

That’s an interesting list of essential purchases isn’t it? But more tourism would help Portugal although the woes of the UK Pound seem set to limit it from the UK.