Can Portugal escape its economic history?

It is time for us to take a trip again to the Iberian peninsular and indeed to the delightful country of Portugal. Back on January 16th I highlighted the economic issues facing it thus.

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 mentions of Italy come about because there are quite a few similarities between the two twins. Both had similar weak economic growth in the better times, both have seen banking crisis which were ignored for as long as possible, and both have elevated national debts currently being alleviated by the bond buying of the ECB. Actually bond markets seem to have caught onto this since we last took a look as Portugal has seen an improvement with its ten-year yield at 3.03% only some 0.86% over that of Italy. This has been happening in spite of the fact that the ECB has in relative terms been buying more Italian than Portuguese bonds. Although sadly for Portugal’s taxpayers the gain from this has been missed to some extent as it issued 3 billion Euros of ten-year debt with a coupon of 4.125% back in January.

What about economic growth?

Back in January the Bank of Portugal was expecting this.

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.

Actually Portugal managed to nearly meet the 2017 expectations in the first quarter of this year.

In comparison with the fourth quarter of 2016, GDP increased 1.0% in real terms (quarter-on-quarter change rate of 0.7% in the previous quarter). The contribution of net external demand changed from negative to positive, driven by a strong increase in Exports of Goods and Services………Portuguese Gross Domestic Product (GDP) increased by 2.8% in volume in the first quarter 2017, compared with the same period of 2016 (2.0% in the fourth quarter 2016).

As you can see there was strong export-led economic growth to be seen. This had a very welcome consequence.

In the first quarter 2017, seasonally adjusted employment registered a year-on-year change rate of 3.2%,

This makes Portugal look like its neighbour Spain although care is needed as a couple of strong quarters are not the same as 2/3 better years. Also the Portuguese economy is still just over 3% smaller than it was at its pre credit crunch peak. A fair proportion of this is the fall in investment because whilst it has grown by 5.5% over the past year the level in the latest quarter of 7.7 billion Euros was still a long way below the 10.9 billion Euros of the second quarter of 2008.

The National Debt

A consequence of the lost decade or so for Portugal in terms of economic growth has been upwards pressure on the relative size of the national debt which of course has been made worse by the bank bailouts.

This means that Portugal has a national debt to GDP ratio of 133%. Whilst this is not currently a large issue in terms of funding due to low bond yields it does pose a question going forwards. There are two awkward scenarios here. The first is that the ECB continues to reduce or taper its purchases and the second is that it runs up to its self-imposed limit on Portuguese bonds. Actually the latter was supposed to have already happened but the ECB has shown what it calls flexibility as we have a wry smile at all the previous proclamations of it being a “rules based organisation”.

The banks

The various bailouts have added to the debt issue in spite of the various machinations and manipulations to try to keep them out if the numbers. There is also a sort of never-ending story about all of this as we mull that Novo Banco was supposed to be a clean good bank  Let us step back in time to what the Bank of Portugal told us just under 3 years ago,

The general activity and assets of Banco Espírito Santo, S.A. are transferred, immediately and definitively, to Novo Banco, which is duly capitalised and clean of problem assets

Sorted? Er not quite as I note this news from Reuters yesterday,

The sale of Portugal’s state-rescued Novo Banco to U.S. private equity firm Lone Star should be concluded by November following a 500 million euro ($566 million) debt swap that will be launched soon, deputy finance minister said on Wednesday.

That was yet another kicking of the can into the future as we discovered that November is the new August. Meanwhile somethings have taken place such as a 25% cut in the workforce and a 20% cut in branch numbers.

Bank Lending

The recent economic improvement does not seem to have been driven by any surge of bank lending as we peruse the latest data from the Bank of Portugal.

In May 2017 the annual rate of change (a.r.) in loans granted to non-financial corporations stood at -3.3%, ……In May 2017 the a.r. in loans granted to households stood at -1.0%, reflecting a positive change of 0.1 p.p. compared with April

So we see that neither all the easing from the ECB nor the improved economic growth situation have got lending into the positive zone. Mind you the numbers below suggest that the banks have their own problems still.

The share of borrowers with overdue loans decreased by 0.1 p.p., to 27.1% ( companies)……… The share of borrowers with overdue loans in the household sector declined by 0.1 p.p. from April, to stand at 13.2%.

Mind you the Portuguese banks do seem to have learned something from British visitors.

The consumption and other purposes segment also posted a positive change of 0.2 p.p., standing at 4.6%

House prices

Is there a boom here responding to the easy monetary policy?

In the first quarter of 2017, the House Price Index (HPI) increased 7.9 % when compared to the same quarter of the previous year, 0.3 percentage points (p.p.) more than in the last quarter of 2016…….When compared with the last quarter of 2016, the HPI increased 2.1%, 0.9 p.p. higher than in the previous period.

Turning British? Maybe in a way as there is something familiar in the way that house prices began to rise again in late 2013.


One very welcome feature of the improved economic situation in Portugal has been the much improved situation regarding unemployment.

The April 2017 unemployment rate stood at 9.5%, down by 0.3 percentage points (p.p.) from the previous month’s level and by 0.6 p.p. from three months before….. and is the lowest observed estimate since December 2008 (9.3%).

If it can keep this up it may move into the success column but there are also issues. Portugal has briefly done this before only to then fade away. The banking sector still has problems and we now know ( post 2007) that readings like this can swish away like the sting of a scorpion’s tale.

The Consumer confidence indicator increased in June, resuming the positive path observed since the beginning of 2013 and reaching a new maximum level of the series started in November 1997.

Let us wish Portugal well as it needs to get ahead of the game as we note another issue hovering on the horizon.

Since 2010 Portugal lost 264,000 Inhabitants……..In 2016, the mean age of the resident population in Portugal was 43.9 years, an increase of about 3 years in the last decade.

Let us not be too mean spirited though as some of the latter is a welcome rise in life expectancy.

Me on FXStreet


7 thoughts on “Can Portugal escape its economic history?

  1. Shaun,
    Great blog as usual. I keep meaning to ask you-just why are all these banks bust? After all:
    1. The southern European banks (I am guessing) did not punt their assets away on trading disasters etc such as the UK/US banks did;
    2. House prices have not collapsed;
    3. Interest rates are so low that you would expect most creditors to be able to pay their interest bills;
    4. Unemployment isn’t that high in Portugal.
    I can see why Greek banks are bust (unemployment/genuine austerity/house price etc), but just why are banks bust in Italy/Portugal etc? Why is there a 27% rate of non-performing loans, as you say above?

    • House prices have not collapsed because Portuguese banks just like their Spanish brothers, have the mortgages on their books at mark to fantasy rather than mark to reality, in other words due to the zero interest rate subsidy of the ECB, the loans look good.

      Of course they are anything but, but this is not the only thing preventing price discover.

      The ugly truth is that all the hundreds of thousands of properties built throughout the 90’s and the noughties have no buyers if rates were to return to normal across Europe and would totally collapse if they did along with the balance sheets of the banks that lent on them.

      But fortunately for the Spanish and Portuguese banks there is an endless supply of buyers who are the most indiscriminate buyers of property, having been trained by the Bank of England over the last half a century to act in the manner of a dog in Pavlovian experiment. There is now a steady stream of UK buyers of “dream” properties on the Costas, using the “equity”(don’t laugh) of their own overpriced properties to buy their own slice of overpriced(but to them cheap) Spanish sun.

      And who can blame them? Courtesy of Mr Carney they have buying power vastly in excess of the economy from which their currency is derived and this is a once in a lifetime opportunity for them to escape to their dream home. Good luck to them I say. But it merely extends the distortions of the central bankers and creates more problems in the future.

      But to a Brit who has his house price inflated by Mr Carney to say £200-500K a Spanish or Portuguese property at £100-150K looks good value as a holiday home, investment property or pension alternative and so puts further support under local prices.
      And so the illusion is maintained

    • Hi James

      The Portuguese banking story is an often tangled web involving corruption and sometimes links with Angola. But the economic weakness did hit the banks and in the case of BES the family which owned it also hit trouble elsewhere.

    • Hi Dutch

      Shifts like that may impact on the unemployment rate in the way that a lower participation rate in the US has affected it there ( on my mind as it is due tomorrow). But there have also been some genuine employment gains affecting the numbers in a positive way,

  2. Portugal’s problems are corruption, corruption and yet more corruption. I have lost count of the instances of blatant corruption that never come to trial and are quietly dropped. Three current examples are: The billions that disappeared offshore during the austerity years that the Bank of Portugal simply refuses to discuss! The toll contracts for the A22 iin the Algarve that were handed out to friends of the then government with guarantees that no matter what the tolls are the tax payer will guarantee a minimum income for the company. Even the EU has said that the tolls should not be charged but nothing changes. Then there are the poor Ria Formosa islanders
    ( mainly fishermen ) who have been fighting to keep their homes in the face of a demolition order. The authorities claim they are too close to the sea and damage the environment whilst developers wait in the wings to create a luxury resort. Just up the coast a luxury development has the go ahead with planned properties equally as close to the sea. Different rules for different power groups. It is a fantastic country but the elite trample all over the rest of the populace and need to be held to account.

    • Hi Pavlaki

      It is a great shame but you are right. There is of course the Angola issue. Also there was the recent theft of military hardware from and air force base, with the current terrorist threat that could be very bad indeed. Yet reform is apparently always just around the corner.

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