Can the Portuguese economic and house price boom continue?

It has been a little while since we looked at the western outpost of the Euro area which is Portugal. The good news is that it has now completed some five years of economic growth which in historical terms is a lengthy period for it. Albeit that rather ominously that length of growth ran straight into the credit crunch last time around. According to Portugal Statistics here is the current state of play.

In comparison with the second quarter of 2018, GDP increased 0.3% in real terms (0.6% in the previous quarter). The contribution of net external demand to the GDP quarter-on-quarter change rate became negative, after being null in the previous quarter, reflecting a decrease of Exports of Goods and Services more intense than that of Imports of Goods and Services. The positive domestic demand contribution increased in the third quarter, reflecting the higher growth of private consumption and Investment.

Firstly it has been nice to see Portugal have a better run as it badly needed it. For the last two quarters it has managed to grow faster than the Euro area average which it does not do often. However we do note that whilst it has done better than average it too was affected by the third quarter slow down too as the quarterly growth rate halved. This impacted on the annual rate.

The Portuguese Gross Domestic Product (GDP) increased by 2.1% in volume in the third quarter 2018, compared with
the same period of 2017 (2.4% in the previous quarter). Domestic demand registered a less intense positive
contribution to GDP year-on-year change rate, due to the deceleration of private consumption, as Investment presented a slightly more intense growth. Net external demand presented a negative contribution similar to that observed in the two previous quarters.

So still good in Portuguese terms as we note that a familiar issue which is trade being picked up on our radar screens. This matters on two counts firstly because the Euro area “internal competitiveness” austerity model was something which should be picked up in the trade balance. Secondly it is an old problem area for Portugal that has regularly led it into the arms of the International Monetary Fund or IMF.

Trade

As you can see the growth rates are very good but 2018 has seen export growth overtaken by import growth.

In the 3rd quarter 2018, exports and imports of goods increased by 6.1% and by 7.3% respectively, vis-à-vis the
same period of the previous year. In the 2nd quarter exports and imports recorded variations of +10.8% and +9.5% respectively. In accumulated terms, from January to September 2018, exports increased by 6.7% and imports grew by 7.8%.

Cars

The automotive sector is an important one for Portugal.

The auto sector – including car and component production – is a core sector of the Portuguese economy. It represents 4% of total GDP, is represented in 29 000 companies, is responsible for 124 000 direct jobs and a business volume of 23, 7 thousand millions of euros and 21,6 % of the total fiscal revenues in Portugal. ( Portugal IN)

A fair bit of this is Volkswagen and this from The Portugal News on the 30th of August was very upbeat.

AutoEuropa has produced over 139,000 vehicles this year, surpassing its previous record of 138,890 in 1998, the company announced on an internal communication………According to the company’s data, in 2017” AutoEuropa’s sales weight on Portugal’s goods export was 3.4%……..AutoEuropa expects to double its sales in 2018 compared to 2017, meaning that Portugal’s goods export would grow 3.4%, and the weight on the exports would increase to 6.6%.

As you can see it has been driving both export and GDP growth and has been a success story for Portugal. Switching back to the trade figures we see that transport sector exports grew by 15.3% in the third quarter. This means that the overall picture conforms to this from FT Alphaville in April.

Portuguese earnings from selling goods to the rest of the world — particularly manufactures related to the Iberian motor vehicle supply chain — grew by more than 40 per cent from 2008 through 2017:

Thus we have an actual success for the internal devaluation model so well done to Portugal. Of course the car market even with all the help is only a certain size and it is not all gravy as some of this has been from other Euro area countries. Also we await the news from the last part of 2018 as we have seen car production slowing and temporary factory shut downs due to a reduction in demand from Asia and the Trump Tariffs.An example of this has just flashed across the newswires.

*VW GROUP OCT. DELIVERIES FALL 10% Y/Y; 846,300 VEHICLES…… *VW GROUP OCT. CHINA SALES FALL 8.3% Y/Y; 365,100 VEHICLES ( @mhewson_CMC )

Looking further ahead there is the issue that car production may move even further south as more and more producers look at places like Morocco.

Unemployment

This has been a success too no doubt driven by the developments above and helped by the tourism boom.

The unemployment rate for the 3 rd quarter of 2018 stood at 6.7%, corresponding to the lowest value of the data series
started in the 1st quarter of 2011. This value is equal to the one from the previous quarter and lower in 1.8 percentage
points (p.p.) from the same quarter of 2017.

The full picture is given here.

These reductions were also observed in the
correspondent rates, having the unemployment rate
dropped from 17.5% to 6.7% and the labour
underutilisation rate from 26.4% to 13.1%

The attempt to measure underemployment is welcome as is its drop although it is still high which is true of the number below.

The youth (15 to 24 years old) unemployment rate increased to 20.0%, the second lowest value of the data series started in the 1st quarter of 2011.

Comment

So far today we have charted some welcome progress but there are still issues of which number one was highlighted by the official data on Thursday.

In 2017, the resident population in Portugal was estimated at 10,291,027 people, which accounted for a 18,546 decline
from the previous year………. Despite the positive net
migration in 2017, the population’s downward trend observed since 2010 continued in 2017, although in the last four years at a slower pace.

There are simply fewer births than deaths and for a while many left. This mattered more than it may seem because the emigrants were often those with skills who could leave. Some have returned but many have not and for example I passed some of Little Portugal in Stockwell a couple of weekends ago with its Portuguese restaurants and delicatessens.

The five better years have coincided with the post “Whatever it takes to save the Euro” period and as we looked at on Friday there are now issues for what the ECB does next? Portugal has benefited in terms of a government bond yield of less than 2% for the tern-year benchmark as opposed to the 17/18% at the peak of the crisis. No doubt it has also helped some businesses borrow more cheaply although of course there is also this.

In the 2nd quarter of 2018 (last 12 months), the median house price of dwellings sales in Portugal was 969 €/m2
, an increase of +2% compared to the previous quarter and of +8.15% compared to the same period in the previous year.

Also the Golden Visa programme which has brought in Madonna for more than a holiday and Michael Fassbender for example is no doubt at play here.

The city of Porto (+24.7%), Lisboa (+23.4%), Amadora (+15.8%), Braga (+12.3%), Funchal (+10.4%) and Vila Nova de Gaia (+10.3%) scored the most significant growth rates, compared to the same period in the previous year.

Or as @WEAYL points out.

Housing in Lisbon (€3,381/m2) now more expensive than Madrid (€3,317/m2)

Actually if we look for the source which is JornalEconomico it points towards a familiar problem.

Buying a home as the first option is a wish of the Iberian families. It is not only in Portugal that acquiring housing is the dream of most people, also in Spain this is the first choice of families.

Although they should not be worried as apparently there is no inflation.

In October, the Portuguese HICP annual rate was 0.8% (1.8% in the previous month) while the monthly rate was
-0.5% (1.5% in September and 0.5% in October 2017).

So it is much more expensive but wages are under the influence of the “internal devaluation” model. As to a full perspective the previous peak of 45.76 billion Euros for GDP was finally passed in the second quarter with its 45.88 billion.

 

 

 

 

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Can the Portuguese economy rely on the Lisbon house price boom?

It is time to head south again and touch base with what is happening in sunny Portugal. In the short-term the UK weather may be competitive but of course in general Portugal wins hands down which is why so many holidaymakers do their bit and indeed best for retail sales and the tourism industry over there. No doubt they helped cushion things when the economy was hit by the double whammy of the credit crunch followed by the Euro area crisis but now the Bank of Portugal was able to report his in its May Bulletin.

In 2017 GDP grew by 2.7%, in real terms, after increasing by 1.6% in the previous year.

This is significant on several levels. The most basic is that growth is happening. Next comes the fact that for Portugal this is a performance quite a bit above par. This is because as regular readers will be aware the background is of an economy that has struggled to maintain economic growth above 1% per annum. It is also means that the statement below has been rather rare.

In Portugal, GDP growth stood close to the
euro area average.

Accordingly the nuance is a type of statement of triumph as not only has Portugal seen absolute economic problems it has been in relative decline. Tucked away in the detail was good news for issues which have plagued the Portuguese economy.

The factors behind the acceleration of the Portuguese economy in 2017 were exports and
investment. This composition of growth is particularly important in correcting a number of
structural problems persisting in the Portuguese economy. The strong performance of Portuguese
exports mostly resulted from a recovery in the pace of growth of external demand for Portuguese
goods and services, in particular from euro area partners.

So the “Euroboom” helped and one part of the story allows the central bank to do a bit of cheerleading.

These developments have a structural dimension, including the closure of firms which are more oriented towards the domestic market and the establishment
and expansion of new firms that export higher value-added goods and are oriented towards more diversified geographical markets than in the past.

However us Brits may well have done our bit for something which is also going well.

In 2017 the market share gain of Portuguese exports was also associated with extraordinary growth in tourism exports. The dynamism observed in the tourism sector in Portugal exceeds that of a number of competing
countries, namely the other countries in Southern Europe.

This issue matters because Portugal has in recent decades been something of a serial offender in terms of finding itself in the hands of the IMF ( International Monetary Fund). A familiar tale of austerity and cut backs then follows which is one of the causes of its economic malaise. The May Bulletin implicitly confirms this.

Bringing the GDP per worker in Portugal closer to the average of European Union (EU) countries is a particularly important challenge for the Portuguese economy.

Indeed and tucked away in the better news on investment is something of a warning.

Construction benefited from favourable financing conditions, an increase in demand from
non-residents and strong growth in tourism and related real estate activities……….This is particularly relevant for an economy such as Portugal, where housing has
a very high share of the capital stock and the level of capital per worker is low compared with
the other European countries.

This brings us to the background of Portugal being a low wage, low productivity and low growth economy. An issue is this way it leads this European league table.

In 2015, Portugal was the country with the largest weight of construction in the stock of fixed
assets, with 91.7% (41.5% associated with dwellings and 50.2% associated with other buildings
and structures)

Unemployment

The better economic situation has led to welcome developments in this area as you might expect. From Portugal Statistics on Friday.

The April 2018 unemployment rate was 7.2%, down 0.3 percentage points (p.p.) from the previous month’s level,
0.7 p.p. from three months before and 2.3 p.p. from the same month of 2017.

This area has been a particular positive as the unemployment rate has gone from a Euro area laggard to one improving the overall average. Whilst in Anglo-saxon and Germanic terms it still looks high for Portugal it is an achievement.

only going back to November 2002 it is
possible to find a rate lower than that.

On a deeper level we learn something from the employment trends. For newer readers in the credit crunch era rises in employment have become a leading indicator for an economy. Looked at like this then there was a change in the summer of 2013 and since then an extra half a million or so Portuguese have found work. Returning to economic theory this is a change as it used to be considered a lagging indicator whereas now we often see it being a leading one.

House Prices

The Bank of Portugal will be pleased to see this and will have its claims of wealth effects ready.

In the first quarter of 2018, the House Price Index (HPI) rose 12.2% in relation to the same quarter of the previous
year, 1.7 percentage points (p.p.) more than in the fourth quarter of 2017. This was the fifth consecutive quarter in
which dwelling prices accelerated

Perhaps this is what they meant by this.

Monetary and financial conditions contributed to this economic momentum, with the ECB’s monetary policy remaining accommodative.

A couple of areas stand out according to Reuters.

The National Statistics Institute said house prices in the Lisbon area rose 18.1 percent in the fourth quarter from a year earlier to an average of 1,262 euros per square meter. In Porto house prices rose 17.6 percent.

So Portugal now has the capital city house price disease. Just under half of recent turnover in houses by value has been in Lisbon. Yet the ordinary first-time buyer is seeing prices move out of reach.

Comment

The new better phase for Portugal is very welcome for what is a delightful country. But beneath the surface there are familiar issues. Let me start with an area that should be benefiting from the house price boom which is the banks.

Nevertheless, NPLs remain at high levels, in turn, weighing on banks’ profitability, funding and capital costs. High NPLs also hinder a more efficient allocation of resources in the corporate sector and thus weaken potential growth.

You may note that the European Central Bank prioritises the banks over the corporate sector as it reminds us that non performing loans remain an issue. Also there is the ongoing problem on how the new  bank Novo Banco went from being perceived as clean to dirty like it was a diesel.

The FT’s Rob Smith has a story today on the latest complication. Novo Banco is planning to push ahead with its bond sale, which involves tendering outstanding senior bonds, despite a new legal challenge from a London-based hedge fund, which argues that it has actually already defaulted on its senior debt. ( FT Aplhaville).

Also there is this pointed out by @WEAYL around ten days ago.

CGD, BCP and Novo Banco lent 100 million to the venture capital company ECS at the end of 2017. The next day they received the same amount in a distribution of the fund’s capital managed by ECS. (Economic Online)

Next comes the issue of demographics of which I get a reminder whenever I go to Stockwell or little Portugal.

The resident population in Portugal at 31 December 2017 was estimated at 10,291,027 persons (18,546 fewer than in
2016). This results in a negative crude rate of total population change of -0.18%, maintaining the trend of population decline, despite its attenuation in comparison to recent years.

Even worse the departed are usually the young, healthy and educated.

Should the trade wars get worse, then there will be an issue for the car industry as it is around 4% of economic output and has been doing well.

Portugal hopes to end its lost decade later this year

It is time for us once again to head south and take a look at what is going on in the Portuguese economy? The opening salvo is that 2017 was the best year seen for some time. From Portugal Statistics.

In 2017, the Portuguese Gross Domestic Product (GDP) increased by 2.7% in real terms, 1.1 percentage points higher than the rate of change registered in 2016, reaching, in nominal terms, around 193 billion euros. In nominal terms, GDP increased 4.1% (3.2 in 2016),

So both economic growth and an acceleration in it from 2016. In essence the performance was an internal thing.

The contribution of domestic demand to GDP growth increased to 2.9 percentage points (1.6 percentage points in 2016), mainly due to the acceleration of Investment. Net external demand registered a negative contribution of 0.2 percentage points (null in 2016),  with Imports of Goods and Services accelerating slightly more intensely than Exports of Goods and Services.

It is hard not to feel a slight chill down the spine at the latter section as it has led Portugal to go cap in hand to the IMF ( International Monetary Fund) somewhat regularly over the past decades. But to be fair the last quarter was better on this front.

The contribution of net external demand to GDP quarter-on-quarter growth rate shifted from negative to positive, due to the significantly higher acceleration of Exports of Goods and Services than of Imports of Goods and Services.

Indeed the last quarter was good all round.

Comparing with the previous quarter, GDP increased by
0.7% in real terms.

Also whilst it fell from the heady peaks of earlier in the year investment had a good year.

Investment, when compared with the same quarter of
2016, increased by 5.9% in volume in the last quarter of
2017, a 4.4 percentage points deceleration from the
previous quarter.

This was particularly welcome as it needed it as I pointed out on the 6th of July last year the economic depression Portugal has been through saw investment collapse.

 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.

Unemployment

The national accounts brought a hopeful sign on this front too.

In the fourth quarter of 2017, seasonally adjusted
employment registered a year-on-year rate of change of
3.2%, (3.1% in the previous quarter)

Of course this does not have to mean unemployment fell but in this instance as we learnt at the end of last month the news is good.

The December 2017 unemployment rate was 8.0%, down by 0.1 percentage points (p.p.) from the previous month’s
level, by 0.5 p.p. from three months before and by 2.2% from the same month of 2016…………The provisional unemployment rate estimate for January 2018 was 7.9%.

This means that the statistics office was able to point this out.

only going back to July 2004 it
is possible to find a rate lower than that.

The one area that continues to be an issue is this one.

The youth unemployment rate stood at 22.2% and
remained unchanged from the month before,

Is Portugal ending up with something of a core youth unemployment problem?

The latest Eurostat handbook raises another issue as it has a map of employment rate changes from 2006 to 2016. For Portugal this was a lost decade in this sense as in all areas apart from Lisbon (+1.1%) it fell from between 2.5% and 3,8%. Rather curiously if we divert across the border to a country now considered an economic success Spain it fell in all regions including by 7.2% in Andalucia. So whilst both countries will have improved in 2017 we get a hint of a size of the combined credit crunch and Euro area crises.

Is Portugal’s Lost Decade Over?

No it still has a little way to go and the emphasis below is mine. From the Bank of Portugal economic review.

economic activity will maintain
a growth profile over the projection horizon,
albeit at a gradually slower pace (2.3%, 1.9%
and 1.7% in 2018, 2019 and 2020 respectively)
. At the end of the projection horizon,
GDP will stand approximately 4% above the level
seen prior to the international financial crisis.

So it will be back to the pre credit crunch peak around the autumn. We will have to see as the Bank of Portugal got 2016 wrong as I was already pointing out last July that the first half of 2016 had the economic growth it thought would arrive in the whole year. Maybe its troubles like so many establishment around the world is the way it is wedded to something which keeps failing.

Projected growth rates are above the average
estimates of potential growth of the Portuguese
economy and will translate into a positive output
gap in coming years.

Actually that sentence begs some other questions so let me add for newer readers that the economic history of Portugal is that it struggles to grow at more than 1% per annum on any sustained basis. In fact compared to its peers in the Euro area 2017 was a rare year as this below shows.

interrupting a long period of negative annual
average differentials observed from 2000
to 2016 (only excluding 2009).

This is unlikely to be helped by this where like in so many countries we see good news with a not so good kicker.

The employment growth in the most recent
years, which was fast when compared with activity
growth, has resulted in a decline in labour
productivity since 2014, a trend that will continue
into 2017. ( I presume they mean 2018).

House Prices

It would appear that there is indeed something going on here. From Portugal Statistics.

In the third quarter of 2017, the House Price Index (HPI) increased 10.4% in relation to the same period of 2016 (8.0% in the previous quarter). This rate of change, the highest ever recorded for the series starting in 2009, was essentially determined by the price behaviour of existing dwellings, which increased 11.5% in relation to the same quarter of 2016………….The HPI increased 3.5% between the second and third quarters of 2017

The peak of this was highlighted by The Portugal News last November.

Portugal’s most expensive neighbourhood is, perhaps unsurprisingly, the heart of Lisbon, where buying a house along the Avenida da Liberdade or Marquês de Pombal costs around €3,294 per square metre; up 46.1 percent in 12 months.

Time for the Outhere Brothers again.

I say boom boom boom let me hear u say wayo
I say boom boom boom now everybody say wayo

The banks

Finally some good news for the troubled Portuguese banking sector as their assets ( mortgages) will start to look much better as house prices rise. If we look at Novo Banco this may help with what Moodys calls a “very large stock of problematic assets” which the Portuguese taxpayer is helping with a recapitalisation of  3.9 billion Euros. Yet there are still problems as this from the Financial Times highlights.

Portuguese authorities last year launched a criminal investigation into the sale of €64m of Novo Banco bonds by a Portuguese insurance firm to Pimco that occurred at the end of 2015. A week later, the value of the bonds sold to Pimco were in effect wiped out by the country’s central bank.

This is an issue that brings no credit to Portugal as Novo Banco as the name implies was supposed to be a clean bank that was supposed to be sold off quickly.

Comment

So we have welcome economic news but as ever in line with economics being described as the “dismal science” we move to asking can it last? On that subject we need to note that an official interest-rate which is -0.4% and ongoing QE is worry some. Also Portugal receives quite a direct boost in its public finances from the QE as the flow of 489 million Euros  of purchases of its government bonds in February meaning the total is now over 32 billion means it has a ten-year yield of under 2%. Not bad when you have a national debt to GDP ratio of 126.2%.

To the question what happens when the stimulus stops? We find ourselves mulling the way that Portugal has under performed its Euro area peers or its demographics which were already poor before some of its educated youth departed in response to the lost decade as this from the Bank of Portugal makes clear.

The population’s ageing trend partly results from
the sharp decrease in fertility in the 1970s and
1980s,

So whilst some may claim this as a triumph for the “internal competitiveness” or don’t leave the Euro model 2017 was in fact only a tactical victory albeit a welcome one in a long campaign. Should some of the recent relative monetary and consumer confidence weakness persist we could see a slowing of Euro area economic growth in the summer/autumn just as the ECB is supposed to be ending its QE program and considering ending negative interest-rates. How would that work?

 

 

 

 

The Novo Banco saga has been one of misrepresentation and woe

Yesterday saw an announcement from the Bank of Portugal on a saga which has run and run and run.

Banco de Portugal and the Resolution Fund concluded today the sale of Novo Banco to Lone Star, with an injection by the new shareholder of €750 million, which will be followed by a further injection of €250 million to be delivered by the end of 2017.

Indeed there is an element of triumphalism and back-slapping.

The conclusion of this operation brings to a close a complex negotiation process with the new shareholder, European institutions and other domestic institutions, in close cooperation with the Government.
The completion of the sale announced on 31 March brings about a very significant increase in the share capital of Novo Banco and terminates the bank’s bridge bank status that has applied since its setting up.

The opening issue is why this New Bank which is what Novo Banco, means that was supposed to be clean, needs an increase in capital? Let us look deeper.

As of this date, Novo Banco will be held by Lone Star and the Resolution Fund, which will hold 75% and 25% of the share capital respectively. It will be endowed with the necessary means for the implementation of a plan ensuring that the bank will continue to play its key role in the financing of the Portuguese economy.

The story gets a twist as we see that Lone Star will be walking away with 75% of Novo Banco and in return the Portuguese taxpayer does not get one single Euro. The implication is that the Resolution Fund is keen to get it off its books at almost any price.

Step Back In Time

If we follow the advice of Kylie Minogue we can go back to August 2014 when the Bank of Portugal was dealing with this.

The Board of Directors of Banco de Portugal has decided on 3 August 2014 to apply a resolution measure to Banco Espírito Santo, S.A.. 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. Deposits are fully preserved, as well as all unsubordinated bonds.

BES had collapsed and I note again that Novo Banco was supposed to be clean of problem assets. However it did not take long for what Taylor Swift would call “trouble, trouble, trouble” to emerge as a rather unpleasant Christmas present arrived a few months later for bondholders. From my article on the 4th of April.

The nominal amount of the bonds retransferred to Banco Espírito Santo, S.A. totals 1,941 million euros and corresponds to a balance-sheet amount of 1,985 million euros………This measure has a positive impact, in net terms, on the equity of Novo Banco of approximately 1,985 million euros.

So just under 2 billion Euros was required to steady the ship of our “clean” bank and you can see why no one was in a rush to buy it!

Money Money Money

If we go back to the origination of this there was a bold statement from the Bank of Portugal.

This means that this operation does not involve any costs for public funds.

However there was this.

The State will bear no costs related to this operation. The equity capital of Novo Banco, to the amount of €4.9 billion, is fully underwritten by the Resolution Fund.

Ah good so the banking sector was paying up.

The Resolution Fund’s sources of funding are the contributions paid by its member institutions and the proceeds from the levy over the banking sector, which, according to applicable regulations, are collected without jeopardising the solvency ratios.

Meanwhile if we rejoin the real world that is the same Portuguese banking sector that was in severe disarray so the money had to be found from elsewhere.

the Fund took out a loan from the Portuguese State. The loan granted by the State to the Resolution Fund will be temporary and replaceable by loans granted by credit institutions.

At this point it sounds rather like the Amigo loans advertised in the UK where you can borrow the money but somebody else has to guarantee it, in this case the Portuguese taxpayer. Also if this were an episode of Star Trek the USS Enterprise would be on yellow alert at the use of the word “temporary”. If we step forwards to just over a year ago the Resolution Fund told us this.

the conditions of the
loan of €3 900 million extended to the Fund in August 2014

which are?

Currently, the maturity date of said loan is 31 December 2017. The review that has now been
agreed upon will allow the extension of that maturity date in a way that ensures the capacity of
the Resolution Fund to meet in full its obligations through its regular revenue, and regardless of
the positive or negative contingencies to which the Resolution Fund is exposed.

Ah so it is To Infinity! And Beyond?! Oh and the temerity of the idea that the banks might have to back the er banking sector resolution fund.

without the need to raise any special contributions.

Number Crunching

Here is Reuters from September 2015.

“Once more, I repeat, there is no direct impact (on taxpayers), since the Portuguese state did not nationalise the bank nor take a direct stake in Novo Banco’s capital,” minister and government spokesman Luis Marques Guedes said.

Okay that is clear so let us look at the view from Europe’s statistics agency Eurostat a mere one month later.

 The second most significant impact to the deficit in 2014 was in Portugal (3.0pp of GDP) and it was also mainly due to a bank recapitalisation……. The recapitalization of Novo Banco. In the third quarter of 2014, the Portuguese Resolution Fund injected 4.9 bn euro (2.8% of GDP) into Novo Banco. As the sale of Novo Banco did not occur within one year after the capitalisation, the capital injection has impacted the deficit of Portugal in 2014 for its full amount.

Comment

Let us consider this in terms of the two main variables which are time and money. The time element is that the new clean bank was supposed be sold quickly whereas it took more than three years. The money element is that the Resolution Fund underwrote the bank capital to the tune of 4.9 billion Euros. There was then a swerve to get just under 2 billion Euros off some bondholders as the word clean somehow meant dirty, Now we see that where 100%= 4.9 billion back then now 75% = 1 billion as we note the value destruction leaving the Resolution Fund with its 25% apparently worth 0.333 billion Euros but backed by a loan of 3.9 billion Euros.

So quite a large gamble has been taken by the Portuguese authorities with taxpayers money whereas if things go well Lone Star has been able to get assets very cheaply. It has 75% of the capital after only paying around 20% of the total Of course should it go wrong then we can refer back to my timeline for a banking collapse. We had this back in autumn 2014.

6. The relevant government(s) tell us that the bank needs taxpayer support but through clever use of special purpose vehicles there will be no cost and indeed a profit is virtually certain.

And at some date in the future ( like when Eurostat rules on this for example) we are likely to see this.

It is also announced that nobody could possibly have forseen this and that nobody is to blame apart from some irresponsible rumour mongers who are the equivalent of terrorists. A new law is mooted to help stop such financial terrorism from ever happening again.

Me on Core Finance TV

http://www.corelondon.tv/uk-inflation-understated/

 

Can Portugal trade its way out of its lost decade?

The weekend just gone has brought some good news for the Republic of Portugal. This came from the Standard and Poors ratings agency when it announced this after European markets had closed on Friday.

On Sept. 15, 2017, S&P Global Ratings raised its unsolicited foreign and local currency long- and short-term sovereign credit ratings on the Republic of  Portugal to ‘BBB-/A-3’ from ‘BB+/B’. The outlook is stable.

Bloomberg explains the particular significance of this move.

Portuguese Finance Minister Mario Centeno expects greater demand for his nation’s debt from a broader array of investors to spur lower borrowing costs both for the government and corporations, after the country’s credit rating was restored to investment grade status by S&P Global Ratings.

So the significance of their alphabetti spaghetti is that Portugal has been raised from junk status to investment grade. I will deal with the impact on bond markets later but first let us look at the economic situation.

Portugal’s economy

The key to this move is an upgrade to economic prospects.

We now project that Portuguese GDP will grow by more than 2% on average between 2017 and 2020 compared to our previous forecast of 1.5%.

This is significant because one of my themes on the Portuguese economy is that if we look back over time it has struggled to grow by more than 1% per annum on any sustained basis. This has led to other problems such as its elevated national debt to economic output level and makes it very similar to Italy in this regard. So should it be able to perform as S&P forecast it will be a step forwards for Portugal in terms of looking forwards.

If we look for grounds for optimism there is this bit.

We expect Portugal will maintain its strong export performance over the forecast horizon, reflecting solid growth in external demand and an uptick in exports.

Export- led growth is of course something highly prized by economists.

A solid external performance is likely to bring goods and services exports to around 44% of GDP in 2017, from below 29% just seven years ago.

Portugal has done well on the export front but S&P may have jointed the party after the music has stopped as this from Portugal Statistics earlier this month implies.

In July 2017, exports and imports of goods recorded year-on-year nominal growth rates of +4.6% and +12.8%
respectively (+6.7% and +6.6% in the same order, in June 2017)…….The deficit of trade balance amounted to EUR 1,057 million in July 2017, increasing by EUR 446 million when compared with July 2016.

Okay so worse than last year. I often observe that monthly trade figures are unreliable so let us move to the quarterly ones.

In the quarter ended in July 2017, exports and imports of goods grew by 9.0% and 13.4% respectively, vis-à-vis
the quarter ended in July 2016.

If we look back we see that if we calculate a number for the latest quarter then we now have had a year of monthly data showing a deterioration for the trade balance. Just to be clear exports have grown but imports have grown more quickly. So the monthly trade deficits have gone back above 1 billion Euros having for a while looked like going and maybe staying below it.

If we move to the other side of the trade balance sheet we see that imports have surged which will be rather familiar to students of Portuguese economic history ( as in a reason why they have so frequently had to call in the IMF). This year the rate of growth ( quarterly) has varied between 12.2% and 15.9% in the seven months of data seen.

There is a clear tendency for ratings agencies to be a fair bit behind the news and the export success story would have fitted better a year or two ago. Let us wish Portugal well as we note the recent growth has been in imports and also note that in general in 2017 so far the Euro has risen putting something of a squeeze on exports which compete in terms of price. The trade weighted exchange-rate rose from 93 in April to 99 now in round terms. So the gains of the “internal devaluation” which involved a lot of economic pain are being eroded by a higher exchange rate.

Debt

If you look at the economy of Portugal then the D or debt word arrives usually sooner rather than later. This is why an improved trade performance is more important than just its impact on GDP ( Gross Domestic Product). This is how it is put by S&P.

Estimated at about 236% in 2017, we view Portugal’s narrow net external debt to CARs (our preferred measure of the external position) as being one of the highest among the sovereigns we rate, albeit on a steady declining trend.

There has been deleveraging but of course this drags on growth before hopefully providing a benefit.

Data from the Portuguese central bank, Banco de
Portugal, indicate that resident private nonfinancial sector gross debt on a nonconsolidated basis was still at a high 217% of GDP in June 2017, down from 260% at end-2012.

So far I think I have done well in avoiding mentioning the ECB ( European Central Bank) but this is an area where it has really stepped up to the plate.

The ECB’s QE has helped to further bring down the government’s and corporate sector’s borrowing costs.

Although it does pose a challenge to this assertion from S&P.

While we view the high level of public and private sector indebtedness as a credit weakness, we observe that external financing risks have declined significantly reflected in a substantial improvement in the government’s borrowing conditions.

Maybe but you cannot ignore the fact that the ECB has purchased some 29 billion Euros of Portuguese government bonds as part of its ongoing QE programme. To this you can add purchases of the bonds of Portuguese corporates and of course the 91 billion Euro rump of the Securities Markets Programme which also had Greek and Irish bonds. If you read about lower purchases of Portuguese bonds it is mostly because the ECB already has so many of them. Last time I checked large purchases of something tend to raise the price and lower the yield.

According to the latest ECB data, the central bank acquired €0.4 billion of Portuguese government bonds in August 2017, hitting a new low since the beginning of the
PSPP. The peak was in May 2016, at €1.4 billion.

The banks

Even S&P is none to cheerful here pointing out that the sector remains on life support.

It remains reliant on ECB funding.

Indeed the prognosis remains rather grim.

Banks’  earnings generation capacity also remains under significant pressure given the ultra-low interest rates, muted volume growth, and still large stock of
problematic assets (about 19% of gross loans) and foreclosed real estate assets (including restructured loans not considered in the credit-at-risk definition) as of mid-2017.

Internal Devaluation

If you improve your position via an internal devaluation involving lower wages and higher unemployment then moves like this are simultaneously welcome and risky.

In our opinion, consecutive increases in the minimum wage, most recently by 5.1% in January 2017, accompanied by measures to offset some of the additional cost for employers, are unlikely to have weakened the cost competitiveness of Portuguese goods and services.

Comment

Portugal is a lovely country so let us look at something which is really welcome.

As such, the jobless rate has almost halved from its peak of 17.5% during 2013 and is currently at 9.1% (July 2017), in line with the eurozone average and lower than in France, Italy, and Spain.

Good. However this does not change the fact that Portugal has travelled back to between 2004 and 2005. What I mean by that is that annual GDP peaked at 181.5 billion Euros in 2008 and after the credit crunch hit there was a recovery but then a sharp downturn such that GDP in 2013 was 167.2 billion Euros. The more recent improvement raised GDP to 173.7 billion Euros in 2016 and of course things have improved a bit so far this year to say 2005 levels.

Why is there an ongoing problem? Tucked away in the S&P analysis there is this.

we consider that Portugal’s fragile demographics, weakened by substantial net emigration and a declining labor force, exacerbate these challenges. Low productivity growth would likely stifle the economy’s growth potential (though this is not unique to Portugal), without further improvements in the efficiency of the public administration,
judiciary, and the business environment, including with respect to barriers in services markets (for example, closed professions).

Let me end by pointing out the rally in Portuguese bonds today with the ten-year yield now 2.5% although having issued 3 billion Euros of such paper with a coupon of 4.125% in January it will take a while for the gains to feed in. Also let me wish those affected by the severe drought well.

 

 

 

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.

Comment

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

The ongoing disaster that is Novo Banco of Portugal

A constant theme of this website is an ongoing consequence of the credit crunch where more than a few banks have not been reformed and are still damaged goods. They are banks which were somewhat presciently sung about by the Cranberries.

Zombie, zombie, zombie

Certainly in that list was Banco Espirito Santo of Portugal which found itself in a spider’s web of corruption and bad loans. This led to this being announced by the Bank of Portugal in August 2014.

The Board of Directors of Banco de Portugal has decided on 3 August 2014 to apply a resolution measure to Banco Espírito Santo, S.A.. 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.

The point of this was supposed to be that Novo Banco would then be like its name, a New Bank. It would be clean of the past problems and would then thrive and the bad bank elements would be removed. Reuters took up the story.

Novo Banco, or New Bank – will be recapitalised to the tune of 4.9 billion euros by a special bank resolution fund created in 2012. The Portuguese state will lend the fund 4.4 billion euros.

At the time there were various issues as Portugal itself had only recently departed an IMF bailout so was not keen to explicitly bailout BES. Thus the bank resolution fund was used except of course it had nowhere near enough money so the state lent it most of it. These sort of Special Purpose vehicles are invariably employed to try to keep the debt out of the national debt. To be fair to Eurostat that usually does not work but left an awkward situation going forwards where in theory the other Portuguese banks created Novo Banco but in reality the Portuguese taxpayer provided most of the cash.

Novo Banco

As regular readers will be aware investors in Novo Banco later discovered that the word “clean” was a relative and not an absolute term.

The nominal amount of the bonds retransferred to Banco Espírito Santo, S.A. totals 1,941 million euros and corresponds to a balance-sheet amount of 1,985 million euros………This measure has a positive impact, in net terms, on the equity of Novo Banco of approximately 1,985 million euros.

This may have happened just after Christmas 2015 but there was no present here for the holders of these bonds who found them worth zero. To say that institutional investors were unhappy would be an understatement and I will return to this later but for now I just wish to point out that the bill is escalating and also how can a clean new bank have to do this?

The sale of Novo Banco

There were various efforts to sell Novo Banco which went nowhere and of course trust in the Bank of Portugal was damaged by what happened above which added to the misrepresentations issued by it as BES declined. Just over a year ago it published this.

Banco de Portugal has defined the terms of the new sale process of Novo Banco, following the re-launch announced on 15 January 2016.

This January the Lex Column of the Financial Times pointed out why buyers have been in short supply.

Available for purchase: one crippled bank suffering from poor credit quality and high costs. Location: Portugal. Important information: Potential for future damages arising from litigious creditors. The sale prospectus for Novo Banco does not look enticing.

It gets worse.

Quarterly losses since Novo’s creation have averaged €250m. A quarter of all loans are delinquent or “at risk” of being so.

Again we are left wondering exactly how the Bank of Portugal defines the word “clean”?! But whilst the FT thought there were bidders it looks to me that the only player was the appropriately named Lone Star.

Lone Star

What happened late on Friday was summarised by Patricia Kowsman of the Wall Street Journal.

Dallas-based Lone Star will inject €1 billion ($1.07 billion) in Novo Banco for a 75% stake, while a resolution fund supported by the system’s banks will hold the remainder. The setup could ultimately leave Portuguese taxpayers exposed to losses, which is what the country’s central bank had tried to avoid when it imposed a resolution on the lender almost three years ago.

Actually they are only paying 750 million Euros up front with the rest by 2020. But as we number crunch this there are a lot of problems.

  1. The nearly 2 billion Euros of bonds written off do not seem to have made the situation much better.
  2. The Portuguese Resolution Fund put in 4.9 billion Euros for a bank which is now apparently worth 1 and 1/3 billion.

The Resolution Fund took steps last September to cover this.

the maturity date of the loan will be adjusted so as to ensure that it will not be necessary to raise special contributions,

I would like to take you back to August 2014 when it told us this.

Therefore this operation will eventually involve no costs for public funds………..This applies even in exceptional cases, such as this one, in which the State is called upon to provide temporary financial support to the Resolution Fund, as that support will later be repaid (and remunerated through payment of interest) by the Fund.

The use of the word “temporary” was a warning as its official use is invariably the complete opposite of that to be found in a dictionary. Also I am reminded of my time line for a banking collapse.

5. The relevant government(s) tell us that they are stepping in to help the bank but the problems are both minor and short-term and are of no public concern.

6. The relevant government(s) tell us that the bank needs taxpayer support but through clever use of special purpose vehicles there will be no cost and indeed a profit is virtually certain.

Back in August 2014 we were told this. From Reuters.

“The plan carries no risk to public finances or taxpayers,” Carlos Costa, the central bank governor, told reporters in a late night news conference in Lisbon.

Litigation

You might think that things could not get much worse. Yet apparently they continue to do so. From Reuters.

Blackrock and other asset management institutions are seeking an injunction this week to block the sale of Portugal’s Novo Banco to U.S. private equity firm Lone Star.

Okay why?

The bond transfer had caused losses of about 1.5 billion for ordinary retail investors and pensioners

Comment

A critique of the banking bailouts has been the phrase “privatisation of profits and socialisation of losses ” and we see this at play here. Whilst there is a veil of a Special Purpose Vehicle ( the Resolution Fund) the Portuguese taxpayer has had to borrow money to back most of it. It is plain that we were not told the truth or anything remotely like the truth when a “clean” bank was created. As no cash at all has been returned from the sale of Novo Banco – the funds are to boost bank capital – they are left hoping that one day the money will be repaid except they have been diluted by a factor of four.

Let us take a happy scenario where Novo Banco now does well the majority of the gains will go to Lone Star and a minority to the Resolution Fund. So the minor stakeholder gets the majority of the returns? Oh and even worse the Fund is backing another sector of potential losses. From the Algarve Daily News.

In a statement issued today, PS party leader Carlos César says MPs “should know in detail all the preparatory and contractual aspects of the sale operation” – bearing in mind the State has no say in the bank’s management, but is guaranteeing to underwrite extraordinary losses of up to €4 billion.

In a happy scenario the other Portuguese banks will be likely to be able to put some extra money into the Resolution Fund but of course many of them have their own problems and the Portuguese economy could do with them backing it.

And a bad scenario? Well look at the sums above……..