Article published in
Katoikos
Lisbon's mayor Fernando Medina and Prime Minister António Costa, October 2017 (Source: Paulo Vaz Henriques)
The
current left-wing government in Portugal formed by the Socialist Party, the
Left Bloc and the Communist Party, was given a popular endorsement at the
municipal elections on 1 October. Aiming at the seats for new mayors in 308
city halls and 3,085 parishes throughout the country, the politicians promised
affordable housing, better quality public transport, health and education.
In
what the Spanish daily El País
called a “bulldozing”,
the Portuguese Socialists will now dominate a record 158 of the country’s 308
town halls. While keeping Lisbon, they also gained nine out of the 15 most
populous cities.
Overall,
the Socialist Party (SP) won 37% of the vote at national level. It was followed
by the Social Democrats (PSD) with 16% of the vote. The Communist Party gained
9.7%, which put it well ahead of the Left Bloc on 3.2%. The biggest loser was
the PSD, a centre-right opposition party, which was pushed down into third
place in both Lisbon and Porto, prompting the resignation of its leader, former
Prime Minister Pedro Passos Coelho. As for the PSD’s closest ally, the
CDS-People’s Party, it scored an unusual 20.6% in Lisbon. Nonetheless, the real
winner of the election was a robust abstention rate of 45%.
The
Communists recorded their worst ever local election results, losing ten towns
halls to the Socialists. The Left Bloc’s achievement was far from spectacular
but it did manage to be represented in the capital.
As
the Socialists are forming a government with both the Communists and the Left
Bloc, António Costa, the prime minister and secretary-general of the
Socialist Party, reassured continuity of good relations: “Our victory is not a
defeat for any of our parliamentary partners,” he said, adding that “these
results strengthen the SP, but also the parliamentary majority that has brought
change.” The President of the Socialist Party Carlos César also
guaranteed that the election outcome would not interfere in the good relations
between the parties that support the government.
The
municipal elections are considered an indicator of the popular view of the
government’s performance: a significant portion of the population appears
satisfied, to the detriment of the current opposition, with almost two years to
go before the general election in 2019.
Improving
economic outlook
On
15 September, the rating agency S&P raised its forecast for
Portugal’s economic growth from BB+ to BBB-, thus upgrading the country’s
rating to “investment-grade” status with a stable outlook. This is an
additional booster for the ruling government, but the opposition has claimed
recognition for its own contribution while in office.
“It
allows a much vaster array of investors to have Portuguese debt in their
portfolios. It also allows private debt to benefit from better financing
conditions, and this is very relevant for Portuguese banks,” Portuguese Finance
Minister
Mário Centeno told
Bloomberg.
Until
now, Portugal was hanging by the thread of a single investment-grade rating,
granted by the Canadian DBRS, which has allowed the country to have access
to the European Central Bank (ECB) bond-buying programme. With the additional
favourable grading from S&P – one of the “Big Three” – Portugal is expected
to attract more investment and reduce financing costs due to the resulting fall
in interest rates to their lowest point since late 2015.
While
not having changed their rating, the other two large rating companies, Fitch and Moody’s raised
their outlook to “positive”, possibly indicating that they may follow S&P in
the near future.
“This
is a very positive development, it shows that the economic recovery in Portugal
is on the right track, that the budget deficit is on a downward trajectory, and
this is recognised by rating agencies,” said Valdis Dombrovskis, the European
Commission Vice-President for the euro.
Portugal’s
efforts were also recognised by the Financial Times, which described the
recovering country as a “
rare beast”
in the eurozone.
The
S&P statement came while the Portuguese government was undergoing its 2018
budgetary talks. The financial guiding document for the coming year will be
presented on 13 October for final voting on 28 November.
According
to the
winter
forecast issued by the European Commission, Portugal’s economy
grew by an estimated 1.3% in 2016 and real GDP growth is forecast to reach 1.6%
in 2017 and 1.5% in 2018. Moreover, the deficit is projected to decrease to
2.0% of GDP in 2017, mainly due to a one-off operation (the recovery of a
guarantee to Banco Popular Português worth 0.25% of GDP).
Additionally,
the Portuguese government reported a €3.7 billion deficit in 2016, equivalent
to 2% of GDP. Figures came well below a 4.4% gap in 2015 and a 2.5% deficit
agreed with the European Union (EU). It is the lowest budget gap since the end
of Portugal’s dictatorship in 1974, and below the 3% maximum allowed under EU
rules. The improvement is largely due to lower capital expenditures and higher
social security receipts.
Background
In
March 2011, with interest rates spiking to unsustainable levels, Portugal
received the €78bn bailout from the EU, the ECB and the International Monetary
Fund, as well as bilateral loans, in exchange for a packet of reforms,
including cuts in public spending and tax hikes.
By
then, Greece and Ireland had already received their own
austerity packages and, given the contradiction in all these economies and the
fear of contagion, interest rates on Portuguese ten-year debt had risen
further, reaching an alarming 17% in early 2012. By then, ten-year bonds yields
(or interest rates) were downgraded to BBB-, otherwise known as junk.
Since
taking office at the end of 2015, Prime Minister Costa has been expressing his
intention to reverse some of the measures introduced during the bailout.
Banks
and public debt still not satisfactory
Although
Portugal exited the three-year international aid programme in 2014, opening the
way for an improvement of the country’s economic performance, non-performing
loans (NPL) are still a hurdle haunting its banking system.
Non-performing loans
as a share of all bank loans in Portugal (Source: The Global Economy)
Last
year, Portugal recorded a public debt equivalent to 130.4% of the country’s GDP
– still a high value that requires some work, yet the forecast for 2017 is a
public debt of 127.7%,
according to
Finance Minister Centeno.
The
government debt to GDP ratio in Portugal averaged 76.1% from 1990 until 2016,
reaching an all-time high of 130.6% in 2014 and a record low of 50.3% in 2000.
“Many
banks have high levels of NPL, but that does not mean that they are in crisis,
only that their profitability is low because these loans do not generate
income,”
said the
Managing Director of the European Mechanism of Stability
Klaus Regling,
who
considers Portugal
a successful case.
Nevertheless,
the recapitalisation from the Caixa Geral de Depósitos (CGD) bank is likely to
be added to public debt against people’s will, thus hampering Portugal’s
ability to ease what is currently its biggest burden.
