Capital markets and M&A in Portugal post-Troika. Portugal's successful return to the international capital markets c
September 2015
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Contents
Capital markets and M&A in Portugal post-Troika
Portugal’s successful return to the international capital markets continues, with CaixaBI a key player in the majority of recent issues Caixa - Banco de Investimento
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Portugal: investing in sustainable growth
Portugal’s economic turnaround is gathering pace, with rising domestic demand and continued export growth Santander Totta
Still progressing, despite the setbacks
Resilient to the Greek crisis and now finding the recipe for economic growth, Portugal’s long-term improvement in creditworthiness since the global financial crisis has continued this year according to experts taking part in Euromoney’s Country Risk Survey
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This special report is for the use of professionals only. It states the position of the market as at the time of going to press and is not a substitute for detailed local knowledge. Euromoney does not endorse any advertising material or editorials for third-party products included in this publication. Care is taken to ensure that advertisers follow advertising codes of practice and are of good standing, but the publisher cannot be held responsible for any errors. Euromoney Trading Ltd Nestor House Playhouse Yard London EC4V 5EX Telephone: +44 20 7779 8888 Facsimile: +44 20 7779 8739 / 8345 Chairman: Richard Ensor Directors: Sir Patrick Sergeant, The Viscount Rothermere, Christopher Fordham (managing director), Neil Osborn, John Botts, Colin Jones, Diane Alfano, Jane Wilkinson, Martin Morgan, David Pritchard, Bashar Al-Rehany, Andrew Ballingal, Tristan Hillgarth Advertising production manager: Amy Poole Journalist: Jeremy Weltman (ECR) Printed in the United Kingdom by: Wyndeham Group © Euromoney Trading Ltd London 2015 Euromoney is registered as a trademark in the United States and the United Kingdom.
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CAPITAL MARKETS AND M&A IN PORTUGAL POST-TROIKA Portugal’s successful return to the international capital markets continues, with CaixaBI a key player in the majority of recent issues Portugal exited the Troika’s economic and financial assistance programme in May 2014. The programme has put the Portuguese economy on a path towards sound public finances, financial stability and competitiveness. During the programme’s three years, the external current account shifted from a deficit of over 10% to a surplus of 1.4% in 2013 (0.6% in 2014), the budget deficit was halved (4.5% in 2014 and projected by the European Commission at 3.1% in 2015), while public debt has remained sustainable, even at the current high level of 130% of GDP. Ambitious reforms were implemented across all the main sectors of the economy and growth was reignited in 2013; in 2015, according to the Bank of Portugal, the country is projected to grow by 1.7%. Successful implementation of
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the adjustment programme and consequent economic rebalancing led investors progressively to rebuild their Portuguese risk exposure, contributing to a dramatic tightening in Portuguese spreads throughout 2013 and 2014. Portugal’s return to international capital markets began in September 2012, 18 months into the Troika’s assistance programme, but the clean exit from the Troika in 2014 sealed its comeback. During the Troika, all the usual issuers, such as EDP, REN, BCR, Portugal Telecom and the country’s main financial institutions, plus inaugural issuers Galp, Portucel and Empark, brought successful transactions to markets in the threeto seven-year tenors. The Republic brought two five-year tap issues and a 10-year new issue and tap. CaixaBI was bookrunner in 12 of the 19
corporate and SSA Eurobond issues in this period.
Debt issuance continues with Troika’s departure Summer 2014 was marked by the fallout and subsequent resolution of Banco Espírito Santo (BES), a highly disruptive event that kept investor activity subdued and contributed to a temporary wobble in Portuguese spreads. The tightening trend in spreads quickly regained momentum after the summer break. Taking advantage of this positive turnaround in market sentiment, the Portuguese sovereign came out with a ground-breaking 15year benchmark issue after the summer lull (3 September); the first since 2008. The new €3.5 billion OT 3.875% due February 2030 at swaps spread of 235bps had CaixaBI as joint bookrunner. Following on 11 September was prominent Portuguese issuer EDP, with a seven-year issue, a €1 billion 2.625% due January 2022 at swaps plus 190bps. Also, with the aim of maintaining its presence in the US dollar market, EDP opted for a new five-year issue on 13 November, a $750 million 4.125% due January 2020 at Treasuries plus 255bps. The second half of 2014 brought the spectrum of deflation in the eurozone to the minds of investors, crystallising prospects of enduring low interest rates. In this environment, also plagued by a scarcity of investment opportunities due to the continuing deleveraging
of European corporates, investors had to continue their search for yield by taking higher-risk and longerduration assets into their portfolios. In October 2014, Greece was back in the spotlight due to concerns over domestic politics - the rise of Syriza and the risk of early elections - and uncertainty over the end of the bailout programme in December 2014. Greek spreads began a solo widening move, intensified in December by the aggravation of the same risks, resulting in an extension to the expiring bailout programme. The culmination came in January with the election of Syriza, effectively materializing investors’ concerns and taking the country on a path of confrontation with European institutions and away from financial markets. Despite being initially entangled by the re-ignition of Greek woes in Q4 2014, the new year confirmed the detachment of Portuguese spreads from the Greek situation as a reflection of investors’ perception of separate country risks. Proof of this pattern was the launch on 13 January of the 10year and 30-year dual-tranche transaction by the Portuguese sovereign. The €3.5 billion 2.875% due October 2025 and the €2 billion 4.1% due February 2045 were jointly placed by CaixaBI at swap spreads of 212bps and 282bps respectively. This transaction carried the lowest-ever coupon for a 10-year public debt issue and, in its 30-year tranche, the first such maturity since 2006. Galvanized by the ECB’s launch of its covered bond purchase programme in October 2014, CGD decided to tap the markets on 20 January 2015 with a covered bond, which has become something of a tradition at this time of the year. This transaction of €750 million due January 2022 at swap spreads of 64bps, jointly run by CaixaBI,
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10-year OT spreads performance from January 2014 to July 2015 Bps
400 350 300 250 200 150 100 50 0 Jan/14
Mar/14
May/14
Jul/14
Sep/14
OT Buoni
Nov/14 OT Bund
Jan/15
Mar/15
May/15
Jul/15
OT Bono
Source: Bloomberg
managed to print with a recordbreaking coupon of 1%.
Investor confidence peaks, Portuguese spreads at lowest levels Several months after the Troika’s departure, Portuguese issuers continue to exude confidence in international debt markets. An additional sign of this return to normality in Portuguese debt markets was, in 2015, the 10-year tenor bonds successfully placed jointly by CaixaBI for the three main corporate issuers in the country, REN, EDP and BCR. On 5 February, REN came out with a €300 million 2.5% due February 2025 at a swap spread of 182bps, the longest Portuguese corporate Eurobond to venture into the market since 2009 and bearing the lowest-ever coupon for a corporate. Also successful were EDP on 16 April, with a €750 million 2% due April 2025 at swaps plus 155bps, and BCR on 20 April, with a €300 million 1.875% due April 2025 at swaps plus 153bps. Investors’ search for yield and consequent risk-on mode propelled
Portuguese asset prices and took the 10-year OT Bund spread to lows of 127bps (yield of 1.56%) on 16 March, coinciding with the launch of the ECB’s public sector
purchase programme (9 March) that gave this momentum an extra boost. Simultaneously, Portuguese sovereign spreads to comparable peripheral countries, Spain and Italy, also got to minima, with the 10-year OT Bono spread reaching 37bps on 17 March and the 10-year OT Buoni spread touching 33bps on 9 April, both coming from a level of 183bps at the beginning of 2014.
Debt markets paradigm shifts, Greek woes intensify
“Several months after the Troika’s departure, Portuguese issuers continue to exude confidence in international debt markets”
By the second quarter of 2015, with the ECB’s quantitative easing well under way, economic indicators showing better growth numbers and slight upticks in inflation, medium and long-term yields began to drift up, with volatility also on the rise. This inversion of the market trend was confirmed during April, with the Bund flash crash of 29 April, which calmed investors searching for duration and set in a new rates and credit markets paradigm plagued by high price volatility. In the midst of this shift in investor sentiment, the Republic
managed a last-minute (29 April) tap issue of its dual-tranche transaction launched earlier in January. The €2 billion tap of the 10-year tranche priced at a swap spread of 155bps, while the €500 million 30-year tranche came out at swaps plus 215bps. Adding extra volatility was the escalation of Greek woes in May, with daily headlines having a major impact on investor sentiment. This was reflected in credit market prices, which eventually all but closed the markets for new issuance until a decisive Greek agreement was to be found. The Greek debacle during May and into the summer months kept investment banks’ pipeline clogged with prospective new issues. This is also the case for Portugal, where CaixaBI continues its leadership in debt capital markets in the post Troika period, having placed seven of the 13 new corporate and SSA Eurobond issues.
Equity markets turn down Despite the conclusion of the Portuguese adjustment programme in May 2014, there followed a
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Base 100 as of 1 January 2014
PSI 20 index performance from January 2014 to June 2015
120
100
80
60 Jan/14
Mar/14
May/14
Jul/14
Sep/14
Nov/14
Jan/15
Mar/15
May/15
PSI 20 Index
Source: Bloomberg
substantial downturn in the positive context of the Portuguese equity capital markets (ECM). The positive trend had been building since the summer of 2012, with the recovery of the PSI20 index, and had consolidated in the first half of 2014, with a significant increase in the number of new ECM transactions: initial public offerings (IPOs), accelerated bookbuilding offers (ABBs) and rights offerings. From June until the end of 2014, the PSI20 presented a negative performance as a result of the instability in the Portuguese financial sector. This was due to the financial problems identified in the main shareholder of one of the largest Portuguese private banks, BES, culminating with the Bank of Portugal applying a resolution measure to BES by transferring its general activity and assets to a new bank (Novo Banco). The sharp decline in oil prices that began in August 2014 and the political problems in Greece that surfaced in Q4 2014 and led to the holding of new legislative elections had a strong adverse impact on the Portuguese equity market. The PSI20 index fell by 29.4% in the second half of 2014 and 26.8% over the whole year. As a consequence, Portuguese ECM activity suffered a sharp
decline. However, even during this period, the Portuguese government was able to take advantage of a window of opportunity in early September 2014 and concluded the privatization of CTT, selling its remaining stake of 31.5% through an ABB, which amounted to €342.6 million. The offer achieved great success, reaching a significant level of demand, mostly from international investors, exceeding the total existing shares for sale. CaixaBI was joint global coordinator and joint bookrunner in this transaction, being instrumental in its success. Additionally, Sonae Indústria was able to conclude a share capital increase through a rights offering, a crucial part of its strategic plan, allowing a significant strengthening of its capital structure. CaixaBI acted as joint global coordinator and bookrunner in this offer, making an important contribute for its completion. At the beginning of 2015, the PSI20 index returned to positive performance on the back of the announcement by the ECB of its expanded asset purchase programme, registering a growth of 31.2% until the middle of April. This new positive context allowed José de Mello Group to conclude the sale of its stake of 2% in EDP through an ABB which
amounted to €249 million, on which CaixaBI acted as adviser and joint bookrunner. The offer achieved a level of demand that exceeded the total existing shares for sale and a discount that was below the average in similar European ABBs in the first half of 2015. These examples show that, despite the instability of the Portuguese market, there is always place for good investment opportunities. Investors are always looking for companies with well-defined equity stories and valorization potential. The political context in Greece and the uncertainty in relation to the negotiation of the third economic adjustment programme, culminating in the country’s inability to repay a €1.6 billion tranche to the IMF on 30 June, again had a strong negative impact on the Portuguese equity capital markets. From the middle of April 2015 until the end of June, the PSI20 index decreased by 11.8% and market conditions did not permit the conclusion of new ECM transactions. The recovery of Portuguese ECM activity by the end of 2015 is highly dependent on an improvement in overall market conditions, through a positive performance of Portuguese and international equity indexes
and a decrease in volatility levels. If this is the case, and considering that Portuguese macroeconomic conditions have improved during the past two years, there might be opportunities for companies to finance themselves through IPOs, follow-ons or other types of ECM transactions.
M&A picks up on the back of economic recovery In the past few years, Portugal has made significant reforms in a challenging macroeconomic context, paving the way for its successful exit from the economic and financial assistance programme in May 2014. According to the Bank of Portugal, the economy is projected to grow by 1.7% in 2015 (versus 0.6% in 2014). Exports are expected to continue to lead the economic recovery, as growth in Portugal’s main export markets, especially Europe, is expected to pick up. Not surprisingly, M&A activity has been strengthening. After almost four years of privatization-led M&A that brought significant overseas investment, especially from China, it is now time for some market-driven deals. 2014 marked a turnaround in M&A in Portugal, posting nearly €10 billion of announced deals, almost 40% more than in the previous year. In 2015, announced transactions
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already account for approximately €3 billion, with major deals still expected to be announced during the second half of the year. The last sizeable privatizationdriven deals have been announced, with TAP (2015), the Portuguese flagship airline, and EGF (2014), the waste management leader, being seized, respectively, by Portuguese-Brazilian private investors’ consortium Gateway and Portuguese construction/ waste consortium Mota-Engil/ Suma. CaixaBI was actively involved in both transactions, alongside Brazilian-led consortia with competitive bids, contributing to market dynamics. So far, 2015 has been marked by high-profile infrastructure deals, involving professional investors, some of whom fall into the category of top-notch private equity with a global reach, attesting to the overall improvement in the perceived risk allocated to Portuguese infrastructure assets. These are, for example, the announced acquisitions of several Portuguese-operating toll-roads belonging to the two major players, BCR (minority acquisition by
Brazilian private investors) and Ascendi (50% acquisition by Ardian, the French private equity and infra group), with CaixaBI participating in both deals. The Ascendi deal represented close to a €3 billion enterprise value transaction, with CaixaBI being the sole financial adviser involved, acting on the buy side for Ardian. 2015 should see further infrastructure transactions towards the end of the year, notably in the renewable energy sector. It is worth mentioning that the financial services sector has also been quite active, mainly following the break-up of the former BES Group. The sale of Tranquilidade to Apollo Global Management and the sale of BESI to Haitong Securities, both during the second half of 2014, will be followed by the sale of Novo Banco, which should occur in the second semester of the year. All in all, 2015 should be a fairly good year for M&A, provided of course major global risks that could affect European and global economic performance do not materialize. The financial services sector should continue to stand out, not only due to the on-going sale of Novo Banco, but also to the overall
“All in all, 2015 should be a fairly good year for M&A, provided of course major global risks that could affect European and global economic performance do not materialize”
market consolidation already in motion, led by recently announced or rumoured insurance and banking business sales (for example, Axa Portugal and Barclays Portugal)
and potential retail banking tie-ups. Industrials should also play a bigger role, since private equity players are becoming extremely active in the market (sources of finance are again abundant), especially in the mid-market segment, as jumbo deals tend to rarefy and large privatizations have come to an end. Nonetheless, these financial investors are expected to become increasingly selective, seeking assets with scalable and/or export capabilities. In addition, as already hinted, infra deals are clearly gaining momentum since portfolios need to be renewed and foreign investors see the opportunity to seize relevant yields at low levels of perceived risk. Overall, from a fundamental perspective, Portugal’s privileged geographic location and longstanding cultural affinities with several countries in the southern hemisphere make a compelling argument for investors to view Portuguese corporates as the preferred expansion platform not only to Portuguese-speaking emerging countries, including Brazil, Angola and Mozambique, but also to emerging markets in Latin America.
For further information please visit www.caixabi.pt or contact the following individuals:
Ana Santos Martins Head of ECM
[email protected]
Paulo Serpa Pinto Head of DCM
[email protected]
Marco Lourenço Head of M&A
[email protected]
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PORTUGAL: INVESTING IN SUSTAINABLE GROWTH
other measures; and emigration (the resident population has declined by 125,000 since 1Q13). Better economic conditions help to explain the change in the mix of employment, including the recovery of employment in manufacturing, while sectors such as agriculture and construction have faced declining employment. Services, however, made the largest contribution to employment creation.
Portugal’s economic turnaround is gathering pace, with rising domestic demand and continued export growth Last summer, Portugal was concluding the three-year economic and financial adjustment programme it agreed with the EU, ECB and IMF in 2011. One year ago the economy was taking the first steps into the economic recovery that has been strengthening since, as reflected in faster growth and lower unemployment. In the second quarter of 2014, GDP was growing by 0.9% year on year, while the growth mix was changing, from external demand (which had positive contributions to GDP growth in 2011-13) to domestic demand. This switch, however, occurred in an environment where exports have continued to grow at solid rates, in real terms, so that Portugal gained market share in terms of world trade. The improvement in domestic demand reflects two underlying trends. The first trend is the recovery of private consumption,
following three years of contraction during which household expenditure fell by more than 10%. Private consumption is currently growing by around 2% year on year, in line with both an improvement in disposable income and a decline in unemployment, which in 2Q15 fell to 11.9%, the lowest level in four years. Disposable income has been recovering from recent lows, not only because of developments in the labour market, but also because there has been an increase in the minimum wage (by 4.1%, to €505 per month) and the partial repositioning of wages in the public sector and of pensions. Following the Constitution Court’s ruling of May 2014, in 2015 the government reversed 20% of the cuts in wages and pensions that had been in place since 2011. As households began spending more, the trend of rising savings has also been halted.
GDP growth (YoY and QoQa)
Labour market improving The labour market has been showing signs of improvement since the first quarter of 2013, when the unemployment rate reached its historical maximum of 17.5%, equivalent to 927,000 unemployed people. Employment, in turn, reached a minimum of 4.35 million in that same period. Since then, the unemployment rate has fallen by 5.6 percentage points, to 11.9%, and the number of unemployed by 306,000, to 620,000. Employment rose by 226,000, while the active population declined by 80,000 in the same period. Despite the fact that all labour market indicators are worse than pre-crisis levels, it is worth noting the recent improvement in the trend. Three factors account for this decline in unemployment: the improvement in economic conditions; active labour market policies, with internships among
Catalysts for investment The underlying improvement in manufacturing conditions is clearly positive, and draws on the trend we highlighted in last year’s report: resilient export growth and gradually stronger domestic demand would be the catalysts for investment, for both improvement and expansion of capacity. That process has begun already, with non-construction related investment registering positive year-on-year growth rates since the second quarter of 2013. That movement has been led by capital expenditure in transport equipment, but also in machinery and equipment, and in 2015 there has been also an improvement in investment in construction, posting the first yearon-year increase since 2007. The latest Investment Survey by Statistics Portugal shows
Unemployment rate 20%
6%
18%
4%
16%
2%
14%
0%
12% 10%
-2%
8%
-4%
6%
-6% -8%
GDP (QoQa)
4%
GDP (YoY)
2%
Unemployment rate
0%
-10% 08
09
10
Source: Statistics Portugal
Rui Constantino Santander Totta Economic Research
[email protected]
11
12
13
14
15
08
09
Source: Statistics Portugal
10
11
12
13
14
15
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Exports of non-oil goods are expected, according to the survey, to grow by 4.5% in 2015.
Evolution of business GFCF in value 30 20
Working together
10 0 -10 -20 -30
Final estimate
-40 1990
1994
1998
2002
2006
2010
2014
Source: Statistics Portugal
improved expectations regarding capital expenditure in 2015, which businesspeople expect to expand by 2.5%, a significant improvement since the last report, which expected a decline of 2.2%. This trend follows a revised growth of 5.4% in 2014 (revised upwards from 1.0% in the previous survey). The main reasons for higher investment expenditure are related still to capacity expansion, closely followed by replacement investment. The difference between these two objectives is larger, to the advantage of capacity expansion, in the manufacturing sector, and especially for exporting companies. However, investment expectations for these two sectors are for a decline in 2015, especially for exporting companies: a reduction of 5.5% of investment, following an increase of 1% in 2014. Businesspeople in the automotive sector, which has a large share in both manufacturing and exports, report intentions to increase investment by 7.4%, following an increase of 30% in 2014. This is likely related to adjusting production to new automobile models. In other significant sectors, such as food, beverages and tobacco, the expected decline may be related to higher investment having already been implemented in 2014.
Self-funding trend A clear trend of the past few years has been greater reliance on selffunding. This reflects the adjustment the non-financial corporate sector has been implementing to improve its cash-flow generation and profitability (although the trend is uneven across companies by sector and size). For this reason, the main factors seen limiting investment in 2015 are not related to access to credit or the cost of funding but rather to the deterioration of sales perspectives, as has been the case for some years. Still, in 2015, this last factor is reported by around 48% of companies. Although it is still the primary limitation reported by exporting firms, just 27% of them mention it. This is very much in line with the results of the latest survey on export prospects, also by Statistics Portugal. Exports of goods are expected to rise by 3.4% in nominal terms in 2015, an upward revision from the previous survey (+0.9 percentage points), led by stronger sales to EU countries. Exports to non-EU countries are now seen as less dynamic, but still growing by 4.3%. The recent slowdown of growth in emerging markets, including Angola, which is a significant commercial partner for Portugal, contributes to this revision.
The various engines of growth seem to be working in connection, with resilient export growth reflected in investment, which in turn is leading to employment creation, in its turn supporting private consumption. This contributes to a more sustained and balanced growth model that should result in GDP growing around 2% in the next two years, as is also forecast by the Bank of Portugal in its June Economic Bulletin. Sustained economic growth remains essential to the adjustment process, also to ensure a sustainable path for the fiscal accounts. In 2014, Portugal achieved a primary surplus of 1.4% of GDP, while the global deficit was 3.6% of GDP (excluding various one-offs that had an impact on the deficit, but which are non-recurrent, such as the recapitalization and financing of some state-owned companies). This marks a clear improvement from the situation before the adjustment programme, but it must be sustained to ensure a gradual decline of public debt, which is still around 130% of GDP.
Still, investors’ confidence in the economy is best seen in the repeated ability of the Treasury to obtain market financing at longer maturities and lower costs. In July, just after the agreement between the Greek government and the institutions for a third financial assistance programme, the Portuguese Treasury issued €600 million of the OT2037 bond, with a yield of 3.53%. Since the start of the year, the Treasury has issued €10.8 billion of long-term debt with an average cost of 2.73%. It also obtained approval from the European institutions to anticipate the repayment of the IMF loans, which face higher costs (an all-in cost of 4.7% and an average maturity of 7.3 years). So far, the Treasury has paid back 28.7% of the initial loan, in the amount of SDR6.6 billion. This confidence should also be reflected in the decline of the risk premia, allowing Portuguese corporates to obtain funding at better conditions, with declining costs. This is also observed in the cost of bank loans, which should ultimately give additional support to investment, oiling the engine of growth, which should be operating at cruise speed in the coming quarters, as reflected in the abovementioned projections for economic growth.
Government bond issuance in 2015 4.10% 3.53%
3.50 2.49% 1.42%
0.90
22 Jul 15 5Y
1.55%
2.88%
2.00 1.25
1.00
27 May 15 13 Jan 15 6Y
2.04%
11 Feb 15
1.50
25 Feb 15
0.60
22 Jul 15
10Y Amount ( bn)
Source: IGCP - Debt Management Agency
22Y Yield (%)
13 Jan 15 30Y
Euromoney Country Risk
Still progressing, despite the setbacks Resilient to the Greek crisis and now finding the recipe for economic growth, Portugal’s long-term improvement in creditworthiness since the global financial crisis has continued this year according to experts taking part in Euromoney’s Country Risk Survey Confidence in Portugal among global economists taking part in Euromoney’s unique “crowd-sourcing” survey of investor risk has continued to rise since the completion of its €78 billion bailout without ongoing creditor support in 2014. The return of Portugal to the international markets marked a turning point from which it has continued to gain in spite of recurrent setbacks. These include the liabilities the sovereign incurred from the failure of Banco Espirito Santo (BES) in 2014 and the slow implementation of structural reforms affecting the debt dynamics. With economic growth at last emerging and other macro-indicators performing better - with the current account of the balance of payments now back in surplus - the sovereign’s country risk score has increased further this year, by 1.2 points to 54.3 out of a maximum 100. This amelioration in risk has elevated Portugal’s position in the global rankings two places since 2014, and six in total since 2010 to 55th out of 186 countries, pushing it a little higher in the tier-3, medium-risk category. Euromoney’s country risk rankings are a useful guide to how experts perceive the sovereign risk profile of different countries over time. The survey utilizes a simple but effective methodology to measure political and economic risk, as well as structural factors (infrastructure and demographics, for example) that can affect a country’s investor risk profile. All 186 sovereigns in the survey are allocated among five risk categories, with tier-3 symbolizing a BB+ to A- credit rating. Portugal’s improving score and sovereign risk comparability with other issuers suggest it should now be considered for an investment grade:
Not an easy ride It hasn’t proved an easy ride though for one of Europe’s most indebted countries, as is reflected in a risk score that is still some 17 points lower than before the global financial crisis in 2007. Economic recovery was set back by three years of contraction in 2011-13, before GDP expanded in real terms by 0.9% last year to put the country back on track. Constitutional blocking of planned spending cuts and political inaction stifling bolder reforms have highlighted the risks of delays to the fiscal correction required to bring the gross debt burden (the EU measure) down from 130% of GDP in 2014. The elections this October might
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SPECIAL REPORT : PORTUGAL · September 2015
provide the spark for heightened political risk given the present lead for the Socialists promising to roll back reforms, without which Portugal’s country risk score would probably have improved even more by now. Even the Socialists will probably come to recognize the urgency of deep-seated reforms, and it remains notable there is no anti-establishment party, like Syriza in Greece or Podemos in Spain, pushing the country in a more radical direction. In any event, with the Greek crisis now easing, commodity prices remaining low and depreciation of the euro persisting, Portugal is on course for 1.6% GDP growth this year, according to the European Commission. The IMF concurs, despite warning of a slowdown in the fiscal adjustment in its second post-programme monitoring report. If all goes well, 2% growth is achievable in 2016, highlighting how the risk of government non-payment/ non-repatriation of capital is easing according to the experts.
Positive trends Consumer spending, which was sent headlong into a steep decline by years of austerity, is expected to survive the additional spending cuts required to push the general government deficit down to 3% of GDP and tackle the debt burden. Households will benefit from personal income tax reform and a gradual recovery in the labour market, including a rise in wages as the unemployment rate resumes its gradual downward trend. Exporters will gain market share from the strong and sustained recovery in Spain, and investment prospects will respond to improving balance sheets, low borrowing rates and enhanced credit availability. These positive trends are reflected in the various surveyed economic risk indicators for Portugal, including the economic-GNP outlook, employment/unemployment prospects and government finances. As economic growth strengthens it will help to improve bank profits and ease the high level of non-performing loans. Consequently, the survey score for bank stability has increased since the government injected €5 billion into BES to resolve its acute crisis, not least since better safeguards are in place to minimize system-wide instability, with increased capitalization requirements and less reliance on euro-system financing.
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