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Portuguese report Portuguese report
by Euro Reporter
2012-01-29 11:17:15
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Portugal is beating the headwinds

The financial crisis has forced Portugal to confront a number of longstanding imbalances in its economy. No country desires an adjustment program, but once in place it should be embraced as an opportunity for decisive action in addressing fiscal problems and eliminating barriers to growth. In turbulent times, an adjustment program provides much-needed breathing room to focus on what matters: reforms that boost competitiveness. Eight months into the EU-IMF program and despite the hard work still ahead of us, there is already ample evidence that Portugal has been seizing this opportunity. In recent days, some commentators and the illiquid secondary bond markets suggested concerns about the Portuguese situation. Being a small part of a wider global crisis, and facing jittery markets, it is difficult to get across the relevant information on what we have been doing to generate growth, and to highlight the indicators that suggest that imbalances are being corrected.

In recent years, problems of competitiveness and high levels of debt-fueled consumption brought external deficits to unsustainable levels. In 2010 Portugal's deficit in the current account was 8.9% of GDP. Recent Bank of Portugal estimates project sharp corrections in this deficit: to 6.8% in 2011, and to 1.6% of GDP in 2012. In 2013, for the first time in decades, it is expected to positive. These corrections are explained in part by a contraction of domestic demand, mirrored by a healthy rebound on the savings rate, but also by the strong performance of exports, which grew by 7.3% in 2011. In a context of dampened global demand, such growth suggests that Portugal is gaining market share. The latest official figures, from November 2011, continue to show double-digit growth in exports of goods. This is a major adjustment, both in magnitude and in speed. It is a testament to the strong adaptability of Portuguese companies, which, facing weaker demand in European markets, are tapping the strong potential of emerging markets with linguistic ties to Portugal, such as Brazil and Angola. Thus, Portugal is showing a capacity to restore competitiveness within the constraints of the monetary union.

In terms of fiscal consolidation, adjustment is well under way. We have already brought down the structural deficit to 6.9% in 2011 from the 2010 high of 11.4% of GDP, and we will bring it further down to 2.6% of GDP in 2012. This year, the primary balance (excluding interest payments) is expected to be a surplus of 0.3% of GDP. Naturally, this entails austerity measures and some economic contraction. But because more than 70% of the adjustment comes from spending cuts and the rest from the revenue side, we are minimizing potential disincentives for economic activity while retrenching the size of the state. Total primary expenditure represented a staggering 48.4% of GDP in 2010 and will be brought down to 42% in 2012. This will further contribute to a shift from the non-tradable to the tradable sectors, and will ultimately open the possibility for tax cuts. We are also moving decisively on our privatization program. With our first transaction, that of the power company EDP, we obtained a 53% premium on the share price, for total revenue of €2.7 billion. The proceedings from this one sale represent more than half of expected revenue for the whole privatization program. This first transaction, which was widely praised for its fair and transparent process, bodes well for future transactions and for FDI attractiveness.


Investor optimism ruled by euro debt

The long and winding process of reforming the European Union takes another step on Monday when the region's leaders gather for their first 2012 summit with investors desperate for a show of unity on tackling the region's debt crisis. Agreement is crucial for European debt markets, which are slugging their way through a heavy first quarter of refinancing. Despite the increased liquidity in financial markets, fears remain that the strong start in global asset markets could be put at risk. Hope is nonetheless rising that EU leaders are moving towards agreement on the key issues of how much money to put into the bailout funds for debt-ridden countries and the shape and enforcement of budgetary reforms, known as the fiscal compact.

"It seems as though a consensus is building," said Philip Poole, global head of macro and investment strategy at HSBC Global Asset Management. Though Poole has no illusion this is going to be agreed at the upcoming leaders meeting, he is hopeful a package of measures could be ready by the next summit in March. "The fiscal compact, if it's agreed and if it's got teeth, should start to give investors a feeling that, if we can get over the current problems, then in the future there's a mechanism to get over these problems again," he said. In the short term the key risks surround Greece and the progress it makes in meeting the conditions required to trigger bailout funds from the EU and International Monetary Fund needed to cover bond redemptions due in March and avoid a messy default. "For me that aid package is what controls systemic risk," Mohit Kumar, head of Europe & UK rates strategy at Deutsche Bank said.

"What happens in Greece is important for Greek bondholders but what is more important as far as the rest of Europe is concerned is whether there is a systemic risk of contagion or not," he said. Otherwise the huge liquidity injection by the European Central Bank at the end of 2011, the prospect of another big round at the end of February, plus the outlook for a long period of low interest rates and some improving economic data have encouraged optimism among investors. "The reality is there's plenty of cash in the system. It's just not going in the right place," said Poole. The MSCI ACWI Index .MIWD00000PUS that is designed to measure the equity market performance of developed and emerging markets is on track to rise by 6 percent in January while 10-year Italian bond yields, an informal bellwether of euro zone risks, were at 5.85 percent on Friday, well below the 7 percent level seen as unsustainable.


Portugal's borrowing rates rise to record 19.4%

The threat posed to the British economy from the eurozone crisis was underlined on Wednesday when Portugal saw its borrowing costs soar to a record high amid market fears that the bailed-out country will not be able to break free of its financial crisis in the near future. The yield, or interest rate, on three-year bonds reached 19.4%, while the rate on 10-year bonds was 14.6%, figures that compare with British rates of less than 2%. Portugal needed a €78bn (£65bn) rescue package last year as its high debt load and feeble growth pushed it towards bankruptcy.

A three-year programme of austerity measures and economic reforms is aimed at restoring investor confidence in the country, but a deepening recession, with a 3.1% contraction forecast for this year, is undermining the faith of the markets in Portugal.

The worsening crisis in the eurozone has hit the British economy, and analysts fear that the contagion from Greece may spread throughout the eurozone and drag Britain and the rest of the world into a prolonged recession. Antonio Barroso, an analyst with Eurasia group, said in a note that the recent downgrade and Greece's troubles "are increasing the perception that Portugal might not be able to avoid a default".

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