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Portugal's turnaround: improved growth, deficit, and employment - but debt burden still an issue

My meeting with Portugal's Prime Minister Antonio Costa

Key points:

1) Portugal's growth accelerated twice as fast as Eurozone average in Q1 2017

2) Unemployment has fallen to below 10%, a large improvement from 18% five years ago

3) Budget deficit at 2% of GDP, compared to 11.2% of GDP 4 years ago

With this said, public debt still exceeds 120% of GDP

A bit more on the landscape and the causes that led to these developments -

As most of Europe began recovering after the 2008 financial crisis, Portugal fell into a second deep recession from 2011-2014. The country took a €78bn bail-out from the IMF / EU, and implemented various austerity measures under the conditions of this bail-out agreement. The country experienced substantial GDP contraction and the EU and Portugal's right wing government, led by Pedro Coelho of the Portugal Forward party, pushed through tough austerity measures. The rates on Portugal's 10yr treasuries jumped into the high teens and the country suffered a substantial lending and growth crisis during this period. The government made improvements and cut the budget deficit from 11.2% of GDP in 2011, to 4.4% in 2015.

After the 2015 election, the right wing government got replaced by the anti-austerity Socialist party led by Antonio Costa. He preached to end the austerity measures, while at the same time recognized that Portugal needed to keep its spending under control to avoid bankruptcy. Costa made various efforts to increase government worker pay and change the tax system. Since his election, the country has experience a significant economic change.

Before crediting Costa's anti-austerity measures with these improvement, we have to recognize that much of the budget deficit improvement has come from his continued sweeping cuts to public investment and other government expenditures. Costa recognizes and has fulfilled his political promises to the people of anti-austerity - at the same, he is an intelligent and practical person who recognized that certain spending did indeed have to go. As a result, the European Commission recommended that Portugal be allowed to leave the "excessive debt procedure".

Despite these positive improvements, we still need to pay attention to the country's high public debt to GDP ratio and structural deficit. These types of issues are typically where politics cross with economics, and the lure of votes sometime skews decisions. Portugal still has a long way to go with both the public and private debt reduction; however, the improved economic backdrop potentially poses opportunities for investors looking to take advantage of debt opportunities.

Authored by Karl Hefele

See the Financial Times article with similarly interesting thoughts here



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