Country Reports - Portugal PDF

Country Reports - Portugal
27 Feb 2015 IHS Economics and Country Risk
Our take
Key points
Political stability is likely to be maintained in the coming months as the government prepares for the September−October 2015 parliamentary election.
Government's privatisation plans increase labour strike risks in Portugal.
Bond market conditions are expected to remain benign but volatile following the bailout exit.
The economy is expected to grow in 2014.
Analysis
Six-Factor Country Risk - Portugal
Risk Score Description

Political 2.25 MODERATE
Economic 2.75 MEDIUM
Legal 1.50 NEGLIGIBLE
Tax 2.00 MODERATE
Operational 2.00 MODERATE
Security 1.25 NEGLIGIBLE
Overall 2.16 MODERATE
12-Month Rating Trend Positive Trend
Note: 1 = minimum risk, 5 = maximum risk. Ratings form part of enhanced Country Analysis & Forecast suite of services.
Sovereign Risk Ratings - Portugal
Medium-Term 45(BB+) Likely to Fulfill Obligations

Sovereign Risk Outlook Positive
Note: 0 = minimum risk, 100 = maximum risk. Ratings form part of enhanced Economic and Sovereign Risk services.
Political stability is likely to be maintained in the coming months as the government prepares for the September−October 2015 parliamentary
election. Unity between the two ruling coalition partners has strengthened since July 2013, when the unpopular austerity regime compromised the
government's overall stability. A cabinet reshuffle, granting more policy-making powers to the junior coalition partner, then narrowly prevented its collapse. As
the government prepares for the 2015 legislative poll, overall political stability is likely to be maintained. However, public support for the government and its
policies remains low, while rejection of the government's policies by the Constitutional Court continues to represent a significant risk to policy predictability as
the ruling coalition tries to find alternative measures.
Government's privatisation plans increase labour strike risks in Portugal. In general, demonstrations in Portugal have been relatively subdued compared
with those seen in Greece, despite the lack of public support for tough austerity measures as the country faces economic and fiscal challenges. The risk of
labour strikes is likely to persist throughout 2015, particularly in the aviation sector, if the government presses ahead with its plans to privatise the national
airline TAP. These strikes are likely to disrupt traffic and cause cargo delays.
Bond market conditions are expected to remain benign but volatile following the bailout exit. Demand for Portuguese debt will be supported by a
gradually improving economy, relatively high yields, and the strong commitment from the European Central Bank (ECB) to intervene in the event of a crisis.
However, we also believe that, given the still myriad risks in place (such as the potential for a deteriorating political situation or stress coming from the banking
sector) bond markets are likely to remain volatile.
The economy is expected to grow in 2014. Despite the sharp fall in activity during the first quarter of 2014, improving confidence, a stabilising labour market,
low inflation, and firmer external demand should continue to support the economy during the coming quarters. However, the economy is still not out of the
© 2015 IHS.. No portion of this report may be reproduced, reused, or otherwise distributed in any form without prior written consent, with the exception of any internal client distribution as may be
permitted in the license agreement between client and IHS. Content reproduced or redistributed with IHS permission must display IHS legal notices and attributions of authorship. The information
© 2015IHS. page 1 of 20
contained herein is from sources considered reliable but its accuracy and completeness are not warranted, nor are the opinions and analyses which are based upon it, and to the extent permitted by
law, IHS shall not be liable for any errors or omissions or any loss,damage or expense incurred by reliance on information or any statement contained herein.
woods and activity will remain under pressure from several factors. Unemployment remains very high, while deleveraging will continue for a prolonged period.
Furthermore, fiscal policy has been tightened sharply in 2014.
Forecast summary
We expect the recovery to continue in 2015. Strong private consumption and investment spending led to a new rise in GDP during the third quarter of 2014,
when it grew by 0.3% quarter on quarter (q/q). A "flash" estimate suggests that the recovery actually accelerated during the fourth quarter. With the exception
of a contraction during the first three months of 2014, the Portuguese economy has increased, on a q/q basis, continuously since the start of 2013. We expect
the recovery to remain in place over the medium term. Positively, short-term indicators still point to improving underlying fundamentals. There are some
indications that improving confidence (business sentiment has been strongly trending upward since the start of 2013) and a stabilizing economic situation are
starting to feed into firms' employment and investment spending. The unemployment rate fell sharply during the first three quarters of 2014, while real
investment spending has also trended upward. Additionally, banks have started to gradually relax their credit conditions, although firms still find it difficult to
access credit. Very low inflation should also help to sustain households' purchasing power, therefore providing a lift to private consumption. Nevertheless, the
economy still faces several headwinds. Unemployment, although falling, is still high. Meanwhile, credit conditions are still tight. Although low inflation has some
positive implications, it also fuels the risk of Portugal being trapped in a deflationary spiral, which would hurt activity. Moreover, falling prices also increase the
economy's debt burden, which is already considerable.
We expect inflation to remain extremely low for a prolonged period, and a deflationary spiral, although not in our central scenario, is a risk. Inflation
has been negative or stagnant since February 2014. This highlights how weak underlying inflationary pressures currently are. Not surprisingly, indicators
measuring short-term inflation expectations have, in general, fallen since the second quarter of 2014. Although economic conditions are starting to stabilize, the
recovery is certainly not strong enough to general inflationary pressures. On top of cyclical factors, there are also structural issues that help to explain why
Portuguese inflation is so low. Inside a monetary union, economic adjustment processes are deflationary and, with demand being weak not only in Portugal but
also in the rest of the Eurozone, this adjustment is being made through deflation. At the moment, there is no evidence that falling prices are resulting in
households and firms delaying spending. Positively, falling prices are helping households protect their purchasing power at a time when nominal wage growth
is weak and taxes are high. Negative inflation differentials vis-à-vis most trade partners is also helping Portuguese exporters improve their cost
competitiveness. However, deflation also increases real interest rates. Tighter monetary conditions will make the needed recovery in business investment more
difficult. Moreover, deflation also has negative implications for debt dynamics, which is particularly problematic for Portugal, given its high private and public
debt. IHS expects inflation be, on average, negative in 2015, although we do not expect Portugal to be trapped in a self-feeding deflationary spiral that could
hurt growth.
Portugal's "clean" exit, although expected, is not without risks. As expected, Portugal decided to follow Ireland and exit its bailout without an external
safety line after it expired in May 2014. A calmer situation in the Eurozone, combined with an improving domestic economy, has resulted in a significant
decrease in Portugal's sovereign bond yields. Another factor contributing to Portugal's "clean" bailout exit is its healthy cash position. Although rating agencies
and markets alike welcomed Portugal's decision to exit its bailout without further support, risks are still in place. The Eurozone crisis has shown how rapidly
bond market conditions can change. The current positive sentiment toward Portugal should not be taken for granted, especially considering Portugal's elevated
funding requirements over the next few years. Several factors could adversely impact bond markets. Markets could react rapidly in the event of a sudden
deterioration of economic conditions. Debt sustainability could also suffer if deflation takes hold in the economy. In addition, fiscal risks are not negligible.
Portugal could also suffer from contagious effects from a worsening situation in Greece, although so far these have been negligible. Although it has narrowed
in recent years, the fiscal deficit remains high. Nevertheless, our central scenario is that, markets should remain supportive of Portugal in the absence of any
shocks, even without a credit line. However, if the potential shocks mentioned above were to materialize, their impact on Portuguese bond markets would be
significantly more pronounced than if Portugal were protected by a credit line. Even then, Portugal could approach the European Stability Mechanism for
support. Nevertheless, the conditions attached to that support would probably be more onerous than if the credit line had been negotiated when market
conditions were benign.
Changes since last forecast

February interim forecast versus January interim forecast
GDP UP IHS has upgraded its growth forecasts for 2015.
Inflation DOWN Inflation in 2015 and 2016 is seen lower than previously expected owing to a lower oil price forecast.
Selected data and charts: Data (forecasts)

Political summary
Presidential elections Next contest: 2016 January; Last contest: 23 January 2011.
Legislative elections (Lower chamber) Next contest: 2015 June; Last contest: 5 June 2011.
President: Anibal Cavaco Silva (since 9 March 2006)
Prime Minister: Pedro Passos Coelho (since 18 June 2011)
Deputy Prime Minister: Paulo Portas (since 24 July 2013)
Source: IHS and CIRCA People in Power
© 2015IHS. page 2 of 20
Key Macro-Economic Indicators
2011 2012 2013 2014 2015 2016 2017 2018 2019
Real GDP (% change) -1.8 -3.3 -1.4 0.8 1.5 1.7 1.7 1.7 1.7
Nominal GDP (US$ bil.) 244.9 218.0 227.3 231.0 190.9 198.7 222.6 250.3 267.9
Nominal GDP Per Capita (US$) 23,113 20,559 21,429 21,769 17,994 18,732 20,996 23,621 25,302
Consumer Price Index (% change) 3.7 2.8 0.3 -0.3 -0.3 1.1 1.7 2.0 2.2
Exchange Rate (LCU/US$, end of period) 0.77 0.76 0.73 0.82 0.94 0.88 0.80 0.76 0.75
Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the 15th of
each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release of the GIIF bank.
Country risk - overall statement
Overall
Portugal has been a stable democracy since 1974 and a member of the European Union since 1986, which has aided its democratic transition and
incorporation into the wider European community. Despite impressive progress since its transition to democracy, Portugal is still considered a European
economic underachiever, with its rate of per-capita GDP among the lowest in the European Union, although its major towns and cities offer an excellent and
secure business environment. Portugal has endured fiscal austerity since 2005, a situation that is likely to continue for the foreseeable future as a result of the
2009 global downturn, structural deficiencies, and the 2011 international bailout. The June 2011 early election brought the Social Democratic Party (Partido
Social Democrata: PSD) back to power in coalition with the Democratic and Social Centre-People's Party (Centro Democrático e Social-Partido Popular:
CDS-PP). Despite the change of government, Portugal initially enjoyed a gentle shift away from combative party politics between the ruling and opposition
parties towards a system based on consensus, such as that shown in designing the labour market reform, making the country an exception among the crisis-hit
Eurozone states. Under the burden of austerity and with falling public support, such cross-party consensus has now broken down, with the opposition calling
for a change in policy direction since mid-2012. However, the current policy direction is unlikely to be affected by this, not least because of the government's
parliamentary majority. Industrial militancy has increased in the face of the strict austerity measures implemented by the government in order to meet its
Eurozone commitments. Accompanying protest rallies tend to attract thousands of participants, mainly in the capital, Lisbon, and the second largest city of
Porto, but they are largely peaceful. Although corruption remains a problem, the need to attract foreign investment has led to effective anti-corruption efforts
and improved transparency in business transactions. Portugal, like the rest of Western Europe, does face a threat from terrorism, but this remains low. Police
attempts to prevent serious crime have largely been successful, although resources in more rural areas of the country are scarce and processes remain slow
and bureaucratic.
Economic: Country risk statement

Following three years of economic contraction, cyclical conditions in Portugal have started to stabilize. Apart from a contraction during the first quarter of 2014,
the economy has been growing since the second quarter of 2013, and confidence indicators have shown a remarkable improvement since the start of that
year. Portugal’s structural adjustment has also been impressive, with the economy running its first current-account surplus in 20 years in 2013. An improved
domestic economy and measures put in place at the Eurozone level have also resulted in improved bond market conditions, which allowed Portugal to exit its
bailout in May 2014. Despite the improved situation, risks remain. Fiscal policy will continue to be relatively tight for an extended time, putting pressure on
activity. The Constitutional Court declared many of the government’s austerity measures unconstitutional in the past, and risks of further adverse rulings
continue to be high. Although sovereign bond yields have fallen significantly, bond market conditions can rapidly change, particularly given the still-fragile
situation in the Eurozone. Private debt levels also remain high, and the deleveraging process is expected to last for an extended period. Finally, consumer
price inflation has been negative, or close to negative, since late 2013. Deflation is certainly a risk in Portugal and, even if the worst-case scenario does not
materialize, inflation is expected to remain low over the medium term, with negative implications for debt dynamics.
Short-term outlook
Key points
We expect the recovery to continue in 2015.
We expect inflation to remain extremely low for a prolonged period, and a deflationary spiral, although not in our central scenario, is a risk.
Portugal's "clean" exit, although expected, is not without risks.
Analysis
© 2015IHS. page 3 of 20
Analysis
We expect the recovery to continue in 2015. Strong private consumption and investment spending led to a new rise in GDP during the third quarter of 2014,
when it grew by 0.3% quarter on quarter (q/q). A "flash" estimate suggests that the recovery actually accelerated during the fourth quarter. With the exception
of a contraction during the first three months of 2014, the Portuguese economy has increased, on a q/q basis, continuously since the start of 2013. We expect
the recovery to remain in place over the medium term. Positively, short-term indicators still point to improving underlying fundamentals. There are some
indications that improving confidence (business sentiment has been strongly trending upward since the start of 2013) and a stabilizing economic situation are
starting to feed into firms' employment and investment spending. The unemployment rate fell sharply during the first three quarters of 2014, while real
investment spending has also trended upward. Additionally, banks have started to gradually relax their credit conditions, although firms still find it difficult to
access credit. Very low inflation should also help to sustain households' purchasing power, therefore providing a lift to private consumption. Nevertheless, the
economy still faces several headwinds. Unemployment, although falling, is still high. Meanwhile, credit conditions are still tight. Although low inflation has some
positive implications, it also fuels the risk of Portugal being trapped in a deflationary spiral, which would hurt activity. Moreover, falling prices also increase the
economy's debt burden, which is already considerable.
We expect inflation to remain extremely low for a prolonged period, and a deflationary spiral, although not in our central scenario, is a risk. Inflation
has been negative or stagnant since February 2014. This highlights how weak underlying inflationary pressures currently are. Not surprisingly, indicators
measuring short-term inflation expectations have, in general, fallen since the second quarter of 2014. Although economic conditions are starting to stabilize, the
recovery is certainly not strong enough to general inflationary pressures. On top of cyclical factors, there are also structural issues that help to explain why
Portuguese inflation is so low. Inside a monetary union, economic adjustment processes are deflationary and, with demand being weak not only in Portugal but
also in the rest of the Eurozone, this adjustment is being made through deflation. At the moment, there is no evidence that falling prices are resulting in
households and firms delaying spending. Positively, falling prices are helping households protect their purchasing power at a time when nominal wage growth
is weak and taxes are high. Negative inflation differentials vis-à-vis most trade partners is also helping Portuguese exporters improve their cost
competitiveness. However, deflation also increases real interest rates. Tighter monetary conditions will make the needed recovery in business investment more
difficult. Moreover, deflation also has negative implications for debt dynamics, which is particularly problematic for Portugal, given its high private and public
debt. IHS expects inflation be, on average, negative in 2015, although we do not expect Portugal to be trapped in a self-feeding deflationary spiral that could
hurt growth.
Portugal's "clean" exit, although expected, is not without risks. As expected, Portugal decided to follow Ireland and exit its bailout without an external
safety line after it expired in May 2014. A calmer situation in the Eurozone, combined with an improving domestic economy, has resulted in a significant
decrease in Portugal's sovereign bond yields. Another factor contributing to Portugal's "clean" bailout exit is its healthy cash position. Although rating agencies
and markets alike welcomed Portugal's decision to exit its bailout without further support, risks are still in place. The Eurozone crisis has shown how rapidly
bond market conditions can change. The current positive sentiment toward Portugal should not be taken for granted, especially considering Portugal's elevated
funding requirements over the next few years. Several factors could adversely impact bond markets. Markets could react rapidly in the event of a sudden
deterioration of economic conditions. Debt sustainability could also suffer if deflation takes hold in the economy. In addition, fiscal risks are not negligible.
Portugal could also suffer from contagious effects from a worsening situation in Greece, although so far these have been negligible. Although it has narrowed
in recent years, the fiscal deficit remains high. Nevertheless, our central scenario is that, markets should remain supportive of Portugal in the absence of any
shocks, even without a credit line. However, if the potential shocks mentioned above were to materialize, their impact on Portuguese bond markets would be
significantly more pronounced than if Portugal were protected by a credit line. Even then, Portugal could approach the European Stability Mechanism for
support. Nevertheless, the conditions attached to that support would probably be more onerous than if the credit line had been negotiated when market
conditions were benign.
Assumptions
Greece will stay in the Eurozone, with its new government eventually reaching an acceptable way forward with the rest of the Eurozone.
Sustained low oil prices will benefit the Eurozone both directly through boosting consumers' purchasing power and companies' margins and indirectly
through boosting global growth, which will help Eurozone exports.
The dampening impact on Eurozone economic activity from the Ukrainian/Russian crisis will gradually fade. This assumes that the Ukrainian crisis does
not deteriorate further, even if there is only an effective freezing of the current situation.
The euro is seen dipping further after hitting an 11-year low of USD1.1098 in late January.
The European Central Bank (ECB) will not take interest rates any lower after cutting its key refinancing rate from 0.15% to 0.05% in September and also
taking its deposit rate further into negative territory (-0.20%). The ECB will fully enact its current quantitative easing program.
Changes since last forecast

February interim forecast versus January interim forecast
GDP UP IHS has upgraded its growth forecasts for 2015.
Inflation DOWN Inflation in 2015 and 2016 is seen lower than previously expected owing to a lower oil price forecast.
Alternative scenarios
Greece eventually leaves the Eurozone (given the current heightened political uncertainty, we now put a 25% chance on an exit in the next 12 months
and 40% within the next five years). The overall impact on economic activity is seen relatively limited owing to the safeguards put in place by
policymakers and the European Central Bank's stated public commitment to keeping the Eurozone together.
© 2015IHS. page 4 of 20
The framework put in place by policymakers to deal with events such as a Greek exit proves to be insufficient. Contagion proves to be deep and longer
lasting, and there is an increased danger that more countries would end up leaving the Eurozone.
The Ukrainian/Russian crisis deepens, intensifying the dampening impact on Eurozone confidence and further weighing on business investment. The
negative impact would be magnified if there were ultimately serious disruptions to gas supplies that pushed up prices.
Portugal suffers deflationary problems similar to those experienced by Japan. A downward falling demand/deflation spiral develops and debt problems
increase.
Political uncertainty stemming from the elections scheduled for late 2015 hurts bond and equity markets. Investment and employment are likely to be
worse than currently projected under this scenario.
Consumer spending improves faster than expected across the Eurozone. The chances of this happening would be magnified if Eurozone unemployment
heads down on a sustained basis over the coming months. As consumer spending accounts for some 57% of total Eurozone GDP, this would be very
beneficial for overall growth.
Data
Key Macro-Economic Indicators
2011 2012 2013 2014 2015 2016 2017 2018 2019
Real GDP (% change) -1.8 -3.3 -1.4 0.8 1.5 1.7 1.7 1.7 1.7
Policy Interest Rate (%) 1.00 0.75 0.25 0.05 0.05 0.05 1.00 2.25 3.25
Fiscal Balance (% of GDP) -4.3 -6.5 -5.0 -4.2 -2.8 -2.6 -2.3 -1.9 -1.5
Population (mil.) 10.60 10.60 10.61 10.61 10.61 10.61 10.60 10.60 10.59
Unemployment Rate (%) 12.7 15.6 16.2 13.9 13.2 12.5 11.8 10.5 10.0
Current Account Balance (% of GDP) -6.2 -2.0 0.7 1.1 2.3 1.9 1.7 1.6 1.7
BOP Exports of Goods US$bn 58.8 56.9 62.0 63.0 52.9 56.1 64.2 73.5 79.9
BOP Imports of Goods US$bn 78.6 68.6 71.9 74.0 60.4 64.8 74.6 85.2 92.2
Medium- and long-term outlook
© 2015IHS. page 5 of 20
Key points
Longer-term growth depends on productivity improvements.
The severe weakness of fixed investment is a growing concern for the longer-term outlook.
Risks to longer-term fiscal stability remain in place.
Analysis
Longer-term growth depends on productivity improvements. As a deteriorating demographic profile threatens to leave the working-age population in a
declining state, attention will have to turn toward raising productivity and increasing Portugal's pool of skilled labor. Portugal currently has one of the lowest
productivity rates within the European Union, and with global competition in traditional manufacturing sectors becoming ever fiercer, Portugal will no longer be
able to rely on its historically low nominal labor costs to attract investment. As a result, there is a pressing need to raise productivity and forge ahead with
reducing state inefficiencies, which put Portugal at a competitive disadvantage within the global economy. Given this background, it will be also important to
improve the quality of secondary and tertiary education, lower the barriers to competition in the domestic markets, and continue reducing red tape. As part of
the EUR78-billion bailout granted to Portugal in May 2011, the three-year program incorporated many reforms aimed to improve the long-term productivity
performance of the economy. Progress has been in line with expectations and many reforms have already been implemented, in particular on the labor-market
front; the authorities have expressed their commitment to continuing with reforms after the end of the bailout. For example, the cost of dismissing new
employees has been cut, while Portugal has committed to reduce severance payments even more to take them in line with the European average. Moreover,
reforms to wage-setting mechanisms, for example by not providing automatic extensions to collective agreements, should help to remove some of the nominal
rigidities currently found in the labor market. This will be key to improve the external competitiveness of the economy and boost potential growth rates,
particularly given that domestic demand is expected to remain very weak for a significant period. It remains to be seen whether reforms will continue to be
implemented at a good pace following the country’s exit from its bailout in mid-2013.
The severe weakness of fixed investment is a growing concern for the longer-term outlook. Capital spending had been falling well before the current
recession. Although this partly reflects a response to an investment bubble that accompanied the run-up to euro adoption, the intensity and duration of the
capital-spending recession raise serious doubts over whether Portugal has made the investments necessary to prevent a severe depreciation of its capital
stock and a decline in its long-run growth potential. Business confidence was hit very hard by the economic downturn earlier in the decade, and has plunged
again during the current recession, despite its recent recovery. It is essential that the government continue on a path of structural reform to improve the
business environment and invest in education and re-training for unskilled workers left unemployed by the extended period of stagnation. The government has
been taking the right steps by streamlining the bloated public sector and freeing up resources for investments in education, research, and infrastructure but
more needs to be done. Public investment has been one of the victims of the government's efforts to improve the country's fiscal position, and many of the
investment projects planned for the coming years have been delayed. These projects include a new airport in Lisbon, the construction of several high-speed
rail lines, and different energy projects. We believe that the successful implementation of these programs once the fiscal position has improved should have a
positive effect on potential growth in the medium-to-long term as well as helping to sustain activity in the construction sector, which represents around 10% of
total employment.
Risks to longer-term fiscal stability remain in place. Balancing the budget as soon as possible is an essential part of the recipe for future long-term
economic stability, especially given the rapid aging of the population in the latter part of our forecast period. Government-spending restraint will be essential for
sustained fiscal consolidation. The financial crisis has resulted in sharp deterioration of the fiscal position. Positively, the government had already introduced
some wide-ranging reforms even before the crisis erupted, although more needs to be done. For example, the pension reform enacted in 2007, which reduced
the incentives for early retirement, among other changes, should help to reduce the percentage of the budget spent in social-security payments. Estimates by
the European Commission show that the reforms should significantly decrease the shortfall in the social-security balance, although further reforms may be
needed to ensure the sustainability of the system in the long run. Nevertheless, it is undeniable that more reforms will need to be introduced in order to obtain
sustainable economic growth in the long run.
Growth
GDP
Key points
A "flash" estimate suggests that the economy continued its gradual recovery during the fourth quarter of 2014.
Activity is expected to grow gradually during 2015, supported by improved domestic conditions.
Nevertheless, risks remain in place.
Analysis
A "flash" estimate suggests that the economy continued its gradual recovery during the fourth quarter of 2014. A seasonally adjusted "flash" estimate
released by Statistics Portugal shows GDP growing by 0.6% quarter on quarter (q/q) during the last quarter of 2014. This is up from increases of 0.3% q/q
during the previous two quarters. Indeed, the q/q growth rate during the fourth quarter was the strongest since the last three months of 2013, when GDP had
increased by 1.0% q/q. On a year-on-year (y/y) basis, GDP went up by 0.7% during the third quarter and by 0.9% in 2014 as a while. The economy had
contracted by 1.4% in 2013, 3.3% in 2012, and 1.8% in 2011. Although Statistics Portugal did not published the breakdown of the fourth-quarter figures, its
© 2015IHS. page 6 of 20
press release mentions that the y/y growth rate was driven by a positive contribution from domestic demand, although its contribution slowed vis-à-vis the third
quarter. Meanwhile, accelerating exports meant that net foreign trade made a less negative contribution to the economy during the fourth quarter.
Activity is expected to grow gradually during 2015, supported by improved domestic conditions. There are increasing signs suggesting improved
confidence has already started to feed through the economy. For example, the unemployment rate fell sharply for the third successive quarter during the
second quarter of 2014. Unemployment still remains high, but we expect this positive trend to continue in 2015 and 2016. Although private debt levels still
remain high, low interest rates mean that the service of that debt is not representing a major obstacle to consumption. Positively, interest rates are expected to
remain low for a prolonged period, and commercial rates may fall even further if the perceived risk in the Portuguese economy eases as it is expected.
Improved confidence and low interest rates should also lead to firmer investment spending, although investment is seen limited in the short term due to
still-large spare capacity levels. Although fiscal policy will continue to be tightened in 2015, the size of the austerity package is significantly down from previous
years. On the external side, the export recovery is expected to remain in place in 2015, supported by a softer euro and a modest improvement in external
demand (despite a still difficult situation in the Eurozone). However, the recovery in domestic demand is likely to boost import growth, suggesting the
contribution of net foreign trade to growth will moderate.
Nevertheless, risks remain in place. Despite the sharp contraction in consumption and investment, private-sector debt levels remain very high. On a
consolidated basis, private debt stood at 223.7% of GDP in 2012. Only Luxembourg, Ireland, Cyprus, and Denmark had a higher ratio in the European Union
that year. Positively, low interest rates mean that the servicing of that debt is not hurting the economy, although deflation means real rates are actually
increasing. Nevertheless, the still very high level of private debt (particularly in the corporate sector) certainly poses a significant risk to the economic recovery.
Several studies show that corporate debt acts as a drag on growth when it exceeds 90% of GDP; the latest figures show it standing at 150% of GDP in
Portugal during the third quarter of 2013. High private debt levels also pose a risk to the banking sector, which is still suffering from high nonperforming loans
and low profitability and is still highly dependent on liquidity from the European Central Bank. As a result, both demand and supply of credit are seen remaining
feeble in 2014 and 2015. Deflation also poses another risk to the economy. Although falling prices will certainly help protect households' purchasing power −
this is particularly welcome, given nominal wage growth remains weak − a period of deflation risks feeding into long-term inflation expectations, with
implications of contraction. Moreover, low inflation also increases the economy's debt burden, which is already high.
Data
© 2015IHS. page 7 of 20
Economic Growth Indicators
2012 2013 2014 2015 2016 2017 2018 2019
Real GDP (% change) -3.3 -1.4 0.8 1.5 1.7 1.7 1.7 1.7
Real Consumer Spending (% change) -5.2 -1.4 2.1 1.7 1.3 1.3 1.6 1.8
Real Government Consumption (% change) -4.3 -1.9 -0.4 0.3 0.8 0.9 1.3 1.2
Real Fixed Capital Formation (% change) -15.0 -6.3 2.2 2.3 3.1 3.9 3.1 2.9
Real Exports of Goods and Services (% change) 3.1 6.4 2.5 3.8 3.7 3.7 3.4 3.1
Real Imports of Goods and Services (% change) -6.6 3.6 5.9 4.2 4.0 3.7 3.2 2.8
Nominal GDP (US$ bil.) 218.0 227.3 231.0 190.9 198.7 222.6 250.3 267.9
Nominal GDP Per Capita (US$) 20,559 21,429 21,769 17,994 18,732 20,996 23,621 25,302
Consumer demand
Key points
Private consumption is expected to grow again in 2015.

Labor-market conditions remain difficult, despite the fall in the unemployment rate.
Fiscal policy will be the main drag on consumer spending.
Despite the recent correction, household indebtedness remains high.
Analysis
Private consumption is expected to grow again in 2015. Falling consumer prices are expected to lift households’ purchasing power and support private
consumption. Forward-looking indicators suggest that households are not delaying spending in anticipation of falling prices, while indices measuring major
purchasing intentions have trended upward during the last quarter of 2014 and the first month of 2015. Deflation, which is expected to remain in place at least
until the third quarter of 2015, should help counterbalance the effects of still-weak nominal wage growth, despite improvements in the labor market since
mid-2013.
Labor-market conditions remain difficult, despite the fall in the unemployment rate. The jobless rate fell sharply during the first three quarters of 2014,
although it still remains high, while forward-looking indicators suggest that firms’ employment intentions have improved since the start of 2013. The situation in
the labor market remains tough. For example, 72% of the jobs created during the third quarter of 2014 were under temporary contracts, while the increase in
employment was solely confined to the service sector (employment in the primary and secondary sectors contracted during the fourth quarter).
Fiscal policy will be the main drag on consumer spending. The main factor weighing on private consumption will be significantly tighter fiscal policy. The
government has not only cut public spending sharply, it has also raised several taxes, and given the large deficit, fiscal policy is not expected to support
consumption over the medium term. However, the pace of fiscal consolidation is expected to ease during the coming years as a result of improving activity
levels and the fiscal deficit’s narrowing, which has been ongoing since 2008.
Despite the recent correction, household indebtedness remains high. Households’ consolidated debt levels fell from a peak of 105.1% of GDP in 2010 to
95.7% of GDP during the first quarter of 2014. For comparison, household debt had averaged 66% of GDP during the five years before the country’s
Eurozone’s accession. Although debt levels remain high, record-low interest rates mean that debt service and repayments, as a percentage of income, are now
significantly down from their pre-crisis levels. Nevertheless, given their high indebtedness, households will be reluctant to take on more debt for consumption
purposes, particularly in an environment of high unemployment and still low consumer confidence.
Capital investment
Key points
Investment spending will continue its recovery in 2015 and 2016.

Construction activity will continue to be hit by tight credit conditions and weak housing-market activity.
© 2015IHS. page 8 of 20
The outlook for the medium term is more upbeat.
Analysis
Investment spending will continue its recovery in 2015 and 2016. Improving business confidence and activity levels, combined with low interest rates, are
likely to drive an increase in investment spending in 2015 and 2016. Nevertheless, investment, which collapsed during 2008–13, is unlikely to reach its
precrisis levels over the medium term. Spare capacity levels, although narrowing, still remain large. Moreover, credit conditions also remain challenging despite
the relaxation experienced in recent quarters. Household investment is set to suffer as a result of the bad sentiment currently prevailing in the housing market
and the low availability of mortgages. Meanwhile, although low inflation is good for consumers, it also boosts real interest rates, which hurts investment. As
result of its efforts to bring down the fiscal deficit, the government has announced that public investment will be significantly lower than previously planned. The
coalition government has also made it clear that investment projects will have to be delayed as part of the fiscal-consolidation project.
Construction activity will continue to be hit by tight credit conditions and weak housing-market activity. The number of building permits continued to
fall at a sharp, but slightly decelerating pace during the first six months of 2014. Moreover, the index of production in the construction sector also dropped at a
marked pace during the first half of the year. We expect activity to remain weak during 2015, as demand for new housing continues to be curtailed by lack of
credit, high unemployment, and falling disposable income.
The outlook for the medium term is more upbeat. Government efforts to reduce red tape and improve the business environment will help to improve the
investment outlook in the medium and long terms. Furthermore, public investment is set to make a more significant contribution to sustaining total investment
once the fiscal-consolidation process is completed in the medium term.
Labor markets
Key points
Unemployment is still elevated, but it is trending downward.
Rising activity and confidence levels are expected to lead to further modest improvements in labor-market conditions in 2015 and 2016.
The government has implemented several reforms aimed at improving the performance of the labor market.
Analysis
Unemployment is still elevated, but it is trending downward. The latest figures show Portugal’s labor market situation improving noticeably. Portugal's
quarterly unemployment rate stood at 13.1% during the third quarter of 2014, according to nonseasonally adjusted figures released by Statistics Portugal. This
was the lowest reading for the quarter in three years. The fall in the unemployment rate was driven by a combination of higher employment and a shrinking
labor force. The number of people unemployed fell at an accelerated pace during the third quarter. However, the number of long-term unemployed as a
percentage of the total unemployed population rose from 64.5% during the third quarter of 2013 to 66.9%, the highest percentage since the start of the crisis.
Rising activity and confidence levels are expected to lead to further modest improvements in labor-market conditions in 2015 and 2016. A
contracting labor force, as some jobseekers emigrate in search of better opportunities and others just stop looking for work, should also exert a positive impact
on the unemployment rate. Nevertheless, we still suspect that labor-market conditions are likely to remain difficult for a prolonged period. Despite the increase
in activity recorded since the second quarter of 2013, the economy is expected to remain under pressure over an extended period. Even if the economy holds
better than expected, efforts to improve their productivity levels (and thus their competitiveness) are likely to make firms make greater use of their current staff
instead of adding to their workforce. Moreover, the government is cutting spending significantly in its efforts to bring down the large fiscal deficit. This will not
only depress general economic conditions, but it also is likely to result in significant job losses in the public sector.
The government has implemented several reforms aimed at improving the performance of the labor market. For example, there are now restrictions to
automatic extensions of collective agreements, while unemployment benefits and severance payments have been capped at lower levels. Moreover, the
maximum additional pay for overtime has been limited to 50% (down from 100% previously). These measures should help to improve the performance of the
labor market once the recovery is fully established.
Inflation
Key points
Falling oil prices drive down Portuguese consumer prices in January.
We expect inflation to remain very low in 2015.
A deflationary spiral is a risk, but we do not expect Portugal to be engulfed in a deflationary spiral.
Analysis
© 2015IHS. page 9 of 20
Falling oil prices drive down Portuguese consumer prices in January. Portuguese consumer prices fell 0.4% year on year in January, according to official
figures released by Statistics Portugal. Previously, prices had been contracting uninterruptedly since February 2014. Core inflation (excluding volatile items
such as energy and fresh-food prices) stood at 0.3% in January, unchanged from December and November but up from 0.2% in October.
We expect inflation to remain very low in 2015. IHS estimates prices to fall 0.3% in 2015. We expect deflation to remain in place during the first half of 2015,
mainly as a result of weaker international commodity prices. Brent oil prices reached a six-year low of USD47.36/barrel in mid-January, and we now expect oil
prices to average just USD66/barrel in 2015. Although unemployment has fallen markedly in recent quarters and is expected to continue its downward trend in
2015, labor-market conditions are still not strong enough to create inflationary pressures. However, a weaker euro (we now expect it to fall to
EUR1.00/USD1.12 by the third quarter of 2015) and the modest increase in the value-added tax as of 1 January will exert some upward pressure on prices.
A deflationary spiral is a risk, but we do not expect Portugal to be engulfed in a deflationary spiral. In part, deflation is the result of the structural
changes happening in the economy, given Portugal’s inability to devaluate its nominal exchange rate to improve its competitiveness. Arguably, cyclical factors
are also playing a part; despite the tentative improvements experienced in recent months, economic conditions remain weak and unemployment high. Although
the risk of Portugal being trapped in a self-feeding deflationary spiral is not negligible, we believe that the most probable scenario is one of a prolonged period
of muted inflation. Moreover, we also see economic conditions improving, which should help to limit the probability of a prolonged period of deflation.
Data
Inflation Indicators
2012 2013 2014 2015 2016 2017 2018 2019
Consumer Price Index (% change) 2.8 0.3 -0.3 -0.3 1.1 1.7 2.0 2.2
Wholesale-Producer Price Index (% change) 3.2 0.1 -1.0 -1.1 1.6 2.0 1.6 1.4
Exchange rates
Key points
The euro retreated to an 11-year low of USD1.1098 in late January from a 30-month high of USD1.399 in May 2014 following the European Central
Bank’s (ECB) announcement of full-blown quantitative easing (QE).
We expect the euro to weaken further, despite a modest rebound to trade around USD1.14 in early February.
Further out, we expect the euro to trend up very modestly against the US dollar in nominal terms, but to soften on a real effective trade-weighted basis.
Analysis
© 2015IHS. page 10 of 20
The euro retreated to an 11-year low of USD1.1098 in late January from a 30-month high of USD1.399 in May 2014 following the European Central
Bank’s (ECB) announcement of full-blown quantitative easing (QE). The euro was also dragged down to its new low by concern over the election of an
anti-bailout Greek government. Since May 2014, the euro has been increasingly pressurized by largely weak Eurozone economic news, very low and falling
Eurozone consumer price inflation, and stimulative action by the ECB. In June, the ECB trimmed its key refinancing rate from 0.25% to 0.15% and took its
deposit rate marginally into negative territory (from 0.0% to -0.10%). The ECB made further reductions to 0.05% and -0.20% respectively in September. The
ECB is also undertaking a number of other measures, including the buying of asset-backed securities and covered bonds. Furthermore, the ECB has made it
clear that it wants a softer euro to limit prolonged Eurozone deflation risks. Strong US data also hurt the euro.
We expect the euro to weaken further, despite a modest rebound to trade around USD1.14 in early February. Although Eurozone economic activity is
expected to improve over the coming months, growth will still be relatively limited and deflation is likely to persist for several months. Meanwhile, the ECB’s QE
program is planned to last through to September 2016 (it is purchasing EUR60 billion of assets a month from March 2015). The euro may also come under
further pressure as market attention increasingly focuses on an expected hike by the US Federal Reserve (projected in June 2015 by IHS). Consequently, in
our February forecast, we project the euro to fall to a low of USD1.05 around September/October. The euro is seen edging off its lows in late 2015 and then
firming gradually in 2016 as the Eurozone growth outlook improves and inflation creeps up.
Further out, we expect the euro to trend up very modestly against the US dollar in nominal terms, but to soften on a real effective trade-weighted
basis. The euro is now seen trading at around USD1.35 at the end of 2020 and USD1.45 in 2044. Eurozone current-account surpluses are expected to
diminish over the long term, while growth is likely to be limited compared with other regions. However, the ECB may maintain a slightly more restrictive policy
than other central banks.
Policy
Monetary policy
Key points
The European Central Bank (ECB) finally introduced a major quantitative easing (QE) program at its 22 January policy meeting.
With the Eurozone slipping into deflation in December, inflation expectations waning, and the ECB struggling to increase its balance sheet, the case for
QE became ever more compelling.
Interest rates will not go lower.
Analysis
The European Central Bank (ECB) finally introduced a major quantitative easing (QE) program at its 22 January policy meeting. The bar for QE has
clearly always been higher for the ECB than for other central banks, primarily reflecting Germany’s strong opposition to the ECB buying sovereign debt.
Consequently, while the ECB had introduced a number of stimulative measures in June and September 2014, it notably held off from QE. The ECB cut its main
refinancing rate from 0.25% to 0.15% in June and then took it down further to 0.05% in September. Furthermore, the ECB took its deposit rate marginally into
negative territory in June by reducing it from 0.0% to -0.10% and it then trimmed it to -0.20% in September. This means that a levy is being imposed on the
deposits that lenders keep at the ECB. The ECB also enacted several measures targeted at increasing liquidity and boosting bank lending to the real economy,
notably including targeted longer-term refinancing operations (TLTROs). In September 2014, the ECB announced asset-backed securities (ABS) and covered
bond purchase programs, which it started in November. The ECB wants to expand its balance sheet back to the March 2012 peak level of EUR3 trillion from
around EUR 2 trillion currently.
With the Eurozone slipping into deflation in December, inflation expectations waning, and the ECB struggling to increase its balance sheet, the case
for QE became ever more compelling. Consequently, the ECB will buy EUR60 billion of private- and public-sector debt each month from March 2015 through
to September 2016. This works out at EUR1.14 trillion of purchases. Furthermore, the ECB has indicated that its QE program can be extended if necessary as
it critically stated that the purchases will “in any case be conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim
of achieving inflation rates below, but close to 2%, over the medium term.” To try and appease Germany, much of the risk (effectively 80%) of the debt
purchases will be borne by national central banks. The remaining 20% will be subject to a regime of risk sharing.
Interest rates will not go lower. Following the September reductions, ECB president Mario Draghi stated that interest rates had reached their low point and
would not go any lower. We expect them to stay at the current levels through to 2017.
Fiscal policy
Key points
The first budget following Portugal's bailout exit sees an easing of austerity in 2015.
The fiscal effort will be broadly balanced between reduced spending and an expected rise in revenues.
The budget projects the general government fiscal deficit, as a percentage of GDP, to fall from a predicted 4.8% in 2014 to 2.7% in 2015.
Sovereign debt restructuring will continue to be a risk as long as debt levels remain high.
Analysis
© 2015IHS. page 11 of 20
Analysis
The first budget following Portugal's bailout exit sees an easing of austerity in 2015. The budget aims to reduce the still-high fiscal deficit without putting
too much pressure on the fragile economy. The bill introduces measures worth a total of EUR1.3 billion (USD1.7 billion), equivalent to 0.7% of GDP.
The fiscal effort will be broadly balanced between reduced spending and an expected rise in revenues. On the revenue side, most of the extra income
is expected to be generated by a growing economy and the fight against tax evasion. GDP is projected to grow 1.5% in 2015, following a rise of 1.0% in 2014.
The extraordinary levies on the banking and energy sectors will remain in place in 2015. Meanwhile, taxes on some alcoholic beverages and tobacco products
will go up in 2015. The value-added tax rate will increase 25 basis points to 23.25% to finance the pension system. Workers’ social security contributions will
also increase 20 basis points to 11.2%. On the other hand, the corporation tax rate will decrease from 23% to 21% in 2015.
The budget projects the general government fiscal deficit, as a percentage of GDP, to fall from a predicted 4.8% in 2014 to 2.7% in 2015. This is
above the 2.5%-of-GDP target included in Portugal's medium-term stability program. The structural fall in the deficit will also be lower than previously agreed.
The draft bill sees this edging down by just 0.1 percentage point of GDP in 2015, well below a target of a fall of at least 0.5 percentage point of GDP. Portugal's
primary fiscal balance (that is, excluding interest payments) is projected to show a surplus of 2.2% of GDP in 2015. Consequently, gross general government
debt is seen falling from 127.2% of GDP to 123.7% of GDP.
Sovereign debt restructuring will continue to be a risk as long as debt levels remain high. This risk will increase if growth disappoints and/or deflation
lasts longer than currently expected. Nevertheless, we believe Portugal will try its best to avoid a restructuring, as it will not want to destroy the market
credibility painfully obtained since the start of this year. Moreover, a restructuring would have significant negative implications for the Portuguese banking
sector.
External sector
Key points
Exports should benefit from a weaker euro and a modest pickup in external demand.
Portugal posted its first current-account surplus in 20 years in 2013, which is expected to remain in place in 2014 and 2015.
Rising imports pose a risk to our current-account forecast.
Analysis
Exports should benefit from a weaker euro and a modest pickup in external demand. Our forecasts see import demand from many important trade
partners improving gradually in 2015. This should help to sustain export growth, which has been strong in recent quarters. In real terms, exports are already
11% above their pre-crisis peak, having fallen by almost 19% between 2008 and 2009. Positively, this improvement mostly reflects new market gains, which
are reducing Portugal's dependence on its main trade partners. Despite the expected improvement, external demand is likely to remain unspectacular. Many of
Portugal’s main export destinations are still suffering from difficult conditions, which are expected to remain in place for a prolonged period (although Portugal’s
main trade partner, Spain, is expected grow in 2015). On a more positive note, moderating unit labor costs should also boost the competitiveness of Portugal's
export sector in the long run, while activity in the tourism sector is set to remain strong in 2015. The sharp easing of the euro since July 2014 should start
benefiting exports at the start of 2015.
Portugal posted its first current-account surplus in 20 years in 2013, which is expected to remain in place in 2014 and 2015. The surplus stood at
EUR881 million (USD1.2 billion) in 2013, following a deficit of EUR3.3 billion in 2012. Positively, Portugal's sharp balance-of-payments correction has been
driven by a strong export performance. On a balance-of-payment basis, exports rose by almost 20% since their pre-crisis peak in 2008. IHS expects Portugal's
surplus to remain stable at around 0.5% of GDP this year and remain in place over the medium term.
Rising imports pose a risk to our current-account forecast. Imports are expected to increase in tandem with improving domestic demand conditions. A
robust recovery in domestic conditions may lead to a stronger-than-expected surge in imports, resulting in a weaker external balance than currently shown in
our forecasts. However, this risk has significantly diminished following the sharp contraction in oil prices since late 2014.
Data
© 2015IHS. page 12 of 20
Trade and External Accounts Indicators
2012 2013 2014 2015 2016 2017 2018 2019
Exports of Goods (US$ bil.) 56.9 62.0 63.0 52.9 56.1 64.2 73.5 79.9
Imports of Goods (US$ bil.) 68.6 71.9 74.0 60.4 64.8 74.6 85.2 92.2
Trade Balance (US$ bil.) -11.6 -9.9 -11.0 -7.5 -8.8 -10.3 -11.7 -12.2
Trade Balance (% of GDP) -5.3 -4.4 -4.7 -3.9 -4.4 -4.6 -4.7 -4.6
Current Account Balance (US$ bil.) -4.5 1.6 2.5 4.3 3.9 3.7 3.9 4.4
Current Account Balance (% of GDP) -2.0 0.7 1.1 2.3 1.9 1.7 1.6 1.7
Key indicators and forecasts
Data (forecasts)
© 2015IHS. page 13 of 20
Detailed Macro-Economic Indicators
2011 2012 2013 2014 2015 2016 2017 2018 2019
Real GDP (% change) -1.8 -3.3 -1.4 0.8 1.5 1.7 1.7 1.7 1.7
Nominal GDP Per Capita (PPP$) 27,090 26,646 26,666 27,262 28,069 29,089 30,147 31,307 32,513
Real Consumer Spending (% change) -3.6 -5.2 -1.4 2.1 1.7 1.3 1.3 1.6 1.8
Real Fixed Capital Formation (% change) -12.5 -15.0 -6.3 2.2 2.3 3.1 3.9 3.1 2.9
Real Government Consumption (% change) -3.8 -4.3 -1.9 -0.4 0.3 0.8 0.9 1.3 1.2
Real Imports of Goods and Services (% change) -5.8 -6.6 3.6 5.9 4.2 4.0 3.7 3.2 2.8
Real Exports of Goods and Services (% change) 7.0 3.1 6.4 2.5 3.8 3.7 3.7 3.4 3.1
Industrial Production Index (% change) -0.9 -6.1 0.4 0.8 2.4 2.6 2.6 2.1 1.7
Wholesale-Producer Price Index (% change) 5.8 3.2 0.1 -1.0 -1.1 1.6 2.0 1.6 1.4
Policy Interest Rate (%) 1.00 0.75 0.25 0.05 0.05 0.05 1.00 2.25 3.25
Short-term Interest Rate (%) 1.39 0.62 0.22 0.22 0.05 0.09 0.80 2.03 3.18
Long-term Interest Rate (%) 10.22 10.59 6.30 3.75 2.51 2.77 3.77 4.31 4.69
Fiscal Balance (% of GDP) -4.3 -6.5 -5.0 -4.2 -2.8 -2.6 -2.3 -1.9 -1.5
Population (mil.) 10.60 10.60 10.61 10.61 10.61 10.61 10.60 10.60 10.59
Population (% change) 0.1 0.1 0.0 0.0 0.0 0.0 0.0 -0.1 -0.1
Unemployment Rate (%) 12.7 15.6 16.2 13.9 13.2 12.5 11.2 10.5 10.0
Current Account Balance (US$ bil.) -15.2 -4.5 1.6 2.5 4.3 3.9 3.7 3.9 4.4
Current Account Balance (% of GDP) -6.2 -2.0 0.7 1.1 2.3 1.9 1.7 1.6 1.7
Trade Balance (US$ bil.) -19.8 -11.6 -9.9 -11.0 -7.5 -8.8 -10.3 -11.7 -12.2
Trade Balance (% of GDP) -8.1 -5.3 -4.4 -4.7 -3.9 -4.4 -4.6 -4.7 -4.6
BOP Exports of Goods US$bn 58.8 56.9 62.0 63.0 52.9 56.1 64.2 73.5 79.9
BOP Imports of Goods US$bn 78.6 68.6 71.9 74.0 60.4 64.8 74.6 85.2 92.2
Exchange Rate (LCU/Yen, end of period) 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01
Exchange Rate (LCU/Euro, end of period) 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Debt Indicators
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Foreign Exchange Earnings (US$ bil.) 74.8 88.8 85.6 94.3 96.1 90.5 97.5 107.0 114.7 ..
Portfolio Investment, Net (US$ bil.) 0.0 -0.1 -0.1 0.0 0.0 0.0 0.0 0.0 0.0 ..
Portfolio Investment, Net (% of GDP) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 ..
© 2015IHS. page 14 of 20
Foreign Direct Investment, Net (US$ bil.) 0.0 0.0 0.0 0.0 10.5 0.0 0.0 0.0 0.0 ..
Foreign Direct Investment, Net (% of GDP) 0.0 0.0 0.0 0.0 4.5 0.0 0.0 0.0 0.0 ..
Foreign Exchange Reserves, Excl. Gold (US$

3.7 2.0 2.2 2.8 2.9 3.1 3.3 3.5 3.7 ..
bil.)
Import Cover (Months) 0.5 0.3 0.3 0.4 0.4 0.5 0.4 0.4 0.4 ..
Total External Debt (US$ bil.) 522.7 517.0 492.1 490.8 485.8 481.4 477.1 472.6 467.7 ..
Total External Debt (% of GDP) 219.3 211.1 225.5 215.7 209.6 224.5 210.0 192.8 180.9 ..
Total External Debt (% of forex earnings) 698.4 582.5 574.8 520.4 505.4 532.2 489.2 441.5 407.6 ..
Short Term External Debt (US$ bil.) 224.4 206.0 183.4 167.0 165.3 163.8 162.3 160.8 159.1 ..
Short Term External Debt (% of total external

42.9 39.8 37.3 34.0 34.0 34.0 34.0 34.0 34.0 ..
debt)
Short Term External Debt (% of international
6,143.7 10,431.3 8,353.2 6,011.3 5,613.3 5,247.7 4,906.9 4,585.5 4,281.2 ..
reserves)
Total External Debt Service (US$ bil.) 43.5 43.8 40.1 40.9 40.8 39.6 39.8 40.1 40.2 ..
Interest Payment Arrears (US$ bil.) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 ..
External Liquidity Gap (% of forex earnings) 346.6 264.8 230.5 192.4 186.7 192.4 176.3 158.0 144.7 ..
Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated live from quarterly
Sovereign Risk forecast bank (SRS).
Key facts and demographics

Area: 92,090 sq km
Language: Portuguese
Religion: Roman Catholic
Time Zone: GMT
Population: 10,427,300 (Instituto Nacional de Estatística, 2013 estimate)
Neighbours: Spain
Capital City: Lisbon
Primary Port: Lisbon
Primary Airport: Lisbon Airport
Currency: Euro (EUR)
External trade
Overview
Portugal's main trading partner, accounting for over 25% of exports and imports, is neighboring Spain (although Portugal’s dependency on Spain has
diminished since the start of the current crisis). Germany, France, the United Kingdom, United States, and Italy are the other principal partners. Nearly 80% of
the country's exports are purchased by the EU-25, although exporters have been making efforts to push into new markets, particularly in the
Portuguese-speaking world. The country's single-biggest export is wearing apparel, followed closely by motor vehicles and textiles. Exports of the latter have
been struggling in recent years, amid fierce competition from lower-cost producers in the Far East and Eastern Europe. Textile exporters are increasingly
attempting to reorient production toward more high value-added and differentiated textiles, in contrast to the mass production goods common in earlier
decades.
Data
© 2015IHS. page 15 of 20
Data
Portugal: Major Trading Partners, 2013
EXPORTS IMPORTS
Country Billions of USD Percent Share Country Billions of USD Percent Share
Spain 14.9 23.9 Spain 24.3 32.5
Germany 7.3 11.7 Germany 8.6 11.5
France 7.3 11.7 France 5.1 6.8
Angola 4.0 6.5 Italy 3.9 5.2
United Kingdom 3.4 5.5 Netherlands 3.7 5.0
United States 2.6 4.1 Angola 3.5 4.7
Netherlands 2.5 4.1 United Kingdom 2.2 2.9
Italy 2.1 3.3 Belgium 1.9 2.5
Belgium 1.8 2.9 China 1.8 2.4
Brazil 1.0 1.6 Russia 1.3 1.7
Source: IMF, Direction of Trade
Portugal: Major Trading Partners, 2000
EXPORTS IMPORTS
Country Billions of USD Percent Share Country Billions of USD Percent Share
Spain 4.5 19.3 Spain 9.7 25.3
Germany 4.1 17.6 Germany 5.2 13.7
France 2.9 12.6 France 4.1 10.6
United Kingdom 2.5 10.8 Italy 2.7 7.0
United States 1.4 6.0 United Kingdom 2.2 5.8
Belgium 1.4 5.8 Netherlands 1.7 4.6
Netherlands 1.0 4.2 United States 1.2 3.1
Italy 0.9 4.0 Belgium 1.2 3.0
Sweden 0.4 1.6 Japan 1.0 2.6
Angola 0.3 1.5 Nigeria 0.8 2.1
Source: IMF, Direction of Trade
Economic development
Overview
Economic Development
EU membership provides boost in 1980s and 1990s. Portugal has become a diversified and increasingly service-based economy since it succeeded in
joining the European Community in 1986. From the mid-1990s onwards, Portugal joined Spain and Ireland in the race to catch up with more advanced peers in
the European Union (EU). During the late 1990s, growth averaged around 3.8%, well in excess of the euro average. Foreign investment, domestic credit, and
private consumption boomed as interest rates came down quickly in the run-up to Economic and Monetary Union (EMU), which saw Portugal successfully
adopt the euro in 1999. Yet despite extensive progress, per-capita income in Portugal remains among the lowest in the EU-15.
© 2015IHS. page 16 of 20
Fiscal mismanagement in run-up to EMU. Next to the extensive benefits, the EMU has also led to the development of a number of imbalances in the
economy. Given the increasingly loose monetary conditions prevailing ahead of EMU, the focus of fiscal policy would ideally have been on the prevention of
overheating in the economy. Unfortunately, the Portuguese government ended up pursuing the opposite course of action as the reduction in interest payments
created illusory optimism about what the state could spend. The increasingly pro-cyclical fiscal stance was evidenced by a rapid rise in government payroll
expenditure and employment. The loose fiscal stance also fueled wage demands in the private sector, which was already under pressure from a tight labor
market. This development began a process of erosion in Portugal's productivity growth and external price competitiveness that hurt the economy considerably
once the cyclical downturn of 2001 set in.
Virtual stagnation of the economy in the 2000s. By the time Portugal joined the euro in 1999, the economy was characterized by mounting imbalances and
structural weaknesses. Households were heavily indebted following the credit boom leading up to EMU, while deteriorating competitiveness hampered exports
and dented Portugal's attractiveness as a destination for foreign direct investment (FDI). Moreover, the economy was badly hit by increasing competition from
low-cost Asian and Eastern European countries. As a member of the Eurozone, Portugal has lost the ability to devalue its currency in order to increase its
competitiveness. Although several structural reforms have been implemented in recent years to improve the competitiveness of the economy, more needs to
be done. Additionally, tight fiscal policy aimed to bring the fiscal deficit down since 2005 left the economy without support at a time when it would have been
needed most. Fiscal policy had to be tightened further following the sharp deterioration of the public finances following the 2008/09 crisis.
Economic Strategy
Deficit reduction and investment in skills to remain a focus of economic strategy. The current administration is seeking to return the country to budgetary
discipline and has implemented a number of tax increases and public-sector spending cuts to this end. The current Stability and Growth Programme foresees
the deficit coming below 3% of GDP again by 2013. Another key objective will be to continue to build up the country's pool of skilled labor and reorient the
economy to more knowledge-based sectors.
Liberalization of key sectors to continue moving forward. Privatization has moved forward during the 2000s, with the government selling off key stakes in
fixed-line telecommunications, energy, and utilities. To raise money for debt reduction, the government is planning to raise EUR6 billion in privatizations and
selling of state-owned stakes in companies over the coming years, including stakes of national airline TAP and the major energy companies.
Labor markets
Labor-force participation is relatively high by European Union (EU) standards. The participation rate is slightly below 80% of the work force and has been
rising in recent years. High female participation has been the driving force, although migration has also become a factor recently.
Wage-setting mechanisms in the private sector are fairly flexible in their ability to respond to economic shocks. Wage formation in the private sector is
predominantly determined by sectoral wage bargaining, which generally takes place at one of three different levels. First, companies can negotiate their own
collective agreements with one or more unions. Second, companies can form alliances and strike multi-employer bargains. Finally, large employer associations
at the industry level can negotiate with unions. The union structure is fairly dispersed, limiting the scope for coordination among unions.
Labor mobility and skills present some shortcomings. One labor-market rigidity often identified with Portugal is the relative lack of labor mobility. Relatively
strict employment protection and low education levels contribute to impeding greater job turnover and worker mobility. Nevertheless, the increasing influx of
immigrants in recent years has helped to increase labor-force mobility. Soon, Portugal should no longer require workers from the new EU-member states to
obtain work permits. It is hoped that immigration could also lead to an increase in the education and skills level of the workforce. Portugal currently ranks very
low within the EU in terms of educational attainment. More than two-thirds of the population has no more than six years of schooling, and the country is a
laggard even among younger people. Only about one-third of people aged 25-34 has attained at least upper secondary education. A poor education system
and emigration of skilled workers to more prosperous countries are the primary explanations of this weakness.
Demographics represent a major challenge for the future. Another challenge for labor markets is presented by Portugal's deteriorating demographic profile.
In the long term, the rapid aging of the population will lead to a declining working-age population. The opening up of the labor market to workers from the new
EU-member states is also intended to counteract this trend. Other European economies—notably Germany and France—have kept their labor markets shut to
these workers, largely on account of anti-immigration sentiment.
Monetary system
Since the euro was launched in 1999, monetary targets in the Eurozone have been set by the European Central Bank (ECB). With Lithuania joining on
1 January 2015, there are currently 19 member states that compose the Eurozone, each of whom surrendered monetary sovereignty upon joining the union.
Oversight of the Economic and Monetary Union (EMU) is vested with the European Commission, although control of monetary policy and the European
Monetary System is administered by the independent ECB. The euro is the sole legal tender of Austria, Belgium, Cyprus (excepting Northern Cyprus), Estonia,
Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.
As one of the world's major convertible currencies, the euro operates on a free float, although the ECB reserves the right to intervene in the
foreign-exchange market to smooth over fluctuations in the euro exchange rate. It has done this in practice, but eschews active exchange-rate
management. Rather, its main objective is to preserve price stability—that is, to preserve the value of the euro. Although it sits atop the European System of
Central Banks (ESCB), the ECB also delegates this objective of maintaining price stability to all member states' national banks, with the proviso that the ESCB
will generally support the economic policies and objectives of the European Union (EU).
© 2015IHS. page 17 of 20
Price stability is defined as a year-on-year (y/y) increase in the EU's preferred measure of inflation, defined by the Harmonized Index of Consumer
Prices (HICP) for the euro area of “below but close to 2%.” Thus, the governing council of the bank has determined that medium-term price stability
involves keeping inflation at approximately 2%. The HICP is used for measuring inflation in the context of international, mostly inner-European comparisons. Its
calculation relies on harmonized concepts, methods, and procedures and is designed to reflect the development of prices in the individual states based on
national consumption patterns. The HICP serves, among other things, to measure the convergence criterion of "price stability" as a basis for judging whether a
member state can participate in the European EMU. The HICP is calculated for each EU member state, as well as Norway and Iceland. It is used to form
aggregates for the Eurozone (Monetary Union Index of Consumer Prices—MUICP), for the EU (European Index of Consumer Prices—EICP), and for the
European Economic Area (European Economic Area Index of Consumer Prices—EEAICP). The ECB makes use of the MUICP in the context of its monetary
policy to judge price stability within the Eurozone.
The governing council effectively consists of the 6 members of the executive board and the 18 governors of the national central banks of the euro
area. The key task of the governing council involves formulating the monetary policy for the euro area. The ECB has frequently come under political pressure
over interest rates and, increasingly during the Eurozone sovereign debt crisis, other elements of monetary policy (such as liquidity provision and bond buying).
Nevertheless, it has jealously guarded its independence and has refused to bow to outside pressures, despite the best efforts of member states. To its credit, it
has been able to steer a relatively influence-free trajectory for monetary policy given the Eurozone's peculiar makeup (i.e., an amalgam of several countries
whose economies are, despite significant convergence, still relatively disparate). Until the Eurozone sovereign debt crisis, the bank tended to err on the side of
inaction, earning itself a reputation for being unresponsive to conditions in the Eurozone. Nevertheless, the bank insists that its mandate is to keep the price
level stable, and as such has remained immune to political demands.
The ECB certainly became increasingly active during the Eurozone sovereign debt crisis and it has since continued to act in response to the
increased risk of Eurozone deflation. While it initially remained unwilling to take its key Eurozone interest rate below 1.00%—in marked contrast, for
example, to both the US Federal Reserve and the Bank of England—the ECB undertook a number of “non-standard” measures to counter the problems. Most
notably, this has included making massive liquidity available to banks and, to a lesser extent, buying sovereign bonds of the pressurized countries on
secondary markets. Still, the bank eventually succumbed to the growing risk that prolonged very low Eurozone consumer price inflation could morph into
deflation by bringing down its benchmark rate as low as 0.05% in September 2014. Furthermore, the ECB took its deposit interest rate into negative territory (it
currently stands at -0.20%). While the ECB has enacted a number of non-standard measures including asset-backed securities and covered bond purchasing
programs in September 2014, it currently continues to stop short of undertaking full-blown quantitative easing in the form of buying government bonds. This
could well change in 2015.
Financial system
The banking sector went under a large round of consolidation in the run-up to the country's entry into the euro. In the mid-1990s, banking concentration
increased the concentration ratio of the largest five banks from 46% in 1997 to 67% in 2004, according to figures from the International Monetary Fund (IMF).
Following the progressive privatization of state assets since the late 1980s, the state-owned savings bank, Caixa Geral de Depositos (CGD), remains the only
state-controlled financial services firm. It is still among the largest financial groups and has in the past served as an instrument of government intervention in
the economy, usually in defense against unwanted takeover bids from foreign investors. There are currently no plans to privatize CGD.
Next to CGD, there are four major private banks in Portugal. These are Banco Commercial Portugues (Millennium BCP), Banco Espirito Santo (BES), Banco
Portugues de Investimento (BPI), and Totta (controlled by Spanish bank Banco Santander). Of these, Millennium BCP is the largest, and in 2006, it launched a
takeover bid for BPI. If completed successfully, the bid would make Millennium BCP by far the largest financial group in Portugal, easily surpassing even CGD.
As of the end of 2006, the bid had not yet received final regulatory or shareholder approval.
Banks exhibit good asset quality and solvency, but difficult economic conditions have put the financial sector under significant pressure. Although banks are
still showing relatively solid capital ratios, concerns about the sovereign have left them reliant on liquidity offered by the European Central Bank (ECB). Risks
stemming from a very weak domestic economic environment—through a fall in asset quality—are high, while credit conditions are expected to remain tight for
a prolonged period.
Portuguese equities are listed on the Lisbon Stock Exchange, which joined Euronext in 2006, amid fears about its continued existence as an independent
exchange. The Euronext trading platform has increased the international visibility of Portuguese companies and eased the less favorable liquidity conditions
that existed previously. Portugal has two principal indices, the Portugal PSI-20 Index and the PSI (BVL) General Index. The PSI-20 Index is a
capitalization-weighted index of the top 20 stocks listed on the Lisbon Stock Exchange.
Natural resources
Around a third of Portugal is forested, providing substantial lumber resources. Portugal produces about half of the world’s cork, but the cork’s popularity as a
bottle stopper is declining. Deposits of iron ore, gold, tungsten, and copper are relatively numerous. Nevertheless, they are also geographically dispersed,
meaning that economies of scale in mining are limited despite excellent infrastructure. There are also a handful of scarce and uneconomic coal and gas
deposits on and offshore. Portugal’s Atlantic coastline and sunny climate provide the potential to harness alternative energy such as solar and wave power.
Some major investments in alternative energy have recently been made in the hope that Portugal will become a leader in this field.
Key sectors
© 2015IHS. page 18 of 20
The Portuguese economy has undergone a transformation since the 1974 revolution. Like neighboring Spain, Portugal has moved from being a closed
agrarian economy to an integrated, open economy based on manufacturing and services. The ratio of foreign trade to GDP now stands at around 65%, with
the European Union (EU) the main recipient of exports and source of imports.
Services: Services account for more than 70% of value-added and employs over half of the workforce. The banking sector benefited greatly from a
series of reforms throughout the 1990s, including interest-rate deregulation, liberalization of the regulatory framework, privatizations, and liberalization of
international capital movements, which boosted the sector greatly. Nevertheless, consolidation is widely expected following the introduction of the euro,
with Spanish banks the keenest to take over the market. The island of Madeira is an offshore financial center, where companies can benefit from tax,
duty, and exchange-control advantages.
Manufacturing: Manufacturing accounts for roughly 14% of value-added, and employs one-fifth of the workforce. Foreign investment attracted by
Portugal's inexpensive labor market has filtered into industries such as auto manufacturing and electronics, with global brands such as Siemens,
Samsung, and Volkswagen all operational in Portugal. The most significant sector remains textiles, employing over one-third of Portugal's industrial
workforce. The sector, however, is being attacked by competition from markets in South and Southeast Asia, in which Portugal's high social-security
costs and tax burden do not prevail. Indeed, foreign direct investment (FDI) into the manufacturing sector as a whole is set to be hit by the emerging
European markets such as Poland, Hungary, and the Czech Republic.
Agriculture: Agriculture employs some 12% of the workforce and accounts for about 3% of value added. This is a major drop from the 1970s, when
25% of the population worked in the sector. The production of port and the fishing industry remain the most important sectors. Timber is an increasingly
significant natural resource. About 30% of Portugal is forested, and over 90% of wood pulp is exported. Portugal is also the world's leading producer of
cork. Nevertheless, agricultural productivity is low, with yields per hectare about one-third of the EU average, and the sector is suffering from strong
French and Spanish competition. Most farms are smallholdings, particularly in the north. Efforts by the government to lead agrarian reform have been
hampered by droughts, poor-quality soil, and outdated production methods. Large forest fires have also become an increasingly severe problem in
recent years.
Construction: The growth of the Portuguese economy in the 1990s was mainly grounded in infrastructure investment and spectacularly large
construction projects. In recent years, the sector has suffered large declines in output, as investment has contracted and the economy has stagnated.
Construction currently accounts for over 6% of value-added and some 11% of employment.
Key sectors data

Portugal: Top-10 Sectors Ranked by Value Added
2014 Level 2015 Percent Change Percent Share of GDP
(Bil. US$) (Real terms) (Nominal terms)
1. Public Admin. & Defense 18.8 -0.3 10.1
2. Education 13.8 0.8 7.4
3. Real estate 13.7 3.4 7.3
4. Health and social services 13.2 0.5 7.1
5. Retail trade - total 13.1 1.3 7.0
6. Banking & related financial 12.5 2.7 6.7
7. Wholesale trade 12.0 2.2 6.5
8. Business services 9.7 1.7 5.2
9. Hotels & restaurants 9.6 1.1 5.1
10. Agriculture 6.8 1.4 3.6
Top-10 Total 123.1 66.0
Source: World Industry Service, IHS Economics
Updated: 20 Jan 2015
Highlights
Portugal has been a stable democracy since 1974 and a member of the European Union since 1986, which has aided its democratic transition and
incorporation into the wider European community. Despite impressive progress since its transition to democracy, Portugal is still considered a European
economic underachiever, with its rate of per-capita GDP among the lowest in the European Union, although its major towns and cities offer an excellent and
secure business environment. Portugal has endured fiscal austerity since 2005, a situation that is likely to continue for the foreseeable future as a result of the
2009 global downturn, structural deficiencies, and the 2011 international bailout. The June 2011 early election brought the Social Democratic Party (Partido
Social Democrata: PSD) back to power in coalition with the Democratic and Social Centre-People's Party (Centro Democrático e Social-Partido Popular:
CDS-PP). Despite the change of government, Portugal initially enjoyed a gentle shift away from combative party politics between the ruling and opposition
© 2015IHS. page 19 of 20
parties towards a system based on consensus, such as that shown in designing the labour market reform, making the country an exception among the crisis-hit
Eurozone states. Under the burden of austerity and with falling public support, such cross-party consensus has now broken down, with the opposition calling
for a change in policy direction since mid-2012. However, the current policy direction is unlikely to be affected by this, not least because of the government's
parliamentary majority. Industrial militancy has increased in the face of the strict austerity measures implemented by the government in order to meet its
Eurozone commitments. Accompanying protest rallies tend to attract thousands of participants, mainly in the capital, Lisbon, and the second largest city of
Porto, but they are largely peaceful. Although corruption remains a problem, the need to attract foreign investment has led to effective anti-corruption efforts
and improved transparency in business transactions. Portugal, like the rest of Western Europe, does face a threat from terrorism, but this remains low. Police
attempts to prevent serious crime have largely been successful, although resources in more rural areas of the country are scarce and processes remain slow
and bureaucratic.
© 2015IHS. page 20 of 20
Copyright of Portugal Country Monitor is the property of IHS Global Inc. and its content may
not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's
express written permission. However, users may print, download, or email articles for
individual use.

Country Reports - Portugal PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Country Reports - Portugal PDF

Uploaded by

Copyright:

Available Formats

Country Reports - Portugal

27 Feb 2015 IHS Economics and Country Risk

Risk Score Description

Sovereign Risk Ratings - Portugal

Medium-Term 45(BB+) Likely to Fulfill Obligations

Changes since last forecast

GDP UP IHS has upgraded its growth forecasts for 2015.

Selected data and charts: Data (forecasts)

President: Anibal Cavaco Silva (since 9 March 2006)

Prime Minister: Pedro Passos Coelho (since 18 June 2011)

Deputy Prime Minister: Paulo Portas (since 24 July 2013)

Source: IHS and CIRCA People in Power

2011 2012 2013 2014 2015 2016 2017 2018 2019

Country risk - overall statement

Economic: Country risk statement

Changes since last forecast

GDP UP IHS has upgraded its growth forecasts for 2015.

Key Macro-Economic Indicators

2011 2012 2013 2014 2015 2016 2017 2018 2019

Medium- and long-term outlook

2012 2013 2014 2015 2016 2017 2018 2019

Private consumption is expected to grow again in 2015.

Investment spending will continue its recovery in 2015 and 2016.

2012 2013 2014 2015 2016 2017 2018 2019

2012 2013 2014 2015 2016 2017 2018 2019

Key indicators and forecasts

2011 2012 2013 2014 2015 2016 2017 2018 2019

Foreign Exchange Reserves, Excl. Gold (US$

Short Term External Debt (% of total external

Key facts and demographics

Religion: Roman Catholic

Time Zone: GMT

Population: 10,427,300 (Instituto Nacional de Estatística, 2013 estimate)

Capital City: Lisbon

Primary Port: Lisbon

Primary Airport: Lisbon Airport

Currency: Euro (EUR)

Spain 14.9 23.9 Spain 24.3 32.5

Germany 7.3 11.7 Germany 8.6 11.5

France 7.3 11.7 France 5.1 6.8

Angola 4.0 6.5 Italy 3.9 5.2

United Kingdom 3.4 5.5 Netherlands 3.7 5.0

United States 2.6 4.1 Angola 3.5 4.7

Netherlands 2.5 4.1 United Kingdom 2.2 2.9

Italy 2.1 3.3 Belgium 1.9 2.5

Belgium 1.8 2.9 China 1.8 2.4

Brazil 1.0 1.6 Russia 1.3 1.7

Source: IMF, Direction of Trade

Portugal: Major Trading Partners, 2000

Spain 4.5 19.3 Spain 9.7 25.3

Germany 4.1 17.6 Germany 5.2 13.7

France 2.9 12.6 France 4.1 10.6

United Kingdom 2.5 10.8 Italy 2.7 7.0

United States 1.4 6.0 United Kingdom 2.2 5.8

Belgium 1.4 5.8 Netherlands 1.7 4.6

Netherlands 1.0 4.2 United States 1.2 3.1

Italy 0.9 4.0 Belgium 1.2 3.0

Sweden 0.4 1.6 Japan 1.0 2.6

Angola 0.3 1.5 Nigeria 0.8 2.1

Source: IMF, Direction of Trade

Key sectors data

2014 Level 2015 Percent Change Percent Share of GDP

(Bil. US$) (Real terms) (Nominal terms)