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Portugal Country Risk Report Q4 2016

  • September 2016
  • -
  • Business Monitor International
  • -
  • 29 pages

Core Views

Portugal’s economic recovery has taken a turn for the worse, and fixed investment will remain weak on the back of increasing policy uncertainty and weak global demand. The large corporate and government debt loads and precarious credit market conditions will remain a major impediment to an acceleration of growth. Portugal’s Socialist Party-led minority government will become increasingly unstable as it walks an ever tighter rope between fulfilling demands for fiscal prudence by its bailout creditors and demands for better workers’ rights by domestic labour unions.Major Forecast Changes We have revised down our average annual real GDP growth forecasts for 2016-17 to 1.0% from 1.5% previously. We have revised down our forecasts for the euro exchange rate, and now project the currency to continue its multi-year depreciation towards parity against the US dollar.

Table Of Contents

Portugal Country Risk Report Q4 2016
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Renewed Investment Weakness Bodes Ill For Growth................................................................................................................8
Weak productivity growth will restrain Portuguese economic activity over the medium term. Real GDP expansion will struggle
to sustainably rise above 1.0% for the foreseeable future, ensuring that Portugal's output shortfall will stretch well into a second
decade.
GDP By Expenditure Outlook.................................................................................................................................... 9
TABLE: GDP GROWTH FORECASTS......................................................................................................................................................................9
TABLE: PRIVATE CONSUMPTION FORECASTS..................................................................................................................................................10
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................10
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................10
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................10
Regional Monetary Policy........................................................................................................................................ 11
ECB Policy: Looser For Longer...................................................................................................................................................11
The economic slowdown caused in part by the UK's vote to leave the European Union in June has increased the chances that monetary
policy tightening in the eurozone will be pushed back even further. But even more importantly, the potential for systemic crises and
the long-term debt outlook increasingly suggest that the path of least resistance for the ECB will be to keep short-term rates as low as
possible for as long as possible, while extending quantitative easing.
TABLE: ECB REFINANCING RATE FORECASTS (%)...........................................................................................................................................11
Regional Currency Forecast................................................................................................................................... 14
EUR: Heading To Parity As Fiscal Woes Take Their Toll..........................................................................................................14
We have revised down our forecast for the euro, now seeing the currency weakening gradually over the coming years. The euro is
caught between the risk of rising inflation expectations on the one hand, and a rising risk premium over the future of the eurozone on the
other.
TABLE: BMI EUROZONE CURRENCY FORECASTS............................................................................................................................................14
TABLE: DOWNWARD REVISIONS.........................................................................................................................................................................15
Chapter 2: 10-Year Forecast................................................................................................................... 17
The Portuguese Economy To 2025......................................................................................................................... 17
Crisis An Opportunity To Improve Long-Term Growth.............................................................................................................17
The near-term outlook for Portugal will be shaped heavily by the measures its government must undertake to corral the fiscal deficit and
bring national debt levels under control. However, beyond the immediate term, Portugal will have to grapple with improving its growth
prospects if it is to escape from the debt trap. We are forecasting an economy more reliant on external demand and investment and less
on private consumption over the coming decade, but the future will depend in large part on the government's reform programme bearing
fruit.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.....................................................................................................................................17
Chapter 3: Political Outlook................................................................................................................... 19
SWOT Analysis......................................................................................................................................................... 19
BMI Political Risk Index........................................................................................................................................... 19
Domestic Politics..................................................................................................................................................... 20
Budget To Test Government Balancing Act...............................................................................................................................20
Portugal's Socialist-led minority government faces difficult choices in the coming months, as it attempts to balance domestic demands
for fiscal expansion with calls from the European Union to shore up the state budget. The 2017 budget process, which is due to begin in
October, will mark a significant flashpoint.
Chapter 4: Operational Risk................................................................................................................... 23
SWOT Analysis......................................................................................................................................................... 23
Operational Risk Index............................................................................................................................................ 23
Chapter 5:BMI Global Macro Outlook.................................................................................................... 25
Global Macro Outlook.............................................................................................................................................. 25
EMs Past The Worst, But Structural Problems Persist.............................................................................................................25
TABLE: GLOBAL ASSUMPTIONS.......................................................................................................................................................................... 25
TABLE: DEVELOPED STATES - REAL GDP GROWTH, %.................................................................................................................................. 26
TABLE: EMERGING MARKETS - REAL GDP GROWTH, %................................................................................................................................. 27
TABLE: MACROECONOMIC DATA and FORECASTS.............................................................................................................................................. 29

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