There have been a number of positive surprises in Portugal since the beginning of the year. First came the remarkable turnaround in market sentiment, resulting in a marked reduction in government bond yields together with successful bond issuances and exchange programmes. Meanwhile, the fiscal outturn for 2013 has beaten all expectations – and the programme target. The deficit target under the Troika programme was set at 5.5% of GDP and while there were fears this target would not be met, it will now be achieved with a very wide margin.
Nonetheless, things are not all rosy and there are significant risks associated with Portugal in the longer run beyond its exit for the bailout programme (the official date for its departure is 17 May, a week before local and European elections). Historically, Portugal is not a high growth economy. In the 10 years to 2012, annual GDP growth has averaged 0.0%, and as the first chart shows, Portugal had very weak growth even in the years heading into the crisis (BNP Paribas: Portugal: a clean exit?). In contrast, Spain and Ireland enjoyed strong growth ahead of the crisis, so their decade average GDP growth rates are 1.3% and 1.7% respectively.
Even in the 10 years prior to 1992, Portugal had the lowest average growth rate at 2.7%. Low growth rates are a problem for debt dynamics. The growth outlook for 2014 and 2015 is an improvement on recent years and will start to reduce the debt ratio, but if the growth rate surprises on the downside, debt reduction becomes an extremely slow process. Ireland recently made a clean exit from a bailout but with a much stronger growth profile (see bottom chart). This type of growth rate gives Ireland scope to reduce its debt ratio even if growth comes in a bit lower than expected. However, with more modest growth projections, a bad outcome for Portugal means that its debt ratio will remain elevated for longer. This would leave Portugal extremely vulnerable to further shocks.
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