Overview Of The Recent Economic Developments In The Portuguese Economy
Introduction
The 2000s was a tough for the Portuguese economy. With an expansion fiscal policy in place the Portuguese economy recovered post global recession. But the eurozone crisis occurred and prevented more capital inflows from coming in. A recession materialized over Portugal as a financial assistance program was in full way that has a strong condition in fiscal strengthening and structural improvements. We were able to leave it in 2014 and the economy was able to recover as the eurozone began to improve which lead to the economic speedup in late 2016. A government coalition was formed in 2015 and such event was never seen before which itself was even regarded as a political phenomenon. But was this responsible for the economy’s strong recovery? In this paper I will be looking into the recent economic developments in the Portuguese economy going from the so called “troika” period to the recent recovery within the context of the political framework.
Background
In 1975, the April 25th Revolution took place which toppled the Estado Novo regime and Portugal became a democracy. The post-revolution period left a negative impact on the Portuguese economy as Portugal lost its colonies in Africa which led to loss in assets. It was the start of a time where the Portuguese were no longer a colonial power. In addition to that the oil price shock of 1973 also hit Portugal hard resulting in energy price hikes and stagflation. All sectors of the economy collapsed and Portugal became the country with one of the lowest growth rates in the west with negative growth. In 1991 the GDP climbed as a result of its activity in the EEC in 1985. But it is important to note that Portugal was not able to recover its economic growth rates during its post-revolution period as it achieved in the last decade prior to the revolution.
2008-2011 Economic and Financial Crisis
After Portugal joined the EU in 1987, its economy started to do better even meeting the European average. In the late 1990’s, Portugal was able to renin inflation and stabilize the exchange rage rates with its European neighbors, which was needed in order for the nation to stay in the European Monetary Union. Among this was the inflow of structural and cohesion funds that were helping in bringing public investments. This gave off positive views by the general public over further European integration as well as fueled hopes over economic growth. This period saw imports multiplying, in things such as cars for example, as the Portuguese began to consume at a higher rate that grew to be quite more similar to the average European. Financial integration was expected to be accompanied by monetary integration and that it would lead to more economic integration as well as continued strong economic growth well into the start of the 21st century. As a result many decisions made were based of such expectations such as decisions on public investment, social policy, and even at the household level when it came to decisions about how much to consume and credit. Also many people felt that being in the euro meant that it was the end of fiscal imbalances.
This did not happen. In 2000-2007 there a period of complete stagnation which would later degenerate into a deep economic crisis, right in the time of the eurozone sovereign debt crisis. When it came to GDP, the economy grew less than the U.S in the Great Depression. During this stagnation period, Portugal was accumulating external imbalances which grew over these years. Portugal went through a historic increase in capital inflows. These inflows were mostly funded by debt which was mostly goods and services. A very small portion came in as foreign investment. This inflow and the use of the euro resulted in a strong appreciation of Portugal’s exchange rates and it became more self-centered: most of the new investment was turned over to non-tradable sectors such as real estate, utilities and infrastructure. In the 2000s there was a period of strong increases in social transfers and public spending in other areas remained the same.
Portugal’s Fiscal Record
As mentioned before, with the fall of the dictatorship, Portugal had never recorded a budget surplus not even a balanced one. The deficit figures between 2016 and 2017 they were significant. What was unique with Portugal was that it had three external intervention programs in 1978, 1983 and 2011. The first one was due to possibly the massive inflow of migrants from colonies and the loss of assets in the colonies as I mentioned before. The last two cases, despite the possible other factors, would have never occurred if it wasn’t the massive accumulation of fiscal imbalances. After more than 40 years of democracy the country still faces the challenge of creating institutions and incentives in result making the governance more fiscally responsible.
The Troika (2011-2014)
Portugal did all it could to restore market confidence. This was the big goal of the program and such was a success. There was strong political support as well as a new government in place at around the same time as the creation of the program. Unlike Greece, there was support from the major opposition party which ensured stability. So in that sense it was a success but relief only came with the supportive monetary policy. The external balance was later regained but the internal balance was lost with the huge increase in unemployment.
The fiscal situation got better as the deficit began to decrease in 2012, but this was very slow. Within the financial sector, the major imbalances were not fully resolved but instead partially with given NPLs. The program also included a 12 billion euros for bank recapitalization which was only used partially. The labor market reaction was really bad with unemployment at 16.4%, and around 200,000 people left Portugal in this period. There was a big impact on the gap between the top and bottom 10% and 5% of income distribution from 9.2 to 10.6. The program had measures for social protection and taxes.
By 2014, things started to improve as Portugal but there was still that sense of financial uncertainty, even though Portugal’s banks had only minor issues, and that was brought into the light further as in August 2014 as the bank of Espirito Santo had a 3.6 billion euro loss which cleaned out all its capital. The amount lead to a loss of access to central bank money and that the bank essentially failed. The Bank of Portugal thus before this happened decided to remove that banks assets and place it in a bank called Novo Banco. Shareholders, bondholders, depositors and some 5 billion euros in public funds were moved to Novo Banco. Taxpayers are not responsible for these funds, instead the government funded this operation and the Resolution Fund was supposed to repay them. But they were recently created and thus had no assets so that means that this was added to the public debt.
Portugal Recovery so Far
The Socialist party and the Communist party decided to come together and form a coalition with the Left Bloc party. They did something that was rare and that was come up with written agreements as pre-conditions for government policy statement and budget for the next years. This political change resulted in a big shift in many fiscal and social policy measures. They proposed the usual left things such as increasing the minimum wage etc. However, fiscal policy did not change that much. Even though they proposed more balanced budget to the public during elections, the budget ended up being even smaller by 2016. But when you look at the primary balance, we see a stricter budgetary path then proposed before. But this changes in 2017 and 2018 since the primary balance going at a less stricter path. Things changed, as outputs increased and fiscal reduction slowed down.
Portugal started a recovery in 2015 and that was followed by a slower recovery but that changed with a 2.7% GDP growth in 2017. IMF reports that they predict that it will continue to grow by up to 2% in the upcoming year. But this recovery is not enough to reach even the stagnated value it once had. But there are good signs such as that exports have exceed imports and for the first time investment has grown by a lot as well as surpassed consumption rates. This is mostly in construction which is mostly foreign investment. It is also important to point out government spending has little impact in domestic spending. In the labor market, unemployment was a pleasant and unexpected. The actual unemployment rate each seems to beat the projections. This is mostly in part because of the growth of the tourism sector that opened up jobs.
