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Portugal: the epidemic outbreak darkens prospects for recovery

2/9/2021

Portugal is currently facing an impressive outbreak of Covid-19 cases. With the reinstatement of a hard lockdown, the growth prospects for 2021 will certainly have to be revised lower. The risks remain significant both in the short term and in the long term. However, Portuguese firms appears in a better position today to cope with the current situation than in previous crises, thanks globally to a lower level of indebtedness and historically-low interest rates.

TRANSCRIPT // Portugal: the epidemic outbreak darkens prospects for recovery : February 2021

FOCUS

FRANÇOIS DOUX

This month we are focussing on Portugal, one of the countries hit hardest by the coronavirus pandemic. It has one of the highest rates per 100,000 population in the world.

Guillaume Derrien, hello.

GUILLAUME DERRIEN

Hello François.

FRANÇOIS DOUX

Portugal has gone back into lockdown. A hard lockdown. Growth estimates for 2021 have been downgraded.

GUILLAUME DERRIEN

Exactly. If we rely solely on estimates from the Bank of Portugal, we would expect a growth of around 4% in 2021 before a slight acceleration to 4.5% in 2022. But what is clear is that the figures will be below what we might have hoped for a few weeks ago, as a result, as you say, of the resurgence of the epidemic.

FRANÇOIS DOUX

Will Portuguese companies and the labour market cope at a time when government support could be scaled back?

GUILLAUME DERRIEN

That is the big question. I would/will? refer to an article from the Bank of Portugal published in January, so very recently, which assessed the impact of Covid on the profitability and the stock of debt at risk for Portuguese companies. This article shows that risks have increased significantly as a result of the epidemic, but we remain at risk levels below those we have seen in previous crises. There are two reasons for this: the fall in interest rates, which has reduced the burden of debt servicing for companies; and the deleveraging trend undertaken by Portuguese firms in the years prior to the epidemic.

FRANÇOIS DOUX

These are fairly positive effects. But are there short-term risks for the Portuguese economy in 2021?

GUILLAUME DERRIEN

The risks are largely the same as they were in 2020. First, the economy is heavily dependent on international tourism, which accounts for around 8% of GDP. We can expect this economic activity to recover fairly slowly, even after the end of the pandemic. Secondly, there are exports. Portugal depends heavily on European demand, more than other countries such as France and Italy. Portugal exports comparatively little to China and the USA, where demand has remained strong. Thus, it seems likely that the recovery in demand in these two countries will be of less benefit to Portugal than to other European nations.

FRANÇOIS DOUX

Let’s turn now to the medium to long term. What are the risks to this famous potential growth?

GUILLAUME DERRIEN

The risks are on investment. With companies seeing debt rising and profitability falling, it seems reasonable to expect that they will spend less on investment. The second risk is the rise in government debt. Portugal has very high debt, and following 2020, we might expect the stock of public debt to have risenabove the 130% of GDP threshold. This would be the third highest level in Europe.

FRANÇOIS DOUX

So, Guillaume Derrien, are there any reasons to be optimistic about the Portuguese economy?

GUILLAUME DERRIEN

Yes. The first factor is the resilience of employment to the economic shock. With the measures introduced by the government, notably the temporary unemployment scheme, employment fell only slightly in 2020 and European Commission forecasts for the next two years predict that by 2022 the unemployment rate will be more or less what it was in 2019. If this effectively occurs, this would be a fairly encouraging development.

FRANÇOIS DOUX

You mentioned the level of Portugal’s debt. However, interest rates are very low. Portugal has even borrowed at negative rates.

GUILLAUME DERRIEN

Exactly. This is a trend that could extend over the coming years, or at least through 2021 and 2022. This will mean that the scale of the debt is softened somewhat by low interest rates.

FRANÇOIS DOUX

Will the European recovery package benefit Portugal?

GUILLAUME DERRIEN

Yes, of course. Portugal will receive around 7% of its GDP in subsidies over the next five years. This is a significant amount. Clearly, this will help Portugal implement a recovery programme over the next few years.

FRANÇOIS DOUX

The last significant factor, as we saw in January, is the relative political stability.

GUILLAUME DERRIEN

Exactly. We saw this at the end of January, with the re-election of President Marcelo Rebelo de Sousa. And more generally, government stability – in contrast to other countries, we see the current situation in Italy – provides a degree of uncertainty, particularly for investors.

FRANÇOIS DOUX

And a bonus question for you, Guillaume Derrien. Portugal is now assuming the Presidency of the European Council. What can we expect?

GUILLAUME DERRIEN

I think that we will see an extension of what we saw under the German Presidency over the past six months. In particular, Portugal will do everything it can to push through the implementation of the European recovery plan in 2021.

FRANÇOIS DOUX

It certainly needs it. Thank you Guillaume Derrien, for this update on the Portuguese economy. Coming up, the Chart of the Month with William De Vijlder.

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