Portugal’s fragile recovery is losing momentum, with growth held back by sluggish investment and weak exports as uncertainty and corporate debt weigh on the economy, the International Monetary Fund has warned.
“The consumption-based recovery of the past three years is running out of steam, the fiscal stance remains expansionary, the current account is weakening and the banking system is plagued by low profitability,” the fund said on Thursday in its latest report on Portugal’s progress since a 2011-2014 bailout programme.
Portugal, it said, “remains uniquely vulnerable to shifts in market sentiment”.
The IMF’s forecast of a worsening slowdown comes ahead of critical decisions by the minority Socialist government and its leftwing partners on next year’s budget and a crucial ruling by Canadian rating agency DBRS in October on Portugal’s only investment-grade credit rating.
Warning that growth was likely to decelerate to 1 per cent this year from 1.5 per cent in 2015, the fund said policy reversals by the “anti-austerity” government that took office in November “had generated uncertainty that appears to be a significant factor behind the slowdown in investment”.
António Costa, the prime minister, who has vowed to “turn the page on austerity”, has increased the minimum wage, restored cuts in public sector wages, reinstated public holidays abolished during the bailout and removed an increase in working hours for most civil servants.
Mr Costa said his anti-austerity programme was delivering both economic growth and fiscal discipline. He has dismissed any suggestion of a second bailout as “nonsense” and says the budget deficit this year will fall “comfortably below” the 2.5 per cent of national output agreed with the European Commission.
Mr Costa believes his policies have also been vindicated by the recent damning internal report into the IMF’s handing of the eurozone debt crisis.
While forecasting the budget deficit at 3 per cent of output this year and next, the IMF said “fiscal loosening” together with support from the European Central Bank through its government bond-buying programme had translated into “robust consumption growth”.
But it warned that a slowdown in economic activity coupled with vulnerabilities in the banking sector and high public debt left Portugal at a “challenging juncture”, saying that “risks had tilted to the downside”.
The fund forecasts investment will contract by 1.2 per cent this year after increasing 4.1 per cent in 2015. It also sees the positive current account balance of recent years, one of the most significant achievements of Portugal’s adjustment programme, falling to zero this year and minus 0.6 per cent of gross domestic product in 2017.
Portugal’s borrowing costs have been higher this year than at any time since April 2014, when Lisbon resumed long-term debt auctions, the report added. “Further negative surprises,” such as a “renewed period of political instability” could push spreads on government bonds even higher, it warned.
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Instability could stem from potential disagreements over next year’s budget between the minority government and the parties further to its left on whose parliamentary support it depends, or between Lisbon and the commission, the IMF said.
A decision by Canada’s DBRS to downgrade Portugal when it reviews the country’s credit rating in October would deprive Lisbon of its only investment-grade rating and exclude the country from the ECB’s bond-buying programme.
However, although DBRS has expressed concern over Portugal’s disappointing growth, it has stated that it remains “comfortable” with its current rating. Having maintained an investment-grade rating since before the bailout, DBRS is seen by most analysts as unlikely to downgrade Portugal now.