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Portugal Country Risk Report Q4 2017

Portugal Country Risk Report Q4 2017

Core Views

Portugal’s Socialist Party-led minority government looks increasinglylikely to maintain power until the next election is due in 2019. Evenso, risks of instability remain high as the government walks a tightrope between fulfilling demands for fiscal prudence by its externalcreditors and demands for better workers’ rights and benefits bydomestic labour unions.

The large corporate and government debt loads and precarious creditmarket conditions will remain a major impediment to an accelerationof growth. In turn, fixed investment will remain weak on the back ofincreasing policy uncertainty and weak global demand.

The economy will become more reliant on external demand andinvestment and less on private consumption over the next decade,but the future will depend in large part on the government’s reformprogramme bearing fruit.

Major Forecast Changes

We have revised up our real GDP growth forecast for 2017 and 2018to 2.5% and 1.9%, from 2.3% and 1.2%, respectively.We revised up our 2017 average euro exchange rate forecast fromUSD1.10/EUR to USD1.13/EUR.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Employment-Led Growth Surge To Fade
Portugal's economic recovery will become increasingly challenging as the rapid gains in employment that have fuelled GDP growth are
set to slow sharply over the coming years. While productivity growth will shift into a higher gear, and the still-negative output gap with
allow for above-potential growth, structural constraints will limit expansion.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Monetary Policy
Improving Growth To Bring ECB Closer To A Gradual Exit
Economic and financial conditions in the eurozone have normalised over the past two-and-a-half years since the European Central Bank
(ECB) announced the launch of its expanded asset purchase programme (APP) in January 2015 and now it is clear that monetary policy
has hit an inflexion point. The withdrawal of monetary accommodation is set to be gradual and cautious, however.
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES, 2016
TABLE: FISCAL AND PUBLIC DEBT FORECASTS
Currency Forecast
EUR: Near-Term Top Is In, But Parity No Longer In Play
The euro has reached a top against the US dollar in 2017, with technicals and positioning both pointing to a near-term reversal. The
euro will continue to weaken in 2018 as eurozone growth cools somewhat and expectations for ECB tightening are tempered, while the
Fed presses ahead with interest rate hikes. Over the longer term, eurozone reform momentum and ECB policy normalisation, including
the potential for a much more hawkish ECB president in 2019, will drive a modest rebound.
TABLE: BMI EUROZONE CURRENCY FORECAST
Chapter 2: 10-Year Forecast
The Portuguese Economy To 2026
Crisis An Opportunity To Improve Long-Term Growth
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
Contents
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Budget And Local Elections To Test Government Stability
We expect the stability in Portugal's government to remain intact through the 2018 budget process, with the increasingly popular
Socialist Party keeping its far-left allies in check. The results of the October 2017 local elections could provide a timely gauge of the
solidity of support for the Socialists.
Long-Term Political Outlook
Debt And Demographics To Pose Major Challenges
Portugal's political stability over the next decade to 2026 will be tested by several challenges. These include a reconsideration of the
country's membership in the eurozone, a political schism over unpopular and painful economic reform measures, and a rapidly ageing
population that will put the country's economic future at risk.
Chapter 4: BMI Global Macro Outlook
As Good As It Gets?
TABLE: GLOBAL MACROECONOMIC FORECASTS
TABLE: DEVELOPED STATES – REAL GDP GROWTH, % y-o-y
TABLE: EMERGING MARKETS – REAL GDP GROWTH, % y-o-y
TABLE: PORTUGAL – MACROECONOMIC DATA & FORECASTS

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