the three key economic differences with Spain, Greece and Italy

the three key economic differences with Spain, Greece and Italy


Portugal was one of the European countries that felt the 2007 financial crisis most intensely. The battered Portuguese economy, like Spain, Italy and Greece, suffered the initial blow (2007-2009) and a second blow, even harder. , during the sovereign debt crisis (2010-2013) that almost broke the euro. During that period, the Anglo-Saxon media used a pejorative term to describe these countries with serious problems in financing themselves in the markets: the PIGS (from the English Portugal, Italy, Greece and Spain). Although this term is rarely heard today, since these countries have managed to stabilize their debt and finance themselves in the markets, there is no doubt The history of Portugal deserves a separate chapter for his spectacular recovery. The Portuguese economy has distanced itself from the PIGS (which means pigs in English) in several key indicators that predict a promising future for Spain’s ‘poor neighbor’.

Why can’t the Portuguese economy be included within the PIGS? There are several differentiating factors: Portugal is today the only one of the PIGS that presents a budget surplus; It is the only economy that has a public debt below 100% of GDP; and finally, your debt is qualified by all rating agencies as investment grade ‘A’ (one of the highest qualifications).

Furthermore, the Portuguese economy presents intense growth and a lower unemployment rate than the rest of the southern European countries. In 2023, the GDP grew by 2.3%, after presenting an advance of 6.8% in 2022, the highest growth since 1987. On the other hand, the unemployment rate is at 6.6%, very high levels. lower than those of Greece, Spain and even Italy.

With these indicators it seems unreasonable to continue putting the Portuguese in the same ‘bag’ as the rest of the southern European countries, at least in terms of debt sustainability. This milestone was completed at the beginning of last month, when Standard & Poor’s (S&P) raised Portugal’s rating to ‘A-‘, maintaining the positive outlook, giving the country an A grade from all international agencies. something that had not happened for 13 years.

Portugal’s debt miracle

A little more than three years ago, the Portuguese public debt was close to 140% of GDP. Today, this ratio is below 100% and falling. To better understand what is happening, it is worth buying the evolution of the Portuguese debt with the Spanish debt, another of the ‘PIGS’. The data speaks for itself. In 2011, the difference in public debt was 50 points over GDP in favor of Spain, today the difference is in favor of Portugal, which has about 10 points less debt over GDP. In Portugal the debt is below 100% of GDP, while in Spain it exceeds 109%. A descent that continues its march.

“Gross general government debt decreased to fall below 100% of GDP at the end of 2023, from more than 135% at the end of 2020, this is one of the biggest drops among its peers“, they stated from the Fitch agency in a report published just a few weeks ago.

There is a tendency to argue that a good part of the Portuguese success is the product of the sacrifices and efforts of the 2011-2015 period (structural reforms, cuts, internal devaluation). There is some truth to this, but it is also true that a good portion of this ‘fiscal consolidation’ (if you can call it that) has occurred in recent years, driven by solid economic growth, aided by inflation ( which reduces the weight of debt over GDP) and containment of spending. Good proof of this is that the nominal debt, that is, public debt in euros has barely moved throughout 2023, while in Spain, for example, it would have grown by more than 50,000 million euros. As if this were not enough, everything indicates that the ‘miracle’ of the Portuguese debt is going to continue.

Last week, the Portuguese Ministry of Finance revised downwards its forecasts for the country’s public debt ratio to 95.1% of GDP this year, after falling to 99.1% in 2023, according to data from the National Institute of Statistics (INE) published a few weeks ago. Last year’s reduction below the 103% forecast in October by the Ministry of Finance and the improvement of the budget balance (surplus of 1.2% of GDP) brought the ministry to the center of Lisbon.

Thus, in the information sent to Brussels within the framework of the excessive deficit procedure, the forecasts for this year, which are the responsibility of the Ministry of Finance, point to a debt-to-GDP ratio of 95.1%.

All in all, it seems logical that the Fitch agency confirmed on March 22 the ‘A’ note of the Portuguese debt and its positive outlook. In the report accompanying the decision, the agency’s economists highlighted that “Portugal’s rating is supported by governance indicators above the average of ‘A’ rated countries, with institutional strengths supported by its membership in the EU and the eurozone, and a history of fiscal disciplinewhich has led to a deleveraging process after the eurozone sovereign debt crisis.”

Public spending in Portugal

The case of Portugal is exemplary in terms of spending: since 2014 (when it reached 50% of GDP), public spending on GDP has tended to fall sharply (apart from the pandemic). Portugal has taken advantage of the years of growth to cut spending in relative terms (over GDP), while in the case of Spain this movement has been much more timid or has not even existed.

This country is one of the few in Europe that is registering fiscal surpluses, that is, it is earning more than it spends. In the face of negative surprises from France (a deficit in 2023 of 5.5% of GDP) “Portugal recorded an estimated budget surplus of 1.3% of GDP in 2023, 0.8 percentage points better than our forecast in the last rating review in September 2023,” Fitch experts acknowledge.

“Portugal compares favorably with the average ‘A’ country, which has a budget deficit of 3.2% and is also an improvement from the deficit of 0.3% of GDP in 2022. We forecast continued superior fiscal performance relative to its rating peers, with budget surpluses of 0.2% of GDP in 2024 and 2025, although political uncertainty arising from the elections generates a downside risk.

In addition, the agency highlights that the Portuguese economy accelerated in the fourth quarter of 2023 up to 0.8% quarter-on-quarter, a figure significantly better than the performance of the general growth of the eurozone. The main drivers of the post-pandemic recovery have been investments and exports, which have grown by 11.5% and 11.8% cumulatively, respectively, since 2019.

GDP and the labor market

“We forecast GDP growth of 1.4% and 1.8% in 2024 and 2025, respectively, continuing the outperformance relative to the eurozone. The labor market has also proven resilient to recent adverse shocks, with a rate unemployment of 6.5% in early 2024 and a record labor market participation rate of almost 69%. Inflation decreased to 2.3% in February 2024slightly below the eurozone average of 2.6% and we project it to fall to 2% on average in 2025,” says the rating agency.

Caixabank Research commented in a report published in March that employment has been growing for three consecutive years at a rate close to 2%, reaching the highest number of employed people since 2008; More than half of the jobs created were concentrated in construction and hospitality. Although the unemployment rate increased slightly, from 6.2% to 6.5%, this is a reflection of the growth of the labor force (in 2023, it increased by 2.4%, almost 125,000 people). Throughout 2024, employment will continue to grow, but at a somewhat more modest pace, the Catalan bank’s experts admit.

However, it seems logical that Portugal pays lower interest to finance itself in the markets. Portuguese debt offers the lowest yield among southern European countries. The 10-year Portuguese bond offers 3.05%, compared to 3.22% of the Spanish bond, 3.45% of the Greek bond or 3.7% of the Italian bond. The markets are taking into account that Lisbon not only keeps its public accounts square, it is also presenting a surplus. If the demand for bonds and the interest rates of the European Central Bank remain stable, Portugal will continue to lower the cost of its debt.



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