Portugal continues to have "persistent vulnerabilities" – The Economic Journal


COSEC, a credit insurance company, organized a conference on international trade in Oporto this Monday to mark the company's 50th anniversary. It will include Georges Dib, from Euler Hermes – a French company similar to COSEC and its shareholder – economist for Latin America, Spain and Portugal, who gave an exclusive interview to the Economic Journal.

For Georges Dib, the country will face a situation that will be marked by the drop in exports and the slowdown in the decrease of unemployment. Meanwhile, expectations for the consequences of the trade war between China and the United States remain high.

How do you see the evolution of the Portuguese economy, in a context of global slowdown of the main indicators?

After almost 15 years of sluggishness, Portugal reconciled with the highest levels of growth (2.8% in 2017, 2.1% in 2018), surpassing the Eurozone average, but is expected to gradually slow down in 2019 (1 , 7%) and 2020 (1.5%). The effect of this growth in the labor market should disappear after the impressive reduction of unemployment, and exports should slow down in a context of trade uncertainty and slowing global growth.

In the future, although private investment in the manufacturing sector should slow down, it should be offset by the pipeline of infrastructure projects (in particular those financed by the European Union). Since 2014, Euler Hermes has improved Portugal's country risk rating from B3 to B2 (3rd quarter of 2014), from B2 to BB2 (3rd quarter of 2016) and more recently from BB2 to BB1 in the second quarter of 2018.

What does this mean for companies?

Companies now face a better business environment and funding conditions, but persistent vulnerabilities; As for the sectors, we see some clouds on the horizon. Interest rates on loans over five years for SMEs benefited from the recovery and lower corporate spreads.

However, SMEs in Portugal face lending rates of 2.8%, higher than Germany (2.2%), France (1.7%), Italy (2%) and Spain (2.1% ). Facilitating access to finance by SMEs is essential: they account for 68.4% of overall added value and 78% of employment, compared with an average of 56.8% and 66.4% respectively for the EU as a whole. European Commission data show that, on average, Portuguese SMEs seem to rely more on bank lending than SMEs from other EU countries.

On the other hand, as its downward trend declines, the total number of corporate insolvencies should remain around 30%, above pre-crisis levels (2007). The steady decline in insolvencies is due to the economic recovery and more efficient insolvency regime since 2010; however, we see this downward trend to slow down (minus 5% in insolvencies in 2019 after minus 12% in 2018).

In terms of Day Sales Outstanding (DSO), companies may have lowered their guard too early. In fact, Portugal's DSO increased another four days to 73 days in 2017 and stabilized in 2018. With accelerated growth in 2017, companies have extended confidence to their customers through longer payment delays.

But as the outlook becomes more hazy, we have not seen (yet) a proportional adjustment, which means that companies must be cautious. In fact, on average in the world, DSO decreased from 66 to 65 days. We projected that the world average will decrease again in 1 day until the level of 2016 (64 days).

Metallurgical sectors have seen a worrying increase (156 days, versus 127 in 2017), while services have seen a five-day increase for 93 days. But some sectors also saw their DSO reduction, such as domestic goods (from 50 to 41), Telecom (from 110 to 97 days), technological (from 109 to 101 days) and machinery and equipment (from 87 to 80 days). The lowest DSO is recorded in retail (15 days) and in oil and gas (22 days).

According to Euler Hermes ratings, despite Portugal's impressive recovery, business conditions have not improved much in all sectors. Most of them are rated at the 'Medium' risk level, but several others are at the 'Sensitive' risk level for profit or liquidity issues (construction, ICT subsectors). The textile sector was downgraded to 'high risk' because of its challenging outlook. The footwear industry, for example, is experiencing difficulties due to strong Turkish competition and reduced demand for large customers in Europe.

Portugal is one of the few European countries with a government supported by the so-called radical left. How do you see your capacity to develop within the obligations imposed by the European Union?

Meeting and exceeding the deficit target set by the European Commission has allowed Portugal to exit from 'excessive deficit procedures', as the budget deficit fell to 1% in 2017 (3% including 2pps due to the recapitalization of Caixa Geral de Depósitos ), below its peak at 11.2% of GDP in 2010.

In 2018, it stood at 1.4%. In fact, with fiscal consolidation, public debt has fallen from its peak of 130.6% of GDP in 2014 to 122.1% of GDP in 2018. We expect public debt to continue its downward trend (around 120% of GDP). GDP in 2019).

The government has approved fiscal measures, such as the gradual reversal of the general government wage freeze or the change in payrolls on the IRS. The 2019 increase in government spending for social purposes could help private consumption, while keeping Portugal's fiscal accounts sound and reducing the debt burden.

However, although the fiscal rebalancing of Portugal has preserved social expenditure to a certain extent, it was carried out at the expense of public investment: annual public investment fell 6.5 billion euros between 2010 and 2017, although it has regained growth in the fourth quarter of 2017. About 1.9% of GDP, compared to 5.3% in 2010. This could be a bad sign for infrastructure in Portugal and for long-term growth.

The European Union votes at the end of May. There is a likely substantial increase in the populist vote. What consequences can this have for the European economy?

The expected high polarization in the European political landscape following the EU elections, where about 40% of seats are likely to go to anti-establishment parties, could make EU voting procedures longer and create noise. In addition, the EU Commission's appointment for 1 November could take longer and present additional difficulties.

We believe that one of the possible responses by European governments is the shift to some demand side policies: for example, we expect this year in the Eurozone a positive fiscal boost to add 0.2pp to real GDP growth in that aggregate; after years of belt-tightening for the states, this could be the first fiscal boost since 2009 to respond to growing discontent with EU institutions and the pursuit of social policies.

On the other hand, the exit from the United Kingdom of the European Union has already cost the economies of Portugal, Spain, France, Italy, Belgium, the Netherlands and Germany 138 billion euros in export opportunities

The exit hypothesis from the United Kingdom of the European Union has already cost the economies of Portugal, Spain, France, Italy, Belgium, the Netherlands and Germany € 138 billion in export opportunities. It is an analysis of the opportunity cost: since the United Kingdom voted to leave the European Union, Portugal lost export opportunities in the order of 2 billion. It is from the European countries less impacted.

Protectionism is one of the hallmarks of Donald Trump's economic guidelines. Can it 'contaminate' Europe?

Europe is experiencing a slower than expected pace in the face of an industrial recession in Germany, a confidence mini-shock in France and a still mild recession in Italy – with high fiscal uncertainty weighing on domestic demand . In addition, the trade dispute between the United States and China is estimated to have subtracted about 0.2 pp from the growth of the Eurozone in 2018 – as well as uncertainty related to Brexit. Finally, it is estimated that the reliable mini-shocks experienced in Italy and France reduced further growth by 0.2pp.

But Europe is expected to perform well overall thanks to five main factors: resilient growth in real wages, due to relatively low inflation rates; a positive fiscal boost; a still very accommodative monetary policy stance, allowing refinancing rates to remain very low by the end of 2020; increased demand from China; and growing economic confidence as the main risks do not materialize (US-China trade dispute, US car import tariffs, Brexit). In fact, the biggest domestic hardship in the United States (government shutdown later this year) could divert President Trump's government from renewing protectionism.



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