Less Pain, More Gain

By Rombel, Adam | Global Finance, July/August 2009 | Go to article overview

Less Pain, More Gain


Rombel, Adam, Global Finance


Portugal's pre-credit crunch party was not as wild as that of many other countries, and its hangover should be much less severe as a result.

You do not have to look very deep to find discomfort in the Portuguese economy, particularly amid the global and European recession. Portugal's economic activity is expected to continue contracting this year, before stabilizing in 2010, and this nation of nearly 1 1 million people faces rising unemployment and high current-account deficits.

However, investors, bankers and businesses are finding opportunities and reasons for optimism. Portugal's embrace of renewable energy, its ties to fast-developing emerging markets, the relative health of Portugal's banking and real estate sectors and the potential for its tourism industry to capitalize on a regional and global economic recovery are just a few of the reasons for optimism, economists and bankers say.

"The international crisis won't vanish soon. But 'green shoots' are surely welcome, and the Portuguese economy is not hindered in the same way, at least as other countries, by an oversized construction sector, by heavily overvalued real estate or by toxic financial assets," says Concaio Pascoal, chief economist with Millennium BCP, Portugal's largest private financial group. "We are positioning ourselves to better harvest the benefits of the global economic upswing."

There is no question that Portugal's growth is suffering. According to the country's national statistics office, the INE, Portugal's gross domestic product decreased by 3.7% in the first quarter of 2009 compared to the first quarter of 2008 and by 2% in the fourth quarter of 2008. Shrinking exports, declining investment - including in construction - and dampened consumer spending contributed to the acceleration in the GDP decline.

Analysts expect more of the same for the rest of 2009. The European Union (EU) recently forecast that Portugal's GDP would fall 3.7% for the full year before clawing back to a more moderate decline of 0.8% in 2010. Other forecasts by banks and rating agencies call for Portugal's GDP to remain flat or even rise slightly in 2010.

"A more visible recovery is expected in 2010," says José Maria Espirito Santo Ricciardi, chairman and CEO of Banco Espirito Santo Investment. "This recovery will come from a better external environment in Portugal's more traditional trade partners in Europe but also from the increased trade and investment ties between Portugal and faster-growing economies in Latin America, Africa and even Asia."

Any recovery will not be without accompanying pain. The unemployment rate in Portugal rose to 9.3% in April 2009 from 9.1% the previous month. The EU forecasts che rate could near 10% by next year. The country's high current-account deficit is also a problem."At 10% of GDP the external deficit is simply unsustainable." says Pascoal. Nearly half the deficit comes from Portugal's dependence on foreign oil.

Causes for Optimism

Despite the long shadow of the economic downturn, not all is bleak. Portugal's banking sector, for example, escaped many of the problems other countries faced from the global financial crisis and mortgage loan debacle. "Portugal did not embrace the housing boom in the same way as other EU countries did," says Pascoal. "The banking sector has also shown its resilience over the most turbulent times we've seen tor decades."

"The Portuguese banking sector is mainly devoted to traditional retail banking," Pascoal continues. "So, today, balance sheets impaired by illiquid and highly devalued complex financial instruments do not burden the main Portuguese banks."

Portugal also presents business opportunities and growth in some sectors, particularly as the broader global and regional economic outlook improves. One of those sectors is renewable energy. …

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