Recent opinion polls suggest the Socialist Party could come out on top in a snap election, but again below a parliamentary majority, indicating that any new government should be difficult to form. Tense relations with left-wing parties, which have so far given outside support to Prime Minister Antonio Costa’s minority government, could increase the risk of continued political instability.
Complex coalition politics could ultimately undermine Portugal’s fiscal prudence record
Portugal’s reliance on a more complex coalition policy in government formation, although increasingly common in European capitals, could ultimately undermine the authorities’ performance on policy. fiscal policy and commitment to fiscal consolidation, and hamper the gradual resolution of structural economic imbalances, including the reduction of high structural unemployment rates.
Economic stagnation is a major risk for Portugal given its modest growth potential, which we estimate at only 1.5%.
The budget proposed by the minority government led by the Socialists, voted by two left allies, would have reduced the budget deficit to 3.2% of GDP in 2022 from 4.3% in 2021, confirming the commitment to stabilization budgetary.
Fiscal discipline has become the norm in Portugal’s policymaking, with the government’s debt-to-GDP ratio falling by 14 percentage points between 2015 and 2019, supported by high primary surpluses combined with robust growth.
The economy is better positioned for sustained growth
The economy has been increasingly positioned for sustained growth since 2014, with banks rebuilding their capital reserves and liquidity, while households and businesses have started deleveraging late. The public debt-to-GDP ratio increased sharply to reach around 134% of GDP in 2020 due to the pandemic crisis, up from 117% in 2019. However, the government maintains a large cash reserve, equivalent to around 12% of GDP at from 2020, offering flexibility in financing plans.
We expect the public debt ratio to resume a downward trend in 2021 despite primary deficits of around 2% of GDP in 2021 and 1% in 2022. Low interest rates and growth expectations robust policies, supported by Portugal’s € 17 billion recovery and resilience program, pave the way for reducing public debt after the crisis.
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Giulia Branz is a sovereign rating and public sector analyst at Scope Ratings GmbH. Jakob Suwalski, Portugal’s senior sovereign analyst at Scope Ratings, helped draft this commentary.