Risk metrics favour Portugal despite Italy contagion

Rosy outlook: Portugal’s tourism revenue is on course for another strong year

A global economy slowing down, oil prices rising, the prospect of repeat elections in Italy with a populist government aiming to take control…

They are hardly the recipe for European unity and prosperity, or a convincing argument for investors in European assets, Portugal included.

Consequently, Italy’s turmoil has rippled out across the eurozone, hitting Portuguese bank shares and increasing the sovereign borrower’s repayment costs this week.

With the future of the eurozone once again under the microscope, the country’s short-term risks are naturally heightened.

Yet, often the temptation is to treat the eurozone countries as a single organization – when there are clearly differences between them – and to become preoccupied by the shock destabilization and exaggerated impact.

Portugal had been fairing well in Euromoney’s country risk survey recently.

On a score of 60.5 out of a maximum 100 risk points, it has climbed to 39th on Euromoney’s global risk scorecard, a high-ranking borrower within the third of five risk categories, gaining 11 places on a year-on-year basis, and 22 overall since the sovereign debt crisis struck in 2010.

Italy, two places lower on 59.4 points, was also improving, but it had – still has – inferior political risk metrics highlighted by the survey’s score differentials. Subtracting Italy’s risk factor scores from those for Portugal show big differences favouring the latter on several measures:

Government stability, corruption and the regulatory environment are all less risky where Portugal is concerned.

On its regulatory strengths, Portugal ranks 29th overall from 190 countries for Doing Business 2018, according to the World Bank, whereas Italy ranks 46th.

In Portugal, there is no notable populist uprising and less institutional risk.

Supported by its left-leaning allies, the ruling Socialist Party governs by consensus, and remains popular, despite being hit by historical corruption scandals.

The government has, in fact, proved surprisingly stable and successful, adopting Keynesian fiscal stimulus – increasing spending on pensions and wages, enjoying the benefits of economic growth, and, crucially, overseeing a structural fiscal improvement that is larger than in Italy.

It should see out the remainder of its term through to late 2019, with its popularity underscored by a tightening labour market.

The harmonized unemployment rate continued to fall in March, to 7.4% (seasonally adjusted), and compares with 9.7% in March 2017, easing the burden on government transfers and improving tax revenue. Italy’s unemployment is still around 11%.

GDP increased at the slower pace of 0.4% in the first quarter, but matched the eurozone average, and grew by 2.1% year on year, compared with Italy’s 1.4%.

Business confidence is down and survey experts agree the expansion will slow over the next few years after last year’s 2.7% outturn.

However, those prepared to offer a view amid the current financial market turmoil argued the country does not appear to be sliding off a cliff-edge, with the construction sector remaining positive and consumer confidence reviving.

Caught up in crisis

That’s not to say Portugal will not be caught up in a new eurozone crisis, but it will do so from a stronger position and there is no reason why it should be equally affected. Nor is there a strong argument for economic growth across Europe suddenly vanishing.

On tourism alone, Portugal is unlikely to lose its lustre and will remain cost-competitive with Spain, even if the recent boom dissipates as travellers return to higher-risk tourism spots around the Mediterranean.

Tourist arrivals rose 12% in 2017 to 12.7 million. The latest figures show tourism revenue was higher in the first two months of 2018, putting the country on course for another strong year.

Moreover, despite periodic support for bank recapitalizations, the government has made good work on addressing the fiscal imbalance.

The national debt remains large at 122% of GDP this year, but is declining, and is smaller compared with Italy, where the recent political problems and slower growth outlook are of greater concern for tackling the problem.

Portuguese authorities will likely deliver a headline general government deficit of 0.9% of GDP this year, the European Commission predicts, which would have been even lower without additional bank support.

When the Italian crisis calms, Portugal will not look such an easy target. Investors will once again focus on its more favourable risk metrics.