Italian Crisis To Impact Portugal?

June 18, 2018

Knock-on effect of Italian crisis could affect former bailout country Portugal

Following a stark warning from the IMF on Tuesday, it’s come to light that a situation where we see weaker growth in the Eurozone could “significantly” affect the economic recovery of Portugal, who still face “lingering domestic vulnerabilities.

Debt Yields

This warning comes on the heels of the fallout from the Italian political crisis that has pushed Portugal’s 10-year debt yield up 12 basis points as of Tuesday, while Lisbon’s PSI 20 stock market index has fallen by 2.4%.

Shares in Millennium BCP, Portugal’s largest listed bank have dropped more than 7% in the past few days.

The IMF statement follows a two week trip to Portugal, where it has determined that potential external shocks are possibly the greatest risk to the Portuguese economy.

The IMF warned that “market interest rate surprises could have an impact on cash flow and activity” due to the nation’s high level of both public and private debt.

Although there was no direct mention of Italy, the report went on to mention that “rising political and policy uncertainty” in some “partner countries” along with “a rise in uncertainty around the world” could affect the recovery that Portugal has made of late.

Portugal Forecasts

Forecasts from the IMF that economic growth in Portugal could slow to around 2.3% this year would signal a drop from the 2.7% that was recorded in 2017, which was Portugal’s highest growth rate in 20 years.

Growth could decelerate to around 1.4% in the medium term, according to IMF projections.

Last year was one of significant progress for Portugal as far as fiscal consolidation goes, which had prompted the Portuguese Government to set a feasible deficit target for this year.

The strong economy and a structural primary balance in surplus for a sixth straight year” was the primary reason behind the progress made, and the minority government has made plans to cut the budget deficit to 0.7% of GDP this year, which is down from 0.9% last year.

IMF advised Portugal to continue down the path of making faster progress in reducing the level of public debt, while taking the time to make sure that any fiscal plans and adjustments were strong enough to withstand potential surprises and sudden changes down the road.