Portugal - Anatomy of a Crisis - The future

In my job in Merlin Properties I prepared, back in July, an analysis of the real estate market in Portugal. I will not publish the somewhat private details of that analysis since they belong to my company and I only include here the macro part of the work that I prepared based on public information from the Bank of Portugal and the extensive research published by the IMF.

The recovery since 2013 shows a relatively moderate pace that contrasts with the severity and length of the previous recession. BoP estimates a moderate recovery over the 2016-18 period (roughly 1.5% p.a.), slightly below the euro area.

Despite that, the debt volume that Portugal has to deal with make for a very painful and long recovery. Portugal, nor Spain, has the benefit of exporting the debt through inflation as the US is able to do or to solve the problem in the Argentina-Greece way with a full default-restructuring.

Portugal needs faster growth to absorb the labor slack through job creation. Considering how Portugal reached this situation (and given its large negative international investment position and high level of debt) this requires continued strengthening of external competitiveness, on which Portugal has room and need for improvement:

• Share of lower-skilled labor in unemployment is by far the highest in the EU.
• Labor Market Efficiency index is 21st among the EU countries (GBR-1st, DEU-11th, FRA-16th, ESP-25th).
• Employment protection is one of the highest in the EU (very similar to France).
• Internal competition ranked only 22nd among the EU countries.
• Portuguese consumers are still paying the highest income-adjusted energy prices.
• Most of foreign direct investment is directed to non-tradable sectors. 

This can be achieved only through structural reforms, given the very limited fiscal space as a member of the currency union:

• Labour market flexibility
• Efficiency and less protected Pension system
• Fiscal measures to incentivize corporate activity and use of more equity
• Stability of fiscal framework
• More efficient public expenditure

One important focus has to be the banking sector:

• Incentivize debt for equity swaps and speeding up the write-offs in NPL as well as the liquidation of nonviable firms
• Tax deductibility of write-offs
• Incentives for REOs way-outs (as Socimi) and legal reforms to improve the in-and out-of-court restructuring.

Structural reforms of this caliber require an institutional change of mind as well as clear domestic political support to strengthen tradables sector and minimize rent-seeking alternatives (so resources are channeled to productive activities) and education improvement to compete successfully in the global economy.

I hope this will be useful when looking into any investment in Portugal.