Portugal’s ‘Syriza’ faces uphill battle

Philip Moore
Published on:

A relatively stable political climate has boosted Portugal’s economic recovery and secured record low borrowing costs. But are markets too complacent? Euromoney interviews anti-austerity advocate Rui Tavares, a leftist founder of Livre and an ally of Greek finance minister Yanis Varoufakis, as the ruling centre-coalition seeks to secure its position ahead of the September elections.

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If far-reaching shifts in the southern European political landscape were on investors’ minds in the run-up to the Greek elections, they had no impact whatsoever on the response to Portugal’s first dual-tranche issue in January.

The Portuguese debt office (IGCP) generated total demand across the 10- and 30-year tranches of more than €14 billion, raising €5.5 billion at a very modest new issue premium.

"The fact that Portugal was able to generate orders of about €6 billion for its 30-year issue prior to the ECB’s QE announcement and the Greek election gives you a sense of the strength of investor confidence," says Kateryna Taousse, director at PAAMCO in London.

It is not just IGCP that has been able to shake off any misgivings that investors might have about southern Europe’s shifting political contours.

Days before the Greek election, the state-owned Caixa Geral de Depósitos (CGD) chalked up a similarly successful landmark when it printed an €1 billion seven-year bond at a coupon of 1%. That, says CGD’s general manager of investor relations Filomena Raquel de Oliveira, was the lowest coupon ever paid by a Portuguese borrower for a seven-year maturity.

"We had more demand than in previous transactions from real-money accounts from Germany and Austria, which I think demonstrates how relaxed investors are about the political situation in Portugal," she says.

As PAAMCO’s Taousse says, investors’ enthusiastic take-up of this year’s Portuguese offerings is a reflection of the hunt for yield in the eurozone – but it also suggests they endorse a somewhat debatable observation on Portugal’s politics made by the borrower at the time of IGCP’s cracking January benchmark. This insisted that no new major party or political force has emerged in recent years in Portugal.

Strictly speaking, this assessment is accurate enough. After all, neither the financial crisis nor the austerity that followed it has created any meaningful tailwinds for radical or extremist political parties in Portugal. Nor has it encouraged the creation of any new party with the strength or cohesion necessary to challenge the stranglehold enjoyed by the Socialists and Social Democrats, which between them have about 60% of the vote.

To date, neither of the two leading parties have lost much sleep over the emergence of a newcomer capable of harnessing widespread support à la Syriza in Greece or Podemos in Spain.

To a degree, this is a reflection of the fragmentation of Portugal’s left wing. The default setting for angry voters, say local bankers, has traditionally been the Portuguese Communist Party. Among other anti-austerity parties, the Bloco de Esquerda (Left Bloc), which hailed Syriza’s victory as a "new beginning for Europe", has seen its popularity nose-dive in recent years.

The failure of the fragmented left to make a meaningful dent in the popularity of the largest parties is also a by-product of the continued recovery in the Portuguese economy.

"We went through a massive adjustment programme which reduced the primary deficit from almost 7% of GDP in 2010-2011 to close to zero today," says Rui Constantino, head of economic research at Santander Totta in Lisbon.

"That took its toll in terms of unemployment, and people are still facing higher taxes than they did before the crisis, and in some cases a continued decline in wages. But in 2014, tax revenues were higher and unemployment was lower than expected, while private consumption picked up."

He adds: "Lower interest rates have led to the average monthly mortgage repayment falling from around €500 to €300, which is providing a massive boost to disposable incomes."

This recovery, and the feel-better factor accompanying it, is expected to gather further momentum over the coming months. Growth is forecast by the central bank to reach 1.5% this year and 1.6% in 2016, but economists think these projections might be on the conservative side.

"Portuguese growth will surprise to the upside this year, as long as Greece does not derail," says Antonio Garcia Pascual, chief European economist at Barclays in London.

A subdued oil price will certainly help to underpin an accelerated recovery.

André Rodrigues, senior equity research analyst at CaixaBI in Lisbon, says: "The low oil price and the cheap euro should add 0.2% or 0.3% to the consensus forecast for growth this year."

José Brandão de Brito, chief economist at Millennium BCP in Lisbon, agrees. He says that as a rule of thumb, a 20% decline in the price of oil stimulates a 0.5% increase in Portuguese GDP. He adds that the negative impact of lower oil prices on trading partners such as Angola is more than offset by their positive impact in Europe.

"Angola accounts for 6% of Portugal’s total exports of goods," he says. "Spain takes 23% and is one of the world’s biggest beneficiaries of falling oil prices."