The Portuguese are less than three months away from their big day – May 17 – when they expect to get financial sovereignty back after three years of being told what to do with their money by foreign bailout creditors.
In return for the 78 billion-euro (HK$832 billion) rescue that has since 2011 prevented national bankruptcy, Portugal consented to an economic crash diet: deep cuts in pay and pensions and welfare rights, steep tax increases, and an end to longstanding labour entitlements.
Countries which share the euro currency are eager for Portugal to show it is financially fit again. Its recovery would help the bloc draw a line under its debt crisis and open the door to growth that could have a beneficial knock-on effect around the globe.
With the euro zone’s financial storm clearing, few reckon Portugal will need more cash, like Greece did. But if there are doubts over its ability to go it alone, the bailout creditors could decide to grant it a protective line of credit that would come with strings attached – more oversight and austerity. Bailout inspectors were due to arrive on Thursday for their next-to-last assessment on the issue.
Portugal this month reached a milestone: private investors trusted it enough to give it a long-term loan.
Three years earlier, international investors had started demanding exorbitant rates to lend to Portugal, fearing they might not get their money back. But on February 11 the Portuguese debt agency raised 3 billion euros in a sale of 10-year bonds at an affordable, though still pricey, interest rate of 5.11 per cent. When Portugal asked for its bailout, that rate was 17 per cent. There was demand for three times the amount of bonds sold, and 83 per cent of them were taken up by foreign investors.
Deputy Prime Minister Paulo Portas summed up the government’s view in three words: “Portugal is back.”
Meanwhile, officials say last year’s budget deficit will be better than the targeted 5.5 per cent of gross domestic product. In 2010, it was a whopping 10.1 per cent.
Portugal last year also broke out of its worst recession in three decades. The economy grew at the second fastest rate in the 18-nation euro zone in the last quarter of last year, expanding 0.5 per cent on the previous three months. In 2012, it shrank 3.2 per cent.
The jobless rate has been inching lower, from a record 17.7 per cent at the start of last year to 15.4 per cent at the end of December. Exports were up 4.6 per cent last year after a 5.7 per cent jump in 2012. Tourism had a record year, with hotels hosting 14.4 million tourists, up 4.2 per cent on 2012.
The government has made the economy leaner and nimbler. It has, for example, made it easier and cheaper to hire and fire workers and alter their working hours and duties; begun restructuring the legal system and state-owned companies; and scrapped century-old rent controls.
Prime Minister Pedro Passos Coelho says the Portuguese have given up some of their bad habits, such as lavish spending financed by credit. Household borrowing for consumption fell 9.4 per cent in 2012 after a 5.8 per cent drop the previous year.
“We are today living much more within our means,” Passos Coelho said this month.
Despite all Portugal’s efforts, the main ratings agencies still classify the country’s bonds as junk. Bulgaria and Romania are rated safer bets by Standard & Poor’s.
The bailout creditors have twice had to ease Portugal’s deficit targets as the economy nosedived. Public debt has grown to around 130 per cent of GDP, more than double the euro zone ceiling of 60 per cent.
The financial sector is still weak – the five biggest banks had their worst ever year last year.
And the standard of living is going backwards. GDP per capita in 2010 was 80.4 per cent of the EU average. In last year, it was down to 76 per cent.
Street protests, though they have never reached the level of violence seen in bailed-out Greece, have compelled the government to tread carefully. It has struggled to reform the hard-lobbying energy sector and the civil service.
Some analysts fear the economic makeover has been skin-deep and that it could soon be “business as usual.” Portugal has needed three bailouts in less than 40 years.
“Change has been very relevant, but there hasn’t been a big bang,” said Antonio Barroso, a London-based analyst with the Teneo Intelligence consulting firm. “If these big bangs have not happened during the crisis, they won’t happen during normal times.”
And the scars of austerity will take time to heal. In 2012, more than 121,000 people emigrated in the biggest mass departure since 1960. The 2012 birth rate was the lowest on record.
The perils for Portugal come from three directions: political rivalries, the Constitutional Court, and the fortunes of the global economy.
Ahead of a scheduled 2013 general election, party leaders are already talking again about lowering taxes and spending more public money.
The leader of the main opposition Socialist Party, Antonio Jose Seguro, has struck a chord with disgruntled voters and taken a lead in polls by accusing the government of turning a blind eye to hardship. “Our country has to change course,” Seguro said on Tuesday.
The Constitutional Court has several times struck down proposed pay and pension cuts and may disallow other austerity measures.
Meanwhile, Portugal remains vulnerable to international market conditions.
Finance Minister Maria Luis Albuquerque warned that, even after May 17, Portugal can’t relax its focus on spending cuts and reforms.
“I am sure that market pressure ... will continue,” she said this week, adding that Portugal’s financial circumstances “will continue to be challenging and somewhat fragile for quite a long time.”