Two-and-a-half years after it took a bailout and embarked on a plan to turn its economy around, Portugal has made deep economic reforms. Those reforms helped cripple its economic growth—in the first quarter of the year, GDP fell 0.4% from the previous quarter, and was down 4.0% from a year earlier. But Portugal’s government is hoping that the pain endured has laid the foundation for growth, and has even returned to the open markets to issue debt.
Is now a good time for the world to take another look at Portugal? Quartz recently sat down with Manuel Rodrigues, Portugal’s secretary of state for finance, to hear the investment case. (We edited the interview for length and clarity.)
Quartz: In early April, the Portuguese Constitutional Court said that cutting certain benefits and wages, part of the planned austerity package, was not constitutional. Is this going to have a long-term impact on the kinds of reforms the Portuguese government can enact?
Manuel Rodrigues: The challenges that Portugal has had over the last year were huge. But we had much bigger challenges in the past that we were able to sort out. You find these types of challenges all across Europe.
The biggest concern of the court when looking at this kind of case is: Are these sacrifices equally distributed within the population? One of the strengths of the Portuguese program is the internal equation…There is a very strong consensus in terms of the fiscal program and the bailout program. As member of the EU, getting a deficit of 3% is not optional.
We’ve gone four-fifths of the way. This moment we consider that the largest macroeconomic imbalances in terms of fiscal consolidation have been achieved and we are initiating a period where we want to anticipate investment. We’ve brought corporate taxes in some cases below 7.5%. We are doing everything it takes to bring growth by the end of this year.
Q: Ok, so when does GDP grow again?
MR: We had 0.4% contraction in the first quarter from last quarter, which was -1.8%. This tells us we are almost reaching the inflection point, but you need a trigger that will bring you to a very low level of growth which gives investors the confidence that we are reaching some period of growth in economic output.
Q: What is the “a-ha” moment?
MR: The first one is in five- and 10-year bond yields. They’ve been on a downward trend, though there’s some volatility. But we were able to generate the best return of any sovereign in the world in 2012, and in 2013 we’ve generated a very good return. We need to show returning investors that they will see good returns. That is absolutely critical.
With guaranteed good returns for investors in sovereign bonds, sovereign yields will keep decreasing, and there will be a virtuous cycle in corporate bond yields. Since the beginning of the program, Portuguese companies issued about $8 billion in corporate bonds. In order to keep increasing exports, as companies are now, many of them at capacity, they need to invest. We want to make the second half of 2013 a tipping point.
Q: Part of rates falling has been generated by a global environment of easy money. This isn’t just a European trend. Are you concerned that this could change as the US Federal Reserve starts tightening monetary policy? Is there a concern about some kind of correction?
MR: We expect Portugal to be able to benefit from this situation if it’s in good economic condition. We are only generating some of the biggest sovereign returns because we are getting the economy in shape.
So are the fundamentals of the Portuguese economy really improving? Do these fundamentals sustain a further progression in Portuguese yields? We believe so. We are getting a positive external account. We are getting exports. We are getting our deficit in shape, because our financial system is now consolidated. Now, you need further upside. It’s done through specific targeted measures in the corporate sector.
Q: Germany in particular has come under fire for not doing enough to help the periphery. Do you think that’s the case?
MR: Germany is very close to the periphery. A few weeks ago, we met with German minister of finance Wolfgang Schaeuble in a bilateral meeting in Berlin. He publicly acknowledged the very strong progress of the Portuguese economy and its structural reforms, and the very strong willingness to support Portugal. And Germany is now bringing in a bank called KfW, a development bank, to bring in special loans to finance Portuguese and Spanish SMEs [small- and medium-sized enterprises].
Q: But part of the reason that SMEs aren’t finding financing right now is because Portuguese banks aren’t considered the most secure right now.
MR: No, Portuguese banks have been fully recapitalized already. Half the funds designated for recapitalization were not used, and the size of the recapitalization was about 3% of GDP. Of all the countries that had to recapitalize their banking sector—even the UK, the US—it was the smallest recapitalization as a percentage of GDP. We have brought the balance-to-deposit ratio for Portuguese banks from 155% two years ago to 120% now. When you compare Portuguese banks with other banks in the euro area, they have a stronger core Tier 1 ratio and they have shrunk their balance sheets. This process is painful but now they are ready to start lending.
Q: Of all the countries hardest hit by the crisis, it looks like Greece might be attracting some investment from private equity, hedge funds, and other alternative asset managers. Do you see Portugal following a Greek path?
MR: And I believe that Greece will also overcome its challenges. But the Portuguese economy is totally different in terms of fundamentals.
Investing in Portugal is getting exposure to the fastest-growing economies in the world. The Portuguese language is the sixth-most spoken language in the world, so investing in the Portuguese economy is getting strong exposure to Brazil, Angola, Mozambique, Macau. These are emerging economies, these are in the low-development stage, and which have a lot of development to do. Portuguese companies have been invested in these economies forever. These economies are strongly aligned with commodities and we know that commodities in the middle-run will have an upward trend.
There are 10 million people living in Portugal, but there are five million Portuguese people outside the country. Portugal is an economy with a very strong upside when you think about exposure and internationalization.
Q: If there were one major roadblock to stand in the way of European recovery in the next few years, what would it be?
MR: My biggest concern is about jobs creation. We can’t waste time on this. We are very focused on our SMEs, which are actually generating more than 80% of our jobs. Imagine if every SME that employs 4-6 people employs one more. You will overcome the jobs problem. Creating conditions for our SMEs to keep progressing, to increase revenues through global growth will help us to tackle jobs creation.
Q: So if you can’t do that, are you concerned about the political repercussions of having a generation of unemployed young people? Are people underestimating the youth unemployed?
MR: We can generate jobs, but it’s a question of how long we will take to get there. We have been investing a lot in teaching that allows universities and companies to work together to make young people more employable. It is very important also to apportion professional development across the board, not only for young people but for the middle-aged. Bring them back to universities, give them a better preparation to work in their own industry.
Q: Anything else?
MR: It’s important to communicate what we’re dealing with. We were conducting a silent revolution in terms of structural reforms, and now we have results to show. We need to pass those results on to our investors. The recovery of Europe has to do with the recovery of confidence. Recovering confidence our corporates to finance themselves at a lower cost, and as they do that, be able to anticipate investment.
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