PORTUGAL Lessons from a Bust without a Boom JosĂŠ Maria BrandĂŁo de Brito
Global Interdependence Center Conference Banque de France, Paris, 21st March
Contents
1. The Crisis Build-up (2000-2010) 2. The Hit (2011-2012) 3. The Stabilization (2013-…)
•2
THE CRISIS BUILD-UP (2000-2010)
•3
Portugal 2000-2015: A Bust Without a Boom Real GDP (CAGR)
Real Aggregate Demand (CAGR) Consumption
Government
Investment
Exports
3,9
Imports
2,8 2,0 1,4
1,0
0,7
-0,4
-0,6
2000-10
2011-15
2000-10 2000 10
2,4
-1,0
2000-10
2000-10
2011-15
2011-15
-1,4
2011-15
2000-10
2000-10
-3,2 2011-15
2011-15 2000-10
2011-15
Debt (as % of GDP)
2011 15
130
125 125 91
80
96
83
59
50 2000 2010
Households Source: Datastream; Eurostat; Millennium bcp
NFC
Government
2014
•4
The Ugly Duckling
Real GDP (CAGR, 2000-2010)
Debt, as % of GDP (change 2000-2010)
2,0
59 46
43 38 32 0,7
2 2000-10
Portugal
Spain
Households
NFC Portugal
Source: Datastream; Eurostat; Millennium bcp
Government Spain
•5
The Ugly Duckling
Real GDP (CAGR, 2000-2010)
Debt, as % of GDP (change 2000-2010) 46
43 32 0,8
0,7
22
2000-10
Portugal
-2
Germany -12 Households
NFC Portugal
Source: Datastream; Eurostat; Millennium bcp
Government Germany
•6
The Ugly Duckling
Real GDP (CAGR, 2000-2010)
Debt, as % of GDP (change 2000-2010) 46
43
32 25 21 0,7 10 0,3
2000-10
Portugal
Italy
Households
NFC Portugal
Source: Datastream; Eurostat; Millennium bcp
Government Italy
•7
Crisis Build-Up: Not That Much Building
Real-estate mania was not the cause of the crisis 260
260
240
240
220
220
200
200
180
180
160
160
140
140
120
120
100
100
80 2000
80 2002
2004
2006
2008
2010
House prices index (2000=100) Portugal
Greece
Source: Eurostat; Datastream; Millennium bcp
Spain
250
250
200
200
150
150
100
100 50
50 0 2000
0 2002
2004
2006
2008
2010
GVA - Construction (index 2000=100) Ireland
Portugal
Greece
Spain
Ireland
•8
Where Did All the Debt Go?
To the irretrievable depths of private and public consumption
72
72
23
23
68
68
22
22
64
64
21
21
60
60
20
20
56
56
19
19
18
18
52
52
17
17
48
48
16
16
44
15 2000
44 2000
2002
2004
2006
2008
2010
Private Consumption (as % of GDP) Portugal
Greece
Source: Datastream; Millennium bcp
Spain
15 2002
2004
2006
2008
2010
Government Expenditure (as % of GDP)
Ireland
Portugal
Greece
Spain
Ireland
•9
Together in Sickness, Not in Health
There wasn’t a shred of a boom in the good times, but there was definitely a bust when things darkened
135
135
18
18
130
130
16
16
125
125
14
14
120
120
12
12
115
115
10
10
110
110
105 100 95 Mar-00
Mar-03
Mar-06
Mar-09
Mar-12
Mar-15
Source: Datastream; Millennium bcp
Euro Area
8
6
6
105
4
4
100
2
2
95
0 Jan-00
0 Jan-03
Jan-06
Jan-09
Jan-12
Jan-15
Unemployment Rate (%)
Real GDP (index march 2000=100) Portugal
8
Spain
Portugal
Euro Area
•10
The Usual Culprits
Loss of competitiveness...
... compensated for with debt
10
10
5
5
0
0
-5
-5
-10
0
0
-20
-20
-40
-40 -42 -49
-60
-58
-10 -80
-15
-60 -62
-67
-70 -89
-100 -20 2000
-20 2002
2004
2006
2008
Unit Labour Costs (real, yoy) Portugal
Source: Datastream; Bank of Portugal; Millennium bcp
Germany
2010
-80
-79
-15
-100
-95 -108
-120 2000
2002
2004
2006
2008
-104
-120 2010
Portuguese International Investment Position (as % of GDP)
•11
THE HIT (2011-2012)
•12
When Enough Is Enough
Twin deficits
Sudden-stop
0
0
-2
-2 -3
-4 -6
-6
-6
-6
-8 -10
-7 -10
-10
-10 -10
-11
-12
-11
-8
-14 2007
2008
Current Account (as % of GDP)
Source: Datastream; Millennium bcp
12
2009
9
9
6
6
3
3
-12
-14 2006
12
-10
-10
-12
2005
15
-4
-4
-4
15
2010
2011
Fiscal Balance (as % of GDP)
0 Jan-05
0 Jan-07
Jan-09
Jan-11
Portuguese 10-year government bond yields
•13
A BoP Crisis on Steroids
20
20
15
15
10
10
5
5
0
0
-5
-5
-10
-10
-15
-15
-20
-20
-25 Jan-05
-25 Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
15
15
10
10
5
5
0
0
-5
-5
-10 Jan-05
-10 Jan-07
Imports of goods & services (yoy, 3mma)
Jan-09
Jan-11
Jan-13
Jan-15
Loans to private setor (yoy)
10
10
20
20
5
5
10
10
0
0
0
0
-5
-5
-10
-10
-15 -20 Mar-05
Mar-07
Mar-09
Mar-11
Mar-13
GVA - Construction (yoy)
Source: Datastream; Millennium bcp
Mar-15
-10
-10
-15
-20
-20
-20
-30 Mar-05
-30 Mar-07
Mar-09
Mar-11
Mar-13
Mar-15
Consumption of durable goods (yoy)
•14
A Pariah on its Own (Monetary) Homeland
Monetary-policy transmission fragmentation
7
7
6
6
5
5
4
4
3
3
2 Jan-05
2 Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
Interest rates on loans to NFC - Portugal Interest rates on loans to NFC - Euro area
Source: Datastream; European Central Bank; Millennium bcp
14 12 10 8 6 4 2 0 -2 -4 -6 -8 -10 Jan-05
14 12 10 8 6 4 2 0 -2 -4 -6 -8 -10 Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
Loans to private setor (yoy) - Portugal Loans to private setor (yoy) - Euro Area
•15
THE STABILIZATION (2013-…)
•16
Myth-Busting #1: Exporting One’s Way Out Without FX flex
A miracle born out of necessity 10
45
8 6
40
4
6.800
6.800
6.200
6.200
5.600
5.600
5.000
5.000
4.400
4.400
3.800
3.800
3.200 Jan-08
Jan-10
2
35
Jan-12
Jan-14
3.200 Jan-16
Exports (Mln€, mm3)
0 -2
30
-4
110
110
106
106
-10
102
102
-12
98
98
94
94
-6 25
-8
20 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 (as % of GDP, moving average 4 quarters) Exports
Imports
External balance (rhs)
90 2000
90 2002
2004
2006
2008
2010
2012
2014
Relative unit labour costs - Portugal
Source: Datastream; Bank of Portugal; Millennium bcp
•17
Textbook BoP Crisis Going in... Not Going out A real devaluation operated under the yoke of a monetary union 104
104
102
102
100
100
98
98
96
96
94
94
92 Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Portugal nominal effective exchange rate
Jan-10
Jan-12
Jan-14
92 Jan-16
Portugal real effective exchange rate
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3 Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
-3 Jan-16
Internal appreciation (+) / Internal devaluation (-) Source: Datastream; Millennium bcp
•18
Myth-Busting #2: Austerity Can Be Fairly Fair Cumulative change in households disposable income due to simulated fiscal consolidation measures, 2008-12 (% of household disposable income)
Structural reforms helped the labor market -3
6
-2
4
-1 2
0 1
0
2
-2
3 -4
4 5 Mar-96
-6 Mar-99
Mar-02
Mar-05
Mar-08
Mar-11
Mar-14
Unemployment rate (yoy change, inverted scale) Real GDP (yoy) Source: IMF, Fiscal Policy and Income Inequality, January 2014
Source: Datastream; Millennium bcp
•19
From Basket-Case to Poster-Boy Financial consolidation
3
2,2 0,8
0
0,0 0,1 -0,1
-0,7
-1,1
0,1
-3,4
-3,4
11,5
0,2
12,3
12,6
11,3
11,6
2014
2Q2015
0
8,7
-0,8 -0,6
7,4 -2,3
-3
12,3
3
2,0
-3,1
-6
-3
-6 -6,8 -8,2
-9 2007
2008
2009
2010
-9 2011
2012
2013
2014 2015(p)
Portugal - Primary balance (as % of GDP) Euro area - Primary balance (as % of GDP)
2010
2011
2012
2013
Core Tier I - Portuguese banking system
Core Tier I – Euro area banking system (SBGs)
Source: Datastream; European Commission – Winter Forecasts (February 2016); Bank of Portugal; European Central Bank – Financial Stability Review; Millennium bcp
•20
Partying with Friends
Government bonds bought under PSPP (as % of total outstanding)*
Differential from 10-year German bonds (b.p.)
30,0 25,5
18,8 16,8
18,0 15,5
16,4 14,2
16,2 14,7
14,0 12,2
PRT
FIN
GER
NETH
SPA
PSPP's conditions before April 2016
IRL
14,1 12,1
AUS
13,1 11,3
FRAN
11,4 9,9
BEL
PSPP's conditions after April 2016
1600
4000
1400
3500
1200
3000
1000
2500
800
2000
600
1500
400
1000
200
500
0 Jan-11
0 Jan-12 Portugal
Jan-13
Jan-14 Spain
Jan-15
Jan-16
Greece (rhs)
(*) Comprises both T-bills and bonds
Source: Datastream; IGCP; Nomura Research, 11 March 2016; European Central Bank; Millennium bcp
•21
Recent Developments No scope for complacency 4,0
4,0
3,5
3,5
3,0
3,0
2,5
2,5
2,0
2,0
1,5 Jan-15
0,5 0,4
0,2 0,1
1,5 Abr-15
Jul-15
Out-15
Jan-16
Mar-15
Portuguese 10-year government bond yields
2,3
Jun-15
Set-15
Dez-15
Real GDP (qoq)
2,1 1,4
-0,3
Mar-15
Jun-15
-0,1
-0,3
Set-15
Dez-15
Employment (qoq)
Source: Datastream; Millennium bcp
Mar-15
Jun-15
-2,7
-1,6
Set-15
Dez-15
GFCF (qoq)
•22
LESSONS From a Bust Without a Boom Lesson #1: If you work hard for a bubble (massive debt build-up), at least get one!
Lesson #2: Whenever aggregate consumption systematically over performs GDP the chances are we’ll get some sort of BoP trouble.
Lesson #3: Never take advantage of other people’s mistakes (especially coming from fickle investors): risk blurring will one day come into focus!
Lesson #4: For a small-open economy it is crucial to keep enhancing competitiveness through reforms aimed at making product and factor markets flexible. Lower corporate taxes also help.
THE GOOD
NEWS:
MARKETS AND
PEER PRESSURE WILL ENSURE THAT ECONOMIC POLICY DOESN’T GO ASTRAY
•23
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•24