Session iii jose brito

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

This information is not an offer to sell or a solicitation to enter into any particular deal or contract. It consists of data compiled by or of Opinions or estimates from Banco Comercial PortuguĂŞs, S.A. and no representation or warranty is made as to its accuracy or completeness.

This information is merely an auxiliary means of analysis to be used by its recipients, who will be solely responsible for its use, including for any losses or damages that may, directly or indirectly, derive from it. Its reproduction is not allowed without permission from the BCP group. The data herein disclosed are merely indicative and reflect the market conditions prevailing on the date they have been collected.

Thus, its accuracy and timing must absolutely be confirmed before its usage. Any alteration in the market conditions shall imply the introduction of changes in this report. This information / these opinions may be altered without prior notice and may differ or be contrary to opinions expressed by other business areas of BCP group as a result of using different assumptions and criteria. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results.

•24