Portugal's New Government Faces Daunting Task

Having failed to secure a majority in Sunday’s election, the new conservative-led coalition will face a daunting task as it attempts to turn around its country’s ailing finances, according to Barclays Capital.

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The new government “will have to deliver the proposed fiscal consolidation path and, more importantly, it must succeed in raising long-term real GDP growth to 1.5-2 percent. We think this might be particularly challenging for Portugal,” said Antonio Garcia Pascual, the chief southern European economist at Barclays Capital said in a note following the election result.

“Over the last decade Portugal has suffered chronically low growth because of very weak productivity and a loss of competitiveness,” he said.

“Internal and external imbalances have also accumulated during these years: a banking sector with the highest loan/deposit ratio in the euro area and private sector debt of 260 percent of GDP is coupled with current account deficits hovering around 10 percent of GDP,” Pascual wrote.

It will be a major challenge to unwind these imbalances according to Pascual, who doubts whether structural reforms on labor markets and the public sector will yield quick results.

“We believe the economy is likely to suffer from another recession during the initial phase of the adjustment program," he said.

"This does not mean that structural reforms are not important or counterproductive; on the contrary they are key to elevating long-term growth, without which neither private nor public sectors will be able to grow sufficiently out of their indebtedness,” Pascual added.