How Portugal came back from the brink — and why austerity could have played a key role

Joao Baptista's career is a good example of the transformation seen in Portugal. The 34-year-old entrepreneur opened his first bar in 2011 – at the height of the euro zone financial crisis. Six years down the line he owns five of the trendiest bars in Lisbon and will open his sixth after the summer in the northern city of Porto.

"The boom in tourism and measures such as reduction of VAT (value added tax) from 23 percent to 13 percent have helped bars, restaurants, and commerce in general," he told CNBC.

Long gone are the days when Portugal took center stage among the PIGS - a derogatory acronym to describe the economies of Portugal, Ireland, Greece and Spain during the financial crisis. Portugal is now often cited as an example of economic resurgence, applauded by international institutions.

But what has driven this change? And more importantly, will it last?

In 2011 Portugal obtained a bailout worth 78 billion euros ($92.2 billion) from Europe and the International Monetary Fund. Its economy contracted as much as 3.2 percent in 2012. During the crisis, the unemployment rate nearly hit 18 percent and among young people that rate was closer to 40 percent.

After many economic and fiscal reforms, led by a center-right coalition government, under the supervision of the IMF and the European Union, Portugal said no to the last tranche from its creditors in June of 2014 and freed itself from international assistance.

Since then the economy has been blooming. The IMF forecasts a 2.5 percent growth rate for this year and an unemployment rate below 10 percent. "Portugal's near-term outlook has strengthened considerably, supported by a pick-up in investment and continued growth in exports," the Fund said last June.

However, "just because you're in the right direction, it doesn't mean you're out of the woods," David Stubbs, global market strategist at JPMorgan Asset Management, told CNBC on Thursday.

Stubbs said that the economic recovery in Portugal has been mainly driven by the European Central Bank's policies rather than the Portuguese government.

The stimulus program from the ECB has meant the bank has been buying Portuguese bonds. At the same time, the ECB kept the euro lower, supporting exports.

However, the current socialist government, backed by two far-left parties in parliament, believes something different. It argues that its anti-austerity strategy is benefiting the economy.

The government led by Antonio Costa, in power since October 2015, has rolled back many austerity measures, including pension and salary cuts. Its key to economic growth is fostering private consumption.

"This year, we're going to have the biggest economic growth ever registered in the 21st century," Costa said at a political rally last week.

But the argument doesn't convince everyone. "Portugal is still one of the most vulnerable economies," Stubbs told CNBC. He added that the economy is only looking good today because of the cuts made during the bailout program.

Portugal still has to deal with a high-level of bad loans in the banking system and substantial corporate and public debt, he said.

Government debt is set to reach 128.5 percent of GDP (gross domestic product) this year, according to forecasts from the European Commission. The savings rate of households is forecast to decrease 0.2 percent in 2017 from last year, though is seen rising in 2018.

In a note out in July, Credit Suisse said the labor market and politics also pose risks to the economy.

"The crisis led to a displacement of workers out of the sectors more closely related to construction and credit growth. The recent improvements in employment growth represent a positive development, although most of the employment growth is concentrated in low productivity sectors."

The Swiss bank also said that the political arrangement in Portugal "might not last forever."

The 2018 budget could be a test for the government. The leftist parties supporting the socialist minority government are pushing for more social security spending. Around the same time, all political parties, including the Socialist Party, will want to please voters ahead of local elections, which could mean further relaxation of austerity policies.

Portugal's deficit forecast for this year is 1.5 percent and 1.4 percent in 2018, according to the IMF. However, despite what some analysts say, the government seems more popular than ever and Prime Minister Antonio Costa is still the most popular party leader.

"I don't see any real change, only a temporary illusion," Aires de Matos, a high-school philosophy teacher with more than 40 years of experience, told CNBC. He cited an increased consumption of imported goods and wrong allocation of funds by the municipalities as two of the biggest reasons for the "temporary illusion" that Portugal is experiencing.

Nonetheless, he mentioned one good decision in the last few years. The previous and current governments have supported tourism, which has grown significantly.

Data from the Portuguese statistical office (INE) showed in June that in the first four months of 2017, Portugal received more than 5.3 million tourists, a 10.9 percent increase in comparison with last year and twice as much growth as seen in Spain.

Bar owner Joao Baptista warned however that the government should re-think its strategy for the tourism sector. "It would be preferable if the government would take measures to boost 'quality tourism' and not 'mass tourism'," he noted.

Carlos Silva, a 32-year-old electrical engineer living in Porto, told CNBC that there are three main factors fostering the Portuguese economy: The policies from the current government, which have given more financial room to households, the change in rhetoric that austerity has gone has made people more confident and lastly, the international economic landscape has also helped.

"I believe there's more room for improvement and the economy will continue growing," he said, citing tourism and industry as strong economic components.

"Of course, there are yet a lot of reforms to do, but I think we are in the right path," he said.

Aires de Matos believes Portugal's economic performance will depend on external and internal factors. "Internally, the real situation of the Portuguese banks remains a big question mark to most Portuguese," he said.

Portugal has had to rescue several banks, including Banco Espirito Santo – now Novo Banco, and the public bank Caixa Geral de Depositos.

But with only two months to go until opening his new bar, Joao Baptista told CNBC: "I like to think that there are good prospects for the country. Mostly because my sector is driven by tourism and this is set to keep rising."