Boston, MA -- (ReleaseWire) -- 12/26/2012 -- Core Views Austerity measures imposed by the so-called troika - made up of the EU, the European Central Bank and the International Monetary Fund - as part of the country's EUR78bn bailout programme, will see to it that government and household consumption and investment spending are negative drags on economic growth. While the continued collapse in import growth will mean a positive contribution to real growth from net exports, the persistently weakening external environment presents a key downside risk to our forecast. We expect the re-balancing of the Portuguese economy to continue over the coming years as structural reforms imposed by the IMF and EU shift the economy onto a more sustainable growth path. In turn, we forecast the current account deficit will continue narrowing as the collapse in domestic demand moderates the merchandise trade deficit and continues to expand the services surplus. While we see little scope for foreign direct investment to pick up this year, beyond 2013 we believe that the government's privatisation drive, which has thus far garnered great interest, will bear fruit, thereby easing deficit financing dependence on the ECB. While Portugal is unlikely to experience the same degree of social and political dislocation currently afflicting other bailout countries Greece and Spain, we maintain that the country's political risk profile will continue to gradually deteriorate over the coming years. Driving this degradation will be an increasingly disillusioned population and inter-party wrangling over the degree to which IMF/EU-mandated austerity and reform measures should be implemented. However, given broad-based support for the bailout package across all political parties, we see little scope for politics to derail Portugal's bailout programme. Key Forecast Changes We have revised our forecast for the current account deficit in 2012 from 5.3% of GDP to 3.2% of GDP. This comes as a result of a stronger than anticipated correction of the current account shortfall in 2011 to 6.4% of GDP (we expected 7.1%) owing to the collapse in domestic demand. Risks To Outlook Downside Risks To Growth Forecast: The biggest immediate danger for Portugal is a deepening of the sovereign debt crisis, either for its own government or in another eurozone country, which would depress domestic confidence and external demand. Upside Risks To Long-Term Outlook: At present, we do not envisage long-term real GDP growth rising much above 1.7% in the latter part of our long-term forecasts to 2021. However, we would upgrade our forecasts upon evidence that the government's structural economic reform package is making headway. Furthermore, if the current debate in the eurozone over growth versus austerity turns in French President Francois Hollande's favour, there is the potential for eurozone-wide growth initiatives that could help boost Portugal's economic fortunes.
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