Week ahead & in review

WEEK IN REVIEW

Deficit 2014 and Novo Banco: The National Statistics released this week the second notification of 2015 for the Excessive Deficit Procedure (EDP). The document’s major revision to the first notification is the inclusion as a capital transfer of the €4.9bn of the Novo Banco (NB) capitalization in the General Government deficit of 2014, which increases from 4.5% to 7.2% of GDP. As the sale of NB didn’t materialize within one year, the capitalization was considered as a capital injection into a public company.

However, this is an extraordinary measure whose impact is merely statistical if the selling of Novo Banco is able to repay the amount borrowed by the State to create the Resolution Fund that owns the Bank. The risk lies moreover on the incapacity to sell NB by the Fund’s value and on the possibility that additional cash needs to be allocated to the Fund if capital ratios are not considered robust enough in the ECB stress tests.

Both the Ministry of Finance and European authorities have already highlighted this one-off operation does not require any additional revenue or expenditure measures to address the Government’s 2014 deficit. See more here.

Annual GDP upward revision: This week the National Statistics also released the final results of the Annual National Accounts.  The final results for 2013 represent an upward revision of the real GDP by 0.5 pp. Thus, real GDP fell only 1.1% in 2013. This revision, and the incorporation of the latest information concerning the General Government sector and international trade in goods and services, also affects the year 2014: real GDP was also revised upwards by around 0.2%, rising 1.1% in 2014. Finally, Q1 and Q2 GDP were up 0.5%qoq and 1.6%yoy in both periods (+0.1 pp compared with the first estimates).

National accounts by institutional sector: In the first semester of 2015, the General Government Deficit for the Excessive Deficit Procedure (EDP) was €4.1bn (4.7% of GDP), 1.9 pp above the Government’s forecast for the whole year 2015, including one-off measures. Comparing with the first 6 months of 2014, the deficit was 1.6pp lower.

One-off measures aggravated in 0.1 pp the deficit until June and include two injections of capital (Carris and Banco Efisa). The transfer to the Mutual Contra-Guarantee Fund (a fund for mutual guarantee societies that support SME finance), which would aggravate the deficit a further 0.1 pp, does not classify anymore as an extraordinary operation due to the revision in the General Government perimeter undertaken with the release of Q2 National Accounts (the Mutual Contra-Guarantee Fund is now part of the Public Administration).

In nominal terms, the deficit already reached 84% of the target for 2015. Although the second semester traditionally yields a better execution, these news put some risks on the initial Government’s forecast: according to the UTAO (the Parliament’s technical unit to analyse the Budget), to achieve the annual target for 2015, the budget deficit could not exceed 0.9% of GDP in the second half of the year, or 1.2% of GDP including one-off, a fiscal performance that seems particularly demanding and without precedents in recent years. This scenario is aggravated with Parliament’s elections taking place in the beginning of Q4, which increases the probability of lack of political stability to accomplish budget targets. However, even if the deficit derrails from the objective, it should not be far from the 3% of GDP required by the EDP. To meet the European rules, the deficit must be below 1.4% of GDP.

According to the National Accounts by institutional sector, the Households saving rate was at 5.0% (0.8 p.p. less than in Q1). These value reflects an increase of households final consumption higher than disposable income.

The Portuguese economy as a whole recorded a net lending of 1.3% of GDP in the year ended in Q2 2015, 0.6 pp below the previous quarter. The growth of disposable income of the economy was below the increase in final consumption expenditure, suggesting the economy is moving up again through consumption.

 

WEEK AHEAD

29 September

  • Portuguese Unemployment, August, National Statistics
  • EU unemployment, August, Eurostat
  • Eurozone Sentiment Indicators, September, EU Commission

30 September

  • Industrial Production, National Statistics

1 October

  • Public Accounts (Government’s net lending and debt, Q2 and August), Bank of Portugal

4 October

  • Parliament elections in Portugal