Portugal, From Europe’s Periphery, Emerges as Bond Market
Star
Borrowing costs dropped after Macron’s victory in France and
on data showing Portugal’s recovery is accelerating
By Jeannette Neumann in Lisbon and Jon Sindreu in London
May 31, 2017 5:30 a.m. ET
The rally in eurozone bonds has a surprising star: Portugal.
Investors have been rushing into eurozone debt of late,
lured by a mix of buoyant economic data and relaxation of political risk. And
Portugal, among the EU’s smallest members and one that suffered through a
bruising bailout six years ago, has benefited from the flood of capital flowing
to Europe’s periphery.
Yields on Portuguese 10-year debt closed at 3.092% Tuesday,
at eight-month lows. That is a sharp reversal from the 4.3% reached in
February, when borrowing costs rose on fears the French would elect
anti-European Union candidate Marine Le Pen as president. Instead, the April 23
victory of Emmanuel Macron in the first round of the election sparked a relief
rally across Europe.
Money flowing into Portuguese equity funds has rocketed
since, figures by EPFR Global show, much more than elsewhere in the eurozone.
Portuguese 10-year yields have also led the fall and dropped 0.7 percentage
points, compared with 0.1 percentage points for Italian yields. Only Greek
yields have fallen more, but for a different reason—expectations that
international creditors will eventually unlock new bailout funds.
Bond investors have been further cheered by data showing
that the three-year economic recovery in Portugal, where 10-year borrowing
costs rose above 16% at the height of the sovereign debt crisis in 2012, is
accelerating. Portugal’s economy expanded by an estimated 2.8% year-over-year
in the first quarter, the fastest pace in nearly a decade. Annual growth is
expected to continue but ease to an average of about 1% to 1.5% in the medium
term, according to Moody’s Investors Service.
“The facts would suggest you are past the point of greatest
grief,” says Steven Andrew, a fund manager at M&G Investments, a £265
billion ($345 billion) asset manager, who was long cautious about Portugal but
turned into an enthusiastic buyer earlier this year.
Portugal remains, however, one of Europe’s weakest links.
Only credit-rating firm DBRS Ltd. considers the country’s debt to be investment
grade. Without at least one investment-grade rating, Portugal would lose access
to the European Central Bank’s bond-buying program. Moody’s and the two other
major credit-rating firms each rate Portugal’s debt in junk territory because
of the country’s high government debt and weak banking sector.
Despite the hurdles to a deeper economic recovery, business
owners such as shoe designer Luis Onofre say they are feeling the nascent
optimism in Portugal. The country’s bailout years were “a dark period,” Mr.
Onofre said, but “the clouds have gone away.”
Visitors have poured into Portugal, fearful of terrorist
attacks in France, Turkey and Egypt. Tourism now makes up 6.4% of GDP, the
highest on record and far above the 4.6% level reached in 2011, according to
data by the World Travel & Tourism Council.
That has given Mr. Onofre, 46 years old, the confidence to
open a store that bears his name in Porto, a city famous for its sweet wine. An
existing shop on Lisbon’s main fashion strip, Avenida da Liberdade, where he
sells high-end men and women’s shoes made in two factories in Portugal, is
thriving.
Portugal isn’t the only one benefiting from the rush to
peripheral bonds amid a sense that Europe is putting years of economic and
political turmoil behind it. Spain, among Europe’s fastest-growing major economies,
has become a poster child for the eurozone recovery.
Portugal hasn’t been long on optimism in recent years. A
debt bubble and rampant public spending—Portugal’s budget deficit was nearly
10% of GDP in 2010—forced the country to take a €78 billion international
rescue package in 2011. It is recovering from the double-dip recession that
followed the bailout.
“It has taken a decade, almost a decade, to correct the
mistakes of a past decade,” Carlos Moedas, European commissioner for research,
science and innovation and a former Portuguese minister, said.
Now, its budget deficit is down to 2% of GDP, while business
and consumer optimism is at levels last reached in 2001. A coalition between
the Socialists and other leftist parties including Communists—an alliance so
unlikely that it was dubbed “geringonça,” or “contraption” when it was formed
in late 2015—has governed well, business executives and investors say.
Real-estate prices in cities such as Lisbon and Porto are on
the rise. This week, Portugal requested EU permission to repay ahead of
schedule about €10 billion in bailout funds to the International Monetary Fund.
But doubts remain about whether the country has made enough
structural changes to ensure a deep and durable recovery—a reminder that the
Europe’s peripheral economies remain vulnerable.
Portugal’s debt-to-GDP ratio is the highest in the EU after
Greece and Italy and will likely remain above 125% in the coming years. And
unlike in neighboring Spain, Portugal didn’t do a deep clean of its banking
system. Bad loans make up 17% of total lending, which is crimping the flow of
fresh loans. That has in turn stalled investment.
“You see all this bullishness around you,” said Nuno Vilaça,
partner at advisory investment boutique Raven Capital in Lisbon. But, he added,
“there is a long way to go in the financial sector and in the industrial
sector.”
Like other areas of the periphery, such weaknesses leave
Portugal particularly vulnerable when the European Central Bank pulls back on
its extremely loose monetary policy, which investors expect to happen next year.
Portuguese paper could come under more pressure if the central bank slows its
monthly purchases of bonds, said Patrick O’Donnell, senior investment manager
at Aberdeen Asset Management , which oversees more than £308 billion ($395
billion).
“Small markets are much more dependent” on the ECB, he
added.
Write to Jeannette Neumann at jeannette.neumann@wsj.com and
Jon Sindreu at jon.sindreu@wsj.com
Sem comentários:
Enviar um comentário