Portugal Politics January 2016

Portugal

Portugal: Portugal elects center-right president in first round for center-left government

January 28, 2016

Marcelo Rebelo de Sousa, former leader of the center-right Social Democratic Party (PSD), was elected as Portugal’s new president on 24 January with 52.0% of the votes, thus avoiding a run-off. He will succeed fellow conservative Aníbal Cavaco Silva, who had been president since 2006. While the election of a center-right president for a center-left government could be interpreted as the Portuguese’s desire to counterweigh the anti-austerity policies, the success of de Sousa may be more attributed to his charisma and background as a popular public speaker and media pundit. Indeed, the president has no executive power and his role is largely limited to being a figurehead. However, he can be an influential voice and has the power to dissolve the Parliament and decide over the formation of a new government.

In the current context, as Portugal just exited a political turmoil that followed the inconclusive general elections that took place on 4 October and that resulted in the formation of a center-left Socialist Party (PS) government led by Prime Minister António Costa on 26 November, backed by the Left Bloc (BE), the Communists and “The Greens”, this can prove to be a crucial power. However, de Sousa affirmed in his victory speech that he would work on promoting consensus, “building bridges and healing wounds” of the recent political crisis, and presents himself as a politically impartial president, despite his past affiliation with the PSD. Nevertheless, de Souza warned that he would use his position to prevent the anti-austerity government from “compromising financial stability”, which might signal a difficult cohabitation with an already instable minority government.

The ruling anti-austerity coalition, composed of members with a history of conflicts, has already initiated a couple of important controversies since it started ruling the country two months ago. In December, the additional bailout of Banco Espirito Santo, which was rescued in 2014, was organized in a way that mostly harmed foreign investors. This resulted in an increase in yields as markets interpreted it as a higher, previously-unforeseen risk on Portuguese assets. In addition, an important internal dispute has arisen surrounding Portugal’s 2016 budget, with far-left parties pushing for a fast reversal of austerity measures, while the more moderate PS seeks a more gradual process. As a consequence, the draft proposed to the European Commission at the start of January fell well outside the targets of the previous administration, which will likely cause the start of lengthy negotiations between Lisbon and Brussels, and this may cause further anxiety in financial markets. Among other anti-austerity measures, the budget plans to reverse salary cuts in the public sector and cut the Value-added Tax for restaurants from 23% to 13%.

Overall, while the current government is still perceived by market analysts as committed to fiscal stability and consolidation, although at a softer pace, the election of a center-right president further weakens an already-shaky government. 10-year bond yields have risen by 0.5 percentage points from around 2.5% to 3.0% since the investiture of the new government, highlighting moderate fears thanks to a reassuring quantitative easing program by the European Central Bank.

The Bank of Portugal expects the economy to expand 1.9% in 2016. The panel of analysts we surveyed for this month’s Consensus Forecast left their 2016 GDP growth forecast unchanged at 1.6%. For 2017, the panel foresees the economy growing at a slightly-higher 1.8%.


Author:, Economist

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