* Three-year international bailout ends on Saturday
* Economic growth remains sporadic, unemployment high
* Austerity has left country dependent on its exporters
By Axel Bugge and Andrei Khalip
LISBON, May 16 As Portugal's government toasts
its exit from an international bailout that imposed years of
austerity on its citizens, small business owner Alexandra Capelo
is in no mood to join the celebrations.
From Lisbon's poorer neighbouring city of Almada across the
River Tagus, 42-year-old mother of two Capelo is one of the
nearly 800,000 people, or 15 percent of the workforce, still
unemployed as the country takes back control of its finances.
"Things have gotten worse since last year, business and
job-wise," said Capelo, who has relied on a home-based sweets
business to supplement her jobless benefits since being laid off
as a graphic designer in January.
On Saturday, Portugal becomes the second euro zone state
after Ireland to exit a bailout, having stuck to the European
Union's recipe of belt-tightening to beat the euro zone crisis.
The 78-billion-euro rescue programme the EU and the
International Monetary Fund assembled in 2011 for the nearly
bankrupt country will formally conclude with Portugal's budget
in much better shape and borrowing costs at eight-year lows.
But a shock 0.7 percent drop in its GDP in the first quarter
points to the risks inherent in an economic recovery plan which,
by focusing on fuelling export growth by cutting labour costs,
has become dependent on volatile foreign demand.
That data, released on Thursday, also illustrated how far
the country is from a lasting economic recovery.
Portugal's central bank highlighted the challenges, saying
progress under the bailout was insufficient, and ensuring
sustained growth and getting banks lending again would require
But as a government no longer dependent on aid looks
anxiously ahead to an election in 2015, these may fail to
For those who have lost their jobs or seen their pensions or
their salaries cut, life in a post-bailout world raises painful
questions: Were the reforms worth it and will they ever deliver
enough growth for jobs and better living standards?
Further south in the industrial city of Setubal - one of
Portugal's poorest and plagued by high unemployment - there is
little evidence of the growth that, before stalling, had
returned to the country in the second quarter of last year.
"Levels of poverty keeps getting worse, especially among
people aged 25-40 who lost their jobs," said Constantino Alves,
a priest who runs a "Social Restaurant" charity for the poor.
"We get young couples, parents with children seeking meals
and aid. There are various small entrepreneurs who had shops
here and are now in utter poverty, eating here. Many have lost
all faith to find jobs. It's a crisis of confidence," he said.
The problem, say economists, is that reforms already
implemented during three years of wrenching recession and
austerity will only have a delayed impact.
"These are political economies that are very difficult to
reform. The only way to change is incrementally," said Antonio
Barroso, senior vice president at the Teneo Intelligence
consultancy in London.
The government has made it cheaper for firms to hire and
fire. That has lowered the cost of doing business and helped
bring unemployment down from its 2013 peak of 17.5 percent.
But many observers say that because austerity during the
bailout focused overwhelmingly on cost-cutting - like public
sector wages and pensions - and tax hikes, deeper reforms that
would have reduced the size of the state or made the economy
even more export-oriented have not taken place.
"The (bailout) adjustment programme was basically based on
internal devaluation," said Antonio Costa Pinto, political
analyst at the University of Lisbon.
That has pleased the creditors. Labour costs in Portugal
fell eight percent since 2011 to 11.6 euros per hour in 2013,
according to EU statistics agency Eurostat. That brought
competitiveness gains, with the value of exports rising to 41
percent of GDP last year.
But the European Commission has said that after wages fell
around 5 percent between 2010 and 2013, Portugal is still only
half-way to getting pay down to levels that could tangibly
"Portugal's challenges remain the same," said Costa Pinto,
pointing to the need for further competitiveness gains.
'DESPERATE FOR GROWTH'
That creates a dilemma for a government that will want to
give voters some hope before next year's national election.
"This government is looking like it is desperate to go for
growth," said Nicholas Spiro, managing director at Spiro
Sovereign Strategy in London.
"...It is still a job half done. The danger is that the
reforms grind to a screeching halt, there is a very high risk
that that happens."
With government bond yields at record lows, market pressure
to persist with tough economic reforms has evaporated.
And now that its lenders from the Commission, European
Central Bank and IMF have stopped reviewing the economy, the
country can change policies more freely, even if still needs to
gradually reduce the budget deficit under EU rules.
The government has already said it will partly reverse
salary cuts in the public sector in the next few years and it is
considering cutting taxes next year.
"I don't think there is an incentive to continue pushing
reforms," said Teneo Intelligence's Barroso. "I think the
pressure to cut taxes before the election is huge."
Perhaps that will give a push to growth in the short term,
but will it help generate the high growth necessary to sharply
reduce Portugal's high debts at around 125 percent of GDP? Or to
create jobs for those outside the few fast-growing sectors?
Back in Almada, Capelo still hopes thing can improve.
"At least we still have hope that the data will one day
transform into real improvements," she said. "I want to try and
get a bank credit this year for the business."
But bank loans to firms and individuals are continuing to
decline, dropping to 240 billion euros in February, their lowest
since 2007, according to the Bank of Portugal.
"Getting loans from banks is the big problem even for
companies that have managed to survive. There are no loans, so
it's difficult to buy new merchandise, not to mention expand,"
said Anabela Sharamia, vendor in a furniture shop in Setubal.
(Editing by John Stonestreet)