Portuguese Vote to Choose Premier to Oversee Economic Rebound

(Bloomberg) — Portugal is holding early parliamentary elections on Sunday and will pick a prime minister to oversee the economy’s recovery from the pandemic.

It’s the third time the Portuguese head to the polls since the pandemic started, after a presidential election and local elections in 2021. Masks must be used and voters are asked to bring their own pen. People isolating due to Covid-19 are allowed to leave their homes to take part, preferably between 6 p.m. and 7 p.m. Voting started at 8 a.m. on Sunday and exit polls will be released at 8 p.m. Lisbon time.

Voter turnout reached 23% at noon, compared to 19% at the same time when the country last held parliamentary elections in 2019, according to the government’s election website.

Why is Portugal holding elections early?

Prime Minister Antonio Costa, 60, of the center-left Socialist Party has held office since 2015. His second term was cut short in October after lawmakers rejected his minority government’s 2022 budget, saying he hadn’t met their demands on a range of issues, including a higher minimum wage.

Costa is facing opposition leader Rui Rio, 64, of the center-right PSD party.

Portugal’s multiparty system has been dominated by the Socialists and the PSD since the 1974 revolution ended four decades of dictatorship. There are about eight smaller parties in the 230-seat parliament.

What are the main election issues?

Top concerns include wages, pensions, the tax burden and affordable housing in cities. 

Covid-19 is of course also still on voters’ minds. In January 2021, Portugal had one of the world’s worst outbreaks, forcing the government to impose strict confinement measures. The country now has one of the highest global vaccination rates, and despite record cases in recent weeks, there hasn’t been a surge in occupancy at intensive-care units. The government eased restrictions earlier this month.

What’s the state of the economy?

The next administration will take on an economy trying to bounce back after the pandemic, helped by European Union recovery funding that began to flow last year. The government said in April that the European pandemic recovery plan will have an economic impact of 22 billion euros ($25 billion) in Portugal through 2025, and estimated that gross domestic product in 2025 will be 3.5% higher than it would be without that plan.

Portugal’s 200 billion-euro economy is recovering after shrinking 8.4% in 2020 —  the most since at least 1960 — as the pandemic hurt tourism and other businesses. For Portugal, which has the third-highest debt ratio in the euro area behind Greece and Italy, tourism represents about 15% of the economy and 9% of employment.

The Bank of Portugal forecasts growth will accelerate to 5.8% in 2022, before slowing to 3.1% in 2023. Inflation is predicted at 1.8% in 2022, subdued when compared to other European economies amid the energy crunch. Meanwhile, the government forecasts the debt ratio will drop to about 122% of GDP at the end of 2022 from about 127% in 2021.

In the rejected spending plan, it aimed to narrow the budget deficit to 3.2% of GDP in 2022.

What will bonds do?

There wasn’t a big bond market reaction in October to the political developments that led to the snap election being called.

Given the country’s debt pile, governments have to keep borrowing costs in check. Portugal’s 10-year bond yield was at 0.63% on Friday, up from 0.19% six months ago but still lower than the rate for Italy or Spain. It peaked at 18% in 2012 at the height of the euro region’s debt crisis.

What are the main differences between Rio and Costa on the economy?

Both Costa and Rio pledge budget discipline. The ruling Socialists say they offer stability and further improvements in household incomes, including raising the minimum wage again, and increasing investment in health care.

The PSD party under Rio, 64, wants to lower the corporate income tax rate in steps from 21% to 19%, and then to 17%. Rio also says he’d privatize airline TAP SA, again. Under Costa, the government regained control of the carrier.

An economist and former mayor of Oporto in northern Portugal, the country’s second-biggest city, Rio overcame a party leadership challenge at the end of last year and hasn’t ruled out cooperating with a new Costa government if his party loses the election. He has ruled out having far-right party Chega in a coalition government.

Costa has in the past received backing for his budgets from the Left Bloc and the Communists, and has reiterated his openness to negotiate with other parties in parliament except Chega. He says he’ll resign if his party doesn’t win.

“The country will continue to pursue a centrist economic policy regardless of whether the PS or the PSD leads the next government,” Antonio Barroso, deputy director of research at Teneo, said in a note.

In 2019, the government was sworn in about three weeks after the election.

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