Boston, MA -- (SBWIRE) -- 10/30/2013 -- We maintain our view that the centre-right coalition government in Portugal will hold onto its mandate in the face of high public discontent and increasing unease with official austerity measures amongst members of the coalition. This is predicated on a strong parliamentary majority and a lack of credible alternatives for the electorate, given it was the opposition Socialist Party that first requested the bailout.

We are forecasting a real GDP contraction of 3.0% in 2013, as the austerity-driven recession continues and the economy rebalances away from domestic consumption. We forecast the pace of contraction to abate in 2014 to 0.5%, but even that mainly reflects a continued deterioration in imports, rather than a tangible improvement in domestic demand.

Weaker-than-expected growth will undermine the government's revenue raising ability. The government is likely to negotiate with the country's troika of international lenders less punishing terms of the rescue package at the next official bailout review. In addition, we do not rule out the possibility of another line of credit when the current financial programme ends in mid-2014.

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Major Forecast Changes

We have revised upwards our forecast for 2014 real GDP growth - from -3.0% previously to -0.5%. Although full recovery is still elusive and private domestic demand will remain under duress, the pace of economic contraction is likely to abate, as the economy has likely already hit a trough.

Key Risk To Outlook

Downside Risks To Growth Forecast: The biggest immediate danger for Portugal is a deepening of the sovereign debt crisis, either for its own government or in another eurozone country, which would depress domestic confidence and external demand.

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