"The problems of Portugal are not over - they are worse," warns Commerzbank in a note to investors.
The German company writes that the Portuguese government is making its economy less competitive and is driving the country back "to unhealthy pre-crisis trends."
Portugal should continue to enjoy the current good news, "but it would be a mistake to pretend that the country has found a lasting solution to its problems."
The warning from a Commerzbank economist, in a note sent to investors, warns that "it is only thanks to the ECB's low interest rate policy that the costs of public and private debt are bearable."
When interest rates eventually rise, Portugal is going to be "one of the countries that will suffer the most," because the competitiveness gained in recent years already is being undermined by its government policies that will return the economy to the unhealthy trends that were only interrupted by the financial crisis, explains the briefing.
The note was sent by Ralph Solveen, an economist at Commerzbank, to clients relying on his investment advice.
The economist published the note in the wake of the removal of the ‘junk’ rating for Portugal from Standard & Poor’s, which questions Portugal’s economic health when looking at medium and longer terms.
In the short term, admits Solveen, with the European and global economy undergoing expansion and with low interest rates in the eurozone, "robust growth should continue in the coming quarters."
“This rate will help offset the impact of increased public spending and reduce the government deficit and debt ratio. Even if the government does not achieve its ambitious goals in these areas, the positive trend should persuade the other rating agencies to raise ratings," however, “it would be a mistake to pretend that the country has found a lasting solution to its problems," says Commerzbank.
This is the same Commerzbank that questioned whether Portugal would be "the next Greece" after the fall of the right wing Passos Coelho government.
Solveen stresses that "the improvements in competitiveness that have been achieved in the last few years are beginning to be lost, mainly due to the action of the Government."
Commerzbank points out that the minimum wage was increased by 5% at the beginning of 2016 and then there was a further increase in early 2017 - and there should be more increases in the coming years.
Even before these increases in the minimum wage, in 2015, "Portugal already had the second highest minimum wage in the OECD compared to the average wage, only surpassed by France. But it has already surpassed France by a wide margin," laments Ralph Solveen, with little thought for the plight of the low paid.
These "excessive increases in the minimum wage make it more difficult for low-skilled workers - who, in Portugal, exist in a much higher-than-average proportion - to find work."
"The result of this is that unit labor costs in Portugal have been rising at a faster rate than in other euro area countries," says Solveen, adding: "If, as we anticipate, this trend continues, Portugal will once again emerge as an unattractive place to invest - and in the long run, the economy will pay the price.
See also: 'Portugal Is a Keynesian Mirage' (Bloomberg)
