Portugal: Outcome of snap election seems very uncertain, no clear ruling majority in sight
Metodi Tzanov
Helping finance professionals understand what is going on in Emerging and Frontier Markets
The latest polls indicate that three weeks away from the 10 March election, the two leading political formations, the Socialist Party (PS) and the Democratic Alliance (AD, made up of the centre-right PSD and CDS) are very close in terms of electoral preferences. Therefore, at the moment it is very difficult to forecast which of the two formations will win the snap election on 10 March. Regardless of who wins, however, an absolute majority for either of them seems a very unlikely possibility. A ruling parliamentary majority will have to be negotiated with some of the smaller parties. All of the parties which entered the previous parliament seem likely to enter the new one as well, and all of them are potential partners either for PS or AD, with the sole exception of the right-wing populist party CHEGA.
CHEGA has recently surged in popularity, consistently polling close to 20%, after winning 7.2% in the previous election. However, it is effectively a political pariah, isolated from everyone, as all other parties, including the PS and the AD, are refusing to even entertain the possibility of negotiating with them. Furthermore, part of the pre-election political messaging of both the PS and the AD has been the promise that CHEGA will not end up in a governing majority following 10 March. Therefore, we think that even if CHEGA manages to nearly triple its previous election result, it will most likely remain isolated in parliament.
It is worth noting, however, that a number of people from the PSD, including former MPs exited the party and moved to CHEGA. These are part of the more conservative and hardcore right-wing part of the PSD. This small political migration helps inject the upstart far-right populists with a number of more experienced political operatives, which helps improve the image of CHEGA, insofar as political professionalism and governing capacity are concerned. Still, we expect CHEGA to remain isolated politically, given current polling figures and the expressed attitude of all other parties.
AD leads in the polls, but a right-wing majority remains very uncertain
The five most recent polls indicate that the election race remains quite close, although the AD appears to be slightly ahead of the PS. All of the polls presented in the table below were conducted between 16 January and 12 February, with the three most recent ones (by CESOP-UCP, Intercampus and Consulmark2) giving the AD a 2.2-4.0pps lead over PS. We note that this lead is small and could easily flip within the next few weeks, but for now, the AD seems the favourite to win by a small margin.
However, in our view, the PS has more options in terms of post-election partners. This is simply because the second-largest political force on the right currently is CHEGA, which is considered too politically toxic by all other formations, including the centre-right AD. This means that, if it does not secure an absolute majority, the AD can only negotiate with the IL on the political right. A successful negotiation with the IL is not a given, however, even if we assume that the combined result of AD and IL would be enough to secure a parliamentary majority, which itself is still quite an uncertain assumption. Out of the five most recent polls, only one (CESOP-UCP) puts the combined result of the AD and the IL at a level, which would be enough for a parliamentary majority, based on our estimates.
PS has more options, but a left-wing majority is also not a given
Although they did not opt to form a pre-election coalition, the PS has already explicitly courted LIVRE as a potential partner and PAN also seems a very likely option, given their history. The BE and PCP would be more difficult partners to negotiate with, but they are definitely not out of the question for PS, the same way CHEGA seems to be for AD. Therefore, PS has four possible partners on its side of the political spectrum, while the AD realistically has one, given that the centre-right formation has repeatedly denied the possibility of negotiating with CHEGA. The latest polls put the combined electoral popularity of PS and other left-wing parties in the 36-44% range, while AD and IL together are within the 32-38% range.
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However, although the PS has more options on the left, given their recently weak polling, they seem likely to need two other parties as partners at a minimum. This could make negotiations difficult and the resulting ruling majority unstable, especially if it includes three or more formations. Here we must mention the possibility of a ruling agreement between the PS and the AD. Although this is not a very likely scenario, in our view, we think it is possible if both PS and AD end up winning about 30% of the vote and CHEGA achieves a strong result of 20% in third place, resulting in a very fragmented parliament beyond the three leading parties.
Fiscal stability remains a top priority for both PS and the AD
The election programs of PS and AD are broadly similar with a small number of key differences. Both leading formations remain committed to fiscal stability, running at least a balanced budget
The most likely potential governing partner of the AD, the Liberal Initiative (IL), also seems committed to a prudent approach to fiscal policy. On the other hand, in the past eight years, the PS has demonstrated a capacity to reign in the more risky, in fiscal terms, tendencies of all its governing partners (particularly the PCP and the BE). The strong commitment of the PS to fiscal consolidation has often been a point of tension with far-left partners such as PCP and BE, which is what led to the breakdown of negotiations over?Budget 2022?and the snap election that followed, in which the PS secured an absolute majority.
In more detail, despite the similar fiscal approach, the PS electoral program is somewhat more restrained in its economic projections and policy proposals
PS program focuses on housing, AD on tax cuts for businesses
In housing, the PS is promising the creation of a "public guarantee for bank financing" for home purchases for people up to the age of 40, who do not own any property. Those who receive such a guarantee will be able to enter into a contract with the state and keep the acquired property as permanent housing, even if they cannot pay their loan instalments to the bank. Such borrowers will instead be allowed to keep their property, as long as they pay rent to the state, compatible with their income. In addition, the PS wants to raise capital gains taxes for those who buy and sell houses without using or rehabilitating them. This measure aims to ease inflationary dynamics in the housing market.
The PS is also promising some new tax breaks, such as the return of 50% of VAT on electric or plug-in hybrid vehicles. This will effectively make it cheaper for people to buy electric and hybrid cars and aims to promote decarbonization and less polluting vehicles. Additionally, a VAT break on consumption of "essential goods" is being planned for households with low incomes. This will in effect replace the "zero VAT" policy which was applied on a basket of essential goods until the start of 2024.
Meanwhile, the AD made a proposed cut to the corporate income tax (IRC) the cornerstone of its electoral program. The opposition leader proposes that the IRC be gradually reduced to 15% from 21% currently, by 2pps per year within a 3-year period. In addition, the AD also promises to reduce the personal income tax for young people up to 35 years of age. The Liberal Initiative (IL) has also proposed tax cuts, therefore we expect that any potential right-wing government to be heavily focused on such policies. The AD program was heavily criticized by the PS as "unrealistic" in its macroeconomic assumption, which the socialists argue could jeopardize the country's balanced budget. We think such criticisms are exaggerations, but the AD is indeed more ambitious in its economic projections.