October 5, 2015 / 10:22 AM / 2 years ago

Portugal to get minority government, reform agenda seen at risk

LISBON (Reuters) - Portugal’s Prime Minister Pedro Passos Coelho is expected to form a minority government after his centre-right coalition won an election but lost its parliamentary majority, a move shrugged off by markets which see little immediate risk of instability.

Portugal's Prime Minister and Social Democratic party leader Pedro Passos Coelho gestures to supporters after polls closed in a general election in Lisbon, Portugal, October 4, 2015. REUTERS/Juan Medina

But economists said on Monday reforms needed to help the indebted country’s meagre growth after a steep recession in 2011-13 would be more difficult to pass and the austerity-minded government could face political turmoil next year.

The election “will further constrain the potential for structural economic reforms and increase risks to the fiscal outlook”, said Eurasia Group analyst Federico Santi, adding the “likelihood that the new legislature will not reach the end of its four-year term is quite high”.

Portuguese shares rose more than 2 percent on Monday, largely in line with other European stock indices, while bond yields were steady to lower in early trade after hitting their lowest level in five months soon after opening.

President Anibal Cavaco Silva must name the new prime minister after talking to all political leaders with discussions likely to start later this week and take around two weeks.

Passos Coelho would be the first leader in Europe to be re-elected after imposing hardship on voters under international bailout packages during the sovereign debt crisis.

His government raised taxes while cutting public spending, but argued during the campaign that the country was now beginning to see the fruits of those measures with a gradual return to growth after three years of recession.

Passos Coelho said he was ready to form a government while suggesting he may have to compromise on policies. Most analysts saw a good chance for the government to be formed and work well into next year without major challenges, continuing budget consolidation.

Defeated Socialist candidate Antonio Costa ruled out forming part of a left-wing “negative majority of those who create obstacles”. Analysts say it is unlikely that the moderate, pro-European Socialists will ally with the anti-euro Communists and the radical Left Bloc in parliament.

BUDGET

The president is expected to try to convince Passos Coelho’s centre-right alliance and the Socialists to form a centrist coalition, but the Socialists are unlikely to agree. Passos Coelho’s alliance is made up of his Social Democrats and rightist CDS-PP.

While party leaders converged for Republic Day in Lisbon’s City Hall, the president did not attend as, according to his office, “he has to focus on reflecting about decisions to be taken in the next few days”.

In a tone of compromise, the Socialist mayor of Lisbon, Fernando Medina, told the gathering the voters’ message was that they wanted to “reconcile our European and euro membership with a change of economic and social policies via negotiations between various parties”.

“We’ll have a minority government that will make agreements in crucial moments like passing budgets. Such agreements are perfectly viable with the Socialists abstaining, be it this year or in coming years,” said political scientist Adelino Maltez.

The 2016 budget bill can only be presented after the new government has been appointed.

Antonio Barroso, senior vice president at Teneo Intelligence in London had a more sombre outlook, saying: “Political stability could become a challenge very soon, possibly as early as next year” when the government tries to pass the 2017 budget.

With 99.2 percent of parishes counted, the ruling coalition had around 38.3 percent of the vote, while the Socialists had 32.4 percent. The final count may take another five to 10 days.

The results showed the government with 104 seats in the 230-seat parliament, short of the 116 needed for a majority.

Portugal, a country of 10 million people, has little history of minority administrations surviving a full term.

“It’s likely to be a minority government formally, but the Socialists are fairly close in their views on budget consolidation with the government. So we see all of this as reassuring and do not expect any impact on the economic outlook in the short run,” said Citi economist Giada Giani.

Portugal is still heavily indebted with low growth.

“The next government will have to step up the pace of reform in order to sustain a growth rate that’s woefully insufficient,” said Nicholas Spiro, managing director at Spiro Sovereign Strategy consultants.

He called the election “a victory for broad policy continuity” and said the “defeat for Portugal’s Socialists is music to the ears of Spanish premier Mariano Rajoy and a kick in the teeth for Podemos” - Spain’s main anti-austerity force.

Reporting By Andrei Khalip; Editing by Janet Lawrence

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