Portugal

Economic revival, but the road ahead is fraught with challenges

BB1

LOW RISK

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD 2,17.571bn (World ranking 46, World Bank 2017)
Population 10.29mn (World ranking 87, World Bank 2017)
Form of state Parliamentory Democracy
Head of government Antonio COSTA
Next elections 2019 legislative, 2021 Presidential
  • Improving competitiveness thanks to deep structural reforms (banking sector, pensions, labour market)
  • Modern infrastructure network
  • Large companies with international presence
  • Good performance in some industrial and innovative sectors
  • Buoyant tourism sector
  • Efficient system for R&D, relatively high-skilled labour
  • Still high public debt (among the highest in the world) despite fiscal consolidation efforts
  • High private sector debt
  • Still weak banking system hampering the financing of the economy
  • Number of insolvencies still 30% higher than in 2007

Slowdown ahead for the good student

Q4 2018 real GDP grew +0.4% q/q (+1.7% y/y), up from +0.3% in Q3 but lower than the H1 average of +0.55%. Overall in 2018, GDP grew a solid +2.1% (though down from +2.8% in 2017) driven by domestic demand. External demand subtracted -0.7pp from growth (after -0.3pp in 2017) as exports decelerated more markedly than imports. Investment grew +4.4% after soaring +9.2% in 2017.

Rising real wages and the effect of social spending measures should continue to support consumption growth this year. Yet, there is limited scope for a further labor market recovery (unemployment is at a 15-year low, below 7%). Exports should slow as economic activity of the main trade partners eases. The drop in the manufacturing capacity utilization rate in Q1 2019 (back to its lowest level since 2014) is a bad sign for investment, but financing conditions should remain favorable in 2019, and there is a busy pipeline of EU co-funded investment projects ahead. We expect Portugal to grow +1.7% this year.

Meeting (and exceeding) the fiscal deficit target set by the European commission allowed Portugal to exit from the “excessive deficit procedure” as the budget deficit fell to -1.0% in 2017 (-3.0% including 2pps due to the recapitalization of Caixa Geral de Depositos), down from its peak at -11.2% of GDP in 2010. In 2018, it stood at -1.4%. Indeed with fiscal consolidation, public debt has fallen from its peak of 130.6% of GDP in 2014 to 122.1% of GDP in 2018. Yet the still high debt burden could limit the government’s ability to respond to future economic shocks. Currently, the cost of debt servicing represents around 8% of public expenditures. We expect public debt to continue on its downward trend (~120% of GDP in 2019). However, the fiscal rebalancing was conducted at the expense of public investment: yearly public investment fell EUR6.5bn between 2010 and 2017, even though it started growing again in Q4 2017. It now accounts for 1.9% of GDP against 5.3% in 2010. This is clearly a bad sign for Portugal’s infrastructure and long-term growth.

After a successful deleveraging and recovery, financing conditions for corporates should stay favorable. With the economy expanding and ratings agencies upgrading Portugal’s sovereign debt, interest costs have remarkably declined; after peaking at 14% early 2012, interest rates on 10-year government bonds are now comfortably below 2% (at 1.7%). Lower sovereign yields drove corporate spreads down to 2.7% in Q3 2018 down from 7.6% in 2008. Besides, as of November 2018, the stock of total credit to non-financial corporations had shrunk by EUR56bn from its 2010 highs (now at EUR85.8bn), as deleveraging continues. Corporate debt (% GDP) has now declined to around OECD average levels, but remains high. Latest 2017 data point to a ratio of 106.8%, down from a peak of 141.5% early 2013.

Better business environment and financing conditions, but persisting vulnerabilities

Reforms have improved the business environment, as the World Bank’s ease of doing business survey ranked Portugal 34th in 2019, an improvement from the 48th position in 2009. Reforms to ease the access to credit and protect minority investors would make it even easier to do business. It now ranks slightly below Spain (30th) and France (32nd) but above the Netherlands (36th), Belgium (45th) and Italy (51st). Key structural reforms have been adopted to lessen the corporate tax burden, better enforce contracts, liberalize the labor market and deregulate several services and professions. Portugal has become one of the most cost-competitive countries in the Eurozone, as unit labor cost decreased between 2010 and 2015. It ranked 1st in the world in the “trading across border” category. Shortcomings remain in the getting credit category (112th position).

The banking sector should not claim victory just yet; the stock of non-performing loans (NPLs) in the Portuguese banking sector has decreased by EUR18bn from June 2016 to June 2018; the ratio of NPL to total loan exposures stands at 12% (against 19.8% in 2016). However, despite an improvement in the quality of assets in the banking system, the ratio remains the second highest in the EU after Greece, and right before Italy.

As the declining trend in insolvencies slows, their total number should remain 30% above pre-crisis levels (2007). The steady decrease in insolvencies owed to (i) the economic recovery and (ii) a more efficient insolvency regime since 2010; yet we see this trend slowing down (-5% in 2019 after -12% in 2018). Portugal’s insolvency regime for firm restructuring has become more efficient since early 2010, notably thanks to the Processo Especial de Revitalização (Special revitalization process). It consists in an alternative judicial instrument to insolvency, giving corporates in difficulty and/or facing imminent insolvency the possibility to negotiate with their creditors, leading to the revitalization of its activity.

Trade structure by destination/origin

(% of total)

Exports Rank Imports
Spain 25%
1
33% Spain
France 13%
2
14% Germany
Germany 12%
3
8% France
United Kingdom 7%
4
5% Italy
United States 6%
5
5% Netherlands

Trade structure by product

(% of total)

Exports Rank Imports
Refined Petroleum Products 6%
1
7% Cars And Cycles
Miscellaneous Hardware 5%
2
6% Crude Oil
Paper 5%
3
5% Plastic Articles
Plastic Articles 5%
4
4% Pharmaceuticals
Vehicles Components 5%
5
4% Meat

Payment terms and late payment interest are regulated in accordance with applicable EU rules; however the standards put in place are among the most lenient in Europe. As a result, DSO remains excessive at around 69 days.

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

The court process is a major complication when it comes to collecting debt and it is advisable to first conduct negotiation with the support of collection specialists. When court is needed, Alternative Dispute Resolution methods and foreign courts (EU judgments will be fairly enforceable in Portugal) may be worth considering in order to avoid inefficient domestic courts.

Despite reforms conducted in 2012 to increase company rescue possibilities, insolvency proceedings often lead to the liquidation of the company and it is rare for unsecured debtors to recover their debt.

Download the entire collection complexity PDF:

Collection complexity Portugal

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Contact

Euler Hermes

Economic Research Team

research@eulerhermes.com

Georges Dib

Economist for Latin America, Spain and Portugal

georges.dib@eulerhermes.com

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