Portugal debate: Portugal perks up

Published on:

The country’s economic recovery continues to gather momentum, underpinned by strengthening domestic demand and robust exports. The government has regained access to the international capital markets and concerns about contagion have receded. There are still vulnerabilities: debt levels are high and the banking system is weak. But Portugal has a spring in its step that it has not had since before the crisis.


Executive summary

• Investor confidence in Portugal is rising
• The low savings rate has constrained the capital market, but companies are becoming less reliant on credit and are moving towards funding projects themselves
• FDI flows are increasing as the labour market evolves
• Doubling the size of the capital market is a realistic target
• The fallout from the Banco Espírito Santo collapse continues, but such an event is unlikely to be repeated
• Contagion from Greece is no longer such a threat

Read more about the participants

Euromoney Cristina, you’ve just returned from a series of meetings with investors in northern Europe. What feedback did they give you about the prospects for the Portuguese economy?

Cristina Casalinho (CC) is CEO of the Portuguese Treasury and Government Debt Agency (IGCP)CC, IGCP Investor confidence in the Portuguese economy is strengthening, supported by increasingly robust evidence that we’re showing very healthy signs of growth.

The early stages of the recovery were driven mainly by net exports, with domestic demand lagging behind. Today, the recovery is more broad-based and the contribution of domestic demand has picked up. Disposable income and consumer confidence have improved, not just because of low interest rates and oil prices but also because labour market conditions have improved significantly, meaning that people are more confident about their job prospects.

The corporate sector is now more comfortable with the outlook for demand. Companies are hiring again and investing in additional capacity, which will be beneficial for exports going forward. Last year, GDP grew by 0.9% and this year the ministry of finance is projecting growth of 1.6%. This growth is on the back of an acceleration in investment, which grew by 2.5% last year and is expected to expand by 3.8% in 2015. 

The export sector is now very close to full capacity utilisation. So it needs to continue to add new output capacity in order to allow export activity to gather more traction.

Joaquim Saldanha e Souza (JS) is CEO at CaixaBIJS, CaixaBI I agree that the economy is clearly recovering. Rising demand from foreign investors is supporting a rebound in the real estate and construction sectors, which is having a multiplier effect on the rest of the economy. The main problem is still the lack of demand for credit. 

David Guerreiro (DG) is an executive board member at Banco Finantia

DG, Finantia The reforms implemented in the labour market over the last five years have led to a significant decrease in unemployment. These reforms have also encouraged entrepreneurial skills, which are supporting job creation and reducing government expenditure on social benefits. This has also reduced emigration and broadened the investor base for smaller companies, which has in turn sustained increasing exports from Portuguese SMEs. 

Luís Laginha de Sousa (LL) is chairman and CEO of Euronext Lisbon and Interbolsa, and a member of the managing board of Euronext (Netherlands)LL, Euronext Looking from the vantage point of the stock exchange, one major economic challenge which needs to be addressed is deleveraging in the corporate world. This can’t be done purely domestically. We have to improve our access to international capital. 

It is clear that the Portuguese capital market has been unable to deliver what a capital market should deliver. In one respect, this is frustrating. But in another it gives us grounds for hope, because I don’t see this as something that we cannot change – provided there is willingness to offer the right incentives and remove the disincentives that have prevented companies from accessing the capital market. 

Euromoney Do these incentives need to be improved to generate more supply? Or is demand also a problem in the capital market? 

Luís Laginha de Sousa (LL) is chairman and CEO of Euronext Lisbon and Interbolsa, and a member of the managing board of Euronext (Netherlands)

LL, Euronext If I had to incentivize one of the two, I would incentivize supply, making sure that companies have fewer disincentives to use the market. 

A key priority in recent years has been to make the country credible again. And to make Portugal credible, there was a bill that had to be paid on the revenue side in the form of tax increases. But this should not be incompatible with removing the disincentives for companies to use the capital market.

Joaquim Saldanha e Souza (JS) is CEO at CaixaBI

JS, CaixaBI When the government began its privatisation programme in the 1980s, it chose to create local groups that controlled companies through leveraged structures and cross-shareholdings with the banking system. This was an original sin that made the crisis much worse in Portugal than elsewhere because it failed to create a real capital market. By contrast, when the UK privatised its major companies in the 1980s and 1990s, it encouraged much more widespread share ownership. It did not leave large 30% or 40% stakes in the hands of leveraged holding companies, as we did in Portugal. 

Cristina Casalinho (CC) is CEO of the Portuguese Treasury and Government Debt Agency (IGCP)

CC, IGCP Although savings have risen slightly in recent years on the back of the adjustment process, the low savings rate in Portugal has always constrained the expansion of the capital market. 

Another structural problem is that mainly because of the tax regime, companies have not been sufficiently incentivized to retain earnings. We are now seeing the first tentative signs that things are changing, which is making companies a little less reliant on banking products. It is also encouraging them to shore up their capital structures, and finance new projects through retained earnings and own funds.