2019 country report portugal - european commission · training and skills • about 52 % of the...

2019 country report Portugal

Lisbon, 26th March 2019


Macroeconomic Context, Public Finances, Financial Sector


Christian Weise, DG ECFIN

Achievements of the Portuguese economy

• Growth above the Euro area average

• Headline deficit moving to balance

• Unemployment below the Euro area average

• High stocks of macroeconomic imbalances are decreasing

• However, structural weaknesses persist.

3

4

Productivity and Investment

• Portugal has one of the lowest investment ratiosin the EU, held back by multiple macroeconomicand structural factors.

• Low investment leads to weak productivitygrowth. The labour productivity gap with the EUaverage shows no signs of closure.

Source: European Commission Source: Eurostat

Labour productivity

0

20

40

60

80

100

120

140

160

180

200

BG

RO LV

HU

HR

EE

LT

PL

PT

CZ

SK SI

EL

CY

MT

UK

ES

DE IT FI

NL

SE

DK

FR

AT

BE

LU IE

2017 2007 EU19

% of EU28 total based on PPS

0

5

10

15

20

25

30

35

40

EL

UK

PT IT SI

BG PL

MT

LT

DE

LU

LV

DK

CY

HR

ES

NL

SK

HU FI

FR IE AT

BE

RO

SE

CZ

EE

Gross fixed capital formation

2017 2007 EU28

% of GDP

5

Income Convergence

• Low investment and weakproductivity dynamics helpto explain the absence ofincome convergence withthe EU average.

• The recent positiveeconomic performance hasstabilised the country's percapita income relative to theEU average, but is stillinsufficient to bring anoticeable convergence.This income gap is likely toremain broadly stable.

• There are significantregional differences in GDPper capita.

Source: Eurostat

0

50

100

150

200

250

300

BG

HR

RO EL

LV

HU

PL

SK

PT

LT

EE

SL

CY

CZ

ES

MT IT FR

UK FI

BE

SE

DE

AT

NL

DK IE LU

GDP per capita

2017 2007 EA19

Index EU28 = 100 based on PPS

6

External Debt

• NIIP remains asource ofvulnerability, beingone of the largest inthe EU, and goingbeyond prudentialand fundamentalthresholds.

• The CA is projectedbelow thebenchmark forclosing the gap tothe NIIP prudentiallevel over a 10-yearperiod.

• Greater FDI inflowsimprove NIIPstructure.

-14

-12

-10

-8

-6

-4

-2

0

2

4

-140

-120

-100

-80

-60

-40

-20

0

20

40

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Net direct investment

Net international investment position (NIIP)

Marketable debt (portfolio debt instruments, other investment and reserve assets) (net)

Current account balance (rhs)

% of GDP % of GDP

Current Account (CA) and Net International

Investment Position (NIIP)

Source: European Commission

90.0

95.0

100.0

105.0

110.0

115.0

120.0

125.0

130.0

135.0

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

Baseline no-policy-change scenario

Standardised (permanent) negative shock (-1 pp.) to the short- and long-term interest rates on newly-issued androlled-over debt

Standardised (permanent) positive shock (+1 pp.) to the short- and long-term interest rates on newly-issued androlled-over debt

Standardised (permanent) negative shock (-0.5 pp.) to GDP growth

Standardised (permanent) positive shock (+0.5 pp.) to GDP growth

Combined (permanent) negative shock to GDP growth (-0.5 pp.) and interest rates (+1 pp.)

Combined (permanent) positive shock to GDP growth (+0.5 pp.) and interest rates (-1 pp.)

% of GDP

7

Public Finances


General government gross debt projections under baseline and

alternative GDP growth and interest rate scenarios

• Public finances have continued improving, while strongly relying on higher revenue, declining interest expenditure and relatively low public investment.

• Public debt started to decrease but remains high, along with medium-term fiscal sustainability risks.

8

Financial Sector

• Private indebtedness has been decreasing, with a favourable outlook.

• Ratios remain above prudential and fundamental thresholds.

0

50

100

150

200

Q2-2

001

Q2-2

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Q2-2

013

Q2-2

014

Q2-2

015

Q2-2

016

Q2-2

017

Q2-2

018

Households Non-financial corporations Total

% of GDP

Private indebtedness

Source: Banco de Portugal

9

Financial Sector

• Financial performance is improving, withincreasing profitability…

-15

-10

-5

0

5

10

15

20

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Portugal EU Euro Area

%

Return on equity (%), domestic banks


• …and decreasing NPLs (even if stillsignificantly above EU average).

NPLs and coverage ratios

30

35

40

45

50

55

0

5

10

15

20

25

30

35

Q1-2

015

Q2-2

015

Q3-2

015

Q4-2

015

Q1-2

016

Q2-2

016

Q3-2

016

Q4-2

016

Q1-2

017

Q2-2

017

Q3-2

017

Q4-2

017

Q1-2

018

Q2-2

018

Q3-2

018

Housing Non-financial corporations

NPLs - Total NPL coverage ratio (rhs)

% of Total %

10

• Low levels of investment and productivity remain a challenge foradvancing income convergence with EU average.

• Portugal's net international investment position remains a significantsource of vulnerability. It is one of the most negative in the EU and goesbeyond the estimated prudential and fundamentally-explained thresholds.

• Public debt has been declining. Yet, it is still far too high. Fiscalsustainability risks are significant in the medium term.

• Private debt has been decreasing but remains above prudential andfundamental benchmarks, both for corporate and household debt.

Key takeaways


Labour Market, Education and Social Policies

Andriana Sukova, DG EMPL


Labour market recovery, with strong job creation and significant fall in unemployment

• UR down from 9.0% in 2017 to 7.0% in 2018 (6.9% in Jan 2018)

• YUR (15-24) down to 19.1% in Q4-2018, from >40% in 2013

• LTU (20-64) down from 4.3% in Q3-2017 to 3.0% in Q3-2018

• ER (20-64) at 75.4% in Q3-2018, above Europe 2020 target of 75%

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45

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55

60

65

70

75

80

85

2001

2002

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2004

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2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

% of

labour

force

% of

population

PT

Unemployment rate 15-74 (rhs)

Activity rate 20-64

Employment rate 20-64

Active labour market policies

• There is scope for wider coverage and focus on upskilling going forward.

• Effectiveness of measures to long-term unemployment remains a challenge.

• There is still limited cooperation of PES with other stakeholders, but authorities are working to improve their matching function.

Many permanent jobs created but temporary contracts didn't decrease

• About 78.000 permanent jobs created during the year to the 3rd quarter of 2018 (20-64)

• However the share of workers with temporary contracts only decreased by 0.1% from 2016 (21.6% in Q3-2018)

• Government and the majority of social partners signed a tripartite agreement to tackle labour market segmentation

Education

• Considerable progress over the last decade in reducing early school leaving: from 28.3 % in 2010 to 12.6 % in 2017. However, significant regional disparities are observed in Madeira and Azores (over 20%)

• Tertiary educational attainment level among 30-34 year olds is still below the EU average (33.5% against 39.9%)

• The share of total graduates in information and communication technologies was well below the EU average (1.2% against 3.4 %)

• This may affect the country’s innovative capacity and productivity growth.

Training and Skills

• About 52 % of the population aged 25-64 has low educational attainment levels, well above the EU average of 22.5 % in 2017

• The QUALIFICA programme and the recent reprogramming of the ESF is an important tool to upskill the low-skilled adult population.

• In 2017, 50 % of the Portuguese population still did not have basic digital skills, and 30 % had no digital skills at all. This compares with an EU average of 43 % and 17 % respectively.

• INCoDe.2030 is Portugal national initiative to improve digital skills and competences.

Continuing some improvement in poverty and social exclusion indicators

• AROPE down from 25.1% in 2016 to 23.3 % in 2017 (EU average 22.4 %)

• According to national statistics, further down to 21.6% in 2017

• Labour market recovery is key driver of improvement

• Monetary poverty also reducing, but at slower pace

…but challenges remain

• Income inequality is reducing, but remains high

S80/S20 at 5.7 in 2017 (EU average 5.1)

• In-work poverty remains stable yet high

10.8% in 2017 (EU average 9.6%);

Issue in particular for temporary workers and families with children

• The impact of social transfers (other than pensions) on poverty reduction remains limited

• Demographic ageing puts pressure on the efficiency and quality of the public services with particular challenges in health and long-term care


Competitiveness Reforms and Investment


Francesco Morandotti, DG GROW

20

• Productivity growth and investment patterns exhibit significantsectorial differences. Exports’ growth has been moderately accompaniedby an upward move in value chains.

• In general, increased profitability has been recorded over the recent yearsacross sectors and firms’ size class.

• Increased innovation capacity and pursuing structural reforms toaddress investment barriers would be key to boost productivity growthand increase the competitiveness of the Portuguese economy.

• Main investment barriers identified:Small average size of companies facing challenges to grow and innovate,

such skills shortages and regulatory footprint;Low capital per worker, allocative inefficiencies (access to finance) and

underdeveloped capital markets;Institutional components: complex taxation, administrative burden,

licensing and judicial system;Restrictions in professional business services weighing on competition;Scarce planning capacity in public procurement

Competitiveness and Investment – Highlights

21

Innovation and skills

• Increasing the innovation base of thePortuguese economy would be key to increasevalue added in exports and fostering anupward move in value chains.

• To improve innovation capacity it is key toaddress a number of structural challenges andbarriers to investment.

• Skills gaps and mismatches in the labourforce compromise the ability to upgrade intoknowledge intensive sectors.

Source: Eurostat

In some sectors, technological intensity increased, but low share of high and high-tech manufacturingexports, reflecting low level of innovation capacity. At the same time, low levels of investment inintangibles.

Graph 4.4.3: Medium-High and High Tech Exports (share of

total goods exports)

Source: Eurostat

Share of Medium High and High Tech Exports

22

Barriers to investment: firms’ size and difficulties to scale-up

Source: Eurostat

One, three and five years survival rates of enterprises, 2016 (%)

• High business creationaccompanied by low survivalrates suggests limitedeffectiveness of scale-uppolicies, scarce managerialskills, financial literacy andlimited digitization

• Overall, in the period 2012-2016 the death rate of firmswas 14.6%, almost doublingthe EU average (8.4%)

Portugal is the EU country with thelowest survival rate of enterprisesafter 5 years

• Portuguese firms are smallerthan EU average with a higherproportion of micro-firms(95.1%)

23

Barriers to investment – Low levels of capital per worker

• The deleveraging process may reduce growthpotential if resources are not enough re-channelled towards more productive firmsand sectors.

Source: INE, Investment Survey

Factors Limiting Investment

While progress has been recorded in access to finance, Portuguese firms often rely on own resources tofinance investment, including firms with growth potential or at early stage. In parallel venture capital andequity remain close to pre-crisis level.

• The low level of capital per worker is a majorobstacle hindering investment andproductivity growth

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LV

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2017 2007 EA-19 in 2017

Index EU28 = 100

Net capital stock per person employed


24

Source: INE – Framework regulation costs survey

Global framework regulation costs indicator

• The costs and time to deal with the judicialsystem are perceived as a major deterrent toinvest.

• The complexity and stability of the taxsystem and administrative burdens are amajor factor preventing investments(Eurobaromater – 76% and 73% of respondents,respectively)

SIMPLEX+ programme and its yearly measures overall represents policy progress in reducingadministrative burden, but…

• Limited achievements recorded in reducingsector-specific barriers to licensing, whichnegatively affect investment decisions innumerous sectors.

Barriers to investment – Institutional aspects

• Barriers to accessing and providing professional services (in the form of reserves of activities,incompatibility rules, shareholding requirements, legal form, management and multidisciplinaryrestrictions) raise concerns over negative effects on competition, consumer prices, choice andinnovation.

o The new OECD Intra-EEA STRI shows high regulatory restrictiveness for a series of servicesectors (such accountancy, legal services, construction and distribution services);

o OECD and Portuguese Competition Authority «Competition Assessment reviews» (2018)covering 13 key professions;

o European Commission Restrictiveness Indicator (2017) shows higher regulatoryrestrictiveness in 4 out of the 7 professions analysed (accountants, civil engeineers, architectsand tourist guides).

25

Barriers to investment – Competition in Professional Services

Source: European Commission Source: OECD

Restrictiveness indicator, 2016, Portugal and the EU Intra EEA Service Trade Restrictiveness Indicator,

Accounting Services, 2018

26

Barriers to investment: competition in public procurement

Direct Awards

Source: Own calculation from BASE, Transparency International 2017, IMPIC

reports 2018

However…

• Lack of appropriate, structured andquantified planning in procurement(broad interpretation of extremeurgency)

• Efficiency and competition in publicprocurement procedures leave scope forimprovement

• Reduction of the share of direct awards are following the entry into force of the new Procurement Code inJanuary 2018

• Improvements in transparency and reliability - control bodies have direct access to databases, thecontract manager reinforces supervision of contracts’ execution

58%82%

Regional dimension

Rudolf Niessler, DG REGIO


EU Cohesion

• Regional disparities are narrowing again

• Regions in eastern Member States have converged to the EU average; Portuguese, Spanish, Greek and Italian regions have fallen back

The convergence trajectory of the Portuguese regionsGDP per head in PPS (2000-2016) in % of the EU average

29

30

Regional convergence trajectory influenced by demographic change (2000-2016)

31

Economic convergence of the Portuguese regionsHead indicators

32

GDP growth in metropolitan areas, 2000-2016

0.31%per year

-0.54%per year

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

%

Greek metropolitan areas Rest of the country

-0.18%per year

-0.29%per year

-0.5

-0.4

-0.3

-0.2

-0.1

0.0%

Italian metropolitan areas Rest of the country

1.5%per year 1.22%

per year

0.0

0.5

1.0

1.5

2.0

%

Spanish metropolitan areas Rest of the country

0.02%per year

0.39%per year

0.0

0.1

0.2

0.3

0.4

0.5

0.6

%

Portuguese metropolitan areas Rest of the country

Risk: Middle-income trap

• Regions that do not move into the higher value added activities

• Face growing competition from less developed regions

• Innovation remains spatially concentrated

34

•Low levels of investment and productivity remain achallenge for advancing income convergence with EUaverage.

•Demography: declining population and ageing requirespecial attention in the investment strategy for Portugal.

•Strategic investments must address nationalcompetitiveness and regional specificities must betaken into account to favour sustainable growth andcohesion.

Key takeaways

2019 country report portugal - european commission · training and skills • about 52 % of the...

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