Portugal “punching below its weight” says industry boss

 In Bi-lateral trade, Economy, News, Trade

A leading business boss in Portugal has outlined 4 recipes to improve and maximise Portugal’s economy which he believes, despite positive export figures and growth in recent months, still has a long way to go.

Armindo Monteiro, who heads the Industrial Confederation of Portugal (CIP), believes Portugal is “punching below its weight” in terms of exports, foreign direct investment, production, and growth.

Monteiro outlined four recipes to get Portugal playing in a higher league: maximising Portugal’s economic potential; moving Portugal towards a knowledge and innovation based economy; creating a climate of confidence and cooperation (over 90% of Portugal’s companies are SMEs and micro companies, so consolidation and cooperation to gain scale is vital), and more careful and strategic criteria for targeted investments.

In his keynote speech addressing business leaders at an event organised by the American Chamber of Commerce (AmCham) this week, Armindo Monteiro stressed that Portugal had an opportunity to enhance its efficiency as much as possible through programmes such as SIMPLEX.

With a citizen-centric approach and a strong focus on co-creation, SIMPLEX is a simplification and modernisation program focused on improving public service efficiency and designed to facilitate the citizens and businesses everyday life, and their interaction with the public administration.

Launched in 2006, it has had several editions since then and has resulted in the implementation of hundreds of initiatives that have (to varying degrees of success) cut red tape, reduced context costs and used ICT to deliver better public services.

Since its introduction in 2006, as an across-the-board strategy for modernisation and the simplification of bureaucratic processes and procedures across all areas of the State, particularly the public administration, notaries, the national health system, business startups, and the tax authorities, Portugal has made strides in reducing red tape and making it easier for investors to start businesses in Portugal.

The latest edition has introduced 18 measures aimed at making a positive impact on businesses so that Portuguese companies can “increase their efficiency and profitability rates” as much as possible.

These measures include paperless invoices for both the public and traders, reforms to planning permission processes aimed at simplifying procedures for companies to encourage growth, investment, and employment, and above all simplify procedures for housing development by reducing, for example, the time and costs of new build.

Potential for growth

In many ways, Portugal is faring well compared to some of its larger and economically stronger European partners.

The Portuguese economy bounced back from the pandemic, expanding by 4.9% in 2021 and 6.7% in 2022 after an 8.4% contraction in 2020, benefitting from EU fiscal and monetary stimulus and a very high vaccination rate.

Portugal’s important tourism sector was also a big factor in Portugal’s economic success since 2020. US tourists, for example, jumped to about 1.5 million in 2022, beating the pre-pandemic record of 1.2 million in 2019.

As a result, the labor market continues to show remarkable resiliency, with unemployment at 6.0% in 2022 but creeping up to 6.6% in 2023. (6.6% in 2021).

António Costa’s PS Socialist government showed a strong commitment to reducing the public debt to 98% of GDP in 2023, while the usual annual budget deficit turned into a surprising surplus of €4.3Bn for the year. Portugal has also progressively improved its sovereign credit ratings. (S&P – BBB+, Moody’s A3, Fitch A- and DBRS A)

Armindo Monteiro welcomed the good news that the Finance minister, Fernando Medina, had succeeded in bringing the public debt down to just below 100% of GDP, but pointed out that the State needed to meet its obligations in providing the right framework and environment for businesses to flourish and grow.

GDP growth at 2.3% last year (6.8% in 2022) was one of the strongest in the European Union, but is expected to fall down to a mean 1% this year – not surprising given the challenging economic crosswinds resulting from various geo-political wars, high inflation, high interest rates, increased energy and raw material costs, and a cost of living crisis.

Portugal has also had a golden opportunity to enhance its economic recovery, modernise, digitalise and green up its economy thanks to €16Bn of EU grants funnelled into the Resilience and Recovery Package (RRP), and other community funding such as Portugal 2020 and Portugal 2030. However, tardiness in applying these funds and questions over how well they are being applied have dogged the entire allocation and application process from the start.

Doing well but could do better

Armindo Monteiro, who last year succeeded António Saraiva at CIP, said Portugal had grown “below its potential” but this provided an opportunity for the country’s businesses and for the State to leverage more.

And there have been success stories. Portugal had improved Foreign Direct Investment from the United States of America, now its most important non-EU trading partner in goods and services.

In 2022, the three top FDI sources were Spain (€25.7Bn), France (€17.2Bn) and the United Kingdom (€13.4Bn). The United States is an increasingly significant player, with an €8.2Bn FDI stock in 2022.

Last year, The US became Portugal’s fourth-largest export market for goods and services and the largest trading partner outside Europe, representing around 7% of all Portuguese exports in 2023.

Increased flows of fossil fuels contributed to a 40 percent jump in this trade in goods and services between the two countries to $US10Bn in 2021 and jumped up to a record US$11Bn in 2022.

However, bilateral trade remains lop-sided with a large US trade deficit of around US$2.2Bn. Many US companies have invested in business/service delivery centers in Portugal, taking advantage of Portugal’s relatively low-cost, talented, and multilingual labor force.

The country continues to push to improve market attractiveness. Portugal’s export and FDI promotion agency (AICEP) celebrated a record €2.7Bn of contracted FDI in 2021, double that of its previous record in 2019.

In terms of FDI overall, Portugal registered 200 projects in 2021, 70% from Europe and 30% from the rest of the world, representing a 30% increase compared to 2020, with 154 projects mainly from the ICT sector.

2021 marked a record-breaking year, with the US being Portugal’s largest source of FDI, representing around 15-18% of all FDI projects in Portugal. In 2022, the US again was the largest source of FDI to Portugal, contributing to 19% of the total foreign investment. According to Banco de Portugal’s latest report on FDI in 2023, the first quarter of FDI in 2023 generated €630 million.  Between 2008 and 2023, the stock of FDI in Portugal has more than doubled.  In 2023, the FDI in Portugal is now double the amount of foreign investment Portugal does internationally.

Portugal’s metalworking, auto component, and machinery industries lead in recent FDI trends, accounting for about 30 percent of the contracted flows, according to the Government statistics .

However, as Armindo Monteiro pointed out, in some cases with Portuguese companies profitability rates were “miserable”, while companies were subject to extremely high and prejudicial taxes although context costs — operational costs as a result of different economic and administrative policies of the border territories, barriers resulting from past development strategies, cultural differences, and resistance to cooperation — were not so harsh.

Creating barriers to investment

And despite Portugal seeing an uptick in FDI, the government often has contradictory policies that actually hampered business and jeopardised growth and profitability.

“We badly need investments and yet we seem to create a series of difficulties that make that investment hard for overseas companies”, said Monteiro.

“Even when companies want to invest in Portugal, they come up against a number of hindrances when setting up”, he said, referring to one example reported from a chamber of commerce, which he declined to name, of a top 10 company in Portugal (also not named) that had received an instruction from the company’s overseas headquarters to up production by 30%.

A reasonably straightforward target, you might think. However, in terms of licencing and regulations at the Portuguese end, it would take 9 months to a year to be able to start. “It took too long, so the investment went to Spain instead”, lamented the CIP president, adding: “If we don’t improve the situation and reduce all these constraints, we’ll lose investment to our competitors”.

And since the private sector is essential for wealth creation and jobs, it was imperative that business, trade and projects advance without such hurdles and constant delays.

“FDI attraction should be a common mobilising policy and we should identify and eliminate obstacles like licences that took forever to approve and excessive regulations, and instead simplify processes for overseas investors.

Poor management and second-rate public services

Also on the negative side, and not actually mentioned in this specific speech, but others, were the scenes of police (doctors and teachers too) protests in the streets in recent weeks complaining over low salaries and poor subsidies because of the high risk of their jobs.

There are also blatant inequalities in pay: Portugal’s Judicial Police (PJ), run by the Ministry of Justice, earn six times more in income than the PSP public service police and the GNR national guard, the latter largely responsible for policing Portugal’s highways.

The criticism from the Portuguese Business Confederation (CIP) is that the government lacks a “coherent and coordinated criteria”, especially given that the Ministry of Justice, which has given pay increases to the PJ judicial police, excluded prison officers from having a fair and equal pay rise, which they should get since their lives are also put at risk on a daily basis.

“It seems to me that we are facing a flagrantly bad example of bad public management that damages the country’s reputation and transmits the idea that the State had not yet set up clear, firm and consolidated management rules”, says António Monteiro.

And regrets: “Instead, what we have seen for too many years are erratic policies, often introduced too late, which demotivate public sector workers, and end up by producing second rate or even unacceptable public services.”

This problem was apparent in a wide range of public spheres including health, education, justice, policing, administrative services, and even regulating entities — whose efficient operations are vital for businesses and the smooth functioning of the Portuguese economy.

This lack of clarity, flip-flopping policies swamped by rules, procedures, regulations — often incoherent — and budgets that are incapable of producing results that are suitable and fit-for-purpose for both the general public and companies was lamentable.

Public investment and sound administrative management are “essential to provide a reason for an overseas company to want to invest in Portugal when there is so much fierce competition” all over Europe, and indeed the world.

In other words, Portugal’s public administration cannot exist just to serve the public sector, the State has to serve the wider public and enterprises on which the economy and the country’s wealth rely.

And echoing a former British prime minister, Margaret Thatcher, who famously once said, “There is no such thing as public money; there is only tax payers’ money” Monteiro stressed that the State is not the absolute fiefdom of governing politicians and government money was actually tax payers’ money.

“Of course, a large and widely spread public administration will inevitably create inefficiencies and waste, but this is a lesser problem compared to the often bizarre and confusing regulations and processes, as well as a lack of personnel to carry out these processes well”, he said.

And continued: “The economy has to become more competitive in order to generate more revenues, which in turn will lead to better salaries and the State has a vital role to play in this competitiveness, and must not be seen as synonymous with delays, incoherence, inequality, lack of transparency, and poor services.”

A knowledge-based economy

António Monteiro emphasised that Portugal needed to change its economy to one based on knowledge and innovation. “We need to base economic growth on value added projects, focused on knowledge, technology, and innovation. “We have abused our economic miracle, distributing wealth without creating it”, he said in a nod to the not always well spent ‘bazooka of EU funding.

The CIP boss pointed out that an environment of confidence and cooperation was required. It has long been stated by captains of Portuguese industry and economists that Portugal needs more mergers and acquisitions to scale up the economy and make it more productive and competitive. However, internal suspicions and company rivalries within and between sectors have made collaboration difficult.

“We have to promote a culture of confidence and collaboration, and abandon this zero sum paradigm and the idea that for someone to win something, we have to take it from someone else.”

Targeted investment selection criteria

António Monteiro says up until now the decision to invest in a particular country or region was based solely on economic results. Portuguese companies did not take into account factors like social responsibility, respect for human rights, values such as democracy and private initiative in their business plans.

However, this was changing and Portugal needed to know how to make the most of its competitive advantages, by being a reliable and trustworthy destination for investors, with predicable and stable economic and fiscal policies.