A decade ago, Portugal, which was on the brink of financial disaster, was not seen as a favorable investment opportunity by anyone. In contemporary discourse, several analysts refer to the phenomenon as the “Portuguese economic miracle.” The nation situated at the westernmost point of the European continent has gradually ascended the incline in a cautious manner, implementing a daring supply-side approach and placing emphasis on its primary resource, namely tourism. Presently, its diligent efforts enabled the country to engage in social redistribution.
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| Lisbon, Portugal |
Just over a decade ago, this term was often used by macroeconomic experts in Brussels and was also prevalent in the everyday lives of the Portuguese population. In 2011, Portugal had a significant downturn, reaching a state of extreme economic hardship.
The westernmost country of Europe, facing imminent financial insolvency, was rescued in the last moments by the provision of a 78 billion euro bailout package by the European Union and the International Monetary Fund (IMF). As a result of this rescue mission, there were significant budget reductions that had far-reaching implications for the economic and social structure of the nation.
However, considering the most recent economic outcomes of the nation that were released this week, it is evident that this previously seen impetus has completely dissipated. The recent announcement made by Prime Minister Antonio Costa’s socialist administration indicated a public surplus of 0.8%, which is said to be the most substantial surplus since the establishment of democracy in 1974. What was the outcome of Portugal’s performance? What are the prevailing economic strengths of the subject under question? What are the novel problems that it now faces? The nation in question has been recently recognized by several experts as a commendable member of the European Union, exhibiting qualities that have earned it the reputation as a “good student.”
An unparalleled fiscal performance
The declaration in the Portuguese Parliament elicited a sense of jubilation among the governing socialist majority. According to the draft state budget for 2024, the government intends to attain a public surplus equivalent to 0.8% of the Gross Domestic Product (GDP) in the year 2023.
This is in contrast to its prior projection of a deficit amounting to 0.4% of GDP. The outcome achieved is unparalleled in over half a century. In the next year, the administration anticipates a surplus of 0.2% of the Gross Domestic Product (GDP), so aiming to expedite the attainment of balanced public finances. This objective was previously projected to be accomplished by the year 2027.
It is anticipated that inflation would see a further decline to 5.3% by the year 2023, followed by a further deceleration to 3.3% in 2024. One significant factor that influenced the government’s choice to refrain from extending the “zero rate” value-added tax (VAT) on a variety of basic food goods may be identified. Regarding the matter of public debt, the government has formulated a strategy to reduce it to a level below 100% of the Gross Domestic Product (GDP) starting from the year 2024. According to the latest projections from Portugal’s statistics agencies, there is an anticipated growth of 2.2% in the country’s Gross Domestic Product (GDP) for the current year.
A nation that has fared better in the aftermath of Ukraine’s conflict
“Portugal is recovering faster than other European countries because it is less exposed to the consequences of the Ukraine conflict.” Especially in regard to energy, which is not insignificant. “Unlike Germany, Portugal was much less reliant on Russian gas imports,” notes Sofia Fernandes, senior researcher, Employment and Social Affairs at the Jacque Delors Institute and specialized in Portugal.
“Exports last year, particularly textiles and wine, were powerful drivers of Portuguese trade,” she says. These are industries in which the nation has extensive expertise. In 2021, the nation will also be the largest bicycle exporter in Europe.
If these positive indicators allow Antonio Costa’s government to easily pass its 2024 finance bill (the final vote is on November 29), a few clouds are gathering on the horizon: the executive expects 1.5% growth in 2023, revised downward from previous forecasts, weighed down in particular by an international context that penalizes exports. “There are worrying signs next year, such as a strong slowdown in the eurozone,” warned Portuguese-speaking Finance Minister Fernando Medina during a news conference this week on the issue.
Tourism, the lifeblood of the economic miracle
The tourist industry in Portugal holds a significant portion of the country’s gross domestic product (GDP), making it a crucial economic asset for the Iberian nation. Based on the official statistical data, the industry in question had a revenue growth of 20% in 2022 compared to the pre-pandemic year of 2019. During the first six months of 2023, a total of 31 million visitors were documented at airports in Portugal. The record generated a substantial income of at least 22 billion for the government in the year 2023.
Indeed, it may be characterized as a genuine explosion. According to the researcher from the Jacques Delors Institute, there has been a notable increase in the number of Spanish tourists, indicating a warm reception of travelers from many countries by the nation.
The employment landscape is seeing significant growth in the main industry, as seen by the unprecedented surge in hiring figures. The hotel and catering business in Portugal employs around 320,000 people. One of the challenges faced by the industry is the emergence of recruiting issues. According to industry experts, there is a present need for 50,000 employment vacancies to be filled. These professionals are advocating for recruitment initiatives targeting foreign markets, with a special focus on nations where Portuguese is spoken. If tourism continues to be the primary driver of economic growth in Portugal, there is a growing consensus among experts that the nation should pursue greater economic diversification.
An effective supply-side strategy
Over the course of many years, successive Portuguese administrations, including the most recent one headed by right-wing Prime Minister Pedro Passos Coelho, have implemented a proactive supply-side strategy in response to financial constraints imposed by Brussels. According to the expert from the Jacques Delors Institute, the nation has indeed received a considerable number of foreign investments, offering very favorable tax systems for international investors and retirees originating from various European nations, such as France.
The scheme in question, often referred to as the “golden visas,” was initiated at the end of 2012 and subsequently terminated in March of the current year. In return for obtaining a residency card, those eligible for this specific visa were required to fulfill one of the following criteria: either make a minimum real estate acquisition of 500,000 euros inside the nation, invest a sum of one million euros in their economic ventures, or undertake the responsibility of generating employment opportunities via the creation of ten permanent positions.
In the last decade, the nation of Iberia has accumulated a sum over 6.5 billion euros via the issuance of almost 11,000 residency cards. In addition, it is worth noting that a total of over 18,000 visas were granted to individuals who are related to these investors.
Approximately 50% of the recipients of this particular provision consisted of Chinese investors, with a significant number of individuals from Brazil and the United States. China has made significant investments in Portugal, capitalizing on the economic crisis that the nation faced in 2010. Sofia Fernandes emphasizes that the principal stakeholder in Energias de Portugal, the Portuguese EDF, is really the Chinese state.
Spain: A crucial economic partner
Portugal, a geographically adjacent country to Spain, has effectively established a substantial economic partnership with its neighbor, characterized by a shared extensive border. Spain is not only the main destination for Portugal’s national exports, but also its main economic partner. Based on data provided by the Portuguese National Statistics Institute (INE), the bilateral trade volume between the two nations saw a notable growth trajectory, surging from 17.6 billion euros in 2000, equivalent to around 14% of the gross domestic product (GDP), to 55.5 billion euros in 2022, or almost 23% of the GDP. This occurrence is without precedence.
The degree of interdependence between the Portuguese and Spanish economies is significant, as shown by the fact that around 25% of Portuguese exports were directed towards the Spanish market during the last decade. In relation to imports, about one-third originated from the adjacent country of Spain. It should be noted that Germany and France hold the positions of Portugal’s second and third largest trade partners, respectively.
Portugal’s societal issue after years of a dry regime
This is the inverse of the economic approach implemented during the previous decade: in order to clean up its finances, Portugal has drastically reduced its spending in public services.
“Currently, the three major gaps are education, health, and housing.” Despite the country’s improved economic health, many Portuguese residents feel undervalued,” asserts Sofia Fernandes.
According to polls, the biggest source of dissatisfaction among Portuguese inhabitants is a lack of affordable housing. Because of the tourist boom, real estate values have risen by 75% on average in the last 10 years. With significant tension throughout the country’s major metropolises’ urban cores (Lisbon, Porto, etc.).
The government’s response to this unhappiness has been the elimination of “golden visas” and the implementation of levies more friendly to the long-term renting market. However, many Portuguese believe that these efforts are inadequate.
On the other hand, the Portuguese government’s 2024 budget calls for increased public investment in the health, education, and housing sectors (like in France, hospital treatment is deteriorating). A big income tax cut is also expected for next year. The socialist leadership also intends to raise the minimum wage and enhance retirement benefits. The minimum salary would so rise from 760 to 820 euros over 14 months, while pensions will rise by an average of 6.2%.
Portugal’s future is in digital and renewable energy
Recognizing the need of economic diversification, Portugal is now allocating resources towards the development of emerging sectors, namely digital technologies and renewable energy. According to Sofia Fernandes, the nation has implemented a comprehensive strategy for the digital transformation.
Furthermore, the region has a noteworthy environment for technological startups. An increasing number of individuals engaged in digital occupations are choosing to establish their residence in Portugal. The nation also embraces substantial investments from prominent corporations, such as Microsoft.
Moreover, Portugal has one of the highest proportions of renewable energy in power generation in Europe, estimated at over 60%, as reported by the International Energy Agency (IEA). This may be attributed to the use of wind and hydroelectric power. The nation is also making investments in solar energy.
Notwithstanding these efforts, Portugal continues to exhibit a reliance on fossil fuels in its total energy use. This is the rationale for the government’s assertion of actively endeavoring to alter the prevailing paradigm. According to a study issued in July 2021 by the International Energy Agency (IEA), the Portuguese-speaking nation was among the early adopters worldwide in establishing a target of achieving carbon neutrality by the year 2050.
Portugal has the foremost lithium deposits in Europe, rendering it a significant prospective resource. Lithium, in conjunction with cobalt and nickel, is recognized as one of the most pivotal metals for facilitating the ecological transition and advancing the digital economy. In recent months, the nation has furthermore granted authorization for the extraction of two mines containing this valuable metal.