Economy minister looks to get Portugal back to growth

Portugal started 2013 in a relatively hopeful mood. The country returned to the long-term debt market for the first time since being bailed out in 2011 with an offer that increased the size of an existing €6bn bond maturing in 2017. The additional money raised was €2.5bn, following demand that was reportedly in excess of €12bn, mainly coming from foreign investors. Even more hopeful was the cost of borrowing for the new funds, which was less than 5%.

“For us, getting back to the market was very important, not only internally but also externally,” says Álvaro Santos Pereira, Portugal’s minister of economy. “When a country is able to get back to the market this helps the financing of our banks and of our [small and medium-sized enterprises]. We are focusing our attention on the financing of the economy. We are following all the necessary steps to get back to normality and to get back to growth, so that we can create jobs and get investments.”

Positive spin

Speaking at a London event aimed at attracting investment into Portugal’s tourism real-estate sector, Mr Pereira is not short of positive messages. The government is keen to return to growth, he says, attract new investment and create jobs. Plans to reignite the economy and reduce the country’s dire unemployment rate – which is expected to rise to 17.3% this year – include a focus on Portugal’s industries, its natural resources and the tourism sector, as well as measures to attract new investments.

“It is important that countries such as Portugal go back to growth, pursuing a re-industrialisation policy, a natural resources policy in terms of mining, oil and gas, but also cutting back on red tape,” says Mr Pereira.

In addition to reducing bureaucracy, the Portuguese government plans to attract investment by reducing taxation, something that would need the approval of the troika of the European Commission, International Monetary Fund and European Central Bank, which is monitoring the country's progress under its €78bn bailout programme. In a country still struggling to meet its deficit targets, tax reduction may be confined to specific areas. Corporate income tax on new investments, for example, could be cut from 25% currently to 10%, making it one of the lowest in Europe alongside countries such as Cyprus and Bulgaria. This may well appeal to investors, but is also likely to alienate existing tax-payers, who have loudly protested austerity measures in the past.

Nevertheless, Mr Pereira highlights the importance of tax reform, as well as other structural reforms, for the future of Portugal. “We are preparing a tax reform for our corporate tax law [and] we’ll talk with the troika soon,” he says. “We are trying to become more competitive, as a package. There are many pieces that need to be put in place [to do so, including]: a privatisation programme, launching new concessions, and the tax reform that we’re trying to implement.”

Export promise

Mr Pereira is also hopeful about Portugal’s export prospects. Exports have indeed grown of late thanks to Portugal’s larger exposure to markets such as China, Brazil and Portuguese-speaking African countries. Mr Pereira says that traditional and higher value-added sectors, such as car manufacturing, will lead Portugal's exports charge.

“In the past 15 years, Portugal and many countries in Europe invested a lot in infrastructure rather than providing good incentives for our companies to prosper in terms of industry and agriculture,” he says. “The agriculture and industry [sectors] are undertaking a process of reform and restructuring. But we think that in Portugal we [already] have excellent industries; not only traditional ones such as textiles and shoe making, but also medium to high value-added industry.”

However, lower growth in some emerging markets and a largely stagnant eurozone recession – despite encouraging economic data in some European countries – will not help Portugal’s manufacturing sector. Recent data from Portugal's statistics agency shows that gross domestic product (GDP) decreased 3.2% in 2012, after a 1.6% reduction registered in 2011. The sharper decline was driven by the reduction of net external demand, which was 4.7% of GDP in 2011, compared with 3.9% in 2012, and is also explained by lower domestic demand, says the agency. Portugal’s government projects that the economy will shrink 1.9% this year. Economic reforms are indeed needed, and fast.