Rather than celebrate a return to growth this year, Portugal has suffered an economic shock as Covid-19 hammers tourism. Is government action enough or does crisis require a unified European response?


Portugal had expected to celebrate 2020 as the year its economy finally turned the corner. The minority Socialist government was on course for posting the former bailout country’s first budget surplus in almost half a century of democracy. The first three months were projected to complete a sixth full year of uninterrupted quarterly growth, the last four years at a pace significantly above the eurozone average. 

In any event, 2019 turned out to be the year for which Portugal recorded its first fiscal surplus since the ‘Carnation Revolution’ of 1974 returned the country to democracy after decades of right-wing dictatorship.

But there were no fanfares when the long sought-after goal of a balanced budget was announced on March 25. By then, the coronavirus had already forced the country into lockdown, and a return to government deficits and an economy beset by recession and unemployment were seen as inevitable. 

“No economy is immune to a shock such as the Covid-19 pandemic and the resulting lockdown,” says José Brandão de Brito, chief economist at Millennium bcp.

Unemployment fears

Forecasts of how much the Portuguese economy will contract this year range between an EU projection of 6.8% and an International Monetary Fund (IMF) estimate of 8%. Mário Centeno, Portugal’s finance minister, has said unemployment could reach 10% by the end of 2020, up from 6.7% in the first quarter. The IMF sees it doubling this year to almost 14%. 

Moving back towards double-digit unemployment has reawakened painful memories in Portugal of the hardships suffered during the ‘bailout years’, the 2011-14 economic adjustment programme overseen by the EU and the IMF in return for a €78bn bailout. During that crisis, the jobless rate remained above 10% for almost six years (2010-16), peaking at just more than 16% in 2013. As Covid-19 threatens to cause another severe downturn, worried families and businesses are asking how long the economy will take to recover this time.

The question is particularly pertinent to Portugal because of its heavy dependence on tourism. Mr Brandão de Brito sees the holiday and travel sector as the country’s “biggest vulnerability”, relative to other economies, because it is expected to take longer than most other industries to return to normal levels of activity.

The number of unemployed in the southern Algarve region, for example, one of Portugal’s most popular tourism destinations, soared 41% year-on-year in March, the month in which Portugal recorded its first coronavirus cases.  

Tourism off a cliff

This sudden fall-off in tourism was the main cause of a 3.9% slide in gross domestic product (GDP) growth in the first quarter. In March, the number of people staying in holiday accommodation plummeted 60% year-on-year. By late April, more than 90% of hotels were closed and 85% of their workers laid off, according to industry bodies. Borders, ports and airports were closed to holiday traffic. A “large-scale state intervention” was being planned for TAP Air Portugal, the national airline, which had grounded all but a handful of flights.

Tourism, alongside exports, had been the main driver of Portugal’s recovery from the European debt crisis and its abrupt shutdown came as a shock. The sector has enjoyed nine consecutive years of record growth with more than 16 million foreign visitors travelling to Portugal last year. Including investment, employee spending and government expenditure, it accounts for around 15% of Portugal’s GDP and directly supports more than 8% of jobs.

Unlike some other sectors, however, it cannot be reopened overnight. “The return to normality for tourism is likely to be gradual,” says Rui Constantino, chief economist at Banco Santander Portugal, indicating that this summer’s holiday season will be “very subdued”.

Pioneering initiative

The Lisbon government has launched what it considers a pioneering scheme in Europe to lift the tourism sector out of a Covid-19-inflicted slump by urging tourists to postpone, rather than cancel, visits. Vouchers are to be issued for cancelled holidays booked for March to September 2020 through travel agents or at accredited accommodation. These can be used to reschedule the holidays until the end of 2021. After that they will be eligible for refunds, which can go up to 100% if the holder loses their job before September 30, 2020. 

In direct support of the tourism industry, the government has launched a €1.7bn credit line for a sector that the Portuguese Hospitality Association estimates will lose up to €1.4bn in revenue between March and June 2020 alone. The tourism aid scheme is part of a wider €9.2bn coronavirus package aimed at supporting workers and companies during the pandemic.

Equivalent to about 4.3% of GDP, the package includes about €3bn in state-guaranteed credit lines to support companies, a further €5.2bn in deferred tax payments and about €1bn in delayed social security contributions. There are additional credit lines aimed at other key industries including clothing, textiles and timber-based production.

About a third of the total is reserved for small and micro firms, which account for more than 99% of companies in Portugal. Employees temporarily laid off by struggling companies are entitled to receive two-thirds of their wages, of which 70% is be paid by the state. By early May, about one in five Portuguese workers were being helped in this way.

Debt vulnerabilities

Portugal’s high level of indebtedness makes it vulnerable to the fiscal strain of such measures. The country’s public debt-to-GDP ratio has been steadily declining – dropping to about 118% last year – but remains the third highest in the EU after Greece and Italy. The hard-won fiscal progress Portugal has made over the past decade, however, makes it much better prepared to deal with a crisis like Covid-19 than it previously was. 

“The current pandemic shows how important it is to have balanced fiscal accounts, to allow fiscal policy to work and to support the economy in the face of a major shock,” says Pedro Castro e Almeida, chief executive of Santander Portugal. “Once the crisis is over, the country will need to move back towards a balanced budget and to continue reducing pubic debt.”

Pablo Forero, outgoing CEO of Banco BPI, says: “The progress in fiscal consolidation has been remarkable. It is very important to keep on the consolidation track and build on the strong credibility that has been so patiently recovered.” While Covid-19 will demand exceptional measures, he says, this should not lead Portugal to “abandon the sound principles of economic and financial stabilisation that will be essential” after the crisis.  

Mr Constantino says that risks to the banking sector are related mainly to the duration of the pandemic and the mitigation measures implemented. “A shorter [crisis] period will have some impact on profitability, possibly including lower volumes, but mainly lower fees,” he says. A more extended crisis, he believes, would generate risks related to lower activity and a deterioration of credit quality.

Hopes of euro response

“The banking sector entered the pandemic crisis from a position of strength, both in terms of capital and liquidity,” says Mr Brandão de Brito. “But banks will necessarily take a hit due to much lower levels of economic activity and the rising cost of risk.” He estimates, however, that “banking volumes are likely to contract less than overall activity due to the extensive lines of credit provided by the government”. State guarantees also mean “the cost of the risk is likely to rise less in the banking system than in the overall economy” . 

While he says the government’s immediate response to the Covid-19 crisis “focused mainly on solving the liquidity crunch stemming from the lockdown and protecting employment”, he believes it will soon have to deal with a “corporate capital crunch”. 

“This will require a European policy supportive of the efforts of national governments to avoid a widespread shutdown of the productive sector,” he says. “Some kind of debt mutualisation, backed by the European Central Bank’s purchasing power, is highly desirable. The issuing of ‘coronabonds’ could be an interesting solution.”

Millennium CEO Miguel Maya stresses the importance of a unified European response, advocating “a European recovery fund that ensures support for citizens and businesses under the same conditions and following the same criteria, regardless of the EU country in which they are based”. 

Such a fund, he believes, could “issue perpetual debt, with debt servicing being ensured through a contribution based on each state’s GDP. With a model of this nature, the concept of solidarity would be replaced by equity, justice and cohesion.” 

Prime minister António Costa took office in 2015 promising to overturn the austerity inflicted on Portugal during the sovereign debt crisis. Many citizens are hoping the EU will find a more unifying and supportive way of dealing with the impact of Covid-19.


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