EKONOMİ YAYINLARI
Portugal

Portugal

Population 10.3 million
GDP 23,132 US$
A3
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A2
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Synthesis

major macro economic indicators

  2018 2019 2020 (e) 2021 (f)
GDP growth (%) 2.6 2.2 -10.1 5.7
Inflation (yearly average, %) 1.2 0.3 0.0 1.1
Budget balance (% GDP) -0.4 0.2 -8.4 -2.7
Current account balance (% GDP) 0.4 -0.1 -3.1 -3.5
Public debt (% GDP) 122.0 117.7 137.2 130.0

(e): Estimate (f): Forecast

STRENGTHS

  • Potential in renewable energy (hydroelectric, wind and photovoltaic)
  • Above-average absorption of European funds
  • Low labour costs and nascent manufacturing industry (food products, electronics)
  • Comparatively stable governance
  • Increasingly attractive to foreign talent

WEAKNESSES

  • Underdeveloped manufacturing sector with low-to-medium range added value
  • Highly exposed to pandemic-sensitive sectors (tourism, textiles, auto parts)
  • Slow-functioning legal system
  • Poor quality of bank portfolios, high bad debt rates
  • Deepening infrastructure gap

RISK ASSESSMENT

Tourism dependence leads to a sizeable contraction and an uncertain recovery

Despite a relatively less severe early outbreak, the Portuguese economy is highly singularly vulnerable to the pandemic. This is in large part due to the overwhelming importance of the tourism sector (17% of GDP, 50% of services exports in 2019), which is expected to lose 65-70% of its annual revenues in 2020 and whose prospects for recovery remain highly uncertain in 2021. Indeed, Portugal’s off-centre position in Europe makes it highly dependent on air transport for tourism income. Overall, exports of goods and services (43% of GDP) contracted by 21% in 2020 and should rebound by 10% in 2021. Internal demand and imports are being less elastic, making for a strong negative contribution of net exports (-3%) in 2020, which will become slightly positive in 2021 thanks to the revival of exports. Furthermore, SMEs tend to have lower chances of survival, and they are disproportionately prevalent in the Portuguese industrial landscape: 77% of employment and 68% of value added (EU average: 66% and 56%, respectively). Renewables (30% of the energy mix, mostly solar and offshore wind), on the other hand, will continue expanding, increasing capacity by 7% and generation by 6% in 2021. The contraction in private consumption (62% of GDP) will be contained to 9% in 2020 thanks to a battery of measures including transfers to furloughed workers (0.3% of GDP) and other transfers to households (0.5%). The 2021 budget plans for further employment subsidies (0.5% of GDP), extended transfers for households (0.2% of GDP) and a 20% increase in public spending. Tax deferrals have been instrumental in supporting the private sector (11% of GDP), notably the fractioned payment of VAT that was extended to H1 2021. Under the effect of pent-up demand, consumption will rebound by 5%.

 

The pandemic response brings unprecedented fiscal pressure, but Europe ensures the funding

Emergency economic measures accounted for 2.5% of GDP. These include the aforementioned subsidies, social transfers and tax deferrals. While discretionary measures were smaller relative to Eurozone peers, the effect of automatic stabilizers will be particularly strong given the importance of social benefits (18% of GDP) and taxes on production and income (15%). The 2020 deficit is further amplified by one-off transfers, such as the activation of Novo Banco’s contingent capital mechanism (0.5% of GDP) and the bailout of flagship airline TAP (0.6%). Overall, expenditure is expected to increase by 11% in 2020, while revenues plunged by 13%. The deficit is expected to normalize only gradually and mostly thanks to the rebound in activity, as the fiscal stance will remain accommodative in 2021. The new budget includes an expanded subsidy for employment and resumption of activity (0.5% of GDP), resumed hiring in health and education, and a 20% increase in public investment. Indeed, the degradation of public finances will no longer weigh on public investment, as EU rules are set to remain suspended and the Next Generation EU fund is set to provide funds equivalent to 27% of 2019 GDP over 2021-2027. Furthermore, thanks to ECB stimuli, borrowing costs have sunk to record lows. Private debt, which prior to the pandemic had fallen to 149% of GDP from its 210% peak in 2012, is set to gain 20 pp. The oversized dependence on tourism exports will shift the current account back into deficit in 2020, which will linger into 2021. While this is not reassuring given the large external debt (203% of GDP) and negative investment position (-100% of GDP), it is mostly financed through FDI (3% of GDP, much less from 2020 onwards) and Eurosystem funds.

 

Cracks start to emerge in the left-leaning coalition government

Led by PM Antonio Costa, the centre-left Socialist Party (SP) holds 106 seats out of 230 in the unicameral legislature, 10 short of an absolute majority. After the 2019 election, it looked like Costa would be able to govern comfortably through a left-wing coalition with the support of either the Left Bloc (LB, 19 seats) and/or the Portuguese Communist Party (PCP, 12 seats). It has since become apparent that consolidating the left is easier said than done, as shown by the razor-thin 2-vote majority in the November 2020 budget vote. Indeed, the LB voted against the SP for the first time in the legislature, raising doubts over the coalition’s stability. Nevertheless, a complete term ending in 2023 remains the more probable outcome. The most controversial aspect of the bill is an amendment seeking to cancel the state’s contingent commitments to Novo Banco. The measure is expected to be overturned by the courts due to its apparent incompatibility with international law (Novo is owned by a U.S. fund). Nonetheless, it is telling that many in parliament are willing to compromise enforcement of property laws, especially considering that the motion was authored by the nominally liberal leader of the opposition, the Social Democrats.

 

Last updated: February 2021

Payment

Cheques are frequently used in Portugal and it is common practice to establish payment plans with post-dated cheques which are payable on presentation. If the bank account is not sufficiently provisioned, they are borne by the bank up to a maximum amount of €150. In the case of bounced cheques, an individual person or a company is prohibited from receiving or issuing further cheques for a maximum term of two years (or eventually six years, if there is a court decision).

Bills of exchange are commonly used for commercial transactions in Portugal. In order to be valid, they are subject to stamp duty, the rate of which is set each year in the national budget. A bill of exchange is generally deemed independent of the contract to which it relates.

Cheques, bills of exchange, and promissory notes offer effective guarantees to creditors against defaults, as they are legally enforceable instruments which entitle debt holders to initiate “executory proceedings”. Under this process, creditors can petition the court to issue a writ of execution and notify the debtor that this has been done. When debtors still fail to settle their debts, the creditors may request that the court officer issues an attachment order against the debtors’ property.

Electronic transfers via the SWIFT network are widely used by Portuguese companies and are a quick, reliable and economic means of payment. If the buyer fails to make a transfer, the legal recourse is to institute ordinary or summary proceedings, based simply on an unpaid invoice.

In the event of a payment default, creditors are not required to issue a protest notice before bringing an action to court, but such a notice can be used to publicise the matter and thus put pressure on debtors to honour their obligations, albeit belatedly.

 

Debt collection

Amicable phase

Amicable collection begins with the debtor being sent four demands for the payment of the principal amount. Interest on the principal can be requested, but is normally difficult to collect in Portugal. Payment agreements subsequently made between creditors and debtors can include guarantees to ensure payments will take place as agreed.

Interest rates are set by the Treasury Department. The rates are published in the Diário da República during the first fortnight of January and July each year, and are applicable for the following six months. These interest rates are applied by default, unless the parties involved in a commercial agreement have contracted otherwise.

 

Legal proceedings
Fast-track procedure

The order to pay procedure (Injunção), which is applicable to uncontested commercial claims, was established in March 2003. These proceedings, whatever the amount involved, are heard by the court in whose jurisdiction the obligation is enforceable, or the court where the debtor is domiciled. Since September 2005, these injunctions can also be served electronically.

The National Injunctions Office (Balcão Nacional de Injunções, BNI) has exclusive jurisdiction throughout the country for the electronic processing of order to pay procedures.

 

Ordinary proceedings

In cases of disputed claims, creditors can initiate formal, but more costly, declarative proceedings (acção declarativa), to obtain a ruling which establishes their right to payment. Once the claim is filed with the court and the debtor notified, a defence can be filed within 30 days. Failure to reply entitles the court to deliver a default judgment. If the judge rules in favour of the creditor, the court may order damages, if requested by the demanding party. They then need to initiate “executive proceedings” (acção executiva) to enforce the court’s ruling.

Under the revised Code of Civil Procedure, any original deed established by private seal (i.e. any written document issued to a supplier) in which the buyer unequivocally acknowledges his deb, is deemed to be an agreement that is enforceable by law. Since 2013, when the most recent revision of the Code of Civil Process was made, written signed payment plans can only be used to initiate executory proceedings when they have been recognised by a notary.

In the scope of the recent restructuring of Portuguese courts which has been ongoing since 2014, more courts specialising in commercial issues have been created. The number of Courts of First Instance has been reduced to 23 (in each district capital), while there are now 21 specialised courts (Secções de Competência Especializada) for commerical issues (secção de Comercio), commercial issues. These latter sections deal specifically with insolvencies and commercial company matters. During this same period, 16 sections specialising in Enforcement Procedures (Secções Especializadas) have also been created.

Legal actions in Portugal can take several years, depending on the complexity of the case. Enforcement proceedings can be faster, depending on the existence of assets.

Enforcement of a Legal Decision

Once all avenues of appeal have been exhausted, a judgment normally becomes final and can be enforced. If the debtor fails to comply with the decision, the creditor can request compulsory enforcement mechanisms before the court – either through an Attachment Order, or by allowing payment of the debt to be obtained from a third party which owes money to the debtor (Garnishee Order).

Foreign awards rendered in other EU countries benefit from specific enforcement mechanisms, such as the European Enforcement Order (which can be used if the claim is undisputed), or the European Small Claims Procedure. Awards rendered in non-EU countries must be party to a bilateral or multilateral agreement with Portugal on the recognition and enforcement of court decisions.

Insolvency Proceedings

Out-of court

A special extrajudicial administrative procedure (Regime Extra Juditial de Recuperação de Empresas, RERE) came into effect on July 1, 2017. This procedure for restructuring company debts is carried out by specialised mediators. It has been designed to enable creditors and debtors to reach a compromise, in a confidential and consensual manner.

 

Restructuring proceedings

The reforms implemented in 2012 included the introduction of a special rescue procedure (Processo Especial de Revitalizaçao, PER). The aim of this new procedure is to ensure the recovery of debts from debtors that are in a ‘difficult economic situation’ without starting an insolvency procedure. The management is obliged to request permission from the provisional judicial administrator in order to perform “particularly relevant acts”. During this process, the administrator prepares a recovery plan which must be approved by the creditors and a judge.

 

Bankruptcy

Insolvency law in Portugal also provides for insolvency proceedings (Processo de Insolvência). The main goal of these proceedings is to obtain payment for the company’s creditors through the implementation of an insolvency plan. Insolvency plans can be established under which the company is restructured and can continue to operate. Should this prove unfeasible, the insolvent’s estate is liquidated, and the subsequent proceeds are distributed among the creditors.

Corporate Insolvencies in Portugal
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