IN MY VIEW by CHRIS GRAEME chris.graeme@theresidentgroup.com
Portugal is in dire straights if warnings from external financial agencies and institutions are anything to go by.
The International Monetary Fund’s analysis report for Portugal in January looked more like the script for Saw 8 than a mild warning.
“While there are pockets of strength and reforms have been undertaken in recent years, more is needed. Productivity and growth remain weak, the competitiveness gap large and Portugal continues to score poorly on various economic indicators and framework conditions, while many problems are long-term, such as the judicial system and low levels of education. Making Portugal’s still highly-regulated product, service and labour markets more competitive and flexible would provide a boost and the right incentives to innovate and invest,” it states.
The IMF also warns: “The large fiscal and external imbalances that arose from the boom in the run-up to adoption of the Euro have not been unwound, resulting in the economy becoming heavily indebted with growing banking system vulnerabilities. The longer the imbalance persists, the greater the risk the adjustment will be sudden and disruptive (meaning in social terms). The IMF also noted the Portuguese banking system’s over reliance on foreign borrowing – 40 per cent of total assets.
The problem, it seems, is not so much government public spending – most European Union countries, including Britain, have been forced to up that since the financial crisis – but rather private and consumer spending which was allowed to spiral out of control in the 1990s.
Two weeks ago the European Union admitted that Portugal’s external accounts went from credit in the mid-1990s to deficit running at 109 per cent of GDP.
This happened largely because the EMU (European Monetary Union) broadened access to credit and Portuguese business and consumers saved less and borrowed more, allowing private consumption to outstrip GDP production.
The Deutsche Bank’s Giles Moec says that Portugal has suffered ever since she joined the EMU. It meant that she couldn’t devalue her currency to keep direct foreign investment high and make Portugal a cheap and attractive market. With goods overvalued, Portuguese exporters have had problems too and resorted to loans to stay afloat rather than switching their business and production models.
Now Portugal is running a total private debt of around 300 per cent while the current account deficit stands at 10 per cent of GDP.
One major difference between Greece and Portugal is that the Portuguese Finance Minister, Fernando Teixeira dos Santos, did spend most of the PS government’s first term in office trimming back public spending and keeping the budget deficit down to below the three per cent stipulated by the European Union’s Growth & Stability Pact.
In fact, successive finance ministers have largely succeeded in keeping the country’s books in order for the best part of 10 years. The problem, of course, was that the measures taken by both the PSD-CDS/PP and two PS governments were too little, too late.
Bloated public sector
Portugal has not managed to seriously tackle the number of employees in the bloated public administration sector. Having around 700,000 public sector workers in a country of only 10 million inhabitants is patently ridiculous.
The other problem is systemic lack of competitiveness and real productivity (64 per cent of the average EU level) in producing exportable goods the world’s market really needs at reasonable prices.
For 20 years, Portugal was in receipt of considerable sums of European Union funds which it could have used to modernise the economy, create new economic models, develop cutting edge industries and invest in an education drive. Sadly, the reality is that much of that money was squandered on swimming pools, second homes, big cars and white elephant projects.
To be fair, unlike Greece, Portugal was not a spendthrift. Greece’s budget deficit stood at 16 per cent of GDP, far greater than the 13 per cent it initially claimed.
But the Finance Minister and President of the Republic, both economists that should know better, cannot moan and cry “unfair” like scolded school children and blame speculators and outside economic agencies.
The simple truth is that Portugal had a golden opportunity between 1985 and 2005 to really institute major social, political and economic reforms.
Successive governments tinkered with the system but lacked the courage to really change what, overall, was wrong. She only has herself to blame.
