Portugal: The “PIG” with a Little “P”

“Portugal is not the next Greece!” That’s the battle cry that has attracted the global financial media to this small European country with an economy the size of Colorado. During the past few months, investors have lumped Portugal together with the other PIGSIreland, Greece and Spain — as one of Europe’s most profligate economies that threatens to burst the European Union along its economic seams. The pressure on Portugal is relentless. Just last week, the ratings agency Moody’s slashed Portugal’s debt rating, based on its “deteriorating financial position and weak economic growth prospects.”

Portugal: Booming Economy Gone Bad

Portugal’s star has fallen far during the past decade. When I covered Portugal as part of my beat as a mutual fund manager back in the 1990s, Portugal boasted one of the fastest-growing economies in Europe, with annual growth rates of around 5%. It had launched a successful privatization program; its tourism industry was growing by leaps and bounds; and the whizz-bang gadgetry of its banks and telecoms seemed light-years ahead of the United Kingdom. Membership in the euro in 1999 was a reward for a job well-done, giving Portugal a stable currency, low-interest rates and access to one of the world’s largest trade zones.

That dream unraveled quickly. Much to everyone’s surprise, adopting the euro transformed Portugal from economic hare to also-ran tortoise. Portugal’s gross domestic product (GDP) growth has averaged a barely perceptible 0.8% since 2001 — the second-lowest in the euro-zone after Italy. And instead of converging upon the standards of living of other European countries, Portugal has fallen further behind. Per capita GDP fell from about 80% of the European Union (EU) average in 2000 to just over 70% six years later. In the past 10 years alone, the Czech Republic, Greece, Malta and Slovenia all surpassed Portugal by this measure.

The culprit? Thanks to the euro, the country’s global competitiveness simply collapsed. Between 2000 and 2007, unit labor costs rose 19% — pulling the rug out from its textiles industry, even as China burst on to the global economic scene. To add insult to injury, government finances went awry, and Portugal became the first euro-zone member slapped with an excessive-deficit warning back in 2002.

Portugal: The State of Play

That all said, you can see why the Portuguese get grumpy when investors compare them to Greece. Public debt as a share of GDP — around 80% — is far from Greece’s triple-digit percentage levels of public debt as a share of GDP. And no one has accused Portugal of ever cooking its fiscal books. Nor is Portugal deserving of a comeuppance for a debt-fueled boom that now has gone bust. Portugal never had a boom. And the Portuguese government was cutting back, even as PIGS rivals Spain, Ireland and Greece were riding the wave of housing bubbles and debt-fueled spending.

Nevertheless, the Great Recession hit Portugal hard. Its budget deficit soared from 2.8% of GDP in 2008 to a record 9.3% last year. Not that the government has sat on its hands. Portuguese Prime Minister José Sócrates boasts that Portugal is far ahead of rivals in spending cuts, reducing the number of civil servants by 10% between 2005 and 2009, and cutting the public sector wage bill from 14.8% to below 12% of GDP. More recently, the government also has frozen civil service wages for four years, reduced social spending and cut military spending by 40%. The value-added tax (VAT) increased to 21% and income taxes rose by 1.5%.

Portugal: Grand Plans after a Turnaround

There are signs that Portugal’s economy is turning around. Its growth of 1.1% in Q1 of 2010 was among the highest in the European Union. In the five months through May, fiscal revenue was substantially above target and state spending lower than forecast.

Beyond the current crisis, an optimistic José Sócrates has grand plans for his country, especially in the areas of green energy and education. Already Portugal generated 70% of its  electricityfrom renewable sources early in 2010. The government has launched a national network to recharge electric cars.

Education is also in the government’s sights. Between 2005 and 2008, Portugal increased public investment in research from 0.7% to 1.55% of GDP, overtaking Ireland and Spain. The government is investing €80 million in the first five years of a research program with MIT and exploring similar programs with Carnegie Mellon, the University of Texas at Austin and Harvard Medical School.

Portugal: The “Lusophone” Edge

Portugal has a secret edge that other countries like Hungary, Czech Republic and Greece don’t have. Portugal’s population is only 10.6 million. Yet 223 million people in the world are “lusophones” (Portuguese speakers) — a vestige of the Portuguese Empire. By dint of a common language, a shared legal framework and long-standing business ties, a “lusophone triangle” links Portugal to Brazil and expanding economies like Angola, Mozambique and Capos Verde in Southern Africa.

Although Portugal’s main export markets today remain Spain, Germany and France, trade links with Portuguese-speaking Africa and Brazil are soaring. Portugal’s exports to non-EU countries have risen from 15% of the total to more than 27% over the past decade. Up to 10,000 Portuguese companies are doing business with lusophone Africa. They have invested more than $1 billion in Angola over the past three years alone, as Angola has become both Portugal’s fourth-biggest export market, and home to 100,000 Portuguese. No wonder TAP-Air Portugal, the national airline, runs 20 direct flights from Lisbon to Luanda, Angola, every week.

A bigger opportunity than lusophone Africa is Brazil, home to 192 million of the world’s Portuguese speakers. Portuguese banking giant Banco Espírito Santo has a 7% shareholding in Brazil’s Bradesco bank and operates its own investment bank there. Portugal Telecom (PT) is battling with Spain’s Telefónica over control of Vivo, Brazil’s largest mobile phone operator.

With all of its advantages — culture of reasonable fiscal discipline, its close links to other lusophone nations, and an enlightened government policy toward education, it seems surprising that Portugal was never a bigger economic success than it has been. But with its economy having screeched to a halt after adopting the euro in 1999, Portugal offers a poignant lesson to other small countries: “Be careful of what you wish for.”

  1. #1 by Carlo Caleffi on January 19, 2011 - 7:47 pm

    I really appreaciate the article, but for me you miss the main topic, the outside euro zone debt. This year USA “forgot” to include the liabilities of Freddi & Fanni in the overal debt, the two institution that were saved by US Gov. has 5.5 trillion dollars volume, with that the ratio debt GDP would rise to 130% with serious problem of solvency even for US.

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