Fitch identifies Portugal’s economic problems.jpg

Fitch identifies Portugal’s economic problems

INTERNATIONAL ECONOMIC and financial ratings group Fitch has identified several key areas where Portugal is still going wrong, writes The Resident’s Chris Graeme.

Despite the fact that the PS government of José Sócrates has identified the country’s problems and seems to be attempting to tackle them, the results, so far, are simply not enough to make a significant difference.

The good news is that Finance Minister, Fernando Teixeira dos Santos, has succeeded, through a mixture of good financial management, in the selling off of public assets and properties, and stricter attention to tax collecting, in reducing the government’s public finance deficit to 4.9 per cent of the country’s Gross National Product – down from over six per cent this time last year.

However, according to Fitch, that’s just tinkering with the system and not radically reforming and altering what’s wrong with Portugal’s outdated economic paradigm.

• Portugal has an inadequate industrial sector – one of Portugal’s key problems is its inability, since the 19th century, to develop a vibrant industrial sector. Still dependent on the textile, footwear and clothing industry, worldwide competition from other Far Eastern countries like China and India means this is no longer a viable source of export income for the country. Answer – develop new industries based on technology.

• Loss of Direct Foreign Investment – problems with General Motors, AutoEuropa and the Sines Oil Refinery project all indicate that Portugal is losing its competitive edge and is likely to fail in attracting investors from abroad, who could provide valuable employment in a country that has half-a-million unemployed. Not only that, Portugal is losing structural funds from the European Union, which are being diverted to more aggressive and up-coming Eastern European ‘Tiger’ economies.

• Sócrates policies are déjà vu – According to Fitch, the government is looking increasingly like that of the PSD government of José Manuel Durão Barroso. In other words, hiking up indirect taxes, IVA (VAT) and cutting public spending, but more radical policies are not being attempted to overhaul the system, yet.

• Ratio of private sector debt (private individuals and companies) against the GDP is a soaring 148 per cent – private credit may not have exceeded double digits as it did in the 1990s, but private individuals and companies are borrowing heavily, not sensibly  and way above their incomes. Portugal’s 148 per cent private debt/GDP ratio is one of the highest in the EU. A large part of this borrowing has been to the construction and real estate sector for building projects and mortgages. The Bank of Portugal has warned that if interest rates go up suddenly many families will face problems.

• Banking system strong – Fitch says that Portugal’s banking system is top notch (Grade A to B+) at offering quality services. It has been raking it in, despite the recession, thanks to low interest rates and record borrowing. However, a serious world crisis and interest rate hikes could cause many people to default on their loans.

• Education dreadful – state education and poor quality teachers, despite the government throwing money at the problem, has not yielded results. According to Fitch, not enough time, money and energy are invested in research and development, and conducting courses in the right technologically driven subjects. What the country doesn’t need are any more lawyers, accountants and hotel and tourism graduates. It needs more computer and telecoms specialists, physicists, engineers, mathematicians, chemists and general scientists.    

Fitch’s report comes at a worrying time, when the accumulated National External Debt has risen to 66 per cent of the country’s GDP and the average private individual is in debt to 117 per cent of his or her annual income.

For now, Portugal’s membership of the European Union, its strong and efficient banking sector and low interest rates are preventing a catastrophe. But what happens if events in the Middle East take a turn for the worse? If oil prices reach 100 dollars a barrel and interest rates suddenly go up, the Portuguese State could end up rather like the Titanic – a ship heading for an iceberg without enough lifeboats to keep her passengers afloat!