Foreign investment crisis cloaked by privatisations

Foreign direct investment (FDI), which supports business development by an individual or company in a foreign country, saw a 75% decrease during the first five months of 2013 compared to the same period last year, according to data from the Bank of Portugal.

Up until the end of May, foreigners had invested €924 million in Portugal, which represented a €2.8 billion drop compared to the previous year.

The privatisation of national companies, such as Cimpor and REN, in the total sum of €2.1 billion during the same period in 2012 has, to some extent, cloaked the negative results. In 2011, the sale of a stake in energy company EDP in a deal rounding €2.7 billion represented a similar boost.

This year, the national airport company ANA may continue the trend with its sale in a €3 billion deal, while Portuguese airline TAP is in line to follow these steps, but more likely in 2014.

Excluding these mega operations, the FDI numbers are not looking good. Economists from the United Nations thoroughly analysed data involving investment data in Portugal, which is, alongside other Southern European countries such as Greece, Italy, and Spain, one of the countries whose FDI rates have been cut in half compared to 2011.

The general belief is Portugal is not an appealing country for investment due to its debt crisis. These investments, however, which often include the transfer of technology and finances, are considered to be crucial to the Portuguese economy during these times of economic difficulties because they create more jobs and wealth.

This year, investment is expected to drop 8.9%, after a decrease of 14.5% registered in 2012. This means a six-year consecutive drop in FDI but an improvement compared to the previous year.

In order to counteract the decline in investment and the apparent disinterest of foreign investors in Portugal, the government has begun conjuring an IRC (corporate tax) reform.

The maximum IRC rate, which is placed at 31.5%, is one of the highest of the European Union and makes investors think twice about investing their money and resources in Portugal. At the end of July, a proposal was presented to lower the tax substantially to a level which could reach 17% by 2018. A member of the right-wing political party CDS-PP described the reform as an attempt to “bring Portugal closer to the more competitive regimes without turning it into a fiscal paradise”.

One of the most praised measures of this new regime is the taxing of investments aimed at other nations but conducted by foreign countries through Portugal.

Mark Simmonds, the Parliamentary Under-Secretary of State at the Foreign and Commonwealth Office, said: “The easiest way to invest in a country that has different legal systems is by doing it through countries like Portugal, which have historic bonds and economic relationships with countries like Angola and Mozambique.”

The willingness of some countries to carry out these kinds of investments could lead to some extra profit for Portugal.

This decision, however, is not believed to have a significant effect on the country’s main priorities – creating jobs and wealth – or help surpass its structural issues. Portugal has a small market and has registered numerous drops in household consumption levels throughout these past years.

Also, its excessive debt and low growth forecasts paint a sombre picture for Portugal’s near future, which is predicted to suffer from continuous austerity and high taxes on companies, salaries and consumption.