The government must reform the judicial, tax, public and education sectors, if the country really stands any chance of long-term improvement, according to one of Lisbon’s foremost investment banking experts, Dr. Luís Luna Vaz, Managing Director of Banco Espírito Santo Investment.
“We have one of the most highly developed banking and service sector industries anywhere in Europe and these financial institutions are making good money and sound investments,” he believes. Luna Vaz blames successive short-termism in Portugal, where governments, whether socialist PS or conservative PSD, simply tinker with the system in the first mandate and worry about winning the election in the second. “What we need is a government like the Spanish had with José Maria Aznar that is not afraid to tackle the real issues dragging the country down, with a set of sweeping, perhaps unpopular, reforms in the first mandate, coupled with an overall long-term 10-year strategic vision for the economy,” he says.
And the problems holding the country back are all too familiar, according to Luna Vaz – too much red tape hampering foreign investment, a wildly large, costly and inefficient public sector bureaucracy employing close on eight per cent of the entire population. Education standards that are well below par compared to other EU countries, illiteracy running at close on 10 per cent in one form or another, and corruption, fiscal and tax evasion from small and medium companies such as restaurants, plus a booming parallel ‘black’ economy that is out of control.
“People claim that the banks are partly to blame because the average family is indebted to the tune of 118 per cent of average income, yet the banks keep on lending money,” he says. “In my view, this lending only becomes a problem if the interest rates go up beyond two per cent. Most people are investing in mortgages, and property is always a good investment while interest rates are low,” he adds.
This is a view shared by Dr. António Carmona of Santander’s Hispamer Financial Services – part of the Spanish banking group that recently snapped up the UK’s Abbey National bank. “We can’t accuse the population of overspending on frivolous consumer items because this simply isn’t the case. We’ve seen a fall off in credit on cars and household electrical items,” he said. “People are wary of spending on consumer items, but they’ll invest in property because the adage ‘as safe as houses’ is a true one when interest rates are low,” he adds.
Of course, the key question for Portugal right now is not whether the country will come out of the economic recession, but by how much the economy will improve the overall conditions for its citizens. It is a question of sustainability.
Figures for the first half of the year brought some cheer to the market following last year’s disastrous performance. GDP was up by 0.6 per cent quarter-on-quarter, which was encouraging after last year’s 1.2 per cent slide. “The figures that offer the most hope for a sustained recovery in Portugal are those of investment, which showed a two per cent gain in the first half of 2004, following a near four per cent drop in 2003,” argues Dr. Luna Vaz.
Private consumption is up 0.5 per cent quarter-on-quarter (1.6 per cent on the year), while it seems that external demand in 2005 could further drive economic recovery.
What both experts believe could put a spanner in the works is continuing high oil prices while larger international companies could re-invest or relocate capital, or themselves, in the new EU economies in Eastern Europe where labour is cheaper, incentives are high and the workforce is better educated.