Other State Department Archive Sites

The State Department web site below is a permanent electronic archive of information released online from January 1, 1997 to January 20, 2001. Please see www.state.gov for current material from the Department of State. Or visit http://2001-2009.state.gov for information from that period. Archive sites are not updated, so external links may no longer function. Contact us with any questions about finding information. NOTE: External links to other Internet sites should not be construed as an endorsement of the views contained therein.

Country Commercial Guides for FY 2000: Portugal Report prepared by U.S. Embassy Lisbon, released July 1999 Note*

Chapter II: Economic Trends and Outlook

Major Trends and Outlook

Twenty-five years ago, at the time of the Portuguese revolution, Portugal was considered the poor man of Europe. The revolution, which unleashed dramatic political and social changes in the country, has also triggered profound changes to the Portuguese economy. In particular following its membership in the European Union in 1986, Portugal has witnessed an economic convergence with its wealthier European neighbors. Portugal's GDP per capita, which had been only 53 percent of the EU average in 1985, has now risen to more than 70% of the EU average by 1997. Membership in the European Union has also deepened Portugal's trade relations with Europe. Between 1985 and 1998, Portuguese exports to other EU member states rose from 68.7% of total exports to 81.5% of exports. Similarly, Portuguese imports from the EU rose over the same period from 48.8% to 77.2% of the total.

Over the last six years, practically all the economic indicators have been positive. The Portuguese economy has experienced robust economic growth since 1993, driven primarily by investment and by domestic consumption. In 1998, the economy grew at an estimated 3.9%, well above the EU average. Portugal's unemployment rate, currently at 4.8% is also significantly better than those of its neighbors. Finally, over the same period, 1993-1998, the government budget deficit fell from 6.1% of GDP to 2.3% of GDP and direct state debt has fallen to 60.9% of GDP.

Much of Portugal's current economic prosperity is linked to its decision to join the European Monetary Union (EMU). Portugal and 10 other European countries agreed to a monetary union in 1998. Since January 1, 1999, they have tied their currencies to the "Euro" and turned over management of monetary policy to the European Central Bank. Although qualifying for EMU required fiscal and monetary discipline, the steps taken to do so created a virtual circle with exchange rate stability leading to price stability and falling interest rates. Lower interest rates, in turn, stimulated the economy and reduced the government's cost of borrowing, both of which made it fairly easy for the government to reach the fiscal targets required by EMU.

While the benefits have been substantial, monetary union may also give rise to economic challenges for Portugal. One symptom of the current economic boom is an inflation rate (measured by the consumer price index) higher than that experienced in the rest of the "Euro-zone". Although inflation (2.8%) is still quite low, some economists worry that the differential will ultimately affect Portugal's competitiveness vis-a-vis its European partners. Within the EMU, however, the Portuguese Central Bank can no longer address this slight overheating of the Portuguese economy through monetary policy. The only tool left to policy makers, a tighter fiscal policy, has proven to be a difficult one to employ particularly in an election year.

While the falling interest rates have been a boon to Portuguese consumers, they have also brought a burgeoning level of household indebtedness which concerns some economists. Between 1994 and 1998 household debt, largely in the form of home mortgages, has risen from 28.6% to 60.8% of disposable income and from 21.1% to 44.1% of GDP. While most economists believe that current levels in themselves are not dangerous, the rapid growth in debt is not sustainable. Beyond concerns about sustainability, there is some worry that higher debt levels could exacerbate any future economic downturn. Also, since most of this is "floating-rate" debt, disposable income can be more rapidly affected by changes in interest rates by the European Central Bank. Finally, the greater availability of home mortgage financing has contributed to a run-up in real estate prices which is not sustainable.

Principal Growth Sectors

Over the longer term, Portugal has been in a transition from a largely agrarian and fishing-based economy to one based on manufacturing and services. In 1971, the percentage of the Portuguese workforce engaged in agriculture, forestry, hunting and fishing was 26.2%. By 1998, this had fallen by half, to 13.6%. Over the same period, the percentage of the Portuguese workforce involved in the services sector of the economy rose from 39% to 50.7%. Over the last three decades, the percentage of the workforce engaged in manufacturing has remained steady at about one-quarter of all workers.

From a macroeconomic perspective, over the last three years, the sectors of the economy experiencing the fastest real growth have been banking and insurance (7.5%/yr), construction (6.9%/yr.), and other services (5.1%/yr.). The sector representing trade, and the restaurant and hotel business grew at the same rate as GDP (3.5%/yr.), while growth in agriculture, fishing, energy and the industrial sectors lagged the rest of the economy. The macroeconomic figures may be misleading with respect to future growth areas, however. For example, much of the construction sector growth came during the run-up to Lisbon's international fair, EXPO'98. In addition, recent growth in the bank sector may be related to a possible one-time expansion in household credit in the economy.

Government Role in the Economy

One result of Portugal's 1974 revolution was a state takeover of many of the country's industries. Following accession to the EU, however, Portugal began dismantling its system of state ownership and the country has adopted an aggressive privatization program. In 1988, the Portuguese public sector accounted for 19.7% of GDP and 5.5% of the country's total employment. By the end of 1997, those numbers had been reduced to 8% and 2.6%, respectively.

The primary privatization mechanism has been to sell shares in these companies, either through a public offering or a private sale, often through a series of allotments involving both. In a number of cases, the government has retained a "golden share" which accords it veto rights over certain corporate decisions. According to the Ministry of Finance, to date, there have been approximately 150 such sales involving the shares of almost 100 companies. Receipts from privatizations have totaled more than $21 billion since 1989 and 52% of the proceeds have been used for public debt redemption. In 1998, the market capitalization of privatized firms accounted for 58% of the total market capitalization in the Lisbon Stock Exchange.

Additional privatizations are expected in 1999 and future years. In addition to further tranches of the stock of such companies as Portuguese Telecom (telecommunications) and EDP (power generation), there are other large state firms in the initial stages of privatization. These include the state airline, TAP, and a newly-formed energy holding company which will combine the state's interest in natural gas transmission and petroleum refining.

Infrastructure Situation

Portugal's economic growth over the last decade has been accompanied by a heavy investment in infrastructure improvements, largely funded by the EU. From 1987 to 1998, Portugal received net financial flows from the EU of approximately $24 billion. The greatest portion of these funds were disbursed through the European Regional Development Fund. As a result, the country has made a number of major infrastructure improvements, most notably a system of modern highways. Additional infrastructure projects are expected over the next several years including; a new international airport (to be built at Ota, north of Lisbon), new metro systems in Porto, an upgrade of the country's rail system, a second phase of a natural gas pipeline system and additional highways, dams and port projects.