Portugal 2019 Economic Survey Overview PDF

OECD Economic Surveys
Portugal
February 2019
OVERVIEW
www.oecd.org/eco/surveys/portugal-economic-snapshot
This Overview is extracted from the Economic Survey of Portugal. The Survey is published on the
responsibility of the Economic and Development Review Committee (EDRC) of the OECD, which is
charged with the examination of the economic situation of member countries.
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EXECUTIVE SUMMARY │9
Executive summary
OECD ECONOMIC SURVEYS: PORTUGAL 2019 © OECD 2019

10 │ EXECUTIVE SUMMARY
The economy has recovered Table A. The solid expansion will continue
% change 2018 2019 2020
Economic conditions in Portugal have improved
Gross domestic product (GDP) 2.1 2.1 1.9
markedly over the past few years. GDP is now back
Private consumption 2.2 1.8 2.0
to its pre-crisis level and the unemployment rate has
declined 10 percentage points since 2013 to below 7%, Government consumption 0.7 -0.1 -0.1
one of the largest reductions in any OECD country over Gross fixed capital formation 4.5 5.6 4.7
the past decade. Nevertheless, legacies of the crisis Exports of goods and services 6.0 4.5 3.7
remain, with the poverty rate of the working age Imports of goods and services 6.2 4.7 4.2
population still elevated and perceptions of subjective Unemployment rate 7.1 6.4 5.7
wellbeing below pre-crisis levels. Consumer price index 1.3 1.3 1.4
Source: OECD Economic Outlook Database.
The recovery has now broadened to domestic
demand. Strong exports sustained economic activity in Risks to the outlook exist. These include an increase
the years immediately following the crisis. This was in interest rates, potentially stemming from the
underpinned by rapid growth in the tourism sector, as normalisation of monetary policy by the European
well as exports across a variety of manufacturing Central Bank, which could negatively impact business
sectors that reflected improvements in product quality and household spending.
and a decline in relative export prices. Machinery and
equipment investment is now rising strongly again and The health of public finances and the financial
housing investment is being stoked by rising dwelling system need to be further improved
prices. Consumption has also made a solid contribution
to GDP growth over the past few years, buoyed by The public debt ratio is falling, but the high debt
rising private earnings. burden still limits the government’s ability to
respond to future economic shocks. Improvements in
Figure A. The recovery is well entrenched fiscal balances have contributed to a decline in the ratio
y-o-y % changes Percentage
4 20
of public debt to GDP from 130.6% in 2014 to around
121% in 2018. Nevertheless, this ratio remains one of
2 16 the highest across OECD countries. Further improving
0 12 public finances will require reducing the fiscal deficit
and maintaining a primary surplus. Faced with a rapidly
-2 8 ageing population, the government has pursued reforms
-4 4 to the health system and pensions. Nevertheless, fiscal
Real GDP (lhs) Unemployment rate (rhs) sustainability will benefit from further moving health
-6 0 treatment to primary care settings and further reducing
2007 2009 2011 2013 2015 2017 2019
Source: OECD Economic Outlook: Statistics and pathways to early retirement.
Projections (database), November.
There is also scope to buttress public finances
StatLink2https://doi.org/10.1787/888933912675 through broadening the tax base. The use of
consumption tax exemptions and reduced rates narrows
The economy is projected to continue expanding at the tax base and should be minimised. Furthermore,
a stable pace. GDP is projected to rise by around 2% a there is scope to raise environmental taxation, given
year between 2018 and 2020 (Table A). Further that the domestic pricing of some fuel sources do not
employment gains and rising real wages will underpin reflect the environmental costs of their use.
consumption growth and inflation will rise slightly. An
anticipated slowdown in the pace of activity in
Portugal’s major trading partners will provide a
headwind to further export growth.

EXECUTIVE SUMMARY │ 11
Figure B. Public debt has fallen but remains high

Future prosperity will depend on the utilisation of
% GDP
140
labour and productivity growth
120 Subjective wellbeing is low, reflecting modest living
100 standards compared with other OECD countries
80 and little convergence over the past few decades. To
60 narrow wellbeing gaps, there should be a continued
40
focus on getting unemployed or marginalised workers
back into jobs. Despite recent progress, the long-term
20
unemployment rate remains comparatively high,
0
especially among the low-skilled. The government has
1995
1999
2003
2005
2007
2009
2011
2013
2015
2017
1997
2001
been encouraging the employment of such workers

Source: OECD Economic Outlook: Statistics and through the provision of hiring subsidies, up-skilling
Projections (database). and re-skilling programmes. Nevertheless, vocational
StatLink 2 https://doi.org/10.1787/888933912694 training programmes that have been found to have a
positive impact on the employment prospects of
Remaining vulnerabilities in the financial sector participants should be expanded to reach more of the
also make the economy less resilient. The stock of low-skilled population.
non-performing loans (NPLs) have consistently
Convergence in living standards can also be
declined (more than 35% since the peak in June 2016
to June 2018). However, the ratio of NPLs to total loan promoted through reawakening productivity
exposures is still one of the highest in the OECD growth, which has slowed over the past two decades.
One of the benefits of higher productivity will be to
(Figure C), weighing on bank profitability. The NPL
boost the external competitiveness of the economy (see
reduction plans submitted by those banks with high
Chapter 1). Exports as a share of GDP and the stock of
NPLs should continue to be strictly monitored,
foreign direct investment still remain below that of
translating performance in achieving targets into
other comparable small European economies (Figure
capital requirements. Since some NPLs are unlikely to
D), although higher than the euro area average.
be recovered, NPL write-offs should continue to be
encouraged, taking into account measures adopted at
Figure D. The economy can become more
the European level. NPLs can also be further reduced outward oriented
by making the liquidation of failed firms easier and % of GDP
reducing constraints to them exiting the market. 120
FDI stock Exports
Figure C. Non-performing loans remain elevated 100
Percentage of loans, 2018 Q3 80

50 60
40
40
20
30
0
PRT HUN CZE BEL
20
Source: OECD (2018), Trade in goods and services (indicator);
10 OECD (2018), FDI stocks (indicator).
StatLink2http://dx.doi.org/10.1787/888933912732
0
ITA
DEU
IRL
ESP
FRA
NLD
GRC
PRT
BEL
GBR
EU
Competition-enhancing reforms to regulatory

Source: European Banking Authority. settings would raise efficiency. Strict regulations in
StatLink 2 http://dx.doi.org/10.1787/888933912713 some services sectors including professional services
and transport are particularly harmful for productivity.
For example, various professional services are both
strictly regulated and represented by the same

12 │ EXECUTIVE SUMMARY
professional association. These include lawyers, where present, inefficiencies in the court system result from
the Bar Association is responsible for formulating difficulties in effectively managing the case workload.
restrictions on entry, lawyers’ fees and the form of The information system that registers court
business. To ensure that regulations in these industries proceedings can be more fully utilised for the purpose
are in the public interest, independent supervisory of workload assessment, to prioritise cases and inform
bodies should be established that approve any new resource allocation across the judiciary. There is also
regulatory arrangements and promote competition scope to strengthen the autonomy of courts, which have
within the profession. been given greater accountability without increased
capacity to manage resources.
Regulatory settings in the transport sector reduce
competition, particularly in the ports. Reforming Figure E. Court proceedings are long
such measures will be important for promoting further
Days to resolve a court case
strong export performance. Port concession contracts
600
can be awarded to private contractors providing port 2016 2010
services, but these are often excessive in their duration, 500
reducing the potential for market entrants that can 400
provide higher quality services. Furthermore, the
300
criterion for awarding port concessions gives
insufficient consideration to the bidder who will charge 200
the lowest price to port users, contributing to higher 100
costs for businesses.
0
Productivity is not only shaped by regulations, but ITA FRA PRT ESP DEU DNK AUT NLD CHE
governance and the institutions which implement Source: CEPEJ.
legislation. The authorities have made sustained efforts StatLink 2 https://doi.org/10.1787/888933912751
to tackle corruption and graft in the public and business
sectors and that should continue to be prioritised. Going Greenhouse gas emissions per unit of GDP are below
forward, the capacity of the Public Prosecution Office the OECD average. Nevertheless, progress in
to fight economic and financial crime should continue decoupling emissions from GDP has stalled in recent
to be enhanced, partly through ensuring that adequate years. Transport accounts for a large share of pollution
resources are available to allow public prosecutors to and emissions and has been reducing its environmental
undertake specialised training in this area. The appeal impact at a slower pace than other sectors in the
procedures should be reviewed to prevent abuse. The economy. This partly reflects the very high share of
Public Prosecution Office and the Criminal passenger cars that are used relative to public transport.
Investigation Police should continue to be endowed As well as raising tax on some forms of energy, such as
with adequate resources. Furthermore, a regularly- coal and natural gas, new shared transport solutions
updated electronic registry of interests for all should be encouraged, accompanied by appropriate
government members and senior civil servants should supervision and regulation.
be introduced and monitored.
Judicial inefficiency lowers productivity in the
business sector (see Chapter 2). Recent reforms have
reduced the time to resolve a case in the court system,
but it remains long (Figure E). Improving judicial
efficiency will ensure contract enforcement in a timely
manner and reduce the cost of making transactions in
the market, thereby promoting competition. It is
particularly important for financial transactions to
ensure collateral enforcement and therefore creditors’
rights. Long and complex court proceedings are
reflected in a very low collateral recovery rate, which
can negatively affect bank lending conditions. At

EXECUTIVE SUMMARY │ 13
MAIN FINDINGS KEY RECOMMENDATIONS

Improving fiscal sustainability and financial stability
There have been steady reductions in the fiscal deficit as a share of Continue gradual fiscal consolidation to ensure the decline of public debt.
GDP. Nevertheless, public debt is high and poses risks in an
environment of heightened global economic uncertainty.
Tax administration remains particularly cumbersome for businesses. Simplify the tax system by reducing the use of special provisions (e.g. tax
exemptions, special rates) and ambiguity in the tax language.
The non-performing loan ratio remains high, weighing on banks’ Competent authorities should continue to monitor NPL reduction plans, translating
profitability and solvency. performance in achieving targets into capital requirements.
Banks should be better able to enforce collateral without going through Make bankruptcy a viable solution for heavily indebted individuals, reducing the
long and uncertain court proceedings. time to discharge and exempting more of the debtor’s assets from bankruptcy
proceedings.
Introduce an out-of-court mechanism to facilitate the liquidation of non-viable firms.
Further promoting export performance
The skills of the population aged over 24 are lagging. Participation in Target lifelong learning opportunities to the low-skilled, including by collecting
lifelong learning activities are particularly modest for those with initially information on the private returns to skills and making it publicly available.
low skill levels.
The efficiency of Portuguese ports is held back by regulations and In awarding port concessions, take into account the price that bidders will charge
practices that reduce competition between private operators. port users in addition to other criteria.
Ensure that port concession contracts specify a minimum level of investment by the
operator and do not renew concessions without opening a new public tender.
Enhancing the judiciary to foster economic activity
Court proceedings remain very long, hampering timely contract Increase the managerial autonomy of the courts so that they can effectively allocate
enforcement for businesses. In spite of recent reforms, there are resources such as judges, other judiciary staff and budgets.
significant bottlenecks in some court districts, thereby inducing court Fully analyse the data collected from the information system on court proceedings
congestion. (CITIUS) so that it allows the courts to identify problematic cases and those that
should be prioritised.
Productivity in the legal sector is low. The Bar Association represents Set up an independent supervisory body to ensure that regulations in the legal
the legal profession and regulates its services. Such self-regulation profession are in the public interest.
tends to identify with the interests of the profession, rather than the
public interest.
The authorities have made significant efforts to investigate and fight Continue to enhance the capacity of the Public Prosecution Office to address
economic and financial crime, including corruption. Nevertheless, there economic and financial crime, including corruption. Public prosecutors should
is still room to improve institutional arrangements in this area. continue to undertake specialised training in this area.
Establish an electronic registry of interests for all government members and senior
civil servants that is regularly updated.
Improving labour utilisation and reducing poverty
Despite recent progress, the long-term unemployment rate remains Avoid across-the-board rises in hiring subsides, limiting them to those at high risk of
comparatively high, especially among low-skilled workers. long-term unemployment and those at risk of poverty.
Expand well-designed vocational training programmes (i.e. “Aprendizagem” and
“Cursos de Educação e Formação de Adultos”), so that they reach more of the low-
skilled population.
Consolidate the two vocational education systems into a single dual VET system
with strong workplace training and perform a thorough evaluation of all vocational
training programmes.
Recalibrating the economy for greener growth
The transport sector is responsible for a large share of Portugal’s energy Encourage public transport use and the development of new shared transport
consumption and CO2 emissions, which have not been declining in solutions, accompanied by appropriate supervision and regulation.
recent years. Portugal uses a high proportion of passenger cars relative
to public modes of transport.
Pricing of carbon emissions remains low and uneven. More consistent Raise taxes on diesel fuel, and increase energy taxes on coal and natural gas.
pricing of energy consumption according to its environmental impact
would prepare Portugal for meeting longer-term environmental targets.

KEY POLICY INSIGHTS │ 15
KEY POLICY INSIGHTS
The Portuguese economy continues to recover, with past structural reforms and more favourable
global economic conditions contributing to the upswing. The economy has largely been
sustained by strong export performance since 2010, but domestic demand is now also growing
solidly. After receding in the five years following the crisis, employment has picked up and the
unemployment rate has fallen from 17% to below 7%. Over the same period, the economy has
notably increased its reliance on some renewable energy sources, such as wind power.
Portugal has been very active in pursuing important reforms. These have included cutting
unnecessary red tape for businesses (Simplex and Simplex+ programmes), improving the firm
restructuring and insolvency framework (Capitalizar programme), facilitating innovation
collaborations (Interface programme), amending labour regulations to reduce duality and
promoting greater use of digital services among the population (INCoDe 2030 and Partnership
Digital Skills+ programmes). Between 2003 and 2013, Portugal witnessed the second largest
decline among OECD countries in the OECD Product Market Regulation indicator (Figure 1).
Nevertheless, some product market regulations remain overly strict compared with other OECD
member countries and the gap between the rigidity of employment protection legislation for
permanent and temporary workers is relatively large, contributing to a high level of labour
market duality. Furthermore, there is room for improving the efficiency with which reforms are
implemented, notably through the judiciary.
Figure 1. Past structural reforms helped the recovery

Percentage change in the OECD Product Market Regulation Indicator, 2003-13
10 10
5 5
0 0
-5 -5
-10 -10
-15 -15
-20 -20
-25 -25
-30 -30
-35 -35
-40 -40
-45 -45
ITA
FIN
IRL
ICL
SWE
JPN
SVK
NLD
HUN
GRC
DEU
CHE
MEX
DNK
FRA
CAN
TUR
LUX
NOR
NZL
PRT
POL
AUT
CZE
ESP
AUS
KOR
GBR
BEL
Source: OECD Product Market Regulation Indicators.
StatLink 2 https://doi.org/10.1787/888933911288

16 │ KEY POLICY INSIGHTS
Indicators of wellbeing are mixed (Figure 2, Panel A). Portugal ranks above the OECD average
along dimensions such as environmental quality and personal security. However, citizens have
a surprisingly low self-perception of their wellbeing. This partly stems from wide gaps in
wellbeing relative to other OECD countries in the areas of health, skills and civic engagement.
Wellbeing through jobs and earnings also remains low, reflecting a lack of economic
convergence with OECD countries over the past few decades (Figure 2, Panel B). Furthermore,
poverty rates are high compared with other OECD countries, suggesting that some members of
the population are finding life considerably tougher than those represented by the average.
Figure 2. Wellbeing can be improved along multiple dimensions

A. Better Life Index
Country rankings from 1 (best) to 35 (worst), 2017
20% top performers 60% middle performers 20% bottom performers Portugal
11
16
18
20
24
28
30 31 32 33
35
Environmental Personal Housing Work-life Income and Social Health status Jobs and Education and Civic Subjective
quality security balance wealth connections earnings skills engagement well-being
B. GDP per capita

Percentage of OECD average
100 100
90 90
80 80
70 70
60 60
50 50
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Note: Each well-being dimension is measured by one to four indicators from the OECD Better Life Index set.
Normalised indicators are averaged with equal weights.
Source: OECD (2017), OECD Better Life Index, www.oecdbetterlifeindex.org, and OECD Compendium of
Productivity Indicators.
At the same time, the population is ageing rapidly, with the ratio of old-age to working-age
population anticipated to rise from around 35% in 2015 to just below 80% by 2075 (Figure 3).

Holding all else constant, this trend will have a significant impact on public finances and lead to
a reduction in economic growth over the coming years.
Figure 3. The population is expected to age rapidly

Projected old-age dependency ratio, %
90 90
Portugal OECD
80 80
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
2000 2015 2025 2050 2075
Note: The old-age dependency ratio is defined as the number of individuals aged 65 and over per 100 people of
working age defined as those aged between 20 and 64.
Source: United Nations, World Population Prospects – 2017 Revision.
The capacity for fiscal policy and the financial sector to support the economy may be challenged
by the legacies of the financial crisis in the form of a very high stock of public debt and an
elevated level of non-performing loans on bank balance sheets. The latter partly reflects
inefficiencies in the judicial system and the insolvency regime that may have contributed to a
high level of forbearance by banks. Diminished fiscal and financial buffers relative to the pre-
crisis period increase the fragility of the economy in a time of heightened uncertainty and global
economic risks.
Looking forward, Portugal should capitalise on its very impressive recent export performance
by continuing to promote firms conducting international trade and entering new markets. To do
so, productivity growth across the business sector must be revived through policy settings that
facilitate the expansion of high potential enterprises. That said, such policies must be coupled
with well-functioning institutions that ensure their efficacy. In particular, the efficiency of the
judicial system should be improved to ensure timely contract enforcement, which is crucial for
market transactions.
Against this background, the main messages of this Survey are:
 There has been progress in improving public finances, reducing private debt and the
health of the banking system, but further efforts can improve resilience to economic
shocks.
 The economy is still less outward-oriented than many other small European economies.
Export performance can be further improved through policy settings that better enable
exporters to innovate and grow.

 There is scope for further reforms that promote the efficiency of the judicial system,
thereby spurring business activity.
Recent macroeconomic developments and short-term prospects
The Portuguese economy continues to grow at a solid pace. Strong exports sustained economic
activity in the years immediately following the financial crisis, but both rising investment and
private consumption have recently also positively contributed to growth (Figure 4, Panel A and
B).
Figure 4. Strong exports sustained activity

A. Annual percentage change
15 15
Exports Imports Domestic demand
10 10
5 5
0 0
-5 -5
-10 -10
-15 -15
2007 2009 2011 2013 2015 2017
B. Export performance, Index (2007=100)

140 140
Portugal Germany Italy Spain Hungary
130 130
120 120
110 110
100 100
90 90
80 80
70 70
60 60
2007 2009 2011 2013 2015 2017
Note: In Panel B, export performance measures the expansion of a country’s exports relative to the expansion of
import demand from its trading partners. Improvements in export performance reflect rising market shares in the
imports of trading partners.
Source: OECD Economic Outlook (database), September 2018.
Exports have been bolstered by the strong performance of the tourism sector. Between 2010 and
2017, average annual growth in travel and tourism exports was above 10%. By that time, tourism
accounted for close to half of all services exports (Figure 5). Strong growth in tourist arrivals

has coincided with an increase in the supply of tourist accommodation and low-cost airlines
flying to Portugal as well as some increase in security risks in some competitor markets (Chapter
1). Nevertheless, there have also been strong gains in exports of goods industries such as
chemicals and machinery.
Figure 5. Travel and tourism now accounts for almost half of services exports
Share of exports by sector and destination, 2017
A. Goods by destination B. Services by destination
4% 2% Euro area 4% Euro area

4%
7%
6%
Other Europe Other EU
8% 7%
Africa
Africa
7% North America
16% North America 54%
63% Other Europe
Asia and Oceania
18% South America
South America Asia and Oceania
C. Goods by sector D. Services by sector
Machinery and transport

equipment Travel
9% Manufactured goods 21%

Transport
7%
27%
Miscellaneous 17%
8% manufactured articles Other business services
Chemicals and related
products ICT services
9% 5%
Food and live animals
6% 2% Construction
22% 48%
18% Mineral fuels, lubricants
and related materials
Others
Others
Note: In Panel C, Others include crude materials, beverages and tobacco, animal and vegetable oils, and commodities
and transactions. In Panel D, Others include insurance and pension, construction services, and other services.
Source: OECD International Trade Statistics.
An improvement in cost competitiveness has played a role in the export recovery, with export
prices relative to Portugal’s competitors depreciating by around 6% since 2009. However,
improvements in export product quality (Fontoura Gouveia et al., 2018) have also been
important (see Chapter 1). Furthermore, in the last few years, foreign demand has stabilised:
weighted according to importance for Portuguese exports, average annual trading partner growth
was 3½% from 2013-17 compared with close to zero in the 2009-12 period. The sustained strong
performance of exports has pushed the trade balance positive, helping begin reverse external
imbalances. Nevertheless, net external debt remains around 90% of GDP (Figure 6) and imports
have been rising strongly since 2013.

Figure 6. External imbalances remain high

Percentage of GDP
300 300
Gross external debt position Net external debt position
250 250
200 200
150 150
100 100
50 50
0 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: World Bank Quarterly External Debt Statistics, OECD Economic Outlook (database), and Statistics Portugal.
Investment has begun to rise again after receding each year between 2009 and 2013. The
recovery has been driven by an increase in spending by non-financial corporations combined
with public investment exerting less of a drag on growth (Figure 7, Panel A). Machinery and
equipment investment has recovered particularly strongly. In the past few years, such investment
has been supported by new contracts from foreign-owned firms for vehicle manufacturing in the
country. Between 2017 and mid-2018, capacity utilisation in the vehicle manufacturing sector
jumped from 60% to 96%.
Credit to the non-financial corporate sector continues to recede, despite significant deleveraging
already having occurred. Corporate debt as a share of GDP has now declined to around OECD-
average levels (Figure 7, Panel B), with an increased share of investment funded from retained
earnings. In 2016 and 2017, strong growth in European Union funding has also supported
investment growth.

Figure 7. Investment has recovered despite ongoing corporate sector deleveraging

A. Gross fixed capital formation
Percentage change of three-year moving average
30 30
Non-financial corporations Government
20 20
10 10
0 0
-10 -10
-20 -20
-30 -30
-40 -40
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
B. Debt by sector
Percentage of GDP
160 Corporate debt - Portugal 160
Corporate debt - OECD average
140 Household debt - Portugal 140
Household debt - OECD average
120 120
100 100
80 80
60 60
40 40
20 20
0 0
2002 2004 2006 2008 2010 2012 2014 2016
Source: Statistics Portugal.
Housing investment has also recovered, responding to strong growth in both new and existing
dwelling prices (Figure 8, Panel A). So far, rising house prices have not been accompanied by
an increase in the stock of housing credit, though the flow of new loans has been increasing since
2013. The boom in the tourism sector and demand by non-residents (responding to government
incentives tying visas to dwelling purchases) have been significant factors behind the strong
growth in house prices in some locations (Bank of Portugal, 2018a). Nevertheless, measured as
a ratio of household incomes or rents, a proxy of an equilibrium price, the level of house prices
is not elevated compared to the average OECD country (Figure 8, Panel B). While a steep
increase in borrowing costs could pose a risk to dwelling prices, the central bank introduced new
macroprudential regulatory measures in early 2018 that should help reduce the probability of
new household borrowers becoming overly indebted. In particular, new caps on the loan-to-
value ratio for property loans, the debt service-to-income ratio and loan maturity have been
implemented.

Figure 8. House prices have risen strongly

A. Year-on-year percentage change
15 15
House prices Housing investment
10 10
5 5
0 0
-5 -5
-10 -10
-15 -15
-20 -20
-25 -25
2010 2011 2012 2013 2014 2015 2016 2017 2018
B. House price metrics

Percentage
130 130
120 120
110 110
100 100
90 90
80 80
Price to rent - Portugal Price to rent - OECD
70 70
Price to income - Portugal Price to income - OECD
60 60
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Source: Statistics Portugal, OECD Analytical House Price Indicators.
Private consumption activity has been solid since the end of 2013, growing by around 2% per
year. This reflects growth in private sector earnings: employment has benefitted from the robust
recovery, especially in some labour-intensive sectors, and wages have risen as the labour market
has tightened.
The fiscal stance is expected to be slightly expansionary in 2018 before being broadly neutral in
2019 and 2020. The authorities must continue to balance the objectives of improving the fiscal
position at the same time as sustaining the economic recovery. In doing so, they must ensure
adherence to counter-cyclical fiscal policy: in case growth surprises on the upside, all windfall
revenues should be used to reduce the public debt ratio faster than currently planned.
Economic activity over the next few years will be supported by the recovery in the labour market.
An anticipated slowdown in the pace of activity in Portugal’s major trading partners, such as
Spain, Germany and the United Kingdom, will be a headwind to growth. In 2019 and 2020, GDP

growth is expected to be 2.1% and 1.9% respectively (Table 1). A gradual further reduction in
economic slack will prompt a slight increase in inflation over the coming years.
Table 1. Macroeconomic indicators and projections

Annual percentage change, volume (2011 prices)
2015
Current prices 2016 2017 2018 2019 2020
(billion EUR)
Gross domestic product (GDP) 179.8 1.9 2.8 2.1 2.1 1.9
Private consumption 117.7 2.4 2.3 2.2 1.8 2.0
Government consumption 32.6 0.8 0.2 1.0 0.2 -0.3
Gross fixed capital formation 27.8 2.3 9.2 4.6 6.0 5.0
Housing 4.4 5.1 6.4 1.7 5.0 4.8
Final domestic demand 178.2 2.1 3.0 2.4 2.2 2.1
Stockbuilding¹ 0.6 -0.1 0.0 0.0 0.0 0.0
Total domestic demand 178.8 2.0 3.0 2.4 2.2 2.1
Exports of goods and services 72.6 4.4 7.8 5.8 4.3 4.0
Imports of goods and services 71.6 4.7 8.1 6.2 4.8 4.5
Net exports¹ 1.0 -0.1 0.0 -0.1 -0.2 -0.2
Other indicators (growth rates, unless specified)
Potential GDP .. 0.9 1.2 1.3 1.3 1.1
Output gap2 .. -5.2 -3.7 -2.9 -2.2 -1.3
Employment .. 1.2 3.3 2.3 1.1 1.1
Unemployment rate .. 11.1 8.9 7.1 6.4 5.7
GDP deflator .. 1.8 1.5 1.4 1.4 1.4
Harmonised consumer price index .. 0.6 1.6 1.3 1.5 1.4
Harmonised core consumer price index .. 0.9 1.2 1.1 1.4 1.4
Household saving ratio, net3 .. -3.7 -4.1 -5.2 -5.8 -6.0
Current account balance4 .. 0.6 0.5 -0.9 -0.4 -0.1
General government fiscal balance4 .. -2.0 -3.0 -0.7 -0.2 0.1
Underlying general government fiscal balance2 .. 0.9 1.0 0.8 0.9 0.7
Underlying government primary fiscal balance2 .. 4.6 4.6 4.2 4.1 3.8
General government gross debt (Maastricht)4 .. 129.2 124.8 121.1 118.4 115.0
General government net debt4 .. 104.0 108.1 105.1 101.8 98.4
Three-month money market rate, average .. -0.3 -0.3 -0.3 -0.2 0.2
Ten-year government bond yield, average .. 3.2 3.1 1.8 2.0 2.3
1. Contribution to changes in real GDP.

2. As a percentage of potential GDP. Based on OECD estimates of cyclical elasticities of taxes and expenditures.
For more details, see OECD Economic Outlook Sources and Methods.
3. As a percentage of household disposable income.
4. As a percentage of GDP.
Source: OECD (2018), OECD Economic Outlook: Statistics and Projections (database).
Risks to the outlook include a tightening in financial conditions. In particular, an increase in

interest rates, potentially stemming from the normalisation of monetary policy by the European
Central Bank, may negatively impact business and household spending (Figure 9). On the
upside, further improvements in the competitiveness of Portuguese exports could manifest in
larger export market share gains than is currently factored into the projections.
Portugal is also potentially vulnerable to exogenous shocks that are not factored into the central
forecast scenario (Table 2). A trade war that results in a significant increase in policy barriers to

trade between the EU and other large countries, such as the US, could derail the recovery given
the economy’s increased reliance on the external sector. Similarly, turbulence that is transmitted
across emerging markets could have a negative impact on the Portuguese business sector. For
example, Brazil and Angola account for over 10% of the stock of Portugal’s outward foreign
direct investment. In addition, a disorderly conclusion to negotiations around United Kingdom’s
planned departure from the European Union could reduce exports.
Figure 9. Macro-financial vulnerabilities remain high in some areas

Index scale of -1 to 1 from lowest to greatest potential vulnerability, where 0 refers to long-term average, period
2007 Q1 2018 (or latest data available)
A. Aggregate indicators B. Individual indicators
Capital ratio
Financial Export performance 1.0 Shadow banking
1.0
REER (CPI-based) 0.5 Housing loans
0.5
0.0
0.0 CA balance Total private credit
External Non-financial - 0.5
- 0.5
- 1.0 Ext. gov. debt - 1.0 Other sect. ext. debt
Gov. gross debt Corporate credit
Fiscal Asset market Gov. budget balance Growth in house prices
Real stock prices House price to inc. ratio

House price to rent ratio
Note: Each aggregate macro-financial vulnerability dimension is calculated by aggregating (simple average)
normalised individual indicators from the OECD Resilience Database. Individual indicators are normalised to range
between -1 and 1, where -1 to 0 represents deviations from long-term average resulting in less vulnerability, 0 refers
to long-term average and 0 to 1 refers to deviations from long-term average resulting in more vulnerability.
Source: Calculations based on OECD (2018), OECD Resilience Database, September; and Thomson Reuters
Datastream.
Table 2. Possible shocks to the Portuguese economy

Vulnerability Possible outcome
Brexit A significant increase in policy barriers governing relations with the United Kingdom in the
areas of trade, investment and labour markets could have negative economic effects on
Portugal. The direct effects could be material, given the United Kingdom is Portugal’s fourth
largest export market.
Turbulence in emerging market Financial or political shocks in important emerging-market economies, such as Angola and
economies Brazil, could negatively impact the profits of Portuguese firms and the export sector.
Rising protectionism As a small open economy, any significant increase in policy barriers to international trade
would have a detrimental impact.
Strengthening the sustainability of public finances
Portugal’s fiscal position has improved significantly; after peaking at 11.2% of GDP in 2010,
the fiscal deficit gradually declined to 2% of GDP in 2016 and it would have been even less than
1% of GDP in 2017 if not for the recapitalisation of the state-owned bank. Indicators of the

structural budget balance suggest that there was a significant discretionary fiscal contraction
between 2010 and 2014.
With the economy expanding and credit rating agencies upgrading their rating of Portuguese
sovereign debt, interest costs have declined. After peaking at 14% at the beginning of 2012,
long-term interest rates on government bonds are now below 2% (Figure 10, Panel A). Debt-
servicing costs have also been reduced by the ongoing amortization of bonds that were issued at
very high interest rates during the financial crisis.
With the improvements in fiscal balances, public debt has fallen from its peak of 130.6% of
GDP in 2014 to around 121.1% of GDP in 2018 (according to the Maastricht criterion).
Nevertheless, the public debt burden remains very high compared with other OECD countries
(Figure 10, Panel B). This severely limits the capacity for fiscal policy to respond in the event
of future economic shocks. Currently, the cost of debt servicing represents around 8% of public
expenditures. A rise in interest rates could increase this cost. Nevertheless, under a scenario of
stable interest rates, debt-servicing costs will decline given there is still a pipeline of high-cost
public debt that is scheduled to mature over the coming years.
Figure 10. Sovereign borrowing costs have eased but public debt remains high
A. Harmonised long-term sovereign interest rates, %
16 16
Portugal Italy Spain Germany
14 14
12 12
10 10
8 8
6 6
4 4
2 2
0 0
-2 -2
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
B. Gross government debt (Maastricht definition), percentage of GDP, 2017

200 200
180 180
160 160
140 140
120 120
100 100
80 80
60 60
40 40
20 20
0 0
EST LUX CZE NOR DNK LTU LVA SWE POL SVK NLD FIN DEU IRL HUN SVN AUT GBR FRA ESP BEL PRT ITA GRC
Source: OECD Economic Outlook Database; OECD calculations.

Under the government’s current plans, the public debt ratio will decline quite rapidly, to 102%
of GDP in 2022. Thereafter, the path of public debt will be highly dependent on the pace of
fiscal consolidation and the government’s ability to introduce new measures that offset the rising
costs of ageing (Figure 11). Indeed, incorporating the increase in ageing-related costs currently
projected by the European Commission into a public debt simulation analysis, the public debt
burden would rise above 110% of GDP by 2050 holding all else constant.
Figure 11. Sustained primary budget surpluses are needed to durably lower public debt
Gross government debt as a share of GDP
140 140
120 120
100 100
80 80
60 60
Continued consolidation effort Not offsetting increase in age-related costs

40 40
Weakening consolidation effort Higher interest rate
20 20
0 0
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Note: After 2020, the “continued consolidation” scenario assumes a continuation of the policy stance of 2020 with a
structural primary surplus of 2.2% of GDP each year over the projection period, inflation of 1.5% and real GDP
growth averaging 1.4% in line with assumed productivity growth. The "not-offsetting increase in age-related costs"
scenario takes the continued consolidation scenario and then includes European Commission projections for public
pensions, long-term care, health, education and unemployment benefits (European Commission, 2018a). These
projections suggest ageing-related costs will add 1.5 percentage points of GDP (using the projections of GDP from
the “continued consolidation” scenario as the denominator) to annual government spending at their peak in 2045
compared with 2016. The “less consolidation” scenario assumes that the structural primary surplus gradually declines
from 2.2% of GDP in 2020 to 1% of GDP in 2030 and is held constant thereafter. The ‘higher interest rate’ scenario
assumes that interest rates rise by 0.5 percentage point, taking five years to fully flow through to debt-servicing costs.
Source: Adapted from OECD (2018), OECD Economic Outlook: Statistics and Projections (database), June;
Guillemette, Y. and D. Turner (2018), "The Long View: Scenarios for the World Economy to 2060", OECD Economic
Policy Paper No. 22., OECD Publishing, Paris; and European Commission (2018a), "The 2018 Ageing Report -
Economic and budgetary projections for the 28 EU Member States (2016-2070)" Directorate-General for Economic
and Financial Affairs.
Improving the efficiency of public spending

Both the revenue and expenditure side of government accounts present opportunities for
improving fiscal sustainability. On the expenditure side, the government has embarked upon a
“bottom-up” public expenditure review, designed to prompt line ministries to generate efficiency
gains that can work towards containing expenditure. The government’s ability to achieve the
anticipated reduction in the overall public debt burden substantially depends on savings
identified through this ongoing review, in addition to sustained favourable economic conditions
(Portuguese Public Finance Council, 2018).

The ongoing expenditure review is intended to be a permanent feature of the government’s fiscal
framework, with multiple policy initiatives running in parallel and at different stages of
formulation and implementation. The review is currently focused on a set of priority areas
including health, education, justice, public real estate management, state-owned enterprises,
public procurement, internal administration and human resource management but will expand
to cover new elements over time. Each year, the State Budget provides an update of the various
strands of work associated with the review. This includes plans for future policy initiatives and
quantitative estimates of the fiscal impacts associated with some of the initiatives that have been
undertaken.
At the same time as identifying cost-savings within the existing policy framework, the
authorities must undertake more fundamental structural reforms that improve the efficiency of
public spending. The deep temporary cuts to public sector wages in the 2010-15 period have
now been reversed and public employment is rising again (Figure 12). However, public sector
wages still depend mostly on years of experience, rather than the performance of the worker
(IMF, 2018). The premium in public sector pay for high-skilled civil servants is also relatively
low, making it difficult to attract highly qualified staff from the private sector (IMF, 2018).
To improve efficiency and ensure that the public service is an attractive career option for talented
individuals, reforms should strengthen the relationship between public sector pay and the
performance of the individual worker. Over the coming years, there will also be a need to
reallocate employment across the public sector to reflect nascent demographic changes. For
instance, resources devoted to the school system should be rationalised as the population ages at
the same time as those allocated to the health system are reinforced.
Figure 12. Public staff expenditures are rising at a slower pace than prior to the crisis
Billion euros Thousands
100 800
90 780
80 760
70 740
60 720
50 700
40 680
30 660
20 640
Public staff expenditures (lhs) Public employment (rhs)
10 620
0 600
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Source: Bank of Portugal, and Statistics Portugal.
As the share of the old age population increases, public health spending will too. Government
spending on health is anticipated to rise very fast compared with other European countries, from
5.9% of GDP in 2016 to 8.3% in 2070 (European Commission, 2018a). Private healthcare
coverage is low and out-of-pocket payments for healthcare in Portugal are some of the highest
in the OECD (OECD, 2017a). As such, there is little potential to increase the share of private

contributions to future healthcare costs without jeopardising healthcare access for low-income
households.
The government has already been active in improving the efficiency of public health spending,
partly in response to the recommendations of the EU-IMF financial assistance programme.
Initiatives have included pharmaceutical pricing reforms that reduced costs and improved
transparency. In addition, efficiency gains by health providers have been encouraged by the
introduction of performance-related remuneration in primary care (OECD and European
Observatory on Health Systems and Policies, 2017). Nonetheless, Portugal lacks a
comprehensive strategy to tackle the health-related costs of ageing (European Commission,
2018b).
Part of the solution will be to further move treatment to primary care settings, as has been done
in many other OECD countries. However, the availability of nurses is key to providing primary
and home care. While there has been a strong increase in the number of nurses over the past
decade in Portugal, shortages persist. Furthermore, the number of nursing graduates in recent
years has been low (Figure 13), partly reflecting a reduction in the volume of students accepted
by nursing programmes through the financial crisis (Moreira and Lafortune, 2016). Going
forward, the authorities should ensure that enrolment restrictions in nursing programmes (i.e.
“numerus clauses”) take into account the rapidly ageing population and the necessary
reorientation of treatment toward primary care. Not to do so risks a deterioration in health care
quality or increase in health costs.
Figure 13. A low number of nursing graduates compounds existing shortages

Nursing graduates, 2017 or nearest year
Per 100 000 population Per 100 000 population
120 120
100 100
80 80
60 60
40 40
20 20
0 0
FIN
ISL
ITA
ISR
CHE
DNK
SVN
AUS
USA
CAN
DEU
HUN
NLD
FRA
POL
IRL
TUR
LVA
KOR
NOR
AUT
SVK
JPN
BEL
NZL
EST
PRT
ESP
CHL
CZE
LUX
GBR
GRC
MEX
SWE
OECD
Source: OECD Health Statistics 2017.
A cycle of hospitals building up arrears that are subsequently financed by central government
transfers has been a consistent pattern in the health system over many years. Their accumulation
impedes the efficient operation of hospitals, not least via the impact on supply chain
relationships, raising costs. Such arrears reflect both inadequate budgeting and, in many cases,
poor hospital management. In response, a new joint unit overseen by the Ministries of Finance
and Health is working on measures to raise the accountability of hospital management and to

find efficiency savings through centralised procurement. This unit was responsible for new
initiatives announced in the State Budget 2019 that coupled an increase in the annual budget of
hospitals with increasing their accountability through new performance monitoring and
managerial evaluation procedures.
Public expenditures on old-age benefits as a share of GDP have grown rapidly compared with
the average OECD country over the past few decades. Furthermore, the increase in the old-age
dependency ratio would be set to raise pension expenditures by 10½% of GDP by 2050, holding
all else constant (Ministry of Finance, 2018). Portugal has a public pay-as-you-go earnings-
related pension scheme, including a minimum pension as well as an additional means-tested
safety net. There are also some voluntary private pensions, which can be defined benefit or
defined contribution, though their share in overall pensions is small.
Significant reforms to the public pension system taken up until December 2017 have improved
the sustainability of the system in the face of these demographic challenges, according to
estimates by the European Commission (European Commission, 2018b). For example, the
statutory retirement age in the public pension system was raised from 65 to 66 in 2014 and future
increases linked to the evolution of life expectancy, bringing the current retirement age to 66
and 4 months. Pathways into early retirement have also been restricted, although significant
differences in the penalty for early retirement depending on workers circumstances creates
inequities in the system (OECD, 2019). Early retirement options for the unemployed over the
age of 57 are also still available, which may disincentivise the reintegration of older unemployed
workers into the labour market (OECD, 2019).
The improvement in the sustainability of the pension system has come at the cost of shifting
much of the burden onto future generations. The use of “grandfathering clauses” partly shielded
existing retirees from pension reforms that reduced the generosity of pension formulas.
Raising revenues in a growth-friendly manner

On the revenue side, total general government receipts increased from 40.4% of GDP in 2009
to 42.7% of GDP in 2017. Recent revenue-raising measures have included a tax on sugary drinks
and an additional real estate tax. These initiatives have contributed to better pricing of negative
externalities (in the case of the former) and a more efficient tax mix through increasing the share
of revenues derived from the taxation of immovable property, which is one of the least distortive
types of taxation for long-run GDP per capita (Johansson et al., 2008). The increased revenues
will help fund a reform to the personal income tax system that will include an increase in the
number of tax brackets which the government expects will reduce tax receipts modestly.
There is the potential for additional tax reforms that improve the efficiency of the tax system as
well as fiscal sustainability (for an estimate of the short-run effects of selected tax reforms, see
Box 1). For example, the share of government revenues derived from property taxation could be
further increased. To the extent that revenues are raised by increasing tax rates, the distributional
consequences of such adjustments should be evaluated and offsetting measures introduced
where necessary.
The value added tax (VAT) in Portugal is characterised by a range of goods and services that
are exempt or taxed at a reduced VAT rate. More than half of the potential VAT revenue in
Portugal goes untaxed as a result of exemptions, reduced VAT rates and weak tax enforcement
and tax evasion. The VAT performance is lower than the OECD average (Figure 14). Weakening
the revenue-raising capacity of consumption taxes, such as VAT, is undesirable given that such
taxes are less harmful for economic growth than those on personal income and corporates
(Johansson et al., 2008). The introduction of a reduced VAT rate for restaurant and catering

services in 2016 narrowed the tax base and such changes can favour high-income households
who are more prone to consuming restaurant meals. Moreover, the experience of other European
countries, such as France, suggest that the stimulatory impact of such measures on employment
are modest (Benzarti and Carloni, 2017).
Figure 14. Most potential VAT revenues are untaxed

VAT Revenue Ratio
1.0 1.0
0.9 0.9
Increasing share of potential VAT revenues collected
0.8 0.8
0.7 0.7
0.6 0.6
0.5 0.5
0.4 0.4
0.3 0.3
0.2 0.2
0.1 0.1
0.0 0.0
ITA
TUR
FRA
NLD
FIN
LVA
LUX
BEL
PRT
IRL
ISL
AUT
CZE
ISR
CHL
SVK
LTU
JPN
EST
MEX
ESP
GRC
GBR
CAN
DEU
HUN
NOR
POL
AUS
SVN
DNK
CHE
KOR
NZL
SWE
OECD
Note: The VAT Revenue Ratio is the ratio between the actual value-added tax revenue collected and the revenue that
would theoretically be raised if VAT was applied at the standard rate to all final consumption.
Source: (OECD, 2016[13])
Fuel excise taxes continue to be lower for diesel fuel than for petrol. However, the former
typically produce more emissions of particulate matter and the nitrogen oxides most relevant for
air pollution. The government is undertaking a gradual convergence in the excise taxes; and
raised the tax on diesel by 2 cents per litre and reduced the tax on petrol by 2 cents per litre in
January 2017. Even so, this convergence process has some way to go, given that the excise tax
gap between petrol and diesel remains over 20 cents per litre. Furthermore, additional reductions
in the petrol tax should be reconsidered given that the current level of taxation may insufficiently
reflect the full environmental consequences of petrol use (Santos, 2017). There is also scope for
raising taxes on other energy sources, including coal and natural gas, where pricing does not
adequately reflect their environmental impact (discussed further below).

Box 1. Quantifying the fiscal impact of selected policy recommendations
These estimates roughly quantify the annual fiscal impact of selected recommendations in this
Survey, as some of them are not quantifiable given available information or the complexity of
the policy design.
Table 3. Illustrative annual fiscal impact of recommended reforms

% of GDP
Expenditures
- Increased spending on active labour market programmes -0.5
Additional revenues
- Impact of structural reforms +0.4
- Improve the design and the enforcement of the VAT +1.4
- Increase in environmental taxation +1.3
TOTAL +2.6
Note: The estimated effects abstract from behavioural responses that could be induced from policy changes, in line
with past OECD work modelling long-term scenarios (Johansson et al., 2013). The estimates are short-run effects
and are based on: i) the assumption of an increase in active labour market spending as a share of GDP to the average
of the top quintile of the OECD (from 0.6% to 1.1% of GDP): ii) the annual GDP impact of the structural reforms
quantified in Box 2 (five-year effect): iii) the assumption of an increase in the VAT revenue ratio to the OECD
average; iv) the assumption of an increase in environmental taxation as a share of GDP to the average of the top
quintile of the OECD (from 2.2% to 3.5% of GDP).
Source: OECD calculations
Some aspects of the corporate income tax system may not support aggregate productivity
growth. Larger firms, that are on average more productive in Portugal (OECD, 2017b), face a
higher statutory corporate income tax rate as a result of surcharge rates that rise with the level
of taxable profits. Furthermore, small and medium-sized enterprises can benefit from a slightly
lower statutory CIT rate.
The government is also planning to introduce a preferential tax rate for companies located in the
interior of the country. While such measures have been introduced in some other OECD
countries, such as France, a potential unintended effect of this type of policy is to encourage
profit-shifting within the country or to divert activity to interior regions from substantially more
productive areas (such as Lisbon in the case of Portugal). Public policy interventions that support
small firms and lagging regions are desirable where market failures exist. However, the
authorities should be cautious about undertaking such interventions by introducing distortions
into the corporate tax system. A more advisable approach would be to reallocate the public
funding to other policy interventions that are currently in existence and that could have longer-
term effects on the economic development of interior regions. For example, public investment
in complementary public assets in these regions could be boosted. The government has
established a working group that will review existing tax exemptions and report their findings
by the end of March 2019 (Table 4).
As discussed further in Chapter 1, tax administration is an area that remains particularly
cumbersome for businesses. Both tax accountants and businesses highlight frequent changes in
tax laws as the most significant contributor to complexity in the tax system (Borrego et al.,
2015). Other factors include the extensive use of special provisions and ambiguity in the tax law
language. In this context, the authorities should simplify the tax system, partly through reducing

the use of exemptions and special provisions. Once this is achieved, ensuring the stability of the
tax system should be the key priority.
Table 4. Past recommendations related to improving fiscal sustainability
Recommendation Action taken since the February 2017 Survey
Reduce tax exemptions, special The Minister of Finance has created a working group to review existing tax benefits (i.e.
rates and tax expenditures. exemptions, special rates etc.) through a cost-benefit analysis of current tax expenditure.
The working group shall present a report by the end of March 2019.
Enhancing financial stability
Portugal has emerged from a severe banking crisis with a deleveraged, recapitalised and
restructured banking sector. Loans to customers have declined significantly over the past 10
years and they currently account for around 60% of total assets. At the same time, the banking
sector’s funding structure has become more stable, with increased deposits and equity-financing
and less reliance on funding from securities and interbank markets.
The quality of assets in the banking system has been improving over the past years. The stock
of non-performing loans (NPLs) in the Portuguese banking sector has decreased more than 35%
(around 18 billion euros) from June 2016 to June 2018 (Figure 15). Additionally, the NPL ratio
has also decreased by about 6.2 percentage points in a context where the deleveraging effort has
been reducing its denominator. The loan-loss coverage ratio in the banking sector is high (Figure
16), as impairment provisions against NPLs have increased in the past few years. Banks have
enhanced their risk assessment on new loans, with interest rate spreads reflecting stronger
differentiation by the risk profile of borrowers than prior to the crisis (Bank of Portugal, 2017).
The value of loans to low-risk firms in recent years has been markedly higher than that to high-
risk firms (Bank of Portugal, 2017). Nonetheless, the stock of non-performing loans remains one
of the highest across OECD countries, despite having declined notably in the past few years
(Figure 15), weighing on banks’ profitability and solvency (see below).
Figure 15. The NPL ratio in Portugal remains elevated
Non-performing exposures by country as a ratio of total outstanding exposures
50 50
2018 Q3 2016 Q3
45 45
40 40
35 35
30 30
25 25
20 20
15 15
10 10
5 5
0 0
ITA
FIN
IRL
SVK
SVN
HUN
ESP
LVA
FRA
LTU
ISL
DNK
NLD
DEU
LUX
GRC
PRT
AUT
BEL
NOR
EST
CZE
GBR
POL
SWE
EU
Note: The following 7 banks are considered: Banco BPI SA; Banco Comercial Português SA; Caixa Central de Crédito
Agrícola Mútuo, CRL; Caixa Económica Montepio Geral; Caixa Geral de Depósitos SA; Novo Banco; Santander
Totta.
Source: European Banking Authority (EBA), “EBA Risk Dashboard”.

Figure 16. The loan-loss coverage ratio is high in Portugal

The coverage ratio as a percentage of NPLs
70 70
2018 Q3 2016 Q3
60 60
50 50
40 40
30 30
20 20
10 10
0 0
HUN POL SVK CZE SVN ITA AUT PRT FRA GRC BEL EU ESP DEU LUX ISL LVA GBR IRL DNK NLD SWE LTU NOR EST FIN
Source: EBA, European Banking Authority (EBA), “EBA Risk Dashboard”.
The profitability of Portuguese banks has improved, but remains low compared with institutions
in other EU countries (Figure 17, Panel A). Banks have reduced operation costs by 27% since
2010, partly reflecting a decline in the number of branches and staff. There have also been
efficiency improvements and the cost-to-income ratio is now below the EU average (Figure 17,
Panel B). Net interest income, the most important revenue source for Portuguese banks,
increased by 4.6% in 2017. Nonetheless, bank profitability continues to be impeded by
additional impairments against NPLs.

Figure 17. Vulnerabilities remain in the Portuguese banking sector
A. Return on Equity B. Cost to income ratio

30 90
2018 Q3 2016 Q3 2018 Q3 2016 Q3
25 80
20 70
15 60
10 50
5 40
0 30
-5 20
-10 10
-15 0
ITA
FIN
ITA
FIN
HUN
CZE
LVA
LTU
SVK
SVN
NLD
LUX
DNK
IRL
FRA
DEU
FRA
LUX
IRL
ISL
AUT
GBR
ISL
DEU
SVN
HUN
NLD
DNK
LTU
EST
ESP
BEL
PRT
BEL
AUT
PRT
ESP
SVK
LVA
CZE
EST
NOR
GRC
GBR
GRC
NOR
SWE
POL
POL
SWE
EU
EU
C. Leverage ratio D. Common Equity Tier 1 ratio
16 40
2018 Q3 2016 Q3 2018 Q3 2016 Q3
14 35
12 30
10 25
8 20
6 15
4 10
2 5
0 0
FIN
ISL
IRL
ITA
FIN
FRA
IRL
ITA
SVN
LVA
LTU
HUN
EST
POL
SVK
LUX
CZE
ESP
DEU
DNK
NLD
LUX
ISL
LVA
LTU
SVN
DNK
CZE
NLD
DEU
HUN
FRA
GRC
PRT
NOR
AUT
BEL
GBR
EST
BEL
POL
SVK
NOR
AUT
PRT
ESP
GBR
GRC
SWE
SWE
EU
EU
Note: The calculation of the leverage ratio and the Common Equity Tier 1 ratio is based on the Basel III rules that
will apply at the end of the transition period in 2019.
Source: European Banking Authority (EBA) “EBA Risk Dashboard”.
As long as banks’ profitability remains low, the organic increase in their own funds will be
limited. However, a number of banks injected new capital in 2017 and issued Tier 2 and AT1
instruments, improving their capital position. The sector-wide leverage ratio (the ratio of core
capital to assets) is well above the EU average (Figure 17, Panel C). Nonetheless, the Common
Equity Tier 1 ratio (an indicator of bank solvency measured as a ratio of banks’ own funding to
risk-weighted assets) remains low (Figure 17, Panel D), due to the existence of risky assets,
including NPLs. The relatively low level of bank solvency leaves the sector vulnerable to
negative shocks.
Improving bank and firm profitability and solvency

In order to durably raise banks’ profitability and solvency, it is essential to continue decreasing
NPLs. The authorities are tackling NPLs within a comprehensive European action plan and
based on the national strategy, which consists of three pillars: legal, judicial and tax; ii)
supervisory action; iii) NPL management options. Particular measures include those

implemented under “Programa Capitalizar”, prudential supervisory action within the SSM and
including the NPL reduction plans submitted by banks to supervisors. Furthermore, a platform
for the integrated management of NPLs has been established.
Over the past years, significant progress has been made in terms of the regulatory framework to
address NPLs, in the context of the Single Supervisory Mechanism (see Annex 1). It includes,
notably, the monitoring of compliance with the NPL reduction plans submitted by banks that
have high NPLs. These plans include specific operational goals by asset class and time frame
and the reduction goals initially stipulated have reportedly been met (Bank of Portugal, 2018a).
However, the targets and timetable on NPL reduction are not publicly known, thus their
stringency cannot be evaluated and instances where banks deviate from the plans identified by
the public. Communicating the plans and the progress in meeting them could boost the credibility
of the banks and add pressure for meeting targets. However, it may compromise the prices at
which banks are able to sell distressed assets if market participants are aware of the sales that
any specific bank needs to make to meet their plan by a set date. Regardless, these plans should
continue to be strictly monitored and competent authorities should reflect performance in
achieving targets into changes in capital requirements. NPL write-offs should continue to be
encouraged, taking into account the measures being implemented, also at the European level, to
reinforce the provisions required against NPLs on balance sheets.
In tandem with changes to supervision, the authorities could consider playing a more active role
in developing distressed debt markets to assist banks in cleaning up their balance sheets. While
there can be scope for the public sector to be involved in the development of distressed asset
markets by, for instance, setting up public asset management companies (OECD, 2017c), current
EU regulations related to state aid pose difficulties for such a reform. Furthermore, the
Portuguese authorities recently conducted a study which found that the potential for a bulk
transfer of the NPLs in the banking system to an asset management company is low given the
characteristics of the underlying assets (Table 5).
A number of policy measures have been introduced since 2016 with the aim of reducing
corporate indebtedness and strengthening loan recovery. These have been under the Programa
Capitalizar and have included promoting the use of out-of-court restructuring mechanisms as
well as efficient and transparent court proceedings, partly to improve the recovery rates of
creditors. The Programa Capitalizar also includes an early warning mechanism, which aims to
inform companies of their financial situation, which is coordinated by the Portuguese
government and is being developed by the Portuguese SME Public Agency (IAPMEI), in
collaboration with Bank of Portugal and the Tax Authorities. These developments go in the right
direction. However, most of the recent policy measures have been aimed at corporate
restructuring, which is most effective for firms temporarily in distress but otherwise viable.
Further NPL resolution continues to be a challenge. The NPL ratio is particularly high for the
non-financial corporations (NFC) sector, which accounts for some 65% of the total NPL stock.
Since some NPLs are unlikely to be recovered, NPL write-offs should continue to be
encouraged, taking into account measures adopted at the European level. Banks are still
vulnerable to any reduction in the value of collateral, despite the increase in the coverage ratio
(Figure 18).
More generally, high private sector indebtedness is a concern. Although having declined
steadily, the stock of private sector debt remains high (Figure 7, Panel B). While about half of
NFCs are not indebted at all, some NFCs are heavily indebted. Around 35% of NFCs with
financial debt have an interest coverage ratio below one, leaving them sensitive to rises in
interest rates. Some of these NFCs could be a source of new NPLs if faced with a negative shock.

Figure 18. The NPL net of provisions to capital ratio is high in Portugal
Ratio of NPLs net of provisions to capital, 2018Q1 or latest available, percentage
172
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
ITA
FIN
IRL
NLD
LTU
ESP
FRA
ISL
AUS
DEU
CZE
GRC
PRT
BEL
AUT
SVK
POL
SVN
USA
LUX
CAN
HUN
CHE
LVA
NOR
EST
GBR
SWE
Note: The chart showing the ratio of NPLs net of provisions to capital gauges how banks would be affected in an
extreme scenario where all NPLs are written off and assuming no collaterals.
Source: IMF Financial Soundness Indicators.
Optimising the insolvency regime

An efficient insolvency regime, allowing rapid debt resolution, improves the operation of credit
markets (Andrews and Petroulakis, 2017). Along with efficient judicial processes, it is also an
important condition for the resolution of NPLs. Portugal’s insolvency regime for firm
restructuring has become more efficient since early 2010, owing to the Processo Especial de
Revitalização. However, the bankruptcy law is very stringent for bankrupt persons (Figure 19;
(Adalet McGowan, Andrews and Millot, 2017). The time to discharge (when the exemption
from pre-bankruptcy debt repayment becomes available) is 5 years, in contrast with other
European countries where it is often 3 years. The exemptions from the insolvency assets (those
assets left to the bankrupt entity at the time of bankruptcy) are limited to vital items only. This
has resulted in the number of personal bankruptcy cases being very limited.

Figure 19. Personal bankruptcy law is stringent in Portugal

OECD insolvency indicator: Treatment of failed entrepreneurs, 2016
1.0 1.0
0.9 0.9
0.8 0.8
0.7 0.7
0.6 0.6
0.5 0.5
0.4 0.4
0.3 0.3
0.2 0.2
0.1 0.1
0.0 0.0
JPN
FIN
IRL
ITA
NZL
DEU
ISR
CAN
TUR
USA
AUS
GBR
CHE
DNK
CHL
AUT
ESP
FRA
GRC
LVA
MEX
NOR
SVK
SVN
HUN
KOR
NLD
BEL
EST
PRT
CZE
SWE
Note: The indicator is constructed based on the OECD questionnaire on insolvency regimes. It ranges from zero (least
stringent) to one (most stringent). “Treatment of failed entrepreneurs” takes into the following aspects: time to
discharge; and bankruptcy exemptions.
Source: Adapted from Adalet McGowan et al. (2017).
StatLink 2 http://dx.doi.org/10.1787/888933912618
Bankruptcy law often has greater importance than corporate insolvency regimes for small
businesses (Armour and Cumming, 2008). Entrepreneurs often use personal finances prior to
incorporating and obtaining limited liability protection (Berkowitz and White, 2004; Cumming,
2012) and lenders often require them to make personal guarantees. In Portugal, such guarantees
are common practice: while collateral requirements are among the highest across OECD
countries (around 80% of the cases; OECD, 2018a), the collateral usually takes the form of
business assets and personal guarantees of business owners. Such collateral requirements help
banks to screen out risky businesses, but once the firm defaults, banks can be negatively
impacted as repossession of collateral is not easy in practical terms. Rather, banks should adopt
a business model focusing more on the assessment of the business plan and cash flow.
Such personal guarantees of business owners make insolvency proceedings very complicated.
This is because an owner of a failing firm that has given personal guarantees becomes liable,
causing them to risk bankruptcy if they cannot pay out all liabilities. Such collateral enforcement
often requires court proceedings, which can be long in Portugal (Figure 20, see also Chapter 2).
Such proceedings are costly and the collateral value can decline markedly during the
proceedings. This is reflected in a very low recovery rate; just 5% on average (Ministry of
Justice, 2017).

Figure 20. Court proceedings for credit claims can take a long time
Share of court proceedings by duration, %
70 70
Total Credit claim
60 60
50 50
40 40
30 30
20 20
10 10
0 0
less than 1 year 1 to 2 years 2 to 5 years more than 5 years
Source: Ministry of Justice.

Bankruptcy law should be made less stringent, thereby making bankruptcy a viable solution for
some highly indebted people. Such a reform typically involves reducing the time to discharge,
as was recently the case in other European countries such as Spain and Ireland. In these
countries, such reforms resulted in a rise in the number of persons choosing to file for
bankruptcy. Less stringent bankruptcy regulation may negatively affect credit supply (due to
creditors having less rights in legislative terms), as shown in Berkovitz and White (2004), but it
would effectively ensure the right of creditors who otherwise continue forbearance instead of
pursuing long and uncertain court proceedings for credit claims.
At the same time, it is worth considering introducing an out-of-court regime for firm liquidation.
Such a system has recently been introduced in other OECD countries, such as Japan (OECD,
2017d). An out-of-court regime for firm liquidation should aim to start debt resolution
proceedings at an early stage, to prevent the deterioration of the debtor’s assets, and to make the
financial state of the debtor transparent, which often reveals hidden assets. Increases in the value
of collectable assets should be shared with the debtor, incentivising them to be engaged in the
debt resolution process. This would complement measures implemented as part of Budget 2018
that allowed creditors to deduct losses incurred as part of the debt resolution process from their
corporate taxes, thus encouraging their participation.
Table 5. Past recommendations related to improving financial stability

Strengthen current regulatory A comprehensive strategy to reduce NPLs has been in force since late 2016. It
incentives for reducing non-performing encompasses initiatives in 3 key pillars, coordinated among all relevant
loans, including through write-offs and stakeholders: i) Legal/judicial, tax and other relevant reforms; ii) Prudential
sales. supervisory action; iii) NPL management options, including the possibility to
develop system-wide solutions.
Support the development of a market The Portuguese authorities conducted a study which found that the potential for a
for distressed debt, notably through the bulk transfer of the NPLs in the banking system to an asset management
creation of asset management company is low.
companies.

Addressing medium-term challenges for the economy

As noted earlier, wellbeing along most dimensions remains well below that in other OECD
countries and there has been limited convergence in living standards over the past few decades.
To further narrow these gaps, the Portuguese authorities must continue to reinvigorate the
economy. Two key channels will be through ensuring that the working age population have the
capability and opportunities to participate more effectively in the labour market and reawakening
productivity growth.
Improving labour utilisation and reducing poverty

The pool of available labour will begin to decline from 2023 as the population ages (Figure 21).
This will result in weaker economic growth, unless there are improvements in the utilisation of
the existing labour resources, especially through getting unemployed or marginalised workers
back into jobs. Measures that ensure that such workers have better opportunities to find jobs,
improve their skills and derive the benefits from increasing their productivity will also raise the
inclusiveness of the Portuguese society and overall wellbeing.
Figure 21. The pool of labour is expected to decline over the long run
Percentage change in potential employment
1.5 1.5
1 1
0.5 0.5
0 0
-0.5 -0.5
-1 -1
-1.5 -1.5
1991 2001 2011 2021 2031 2041 2051
Note: Potential employment takes account of working age population, trend labour force participation and the
equilibrium unemployment rate.
Source: OECD Long-term baseline model.
Although declining rapidly, unemployment among the youth and the low-skilled remains
elevated in Portugal. This is especially the case for young people with no previous work
experience. Many other young workers have only intermittent employment, moving in and out
of short duration jobs. The long-term unemployment rate remains high (Figure 22), with the
low-skilled representing around two-thirds of all long-term unemployed adults (Düll et al.,
2018). Indeed, poor skills is among the most common employment barriers faced by the
unemployed (Figure 23; Düll et al., 2018).

Figure 22. Incidence of long-term unemployment is high in Portugal

As a percentage of total labour force, 2018 Q3
21 21
Unemployment rate of which, long-term unemployment
18 18
15 15
12 12
9 9
6 6
3 3
0 0
ITA
FIN
IRL
ISL
LTU
GRC
ESP
TUR
FRA
LVA
PRT
SVK
LUX
SWE
SVN
DNK
CHE
GBR
NOR
HUN
NLD
CZE
DEU
BEL
EST
AUT
POL
Source: Eurostat Labour Force Survey database.
Figure 23. Low-skilled people face significant employment barriers

Percentage of those unemployed or weakly attached to the labour market facing each identified employment barrier
80 80
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
Lack of skills Scarce job Health limitations "High" non-labour "Low" relative No past work "High" earnings "High" care
opportunities income work experience experience replacements responsabilities
(regress)
Note: Unemployed people often face a number of employment barriers that prevent them from returning to work.
OECD (2018) attribute/estimate such employment barriers to each unemployed person. The chart reports the
proportion of unemployed or people marginally attached to the labour market that face each employment barrier. An
individual can face multiple employment barriers, thus the blue bars in the figure do not sum to 100.
Source: OECD (2018), “Faces of joblessness in Portugal”.
Poverty in market income is high in Portugal (Figure 24, Panel A), concentrated on jobless
households with children (Figure 24, Panel B). Poverty is greatly reduced when measured in
disposable income (Figure 24, Panel A), largely due to income support. The Subsidio de
desemprego, standard unemployment benefit, is relatively generous. Those who are not eligible
for unemployment insurance may benefit from various other support measures, including the

Rendimento Social de Inserção minimum income support which is subject to a means test. This
support was reduced in early 2010s in the context of the fiscal crisis, in particular for households
with dependents and children. This reduction will be fully reversed by 2019, which will help
alleviate poverty in such households. Such benefits should continue to be strictly conditional on
active job search, which will be effective as long as relevant activation and employment support
measures are in place (see below).
Figure 24. Poverty is high in jobless households
A. Poverty rate
Percentage of households, 2016
50 50
After redistribution Before redistribution
40 40
30 30
20 20
10 10
0 0
ISR
ITA
FIN
TUR
LTU
LVA
JPN
LUX
IRL
FRA
NLD
ISL
CHL
EST
PRT
CZE
NZL
AUT
BEL
USA
MEX
ESP
GRC
KOR
CAN
AUS
GBR
POL
DEU
HUN
NOR
SWE
CHE
SVN
SVK
DNK
B. Poverty rate by household structure
2016
100 100
80 80
60 60
40 40
20 20
0 0
Work No work Work No work 2 workers 1 worker No workers 2 workers 1 worker No workers
Single, no children Single, children Two or more adults, no children Two or more adults, children
Source: OECD Income Distribution and Poverty Database.

Public employment services have increased their support to jobseekers

Since 2012, the Instituto do Emprego e da Formação Profissional (public employment service)
has been reformed in a comprehensive way under the programme “Programa de Relançamento
do Serviço Público de Emprego”. It has been further enhanced by the recent “One-stop-shop for
Employment” project as part of the SIMPLEX+ programme. These policy initiatives enhanced
coordination with other public services, notably with the Institute for Social Security and
improved online services for users with digital skills. The public employment service also
strengthened its job-broking function, upgrading the online vacancy database and strengthening
the co-operation with employers, namely by introducing dedicated case managers for relevant
employers (“Gestor+”). These measures can help jobseekers who are relatively job-ready.
At the same time, the public employment service enhanced its supports to jobseekers. It has
provided a range of labour market programmes based on the individual assessment of jobseekers,

including counselling, internships, hiring subsidies, training, employment on public works and
referral to a job interview. In exchange, it has strictly implemented the requirements to meet
with caseworkers, in particular, for the two target groups: those aged 45 years and above and
those unemployed for six months and longer. This strengthened conditionality significantly
raised the employment prospects of jobseekers (Martins and Pessoa e Costa, 2014). Since 2016,
this approach has been strengthened to make labour market programmes more personalised and
developed in collaboration with jobseekers. As part of this, greater flexibility in the frequency
with which users must engage with public employment services has been introduced (i.e.
depending on individual circumstances) and the criteria for the assignment of managers to
jobseekers have been revisited.
Labour market programmes should raise the employability of jobseekers

Traineeship programmes, including on-the-job training, can help individuals to acquire relevant
job skills and to enter the labour market. A stronger emphasis on training measures recently
translated into an increase in the coverage of registered jobseekers in traineeships, from below
10% in early 2016 to above 14% in the second half of 2018. Nevertheless, participation rates in
adult education and training are particularly low in Portugal, especially for those that are
unemployed or inactive.
The government is strengthening professional traineeship programmes. Estágios Emprego,
introduced in 2013, targets mainly youth aged 18-30 or those who recently completed school.
Its objective includes facilitating school-to-work transition. The programme lasts for 9 to 12
months. OECD (2017e) shows that the programme significantly improves the employment
outcomes of training participants (Figure 25). In 2017, the government introduced new
professional traineeships (“Estágios Profissionais”) targeted at young people that included a
one-off payment to employers that hired a trainee after the traineeship had concluded (Table 6).
Some jobseekers need intensive up-skilling and re-skilling programmes. Such training
programmes include “Aprendizagem”, a dual initial vocational training programme, and “Cursos
de Educação e Formação de Adultos” (Adult Education and Training) that provides general and
technological education. These two longer-duration programmes have positive employment
effects, though such effects tend to appear only several years after participation (Düll et al.,
2018). It is important to note that both Aprendizagem and Cursos de Educação e Formação de
Adultos are associated with a qualification level at the end of the course (MTSSS, 2018). These
programmes should be expanded to reach as many low-skilled people as possible.
Qualifica, an adult education and training package programme, came into force in January 2017.
It aims at raising the qualification level of adults and their employability by tailored training
pathways, mainly targeting low-skilled adults and young NEETs. It is built on the Recognition
Validation and Certification of Competences, which ensures a formal recognition of non-formal
learning and skills acquired through work experience. Participants in Qualifica are referred to
relevant programmes including Aprendizagem and Cursos de Educação e Formação de Adultos.
Qualifica is a promising programme, which combines many policy measures already proven
effective at raising the employment prospects of jobseekers and ensuring as many NEETs as
possible stay in touch with the labour market.

Figure 25. Labour market programmes differ in effectiveness for re-employment

Estimated employment ratios over time after the start of the programme
A. Internship programmes B. Hiring subsidies
% %
100 100
Participants Non-participants Participants Non-participants
90 90
80 80
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
6 months 12 months 18 months 24 months 6 months 12 months 18 months 24 months
Note: Individuals who enrolled in one of these programmes at time t are compared to a set of “control” or similar
individuals who did not enrol in that programme at time t. The control group is formed using propensity score
matching techniques. More specifically, individuals are matched on the basis of age, gender, marital status, number
of children, years of schooling, date of registration with the PES and previous employment history. The chart
compares the employment outcome between the two groups t+6, t+12, t+18 and t+24. For Panel A, the employment
outcome of the participants at t+6 should take account of the fact that most of them are still enrolled in the internship
programme, which is not considered to be in employment (“lock-in” effects).
Source: OECD (2017), “Labour Market Reforms in Portugal 2011-15: A Preliminary Assessment”.
Employment outcomes will also benefit from improvements in the adult education system. As
detailed in the 2017 OECD Economic Survey of Portugal, there is particular scope for further
reforms to vocational education and training (VET) arrangements (OECD, 2017c). Although the
offering of VET education has greatly expanded over the recent decade, the system is fragmented
with both the governance of the VET system and VET provision divided across ministries. This
increases the risk of overlaps and inefficiencies in the use of resources and reduces the
effectiveness of quality control.
At present, the Ministry of Education is responsible for VET courses designed for youth at
secondary education level. In addition, the Ministry of Labour coordinates and delivers VET
courses through the IEFP (the Institute for Employment and Vocational Training), which also
provide secondary-level education attainment (e.g. Sistema de Aprendizagem). The IEFP
courses have a stronger dual training element, combining classroom teaching with practical
experience in industry. Across OECD countries, programmes with such a work-based
component tend to be associated with better employment prospects (OECD, 2015a), having been
implemented in countries including Austria, Germany and Switzerland. In addition to the public
VET courses, private providers also offer a variety of VET programmes. However, in some
instances, there have been concerns about the quality of training provided. As recommended in
the 2017 OECD Economic Survey of Portugal, the two VET systems under the responsibility of
the government should be consolidated into a single dual VET with strong workplace training.
This should be accompanied by a thorough evaluation of all the existing VET education
programmes offered across the public and private sectors.
At the same time as bolstering adult education and training programmes, the authorities should
focus on encouraging participation by those most in need. The OECD recently published
guidance on the implementation of a skills strategy for strengthening the adult-learning system

in Portugal (OECD, 2018b). This emphasised the need to overcome the motivational barriers to
participating in training. To do this, information on the returns to different types of education
should be disseminated, especially to those unemployed and with low skills. However, this will
require the government to collect better quality data about the skills of the adult population and
the returns, in terms of income and employment prospects, of accumulating different types of
skills.
Hiring subsidies are another focus of the government in facilitating the transition of jobseekers
into employment. Contrato-Emprego, in place since 2017, targets difficult-to-place workers,
such as youth and long-term unemployed, and is basically reserved for permanent contracts. As
also found in OECD (2017e), the impact of hiring subsidies on employment is immediate and
significant. However, it is not clear if the impact is durable and tends to disappear often when
subsidies terminate. It is worth evaluating the current provisions (OECD, 2017e). This is
especially the case given prevailing fiscal constraints. Employment prospects can be
strengthened differently, for instance, through work experience being validated by a formal
qualification (such as through the Recognition Validation and Certification of Competences
system). Subsidies tend to induce employers to substitute between those employees who benefit
from them and those who do not (Crépon et al., 2013). Thus, hiring subsidies need to be limited
to those most in need, such as those at a very high risk of long-term unemployment and extreme
poverty.
Improving employment conditions for more and better quality jobs

The incidence of hiring on temporary contracts is still high. Around 18.5% of employees are on
temporary contracts, one of the highest proportions in the EU. Employment protection for
permanent workers remains very strict when compared with temporary workers. This is in spite
of a reform undertaken in the 2011-14 period, which included a reduction in severance pay for
regular workers while also introducing changes in the legal framework for fixed-term contracts.
The reform did increase hiring on permanent contracts, and facilitated job flow generally
(OECD, 2017e).
A Tripartite Agreement in July 2018 aimed to reduce labour market dualism by limiting the legal
framework of temporary contracts, namely by lowering the maximum accumulated duration of
fixed-term contracts and by narrowing the conditions under which fixed-term contracts were
authorised for permanent tasks. This was a step in the right direction for reducing labour market
duality while still allowing flexibility for the business sector to grow as new opportunities arose.
Past reforms had established an individual bank of hours that allowed employers and individual
employees to increase normal working hours by up to two hours per day (up to a limit of 150
hours per year). However, these reforms are expected to be amended, no longer allowing such
agreements at the individual-worker level. The June 2018 Tripartite Agreement foresaw the
elimination of the individual bank of hours, while establishing that the bank of hours can be
adopted by collective agreements or by group agreements reached by consultation with workers.
This policy reversal may have a negative impact on employment and business investment.
Collective bargaining has become more frequently utilised in the past few years, after having
weakened in the aftermath of the crisis. Recent tripartite agreements between the government
and social partners have aimed to further revitalise collective bargaining, through making it
acceptable to as many parties as possible. For instance, a maximum period for analysis,
consultation and issuance of extension orders was established, that contributed to decreasing the
risk of having delayed extensions that required the payment of sizeable pay arrears, which was
perceived to be particularly costly for firms (OECD, 2017e). Going forward, collective
bargaining should remain flexible so that wages are aligned with productivity developments at

the firm level. As discussed in the 2017 OECD Economic Survey of Portugal, one aspect of
achieving this would be to introduce more stringent representativeness requirements for
administrative extensions of collective bargaining agreements and opt-out possibilities for
individual firms (OECD, 2017e).
Table 6. Past recommendations related to improving labour utilisation and reducing poverty
Systematically monitor the outcomes of the A study of active labour market programmes identified that some
different active labour market programmes programmes had low employability outcomes and led to poor quality
with a view to concentrating resources on the employment outcomes. These findings prompted a reorientation of the main
more effective programmes. active labour market policies with the aim of promoting greater efficiency of
employment supports by public employment services.
Reduce labour market duality to improve the A tripartite Agreement signed by the Government and the majority of Social
job quality and strengthen learning Partners in July 2018 aimed to reduce the maximum accumulation duration
incentives. of fixed-term contracts from 3 years to 2 years. It also aimed to increase the
financial contribution of employers that use fixed-term contracts excessively.
Decree Law 72/2017 extended the duration of the exemptions of social
security contributions for young people obtaining their first job (for a period
of five years) and the long-term unemployed (for a period from three to five
years), in order to promote permanent contracts.
Consolidate the two VET systems into a No action taken
single dual VET with strong workplace
training and perform a thorough audit of all
vocational training programmes.
Reinvigorating productivity growth

Productivity growth has notably slowed in the past two decades (Figure 26). This is a major
policy challenge, since gains in living standards are driven by productivity growth in the long-
run. The main determinants of a country’s long-run level of productivity include regulations,
governance, institutions and human capital (Guillemette et al., 2017). Implementing the related
reforms recommended in this Survey are estimated to have marked positive effects on GDP per
capita over the coming years (Box 2).
Figure 26. Productivity growth has slowed in Portugal

Annual average growth (%)
3.5 3.5
Labour productivity (per person)
3 3
Labour productivity (per hour worked)
2.5 2.5
Multifactor Productivity
2 2
1.5 1.5
1 1
0.5 0.5
0 0
-0.5 -0.5
1984-1995 1996-2006 2007-2017
Note: For multifactor productivity, data are only available up to 2015.

Source: OECD Productivity Indicators.

Box 2. Quantification of the structural reforms recommended in this survey
This box quantifies the effect of some of the structural reforms for Portugal recommended in
this Survey based on the OECD’s most recent quantification framework (see Égert and Gal,
2017). The effects are derived from a range of time-series cross-country reduced-form panel
regressions on a sample of OECD countries. The estimated effects are allowed to vary across
countries as a result of differences in factor shares, the level of the employment rate and a
country’s demographic composition. The approach is illustrative and results should be
interpreted with care.
Table 7. Illustrative impact of structural reforms on GDP per capita

Total effect on GDP per capita
5-year effect 10-year effect long-term effect
Product market regulations
Regulations in energy, transportation, communications (ETCR) 0.2% 0.3% 0.7%
Regulations in professional services 0.15% 0.3% 0.7%
Quality of institutions
Strengthening contract enforcement 0.75% 1.5% 3.9%
Labour market policies
Improve active labour market policies 0.15% 0.2% 0.4%
Trade openness
Reduce barriers to trade 0.9% 1.3% 2.8%
Total 2.1% 3.6% 8.5%
Note: Calculations are based on a 10% policy change scenario, which corresponds to lowering the sub-indicator for
the transport sector from 3.04 to 2.74, resulting in a reduction in the OECD indicator of Regulations in Energy,
transportation, communications (ETCR) by 0.101 point; lowering the sub-indicator for the legal service sector from
3.88 to 3.49, resulting in a reduction in the OECD indicator of Professional Services from by 0.097 point; increasing
the Rule of Law indicator from the World Bank “Worldwide Governance Indicators” from 1.13 to 1.24; and
increasing ALMP spending per unemployed as a ratio to GDP per capita from 8.1% to 8.9%. The effects of trade
openness are estimated by assuming the typically observed change of an increase by 4 percentage points in the trade
to GDP ratio (the “typically observed change” is measured as the average improvement in the variable over all two
year windows that showed improvements in both periods across OECD countries in the past).
Source: OECD calculations.
The regulatory framework can be further improved

Well-functioning product markets enhance the market selection mechanism and the efficiency
of resource allocation, boosting aggregate productivity (OECD, 2015b). Firm-level empirical
analysis has highlighted the strong relationship between a regulatory environment that promotes
competition and productivity growth in Portugal (Carvalho, 2018).
Regulations in the services sector have direct effects on productivity as well as indirect effects
on downstream industries that use services as intermediate inputs to production (Conway and
Nicoletti, 2006). Indeed, tackling inefficient regulations in the services sector can reduce the
price of intermediate inputs and raise the quality of products. OECD indicators of regulation in
non-manufacturing sectors identify excessively stringent regulations in various professional
services and the transport sector (Figure 27). Of the professional services, regulatory settings in
the legal sector are particularly strict.

Figure 27. Regulation remains stringent in some sectors

OECD indicators of regulation in non-manufacturing sectors
5.0 5.0
PRT OECD average
4.5 4.5
4.0 4.0
3.5 3.5
3.0 3.0
2.5 2.5
2.0 2.0
1.5 1.5
1.0 1.0
0.5 0.5
0.0 0.0
Energy Communication Transport Accounting Legal Architect Engineer
ETCR Professional Services
Note: The OECD Indicators of Product Market Regulation are a comprehensive and internationally comparable set
of indicators that measure the degree to which policies promote or inhibit competition. The indicator ranges from zero
(least stringent) to six (most stringent).
Source: OECD Product Market Regulations Statistics (database).
The Bar Association both represents its members and regulates the exercise of the profession.
For the legal profession, a certain degree of regulation is warranted to ensure the quality of
services offered. However, self-regulation tends to identify with the interests of the regulated
profession, rather than the public interest (Canton, Ciriaci and Solera, 2014). Such self-
regulation in the legal profession covers exclusive rights for lawyers and restrictions on entry,
lawyers’ fees, and the form of business (OECD, 2018c).
While the Bar Association maintains its role as self-regulator, the implementation of self-
regulation can be ensured by an independent supervisory body. In Portugal, the law states that
lawyers’ fees are freely negotiated between the parties. The law specifies the criteria on which
the fee structure should be based, including the number of hours worked, the value of claims,
the lawyer’s qualifications, and the complexity of cases. These criteria are very detailed and
exhaustive, and not easily understood by clients, which can hamper competition in the legal
services market (OECD, 2018c). The establishment of an independent supervisory body could
allow for impartial assessment of legal costs and make them more transparent. Such an
independent body could also deal with disputes over the legal contract brought by clients.
Productivity growth within enterprises benefits from well-functioning transport infrastructure
(Kemmerling and Stephan, 2008). This is especially the case for exporting firms that rely on
such infrastructure to reach end markets. Nevertheless, perception-based indicators highlight
that the quality of transport infrastructure in Portugal is low compared with other southern
European countries such as Spain and Italy (see Chapter 1). A particular area of focus should be
improving the efficiency of the port system, which is currently impeded by a host of regulatory
settings that reduce competition between operators (OECD, 2018d).
Portuguese ports follow the “landlord port” model whereby the port authority manages and
invests in the main port infrastructure, while private entities are able to operate port activities.
This arrangement is sometimes formalised through the concession of exclusive rights to a single
private operator for a period of time, usually when ongoing private competition is not viable or

substantial investment is required by the operator. However, the duration of port concession
contracts in Portugal are frequently excessive, reducing the potential for market entrants that can
provide higher quality services at a lower price to service the business sector. Furthermore, there
is a very weak correlation between the investment spending of private operators and the length
of concession contracts awarded (OECD, 2018d).
When awarding such concessions, a competitive awarding procedure should be undertaken to
ensure transparency and that the best operator is given the contract. However, some concessions
have been renewed at the end of a contract for an extended period without a new competitive
awarding procedure, reducing the potential for the most efficient operator to provide port
services (OECD, 2018d). The criterion for awarding port concessions also gives insufficient
consideration to the bidder who will charge the lowest price to port users. Given the importance
of these services for business sector productivity and future export performance, the likely
impact of a provider on end user costs should be more carefully considered.
Improvements to the port system can achieve their maximum potential productivity benefits if
combined with better connections to international rail freight services. Rail density is low in
Portugal and rail links between the Portuguese and Spanish freight market have been too limited.
Furthermore, differences in the rail gauge and lower maximum train lengths compared with other
key European markets, such as France and Germany, reduces the potential volume of trade. In
recent years, better rail connections with Spain have been prioritised, including the planned
Évora-Elvas-Caia rail line that will connect parts of Portugal with Spanish transport hubs.
Differences in the signalling system to other countries and sections of the train network along
the Iberian Peninsula which are not electrified are also key challenges for inter-European rail
connections with Portugal. These are well recognised by the Portuguese authorities and
overcoming them should continue to be a priority.
Some important institutions and governance need to be strengthened

Productivity developments in the long run are not only shaped by regulation, but also by
governance and institutions which implement the legislation. They comprise such elements as
the rule of law, regulatory quality, government effectiveness, and control of corruption.
According to recent OECD research (Guillemette et al., 2017), there is still significant scope for
Portugal to raise productivity by improving governance and institutions.
Perceptions of corruption matter, not least for foreign direct investment. To improve confidence
in core institutions, the authorities are committed to investigating and punishing wrongdoing.
For example, the Public Prosecution Office has strengthened the collection and analysis of
evidence to improve the effectiveness of anti-corruption investigations and the cooperation with
audit and control bodies to improve the detection of graft (European Commission, 2018c).
Associated projects were partly financed by European structural funds at a time when the budget
of the Public Prosecution Office was cut. There has also been a parliamentary committee
established, with the aim of improving transparency in public offices.
Trust in public procurement among Portuguese firms is low, with firms often perceiving
problems with direct awards and non-competitive procedures (Eurobarometer, 2017). Of all
contracts, the majority have typically been direct awards. Such contracts are sometimes justified
based on extreme urgency. However, in the past, this concept was often interpreted broadly,
contributing to excessive procurement through direct awards (European Commission, 2018b).
In early 2018, a reformed Public Procurement Code entered into force, transposing European
Directives. The reformed Code aims at promoting transparency and better management of public
contracts, making stricter restrictions on direct awards and other conditions for higher value non-
competitive procedures. To ensure that it is effectively enforced, the government has

strengthened the Court of Auditors’ auditing powers and capacity to perform ex-ante and ex-
post control of public contracts (European Commission, 2014).
There is also a need to continue ensuring that the judiciary has the capacity to prosecute
economic and financial crimes. The Public Prosecution Office and the Criminal Investigation
Police must be allocated adequate resources to continue undertaking forensic investigations of
economic and financial crimes, which can be long, complex and resource-intensive. When
adjusting for price differences across countries, the funding of the public prosecution office on
a per capita basis in Portugal is comparable with most other European jurisdictions, although it
is notably lower than in some countries such as Switzerland and the Netherlands in which the
available indicators suggest perceived corruption is very low. It should be noted that such
comparisons of budget allocations do not take into account cross-country differences in the
remits of public prosecution offices. The government has pledged to create a public registry of
interests for local government officials, which should help the public prosecution office perform
its duties, though this has not yet been implemented (European Commission, 2018). Such a
registry should be kept in electronic form, regularly updated and monitored.
In the next few years, a significant proportion of the current stock of public prosecutors will be
retiring, meaning that there needs to be a strong effort in recruitment. In tandem, adequate
specialised training for public prosecutors on economic and financial crime should continue to
be provided. The Prosecutor General should require public prosecutors to attend such training
and set aside funding for this purpose. Strengthening the capacity of the Prosecutor General
should help deter corruption from occurring.
Reliable judicial systems are crucial to make sure laws and regulations are actually enforced. In
this respect, court judgement should be speedy and effective. To do so, court resources should
be allocated efficiently through strengthening the governance structure and workload assessment
(see Chapter 2). Also, specialised courts with national jurisdiction for corruption could be
considered. Such courts currently operate in some other OECD countries, such as the Slovak
Republic. The appeal procedures should also be reviewed to prevent abuse.
Portuguese firms report judicial inefficiency as one of the most severe constraints to their
operations (INE, 2018). Judicial efficiency, as measured by trial length, facilitates market
transactions by ensuring timely contract enforcement and reducing transaction costs, thus
promoting competition. It also facilitates financial transactions by ensuring creditors’ rights,
promoting investments and innovation. It is a critical aspect of the framework conditions needed
for doing businesses and attracting FDI (Chapter 1).
Court congestion has been declining due to recent reforms, but the time to resolve a case in the
court system remains long (Figure 28). In 2013, the government introduced a new Code of Civil
Procedure that simplified a number of court procedures. It also introduced the Law for the
Judicial System Organisation in 2014, which reformed the organisation of courts and aimed to
increase the managerial responsibility of courts. Court resources have also been increased over
the past few years. However, there remain significant bottlenecks in some courts (Figure 29),
pushing up the average trial length.

Figure 28. Court proceedings are shorter than before, but still long
Average time needed to resolve civil and commercial cases, first instance courts, in days
700 700
2016 2010
600 600
500 500
400 400
300 300
200 200
100 100
0 0
GRC ITA TUR FRA PRT ESP SVN FIN LVA POL DEU DNK SWE NOR HUN CZE EST AUT SVK NLD CHE LUX LTU
Source: CEPEJ.
Figure 29. Significant bottlenecks remain in some court districts

Civil cases, 2017
0.6 1800
Resolution rate (LHS) cases in stock/number of judges (ratio, RHS)
0.5 1500
0.4 1200
0.3 900
0.2 600
0.1 300
0 0
Braga
Viana do
Aveiro
Santarém
Beja
Lisboa
Açores
Bragança
Vila Real
Guarda
Leiria
Faro
Lisboa Norte
Porto Este
Portalegre
Lisboa Oeste
Coimbra
Madeira
Porto
Viseu
Évora
Setúbal
Castelo Branco
Castelo
Note: The resolution rate = the number of resolved cases / [the number of pending cases from previous year + the
number of incoming cases].
Source: Ministry of Justice and High Council for the Judiciary.
The efficiency with which the existing resources are allocated is a key factor to explain overall
court performance (Palumbo et al., 2013). Inefficiencies can result from problems in workload
assessment and a lack of effective management of resources. A significant challenge for judges
is to identify which cases should be prioritised in order to alleviate court congestion. A new
information system, CITIUS, was introduced in 2007 in order to electronically store all
information belonging to a proceeding. When functioning properly, such an information system
can be a powerful tool in assessing judges’ caseloads. Although CITIUS was unable to identify

blockages in judicial proceedings previously, the system has evolved and now includes such
features as the detection of cases that have been in the system for several years. These features
can serve as early warning devices, which can be more fully utilised to identify problematic
cases and those that should be prioritised, so that resources can be allocated accordingly.
The governance structure of courts is a critical element for the allocation of resources. In each
court, the Court President, who is a judge that is appointed by the High Council for the Judiciary,
is accountable for court performance. The 2014 reform on the organisation of courts created a
global managerial model including a Court President in each district court, who supervises court
performance. The Court President can propose to the High Council for the Judiciary a
reallocation of judges, but this reallocation may be limited by the total number of judges in the
system and by the fact that the number of judges in each court district is determined by law,
although allowing flexibility. In this context, the courts should be given increased operational
autonomy in order to achieve the objectives for which they are responsible.
Further recalibrating the economy for greener growth

Portugal’s CO2 emissions per unit of GDP are below the OECD average (Figure 30, Panel A).
However, the country has not made further progress in decoupling emissions from GDP in recent
years. Portugal is on course to reach its target, agreed with the European Union, to reduce
greenhouse-gas emissions not covered by the EU Emissions Trading System (ETS) by 17% by
2030 relative to 2005 levels. However, further reductions will be needed beyond this point, as
net emissions worldwide need to move close to zero on a net basis around 2060.
Portugal disposes close to half of its municipal waste through landfill, even though landfill
generates environmental costs in terms of water and air pollution. Little waste is recycled,
foregoing opportunities for reusing materials and reducing energy cost of materials processing
(Figure 30, Panel B). Landfill taxes and fees in Portugal are among the lowest across the EU.
Gradually and predictably raising taxes, for example in a way similar to that recently observed
in the United Kingdom, will reduce landfill and encourage recycling.
Exposure to small particle emissions in Portugal is lower than in most OECD countries (Figure
30, Panel C). Nevertheless, more than 3500 Portuguese die prematurely as a result of ambient
particulate matter per year, with the rate rising since 2010 (Roy and Braathen, 2017). Built-up
surfaces per capita have increased markedly since 2000 (Figure 30, Panel D). Urban sprawl, with
low-density housing in suburban areas, raises pollution and CO2 emissions substantially, by
lengthening urban trips and making it more difficult to meet urban transport demand with public
transport. Average population density in Portuguese cities is close to the OECD average but is
uneven, with a high share of low-density residential areas (OECD, 2018e). Tourism may also
have contributed to rising built-up areas.
Renewable energy sources account for a significant share of energy supply (Figure 30, Panel E)
and Portugal is on track to meet the target of 31% of renewables in final energy consumption by
2020. The majority of fossil fuel-based energy is imported. Imports account for over 70% of
energy demand, substantially higher than the OECD average. Energy supply from renewable
sources increased by almost 70% between 2005 and 2016 and accounted for 55% of electricity
generation in 2016 (OECD Green Growth Indicators). The surge has been driven mainly by the
expansion of wind energy generation, which increased 14-fold between 2004 and 2015.
The development of renewables in Portugal has been impressive, but the high rate of widespread
feed-in tariffs for such technologies has contributed to a significant tariff deficit in the electricity
sector. The accumulated tariff debt reached 4.69 billion euros in 2014 (IEA, 2016). While the
tariff deficit has decreased since then and the government plans to phase out all feed-in tariffs

by 2020, it should ensure that efficient market mechanisms are in place for further sustainable
expansion of renewables. Given Portugal’s dependence on imports of fossil fuels, further
investment in renewable energy not only has the potential to lower GHG emissions but also to
improve energy security. Reforming electricity markets to provide high-resolution prices, better
allocation of transmission and distribution networks costs, the integration of storage and more
inter-connected grid systems favour the cost-effective expansion of renewable energy (IEA,
2016).
Figure 30. Green growth indicators: Portugal
Source: OECD (2018), Green Growth Indicators (database).
More consistent pricing of energy consumption according to its CO2 intensity would prepare
Portugal for meeting longer-term emission reduction requirements in a cost-effective manner,
including by boosting incentives to reduce energy consumption and to produce more renewable
energy. It could also raise more tax revenue. Pricing of carbon emissions remains low and
uneven. Only 28% of emissions from energy use in Portugal are priced above EUR 30 per tonne
(Figure 30, Panel F), the low-end estimate of carbon costs today (OECD, 2018f). Outside the
transport sector, emissions are priced at a much lower rate. This partly reflects relatively low
ETS prices in these other sectors, but domestic taxation of energy use also remains uneven. In

industrial, commercial and residential use, coal and natural gas are taxed less than petrol (OECD,
2018f). As discussed earlier, in transport, diesel is taxed 40% less than petrol.
The transport sector accounts for 42% of Portugal’s total final consumption of energy, higher
than the EU average, and a third of CO2 emissions. Both energy consumption and emissions in
the transport sector have declined since peaking in 2005, although at a rate much lower than
overall energy consumption and CO2 emissions reductions (Figure 31). Nevertheless, energy
and CO2 intensities have hardly fallen in the last years, in contrast to the downward trend
observed among other OECD countries. The Portuguese government has recently introduced a
number of initiatives aimed at improving transport efficiency. These measures include a revision
of the taxation for private car ownership to encourage low CO2 emissions vehicles, development
of a network of charging stations for electric vehicles and introduction of a Low Emissions Zone
in Lisbon which bans high emissions vehicles from entering the inner city centre. Nevertheless,
further measures are needed in order to promote greater use of public transport and its efficiency,
as Portugal is currently ranked second highest in the EU in terms of the proportion of passenger
cars used relative to public modes of transport (Eurostat Statistics).
Figure 31. CO2 emissions and energy consumption from transport have declined relatively slowly
A. CO2 emissions B. Total final energy consumption
Million tonnes
Co2 Mtoe
80 21
Total Transport
70 18
60
15
50
12
40
9
30
6
20
Total Transport
10 3
0 0
2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015
Source: IEA Energy Statistics.
Efficient collective transport schemes can contribute to lower congestion and emissions. They
can also reduce the use of public space for parking. Recent simulations using micro data from
Lisbon has highlighted that a shift from private car use to ride-sharing could have substantial
benefits for reducing CO2 emissions, freeing up public parking and eliminating congestion
(International Transport Forum, 2016). When combined with public transport, ride sharing also
has the potential to provide more efficient and environmentally-friendly transport solutions at
lower cost. While large-scale introduction of such modal shift would be a long-term project, the
government should encourage both public transport use as well as the development of new
shared transport solutions accompanied by appropriate supervision and regulations. This would
improve efficiencies in the transport sector and reduce its environmental impacts.

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ANNEX. PROGRESS IN STRUCTURAL REFORMS │ 57
Annex. Progress in structural reform
This Annex reviews actions taken on recommendations from the previous Survey.
Recommendations that are new to this Survey are listed at the end of the Executive
Summary and the relevant chapters.

58 │ ANNEX. PROGRESS IN STRUCTURAL REFORMS
RECOMMENDATION ACTION TAKEN SINCE THE FEBRUARY 2017 SURVEY

Macroeconomic policies
Maintain momentum for structural reforms, in conjunction with a continuous The results of ex-post evaluations of the policy changes outlined in the annual
ex-ante and ex-post evaluation of reforms. National Reform Programme are now being published in subsequent National
Reform Programme publications.
Continue gradual fiscal consolidation to ensure the decline of public debt The fiscal balance has improved and gross public debt (Maastricht definition)
without jeopardising the recovery. has moderated.
Reduce tax exemptions, special rates and tax expenditures. The Minister of Finance created a special working group to review existing tax
benefits. The working group shall present their report by the end of March
2019.
Strengthen current regulatory incentives for reducing non-performing loans, Measures have recently been adopted to reinforce the comprehensive 3-pillar
including through write-offs and sales. strategy to reduce NPLs which has been in force since late 2016. In particular;
 Introduction of the “Platform for Integrated Management of
Bank Loans” in 2018 to manage the negotiation of non-
performing loan claims and guarantees on behalf of three major
Portuguese lenders (CGD, BCP Millennium and Novo Banco);
 The reform of the Special Revitalisation Proceedings (PER)
regime in 2017 as part of “Programa Capitalizar”;
 NPL reduction plans were submitted by three banks with high
NPLs to regulators following the “Guidance to banks on non-
performing loans” published by the ECB in March 2017.
Support the development of a market for distressed debt, notably through the The authorities conducted a study which claims the potential for a bulk transfer
creation of asset management companies. of NPLs to an asset management company is low.
Strengthening business investment
Improve the workings of insolvency rules by: A one-stop-shop is being established and will enhance the coordination
Reconsidering the privileged treatment of public creditors. among public creditors to facilitate insolvency proceedings.
Enlarging the scope for simple-majority decisions among creditors. A new out-of-court process (Regime Extrajudicial de Recuperação de
Empresas, RERE) was introduced in 2018, replacing the previous one
Shortening out-of-court settlement procedures. (SIREVE).
The Special Revitalisation Proceedings (PER) regime, aiming at corporate
restructuring, was reformed in 2017 to strengthen its effectiveness.
Revise land use regulations and limit discretionary powers of municipalities in No action taken
licensing procedures.
Ease entry requirements for professional services. OECD Competition Assessments of the transport sector and the regulated
professions were published with the cooperation of the Portuguese
Competition Authority in July 2018.
Specifically concerning the construction sector, measures have been
implemented under the Simplex program.
Further reduce trial length and the backlog of pending court cases by No action taken
expanding court capacity and assigning specialised judges to specialised
courts.
Phase out electricity generation schemes with guaranteed prices sooner than No action taken
currently planned.
Improve the efficiency of ports by renegotiating concession contracts, No action taken
attaching service level agreements to any new concessions and promoting
intra-port competition between terminals.
Promote wage bargaining at the firm level, including by placing more binding The Resolution of the Council of Ministers No. 82/2017 established the
limits on administrative extensions of wage agreements. maximum period for consultation and the issuance of extension ordinances to
be 35 working days.
Consider allowing refunds of research and development tax credits for low- SME now have an extended carry-forward period of 12 years. In the context
making firms or extending the carry-forward period significantly. of Programa Capitalizar, a more flexible regime for tax credits was settled.
Raising skills
Target life-long learning programmes towards the low-skilled. The Qualifica programme aims to raise the qualification level of adults.
There is also a specific programme which targets those with the lowest
qualification called Vida Ativa Qualifica+.

ANNEX. PROGRESS IN STRUCTURAL REFORMS │ 59
Systematically monitor the outcomes of the different active labour market A study of active labour market programmes identified that some programmes
programmes with a view to concentrating resources on the more effective had low employability outcomes and led to poor quality employment
programmes. outcomes. These findings prompted a reorientation of the main active labour
market policies with the aim of promoting greater efficiency of employment
supports by public employment services.
Progressively reduce grade repetition in primary and secondary education by The current government is targeting a reduction of 50% of school failure by
identifying students at risk early on and developing early individualised 2020.
support.
Consolidate the two VET systems into a single dual VET with strong workplace No action taken
training and perform a thorough audit of all vocational training programmes.
Strengthen the links between research and the business sector through better The Interface Programme, launched in February 2017, aims to accelerate
incentives for academics to co-operate with industry. technology transfer from universities to companies via Interface Centres
Collect and publish indicators of labour market outcomes (employment, The Institute of Employment and Training publishes data related to registered
unemployment rates, wage premiums) by level of education and area of study unemployment by level of education and field of study and at the regional level.
and at the regional level to allow for better-guided education and career
choices.
Ensure adequate coverage of early childhood care across the country, Additional pre-schooling classes were opened in 2017. A new legal framework
including for children younger than 4 years of age and with a particular focus that dictates children’s allocation to schools takes into account the
on those from disadvantaged socio-economic backgrounds. socioeconomic vulnerability of a family.
Strengthen teacher training and exposure to best practices and enlarge the In 2018/2019, the Ministry of Education will provide a full-time teacher to
probationary induction period for beginning teachers. coordinate each of the the 81 School Associations Training Centres.
Create incentives to attract the most experienced teachers and principals to No action taken
disadvantaged schools.
Take better account of students’ profiles and specific needs when allocating Class size was reduced 2 students per class in the schools of more vulnerable
resources across schools and provide more autonomy to schools to adjust contexts in 2017. In 2018, this reduction was extended to all schools in the
class size accordingly. country.
Reduce labour market duality to improve the job quality and strengthen A tripartite Agreement signed by the Government and the majority of Social
learning incentives. Partners in July 2018 aimed to reduce the maximum accumulation duration of
fixed-term contracts from 3 years to 2 years. It also aimed to increase the
financial contribution of employers that use fixed-term contracts excessively.
Decree Law 72/2017 extended the duration of the exemptions of social
security contributions for young people obtaining their first job (for a period of
five years) and the long-term unemployed (for a period from three to five
years), in order to promote permanent contracts.
Raise managerial skills by developing specific training courses for managers. No action taken

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OECD Economic Surveys

OECD Economic Surveys: Portugal© OECD 2019

OECD ECONOMIC SURVEYS: PORTUGAL 2019 © OECD 2019

OECD ECONOMIC SURVEYS: PORTUGAL 2019 © OECD 2019

Figure B. Public debt has fallen but remains high

been encouraging the employment of such workers

Percentage of loans, 2018 Q3 80

Competition-enhancing reforms to regulatory

OECD ECONOMIC SURVEYS: PORTUGAL 2019 © OECD 2019

OECD ECONOMIC SURVEYS: PORTUGAL 2019 © OECD 2019

MAIN FINDINGS KEY RECOMMENDATIONS

OECD ECONOMIC SURVEYS: PORTUGAL 2019 © OECD 2019

KEY POLICY INSIGHTS

Figure 1. Past structural reforms helped the recovery

Source: OECD Product Market Regulation Indicators.

OECD ECONOMIC SURVEYS: PORTUGAL 2019 © OECD 2019

Figure 2. Wellbeing can be improved along multiple dimensions

B. GDP per capita

OECD ECONOMIC SURVEYS: PORTUGAL 2019 © OECD 2019

Figure 3. The population is expected to age rapidly

OECD ECONOMIC SURVEYS: PORTUGAL 2019 © OECD 2019

Figure 4. Strong exports sustained activity

B. Export performance, Index (2007=100)

OECD ECONOMIC SURVEYS: PORTUGAL 2019 © OECD 2019

4% 2% Euro area 4% Euro area

South America Asia and Oceania

C. Goods by sector D. Services by sector

Machinery and transport

9% Manufactured goods 21%

OECD ECONOMIC SURVEYS: PORTUGAL 2019 © OECD 2019

Figure 6. External imbalances remain high

OECD ECONOMIC SURVEYS: PORTUGAL 2019 © OECD 2019

Figure 7. Investment has recovered despite ongoing corporate sector deleveraging

Source: Statistics Portugal.

OECD ECONOMIC SURVEYS: PORTUGAL 2019 © OECD 2019

Figure 8. House prices have risen strongly

B. House price metrics

Source: Statistics Portugal, OECD Analytical House Price Indicators.

OECD ECONOMIC SURVEYS: PORTUGAL 2019 © OECD 2019

Table 1. Macroeconomic indicators and projections

1. Contribution to changes in real GDP.

Risks to the outlook include a tightening in financial conditions. In particular, an increase in

OECD ECONOMIC SURVEYS: PORTUGAL 2019 © OECD 2019

Figure 9. Macro-financial vulnerabilities remain high in some areas

A. Aggregate indicators B. Individual indicators

- 1.0 Ext. gov. debt - 1.0 Other sect. ext. debt

Gov. gross debt Corporate credit

Fiscal Asset market Gov. budget balance Growth in house prices

Real stock prices House price to inc. ratio

Table 2. Possible shocks to the Portuguese economy

Strengthening the sustainability of public finances

OECD ECONOMIC SURVEYS: PORTUGAL 2019 © OECD 2019

B. Gross government debt (Maastricht definition), percentage of GDP, 2017

Source: OECD Economic Outlook Database; OECD calculations.

OECD ECONOMIC SURVEYS: PORTUGAL 2019 © OECD 2019

Continued consolidation effort Not offsetting increase in age-related costs

Improving the efficiency of public spending

OECD ECONOMIC SURVEYS: PORTUGAL 2019 © OECD 2019

Source: Bank of Portugal, and Statistics Portugal.