COMMISSION STAFF WORKING DOCUMENT Country Report Portugal 2017 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2017 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}
Date: 2017-02-22
Institutions: European Commission, Secretariat-General
Subjects: EU employment policy, EU investment, Portugal, economic development, economic recovery, euro area, fiscal policy, macroeconomics, multilateral surveillance, structural adjustment

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 22.2.2017  SWD(2017) 87 final   COMMISSION STAFF WORKING DOCUMENT Country Report Portugal 2017 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances  Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2017 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011  {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}  
 
 
CONTENTS 

Executive summary 

1. 

Economic situation and outlook 

2. 

Progress with country-specific recommendations 

3. 

Summary of the main findings from the MIP in-depth review 

4. 

Reform priorities 

4.1.  Public finances and taxation 

4.2. 

Financial sector and indebtedness 

4.3. 

Labour market, education and social policies 

4.4. 

Investment 

4.5. 

Sectoral policies 

4.6.  Public administration 

A.  Overview table 

B.  MIP Scoreboard 

C. 

Standard tables 

References 

LIST OF TABLES 

1.1. 

2.1. 

Key economic, financial and social indicators - Portugal 

Summary table on 2016 CSR assessment 

3.1.  MIP assessment matrix - Portugal 2017 

B.1. 

The MIP Scoreboard for Portugal 

C.1. 

Financial market indicators 

C.2. 

Labour market and social indicators 

C.3. 

Expenditure on social protection benefits (% of GDP) 

C.4. 

Product market performance and policy indicators 

C.5.  Green growth 

LIST OF GRAPHS 

1.1. 

1.2. 

1.3. 

Real GDP growth and its components 

Activity, employment and unemployment rates (quarterly) 

Employment by type (permanent, temporary, self-employed), year-on-year changes 

1 

4 

11 

15 

21 

271 

27 

33 

40 

46 

51 

55 

63 

64 

69 

10 

13 

19 

63 

64 

65 

66 

67 

68 

4 

5 

5 

 
 
1.4. 

1.5. 

1.6. 

1.7. 

Inequality of income distribution (S80/S20 income quintile share ratio) 

NIIP and Current Account evolution 

Revealed Comparative Advantage Index (goods) 

Nominal ULC, index 2001Q1=100 

1.8.  Wage growth consistent with constant external competitiveness and actual wage growth 

1.9. 

Productivity decomposition in the overall economy 

1.10. 

Potential growth and its components 

3.1. 

Banking sector situation and domestic debt levels 

4.1.1.  Combined interest rate and GDP growth shock (chart to be updated) 

4.1.2.  Fiscal consolidation 

4.2.1.  Debt breakdown by sector in 2002-2016 

4.2.2.  Breakdown of year-on-year changes in debt-to-GDP ratios, NFCs 

4.2.3.  Breakdown of year-on-year changes in debt-to-GDP ratios, households 

4.2.4.  Breakdown of Portugal's Net International Investment Position (NIIP) 

4.2.5.  Current account financing 

4.2.6.  NIIP sensitivity to macroeconomic shocks 

4.3.1.  Unemployment by duration 

4.3.2.  Main social indicators 

4.4.1. 

Investment productivity 

4.4.2. 

Investment and its components 

4.4.3.  Private and public investments 

4.4.4.  Most problematic factors for doing business 

4.4.5.  World Economic Forum's 2016-2017 Global Competitiveness Report, Portugal 

4.4.6.  Foreign direct investment 

4.4.7.  Component contributions to change in CA balance 2007-2015 

4.4.8.  Nominal unit wage costs by sector 

4.4.9.  Average Quality Rank in the 5 biggest exporting manufacturing sectors 

4.4.10.  Dynamism and Competitiveness of Exports (goods) on top-10 sector destinations 

(2013-2015) 

4.5.1.  Restrictiveness indicator, 2016, Portugal and the EU 

4.5.2.  Shares for selected countries of total EU maritime transport of goods, 2014 

4.5.3.  Wage-adjusted labour productivity of the ports sector 

LIST OF BOXES 

2.1. 

Contribution of the EU budget to structural change in Portugal 

4.4.1. 

Investment Box 

4.6.1.  Selected highlights 

6 

6 

7 

7 

8 

8 

9 

16 

21 

22 

30 

30 

31 

31 

32 

32 

33 

35 

40 

40 

41 

42 

42 

42 

43 

44 

44 

44 

48 

50 

50 

14 

445 

54 

 
 
 
 
EXECUTIVE SUMMARY 

This  report  assesses  Portugal's  economy  in  the 
light  of  the  Commission's  Annual  Growth  Survey 
published on 16 November 2016. In the survey the 
Commission  calls  on  EU  Member  States  to 
redouble their efforts on the three elements of the 
virtuous  triangle  of  economic  policy  –  boosting 
investment,  pursuing  structural 
reforms  and 
ensuring  responsible  fiscal  policies.  In  so  doing, 
Member States should put the focus on enhancing 
social  fairness  in  order  to  deliver  more  inclusive 
growth.  At 
the  Commission 
published the Alert Mechanism Report (AMR) that 
initiated  the  sixth  round  of  the  macroeconomic 
imbalance  procedure.  The  in-depth  review,  which 
the  2017  AMR  concluded  should  be  undertaken 
for  the  Portuguese  economy,  is  presented  in  this 
report. 

the  same 

time, 

to  shocks.  Growth 

While the Portuguese economy has continued to 
recover  for  the  fourth  consecutive  year,  it 
in 
remains  vulnerable 
domestic  demand  is  still  fuelled  by  strong  private 
consumption.  The  conditions 
investment 
remain  challenging  and  continue  to  drag  on 
to 
growth.  However, 
recover in the medium-term with the support from 
EU  funds.  This  will  help  rebalance  the  economy 
by increasing the share of the tradable sectors.  

is  expected 

investment 

for 

risen 

putting 

recently 

pressure 

Recently, there has been a large increase in the 
contribution  made  by  net  external  trade, 
possibly  driven  by  temporary  causes.  A  steady 
increase  in  the  terms  of  trade  has  helped  improve 
the  trade  balance  of  goods.  Yet,  unit  labour  costs 
have 
on 
competitiveness.  Improvements  in  terms  of  trade 
are  expected  to  fade  out  while  robust  domestic 
demand  will  contribute  to  boosting  imports  and 
weakening  the  trade  balance.  Price  pressures  are 
expected  to  re-emerge  again,  mainly  owing  to 
higher  oil  prices.  Employment  is  set  to  improve 
further,  albeit  more  slowly,  becoming  more 
aligned  with  GDP  growth.  Taken  together,  real 
GDP  is  forecast  to  have  decelerated  slightly  in 
2016  before  picking  up  again  in  2017  and  2018. 
Uncertainty  about  investment,  the  banking  sector 
and the implementation of structural reforms pose 
some downside risks to the sustainable recovery.  

Public  finances  are  expected  to  improve,  while 
the  fiscal  outlook  remains  subject  to  downside 
risks. The headline deficit is projected to decrease 
further to 2.0 % of GDP in 2017, mainly as a result 

1 

of  the  moderate  economic  recovery  and  good 
financing  conditions.  However,  uncertainty  about 
the  macroeconomic  outlook,  the  potential  impact 
on  the  deficit  of  banking  support  measures  and 
possible  spending  slippages  pose  risks.  Following 
a steep increase during the economic crisis, public 
debt has stabilised at around 130.0 % of GDP since 
2013.  Supported  by  the  projected  continuing 
moderate 
and  primary 
surpluses, the debt-to-GDP ratio is expected to fall 
gradually from 2017 onwards. The stock of public 
debt,  which  is  still  large,  coupled  with  still 
relatively  high  deficit  levels  and  low  growth, 
makes  Portugal  nevertheless  vulnerable 
to 
changing economic conditions and rising financing 
costs.  

economic 

recovery 

to 

the 

2016 

restructure 

employment 

Overall Portugal has  made limited  progress  on 
addressing 
country-specific 
recommendations. There has been some progress 
in  conducting  an  expenditure  review.  Expenditure 
is  now  subject  to  more  controls  and  expenditure 
containment  with  the  launch  of  spending  reviews 
in  some  sectors.  Some  progress  has  also  been 
made  in  ensuring  the  long-term  sustainability  of 
the  healthcare  sector.  There  has  been  limited 
progress  towards  reducing  the  reliance  of  the 
transfers.  No 
pension  system  on  budgetary 
the 
progress  has  been  made 
state-owned  enterprises  sustainability,  especially 
those in the transport sector. In the labour market, 
limited  progress  has  been  made  towards  keeping 
minimum  wage  developments  at  a  level  which 
promotes 
competitiveness 
although  employment  risks  have  so  far  not 
materialised. There has also been limited progress 
in  ensuring  the  effective  activation  of  long-term 
unemployed,  improving  the  coordination  between 
employment  and  social  services.  Yet,  some 
progress has been made in strengthening incentives 
for  firms  to  hire  through  permanent  contracts.  In 
the  financial  sector,  limited  progress  has  been 
made in tackling the high level of non-performing 
loans  and  improving  the  access  to  finance  for 
start-ups  and  small  and  medium-sized  enterprises 
via  the  capital  market.  Some  progress  has  been 
made in the debt bias in corporate taxation. There 
has been some progress in increasing transparency 
in public procurement, accelerating tax litigations, 
and incentivising cooperation between universities 
and businesses. Limited progress has been made in 
accelerating  licensing  procedures  as  well  as  in 

and 

 
 
Executive summary 

reducing regulatory barriers especially in business 
services. 

Regarding progress in reaching the national targets 
under  the  Europe  2020  strategy,  Portugal  is 
performing  well 
in  reducing  greenhouse  gas 
emissions, the renewable energy target and energy 
efficiency,  as  well  as  reducing  early  school 
leaving.  There  are  still  considerable  obstacles  in 
attaining  the  targets  on  employment  rate,  R&D 
investment, 
tertiary  education  attainment  and 
poverty reduction. 

loans,  Portuguese 

  The large stock of corporate non-performing 
loans  continues  to  pose  challenges  for  the 
banking  sector.  Besides  the  high  level  of 
lenders' 
non-performing 
vulnerabilities stem from different sources: thin 
capital buffers, large amounts of foreclosed real 
estate  assets,  elevated  exposures 
the 
Portuguese  sovereign  debt,  as  well  as  weak 
business models and profit rates of Portuguese 
banks.  Although  some  measures  have  been 
taken  to  reduce  incentives  to  debt  financing, 
corporate  taxation  still  shows  a  relatively  high 
debt bias. 

to 

findings  of 

The  main 
review 
contained  in  this  report  and  the  related  policy 
challenges are as follows: 

in-depth 

the 

  Potential  growth  still 

lags  behind 

its 
pre-crisis level and is below EU average. It is 
affected by persistent bottlenecks and rigidities 
in product and labour markets as well as major 
external imbalances. Efforts to reduce debt and 
the  stock of banks'  non-performing  loans  have 
been  limited,  holding  back  more  sustained 
credit  recovery  and  investment.  At  the  same 
time,  public  debt  sustainability  and 
the 
reduction  of  interest  rate  costs  hinge  on  fiscal 
discipline and the necessary fiscal adjustment.  

  The  external  rebalancing  of  the  Portuguese 
economy  is  underway,  but  at  a  moderate 
pace.  The  current  account 
rebalancing, 
influenced  by  stronger  export  performance,  is 
still having a limited impact on the large stock 
of  net  external  liabilities.  High  external  debt 
and  the  vulnerability  in  the  external  sector  at 
large  are  linked  to  weak  productivity  and 
limited 
competitiveness, 
specialisation  in  sectors  with  higher  value 
added. 

including 

to 

  The  private  business  sector  in  Portugal  is 
over-indebted.  This  is  closely  related  to  the 
ongoing adjustment of the Portuguese banking 
sector.  The  authorities  are  taking  some  policy 
level  of 
measures 
in 
non-performing 
the 
corporate 
business 
administrative 
restructuring 
insolvency 
processes, 
framework 
taxation 
requirements.  

especially 
facilitate 

the 
adjusting 

simplifying 

improving 

the  high 

sector, 

tackle 

loans 

and 

In 

term. 

regarding 

expenditure 

containment 

the  efficiency  of 

  Ensuring  public  debt  sustainability  in  the 
medium  and  long  term  hinges  on  a  solid 
budgetary  consolidation.  It  also  relies  on 
growth  enhancing  structural  measures  as  well 
as 
and 
growth-friendly  optimisation  of  revenue  flows 
indirect 
e.g. 
taxation.  While  reforms  in  the  pension  system 
have  reduced  its  long-term  costs,  it  still  relies 
on  extraordinary  budgetary  transfers  over  the 
the  healthcare  sector, 
medium 
measures  to  promote  prevention  and  primary 
care have been put forward and could probably 
help  cut  costs  in  the  long  term.  However,  the 
growing stock of arrears in hospitals and recent 
measures  concerning  public  sector  working 
hours  weigh  on  the  capacity  to  improve 
services. 
healthcare 
enterprises 
Indebtedness 
remains high, mainly in the transport sector. A 
plan to improve monitoring is being set up, but 
there  are  no  concrete  measures  to  ensure  cost 
efficiency,  and  sound  debt  management.  The 
negative  operational  performance  and  delay  in 
setting  up  a  governance 
for 
metropolitan  transport  further  exacerbate  the 
risks  of  a  debt  increase.  Finally,  the  current 
spending  review  would  benefit  from  a  more 
comprehensive and strategic approach.  

infrastructure 

state-owned 

framework 

and 

of 

  Unemployment 

falling 

and 
keeps 
employment  growing,  while  long-term  and 
youth unemployment  still  remain  high. Half 
of the unemployed have been jobless for a year 
or more, while a quarter of young workers are 
unemployed.  Long-term  unemployment  can 
make  it  harder  to  return  to  work  harming 
Portugal’s growth potential. 

2 

 
 
Executive summary 

Other  key  economic 
to 
particular  challenges  facing  Portugal's  economy 
are as follows: 

issues  which  point 

cooperation  and  knowledge  transfer  remain, 
hampering  innovation  and  the  transition  to  a 
knowledge based economy. 

  Regulatory  and  administrative  barriers, 
restricting investment and efficient resource 
allocation,  have  been  tackled  partially.  The 
government  has  put  forward  measures  to  ease 
businesses'  financing  needs.  Yet,  access  to 
finance  remains  a  concern  for  small  and 
medium-sized  business.  The  authorities  are 
putting  forward  a  framework  for  assessing  the 
legislation  on 
regulatory  burden  of  new 
entrepreneurs. At the same time, there still are 
weaknesses in the areas of the judicial system, 
the  energy  sector, 
the  business 
environment  and  the  innovation  framework. 
There  are  also  barriers  to  the  access  to  certain 
regulated  professions  and  to  more  simplified 
authorisation  procedures.  Previous  reforms 
targeting the most restrictive business services, 
including  regulated  professions,  have  been 
halted and, sometimes, reversed.  

transport, 

  Progress  with  reforming  Portugal's  public 
administration  is  incomplete.  There  is  still  a 
lack  of  a  comprehensive  reform  to  effectively 
rationalise  public  administration.  Coordination 
between  the  central  and  local  levels  is  weak 
without homogenous implementing procedures 
across the different layers of the public sector. 
There are gaps in anti-corruption measures and 
an  overarching  anti-corruption  strategy  is  not 
yet in place. In the judiciary, in spite of efforts 
made,  efficiency 
remain  poor, 
especially for tax and insolvency courts. 

indicators 

awards 

  In  public  procurement,  progress  was  made 
in transparency and reliability of data, while 
competition is still a problem and the use of 
direct 
high.  Other 
limited 
tendering 
weaknesses 
ex-ante  and  ex-post  controls,  lack  of  capacity, 
failure  to  provide  satisfactory  justification  for 
the  recourse  of  direct  awards  and  contract 
splitting.  

remains 

include 

in 

it  poses 

  The  rising  minimum wage may  help  reduce 
in-work  poverty,  but 
some 
employment  risks.  Between  2015  and  2017 
the  minimum  wage rose  faster  than  prices and 
average  productivity.  This  can  reduce  in-work 
poverty 
aggregate  demand 
positively.  At  the  same  time,  it  is  becoming 
increasingly  binding,  covering  a  fifth  of  all 
workers by 2016. Employment risks seem less 
pressing in the current context of job recovery, 
but  remain  a  challenge,  especially  as  regards 
young and low-skilled workers.  

impact 

and 

employers 

  While  incentives  for  firms  to  hire  through 
permanent contracts were strengthened, the 
labour market remains segmented. Although 
financial  incentives  for  permanent  hiring  have 
been adopted, some aspects of labour law may 
still  discourage 
from  hiring 
permanent  workers.  This  has  potentially 
negative  social  consequences  and  hampers 
of 
productivity 
temporary  contracts  may 
labour 
market  turnover.  Younger  people  are  more 
likely to be on such contracts and are thus more 
vulnerable  to  unemployment  spells.  As  they 
have  higher  levels  of  formal  skills,  this  may 
harm potential growth. 

growth.  Extensive 

increase 

use 

  The  proportion  of  people  at  risk  of  poverty 
or social exclusion fell in 2015. This is in line 
with  labour  market  improvements,  but  the 
overall  level  remains  high.  Income  inequality 
also declined. In-work poverty remained one of 
the highest in the EU in 2015, partly due to low 
quality  jobs  and  a  high  involuntary  part-time 
employment. It is still not reflecting the recent 
recovery in the labour market. Measures in the 
area of social assistance were taken in 2016 to 
improve  income  conditions  of  people  in  low 
income households 

  School outcomes are improving but the skill 
level  of  the  labour  force,  including  digital, 
remains low. Tertiary attainment has stagnated 
below EU average and higher education offer is 
scattered. In spite of efforts made, obstacles to 
business 
more 

structured 

university 

3 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth  

Inflation  

recovery 

economic 

Portugal's 
continues, 
supported by a rebound in net exports but held 
back  by  weak  investment.  Annual  real  GDP 
growth  accelerated  significantly  to  1.6 %  in  the 
third  quarter  of  2016.  This  was  due  to  a  strong 
resurgence in exports of goods and services, which 
outweighed  imports  and  increased  the  external 
contribution to economic growth to 0.7 percentage 
points.  Domestic  demand,  which  had  strongly 
fuelled  expansion  in  2015,  reduced  its  positive 
contribution  to  1  pp.  in  the  third  quarter  of  2016. 
This  drop  was  driven  by  falling  investment  and 
slower  growth  in  the  consumption  of  durable 
goods.  Investment  is  estimated  to  have  improved 
only  marginally  by  the  end  of  2016,  due  to 
in  construction  activity,  while 
stabilisation 
employment  growth 
to  drive  private 
consumption  up.  Overall,  the  Commission's  2017 
winter  forecast  estimates  that  real  GDP  growth 
moderated to 1.3 % in 2016.  

is  set 

Graph 1.1: 

Real GDP growth and its components 

Source: European Commission 

Economic  recovery  is  expected  to  pick  up 
modestly  in  2017  and  2018.  Growth  in  private 
consumption  is  also  projected  to  remain  modest, 
reflecting  more  stable  consumption  of  durable 
goods,  a  sustained  high  level  of  household  debt 
and higher oil prices. Coming from a low level in 
2016,  investment  is  set  to  gather  pace  in  2017. 
This  is  driven  by  the  gradual  increase  in  EU 
co-financing  during  the  new  programming  period 
and 
from  external  demand. 
However,  risks  to  the  forecast  are  tilted  to  the 
downside,  as  acceleration  in  growth  will  crucially 
depend  on  investment,  which  has  so  far  remained 
volatile and sensitive to shocks. 

further  support 

4 

Inflation  is  projected  to  rise  moderately  in  the 
medium term. HICP inflation increased to around 
1 %  in  annualised  terms  towards  the  end  of  2016 
on  the  back  of  higher  prices  of  energy  and,  to  a 
lesser  extent,  services.  The  annual  average  rate 
lower  at  0.6 %  reflecting 
however  remained 
downward energy price effects from the beginning 
of  the  year.  HICP  inflation  is  forecast  to  climb 
gradually to 1.4 % in 2018 under the assumption of 
higher  oil  prices  and  related  second-round  effects 
on energy-intensive services.  

Labour market and social conditions 

the  same 

to  stronger  demand  for 

The  recovery  of  the  Portuguese  labour  market 
continued in 2016. Employment growth continued 
at  a  robust  pace  of  2 %  year-on-year  in  Q3-2016, 
labour, 
mainly  due 
especially  services.  At 
the 
unemployment rate fell to 10.5 % in Q4-2016. The 
activity  rate  for  the  20-64  age  group  remained 
close  to  its  historical  highs  at  just  below  80 %  in 
Q3-2016.  Long-term  unemployment 
remained 
high  at  around  60 %  of  total  unemployment  in 
2016 and weighed negatively on potential growth. 
Youth  unemployment,  although  decreasing,  was 
also high at 26.1 % in the third quarter of 2016. 

time, 

fall 

over 

2014-2016.  The 

The  Portuguese  labour  market  showed  strong 
recovery 
in 
unemployment between 2014 and 2016 was about 
4.5 pps. faster than was to be expected on the basis 
of  the  past  relationship  between  GDP  growth  and 
unemployment.  This  overshooting  was  the  largest 
in  the  EU  (European  Commission,  2016a).  The 
relatively  job-rich  recovery  is  probably  linked  to 
factors  including  strong  wage  adjustment  in  the 
previous  years  and  with  recent  labour  market 
reforms.  Strong  growth  in  tourism,  particularly  in 
2016,  is  also  estimated  to  have  had  a  substantial 
positive  impact  on  employment  growth,  as  the 
sector  itself  and  many  related  services  are  labour 
intensive.  Overall,  labour  market  conditions  are 
expected to continue to improve over the medium 
term.  Employment  growth  is  however  set  to  slow 
down  over  the  forecast  horizon.  Along  with  a 
moderate  decrease  in  the  labour  force,  it  is 
expected  to  bring  the  unemployment  rate  from 
around 11 % in 2016 to 9.4 % in 2018.  

-10-8-6-4-20246200120022003200420052006200720082009201020112012201320142015201620172018Inventories investmentInvestment (GFCF)ConsumptionNet exportsReal GDP growthpps. 
 
 
1. Economic situation and outlook 

Graph 1.2:  Activity, employment and unemployment 

rates (quarterly) 

one of the highest in the EU (47 %, Eurostat 2014 
structure  of  earnings  survey).  After  adjusting  for 
personal  characteristics  (such  as  age,  gender  and 
occupation)  it  falls  to  less  than  half  of  this,  but  it 
still remains among the highest. 

Graph 1.3: 

Employment by type (permanent, temporary, 
self-employed), year-on-year changes 

(1) Activity and employment rates (% of population), total, 
ages 20-64, seasonally adjusted       
(2) Unemployment rate (% of labour force), total, ages 
15-74, seasonally adjusted       

Source: Eurostat 

leaving 

Portugal  has  witnessed  negative  net  migration 
flows  since  2011.  The  average  balance  was  about 
32 000  people  per  year 
the  country 
between  2011  and  2014.  More  recently,  the 
situation  has  been 
stabilising,  along  with 
improving  labour  market  conditions.  In  2015  net 
emigration  declined  to  10 500  people  (or  1  per 
1 000  inhabitants).  Young  people  between  15  and 
29  accounted  for  more 
total 
emigration  between  2011  and  2014  and  there  are 
indications 
are 
the 
over-represented (European Commission 2016b). 

than  40 %  of 

high-skilled 

that 

Hiring on permanent contracts continued, while 
labour  market  segmentation  remains  an  issue. 
The  Portuguese  economy  continued  to  add  both 
temporary  and  permanent  jobs  in  2015  and  2016 
(Graph  1.3).  At  the  same  time,  the  creation  of 
permanent  jobs  was  not  sufficient  to  drive  down 
the  share  of  temporary  contracts  in  the  economy. 
Employees with fixed-term contracts accounted for 
22.4 % of total employees in Q3-2016, one of the 
highest  proportions  in  the  EU.  About  a  quarter  of 
temporary  employees  move  on  to  a  permanent 
contract  every  year  (27.3 %  in  2015,  stable  from 
2014  and  slightly  higher  than  the  EU  average  of 
23 % in 2014, EU-SILC data). The wage premium 
of permanent over temporary workers, not adjusted 
for the different composition of the two groups, is 

5 

Source: European Commission  

After  two  years  of  stagnation,  the  rate  of 
persons  at-risk-of-poverty  or  social  exclusion 
declined in 2015. It reached 26.6 % (1), still nearly 
3  pps.  above  the  EU  average.  Children  are 
particularly  affected,  but  their  situation  is  slowly 
improving. In-work poverty is one of the highest in 
the EU, with a sharp increase by 0.2 pps. between 
2014  and  2015  (still,  not  reflecting  the  recent 
minimum  wage  increases  as  it  is  based  in  2014 
this  are 
increases).  The  main 
labour 
low-quality  employment  and 
relationships.  

for 
insecure 

reasons 

the  highest 

Portugal  has  one  of 
income 
inequalities  in  Europe.  Inequality,  as  measured 
ratio (2),  has 
by 
historically been higher than in other EU countries, 
though  it  was  moving  towards  the  EU  average 

income  quintile  share 

the 

(1)  Provisional figures from the national statistical institute for 
2016 point to a further decrease in the at-risk-of-poverty or 
social  exclusion  rate  to  25.1%  and  to  a  stable  in-work 
poverty rate at 10.9%. 

(2)  The  ratio  of  total  income  received  by  the  20 %  of  the 
population  with  the  highest  income  (top  quintile)  to  that 
received  by  the  20 %  of  the  population  with  the  lowest 
income (bottom quintile). 

02468101214161820455055606570758085Q1-2000Q1-2001Q1-2002Q1-2003Q1-2004Q1-2005Q1-2006Q1-2007Q1-2008Q1-2009Q1-2010Q1-2011Q1-2012Q1-2013Q1-2014Q1-2015Q1-2016% of labour force% of populationUnemployment rate 15-74 (rhs)Activity rate 20-64Employment rate 20-64-250-200-150-100-50050100150200250Q1-2000Q1-2001Q1-2002Q1-2003Q1-2004Q1-2005Q1-2006Q1-2007Q1-2008Q1-2009Q1-2010Q1-2011Q1-2012Q1-2013Q1-2014Q1-2015Q1-2016Permanent employeesTemporary employeesSelf employmentOverallthousand people 
 
 
 
                                                           
1. Economic situation and outlook 

to  markedly 

deterioration  of  the  NIIP  but  has  not  yet  been 
sufficient 
improve  Portugal's 
external  position.  The  current  account  improved 
strongly  over  the  past  decade,  from  large  deficits 
to  modest  surpluses.  However,  current  and 
projected  surpluses  fall  short  of  the  estimated 
benchmark of 1.6 % required to halve the negative 
NIIP by 2025. 

Graph 1.5:  NIIP and Current Account evolution 

(1) The cyclically-adjusted CA is defined as the current 
account balance that would emerge at a zero output gap 
in both the country of reference and the partner countries. 
* denotes a forecast figure 
Source: European Commission 

Improvements 

smaller  role. 

important  component  of 

The  most 
the 
sustainable reversal of external imbalances was 
stronger  exports  while  compressed  imports 
played  a 
in 
competitiveness,  resulting  from  adjustments  to 
relative prices and product quality, enabled exports 
to  make  a  growing  contribution  to  reducing  the 
current-account  deficit,  particularly  between  2010 
and  2013.  From  the  second  half  of  2015,  export 
performance  was  hindered  by  a  weak  global 
outlook,  particularly  in  markets  outside  the  EU. 
Yet,  it  improved  significantly  in  the  third  quarter 
of  2016.  This  progress  was  driven  mainly  by 
exceptionally  strong  growth  in  tourism  which, 
however, is not expected to sustain such a fast pace 
in  the  next  few  years.  Moreover,  the  recent 
rebound  in  labour  costs  poses  further  risks  to  the 
country's external competitiveness. In the medium 
term,  exports  are  forecast  to  grow  in  line  with 
foreign  demand.  At  the  same  time  imports  are 

before the crisis (3). This trend reversed since 2010 
as market incomes of poorer households have been 
steadily  eroded,  due  to  rising  unemployment  and 
low wage growth. The tax-benefit system seems to 
have  dampened  the  effect  throughout  the  crisis, 
reducing  inequality  as  measured  by  the  Gini 
coefficient  by about  a  third (4). In 2015,  there  has 
been a modest decline in income inequality, driven 
by  falling  unemployment.  There  was  a  decline  in 
wealth between 2011 and 2015 for all quintiles of 
the  wealth  distribution.  However,  this  drop  was 
more  severe  for  the  poorest  quintile  signalling  a 
worsening of net wealth (5) inequality which is still 
within  the  range  observed  in  other  EU  countries 
for which data were collected in 2013-2014 (ECB 
2016).  Inequalities  in  access  to  healthcare  remain 
critical.  The  gap  between  the  poorest  households 
and  the  richest  in  self-reported  unmet  needs  for 
medical examination increased to 6.7 pps. in 2014 
(EU  average:  4.9),  from  just  2.3  in  2008  (see 
Section 4.3.2). 

Graph 1.4: 

Inequality of income distribution (S80/S20 
income quintile share ratio) 

Source: European Commission 

External rebalancing 

The strong upswing in the current account over 
further 
the  past  decade  prevented 

a 

(3)  From  1995 

to  2002, 

the  10 % 
the 
poorest  %households rose by 12.3 % and continued rising 
until 2007 but have been falling steadily since. 

income  of 

(4)  The  gap  between  the  Gini  coefficient  before  taxes  and 
benefits  and  the  Gini  after  taxes  and  benefits  was  21.5, 
greater  than  the  EU  average  (19.3,  EU-SILC  2015).  The 
Gini coefficient is a value between 0 and 1. Lower values 
indicate higher equality. 

(5)  Difference between total assets and total liabilities. 

6 

4.55.05.56.06.57.07.520052006200720082009201020112012201320142015EUPTincome quintile share ratio-140-120-100-80-60-40-20002040-14-12-10-8-6-4-20242001200220032004200520062007200820092010201120122013201420152016*2017*2018*Net int'l investment position (rhs)Current account (lhs)Cyclically adjusted CA (lhs)%of GDP%of GDP 
 
                                                           
 
1. Economic situation and outlook 

expected to slightly outweigh exports, mainly due 
to increased investment. 

Graph 1.6: 

Revealed Comparative Advantage Index 
(goods) 

The  improvement  in  external  trade  has  been 
driven mainly by services, in particular tourism 
and transport. Both sectors have benefitted from 
positive  external  developments;  a  longer-term 
stable  development  would  depend  on  increased 
investment  and  efficiency.  While  the  negative 
trade  balance  of  goods  almost  reached  13 %  of 
GDP  in  2008,  it  fell  to  around  4 %  in  2016.  A 
steady  increase  in  the  terms  of  trade  has  helped 
improve the trade balance of goods. Yet this price 
effect is expected to reverse due to the increase in 
energy import prices as of the second half of 2016. 
In  addition,  domestic  demand  is  expected  to  push 
up imports over the forecast horizon.  

and 

in 
textiles 

However,  exports  of  goods  in  Portugal  are  still 
mostly concentrated in low technology and high 
intensive  sectors.  Portugal  retains  a 
labour 
the  production  of 
comparative  advantage 
construction  material, 
leather 
production (Graph  1.6).  The lack  of  technological 
innovation could hold back potential growth in the 
export  sector  in  the  medium  term.  The  scope  of 
specialisation in sectors with higher value added is 
relatively  low,  which  limits  the  potential  for 
the 
expanding  market 
sustainability  of  the  rebalancing  process  depends 
largely  on  the  extent  to  which  the  structural 
challenges in the export sector can be resolved (see 
section 4.4.4).  

shares.  Therefore, 

Source: European Commission 

rebound  was  more  significant 

The  resurgence  of  exports  over  the  past  years 
was supported by a decline in labour costs and 
growing productivity. This led to a decline in the 
nominal  unit  labour  costs  (ULC)  in  2010-2015. 
ULC started to rise again towards the end of 2015 
and  the  growth  rate  picked  up  substantially  to 
2.5 %  year-on-year  in  the  third  quarter  of  2016. 
The 
the 
non-tradable  sector  (Graph  1.7),  particularly  in 
construction.  However,  since  2016,  ULC  have 
increased  across  all  sectors  except  agriculture. 
ULC  are  projected  to  increase  only  marginally 
from 2017 due to slower increases of labour costs. 
Risks  to  competitiveness  remain  as  wages  are 
expected to increase (see section 4.3.1) more than 
productivity (see sections 4.3.3 and 4.5). 

in 

Graph 1.7:  Nominal ULC, index 2001Q1=100 

Source: European Commission  

7 

-1.0-0.50.00.51.0Animal & Animal ProductsVegetable ProductsFats And OilsFoodstuffs & TobaccoMineral ProductsChemical ProductsPlastics & RubberRaw Hides, Skins, Leather…Wood & CorkPulp of Wood & PaperTextilesFootwear & HeadgearStone, Cement, Ceramic &…Precious Stones & MetalsMetalsMachinery & ElectricalVehicles, Aircraft, VesselsInstruments & WatchesArms & AmmunitionMiscellaneousArt & AntiquesTrade in goods: Symmetric Revealed Comparative Advantage Index2000200520102015020406080100120140160180200Q4-1995Q4-1996Q4-1997Q4-1998Q4-1999Q4-2000Q4-2001Q4-2002Q4-2003Q4-2004Q4-2005Q4-2006Q4-2007Q4-2008Q4-2009Q4-2010Q4-2011Q4-2012Q4-2013Q4-2014Q4-2015TotalConstructionManufacturingServicesAgricultureIndex(Q1-2001=100) 
 
 
 
1. Economic situation and outlook 

Graph 1.8:  Wage growth consistent with constant external 

Graph 1.9: 

competitiveness and actual wage growth 

Productivity decomposition in the overall 
economy 

Source: European Commission based on the methodology 
described in Arpaia and Kiss (2015)  

Source: European Commission  

labour 

helped 

Nominal  wage  growth  is  estimated  to  have 
turned positive in 2016 in a context of declining 
productivity.  Before  that,  wage  dynamics  and 
rising 
boost 
productivity 
competitiveness  in  almost  every  year  since  the 
crisis,  as  measured  by  the  real  effective  exchange 
rate  (REER)  adjusted  for  ULC  (Graph  1.8).  In 
2016,  nominal  wage  growth  is  estimated  to  have 
turned  positive  but  moderate  (around  1 %).  This 
was  driven  by  the  readjustment  of  public  sector 
wages,  an  increase  in  the  minimum  wage,  and 
wage  hikes  agreed  in  collective  bargaining.  Wage 
growth  is  expected  to  stabilise  just  slightly  above 
1 % in 2017 and 2018 and labour productivity just 
below  1 %,  according  to  the  Commission  2017 
winter  forecast.  Price  setting  mechanisms,  in 
particular  minimum  wage  decisions,  can  hurt 
competitiveness 
by 
not 
productivity gains.  

compensated 

if 

Deleveraging  

Portugal's  high  private  indebtedness  ratios  are 
expected  to  decline  further,  driven  by  output 
expansion and weak credit flows. Since the peak 
in  indebtedness  in  2012,  the  private  sector  has 
reduced its debt. Aggregate bank credit is expected 
to  pick  up  only  gradually  in  the  medium  term  as 
debt levels of the non-financial sector remain high 
with 
compared 
standards. 
the  banking  system  profitability 
Furthermore, 
remains  burdened  by 
stock  of 
non-performing  loans  (NPLs).  Contracting  GDP 
pushed  the  debt-to-GDP  ratio  up  until  mid-2014 
while the subsequent resumption of growth helped 
reduce  the  debt-to-GDP  ratio  (see  section  4.2.4). 
Overall,  deleveraging  is  expected  to  slow  down 
gradually  but  continue  until  a  more  sustainable 
level is reached (6). 

international 

large 

the 

Public finances  

economic 

Public  finances  continue  to  benefit  from  the 
moderate 
the 
favourable  monetary  policy  stance.  Having 
reached 4.4 % of GDP in 2015 (3.1 % of GDP net 
of  one-offs),  the  general  government  deficit  is 
estimated to have fallen to 2.3 % of GDP in 2016, 

recovery 

and 

(6)  According  to  empirical  estimates,  a  private  debt-to-GDP 
level that is higher than 90 % of GDP or 110 % according 
to some other studies is negatively associated with growth 
performance (Cecchetti et al. (2011); Arcand et al. (2012)). 

8 

-4-202468199920002001200220032004200520062007200820092010201120122013201420152016Wage growth consistent with constantULC-based REERActual nominal wage growthpps.0.00.51.01.51995-20052005-2015Change in total labour productivitySectorial productivity growthStructural changespps. 
 
 
                                                           
 
to 

according 
the  Commission's  2017  winter 
forecast.  Lower  regular  revenue  collection  is 
estimated  to  have  been  largely  offset  by  the 
containment  of  expenditure,  in  particular  due  to 
lower  public  investment  and  the  freezing  of 
intermediate  consumption,  and  by  the  revenue 
from  the  extraordinary  debt  settlement  scheme 
PERES.  Borrowing  costs  were  moderated  by  the 
monetary  policy  stance  (particularly  via 
the 
European  Central  Bank's  public  sector  purchase 
programme).  The  headline  deficit  is  projected  to 
fall further to 2.0 % of GDP in 2017, mainly due to 
a  one-off  operation  (a  recovery  of  a  guarantee  to 
the BPP bank worth ¼ pps. of GDP), the continued 
moderate  economic  recovery  and  the  continued 
effects  of 
the  ECB's  public  sector  purchase 
programme. 

the  macroeconomic  outlook, 

Risks  to  the  fiscal  outlook  are  tilted  to  the 
downside.  They  are  linked  to  the  uncertainties 
the 
surrounding 
potential  deficit 
impact  of  banking  support 
measures  (from  the  Caixa  Geral  de  Depósitos 
and  possible 
recapitalisation, 
the  pro-cyclical 
spending 
loosening  of  the  fiscal  policy  stance  in  2015,  the 
fiscal  policy  stance  is  projected  to  have  been  and 
continue  to  be  broadly  neutral  in  both  2016  and 
2017. 

for 
slippages.  After 

example) 

After  reaching  129 %  at  the  end  of  2015, 
Portugal’s  gross  public  debt-to-GDP  ratio  is 
estimated to have risen to 130.5 % in 2016. The 
main  reason  for  the  increase  was  higher  issuance 
of government debt for the planned recapitalisation 
of the state-owned bank Caixa Geral de Depósitos. 
Public  debt  net  of  central  government  deposits  is 
estimated  to  have  slightly  declined  by  around  0.5 
pps.  of  GDP 
in  2016.The  gross  public 
debt-to-GDP ratio is forecast to fall to 128.9 % in 
2017  and  to  127.1 %  in  2018,  due  to  primary 
budget surpluses and continued economic growth. 

Potential growth 

Potential  growth  perspectives  are  being 
dampened  by  the  still  low  level  of  investment. 
While back  to  positive  and  increasing  as  of 2015, 
potential  growth  remains  below  the  European 
average. Different factors are behind the long-term 
decline  in  Portugal's  potential  growth  including 
deteriorating 
to 
emigration  and  ageing),  low  productivity  growth 

demographics 

(both 

due 

1. Economic situation and outlook 

the  decline 

sectors.  Thus, 

and  a  capital  accumulation  process  that  was 
predominantly channelled to investments with low 
productivity.  The  observed  negative  investment 
gap  was  generated  mainly  by  a  fall  in  the 
productivity of capital or by overinvestment in the 
non-tradable 
in 
investment  observed  in  Portugal  since  2010  is 
driven  mainly  by  a  fall  in  investment  in  the  non-
tradable  sector  which 
implies  an 
adjustment  of 
tradable,  more 
productive, sectors. Portugal still faces quite a few 
obstacles 
sustainable 
acceleration  of  capital  accumulation.  These  are 
related  to  the  vulnerability  of  the  financial  sector, 
weaknesses  of  the  corporate  sector,  and  some 
structural  gaps  in  business  environment  (Box 
4.4.1). 

then  also 
to 

prevent  more 

investment 

that 

Graph 1.10:  Potential growth and its components 

Source: European Commission 

Outward migration and ageing are reducing the 
working-age  population  which  weighs  on  the 
long-term  growth  potential.  The  projected 
decline in the working-age population is hindering 
the  convergence  of  the  country's  growth  potential 
towards  the  EU  average.  Emigration  of  youth 
(whose  education  levels  are  increasingly  higher 
than in the rest of the workforce 67 % being mid or 
highly  educated  of  those  between  25-34  against 
only 38 % of population above 35) combined with 
high levels of youth unemployment in the wake of 
the  crisis  involves  the  risk  of  erosion  in  human 
capital,  with  a  negative  impact  on  potential 
growth.  

9 

-2.0-1.5-1.0-0.50.00.51.01.52.02.5200420052006200720082009201020112012201320142015201620172018201920202021Capital Accumulation ContributionTFP ContributionTotal Labour (Hours) ContributionPF Potential GrowthEU Potential Growthy-o-y % change 
 
1. Economic situation and outlook 

Table 1.1: 

Key economic, financial and social indicators - Portugal 

(1) Sum of portfolio debt instruments, other investment and reserve assets 
(2.3) domestic banking groups and stand-alone banks. 
(4) domestic banking groups and stand-alone banks, foreign (EU and non-EU) controlled subsidiaries and foreign (EU and 
non-EU) controlled branches. 
(*) Indicates BPM5 and/or ESA95 
Source: European Commission, ECB 

10 

2004-20082009201020112012201320142015201620172018Real GDP (y-o-y)1.4-3.01.9-1.8-4.0-1.10.91.61.31.61.5Private consumption (y-o-y)1.9-2.32.4-3.6-5.5-1.22.32.62.11.61.2Public consumption (y-o-y)1.32.6-1.3-3.8-3.3-2.0-0.50.80.60.40.5Gross fixed capital formation (y-o-y)0.6-7.6-0.9-12.5-16.6-5.12.34.5-1.53.84.2Exports of goods and services (y-o-y)4.9-10.29.57.03.47.04.36.13.94.14.2Imports of goods and services (y-o-y) 5.0-9.97.8-5.8-6.34.77.88.23.94.34.3Output gap0.0-1.90.0-1.3-4.1-4.3-3.1-1.6-0.70.20.9Potential growth (y-o-y)0.9-0.10.0-0.5-1.2-0.9-0.40.10.40.70.9Contribution to GDP growth:Domestic demand (y-o-y)1.6-2.81.1-5.7-7.3-2.01.72.51.31.71.5Inventories (y-o-y)0.2-1.20.9-0.4-0.30.00.40.00.00.00.0Net exports (y-o-y)-0.50.9-0.14.33.60.9-1.3-0.80.0-0.10.0Contribution to potential GDP growth:Total Labour (hours) (y-o-y)-0.4-1.0-1.0-1.1-1.4-1.0-0.3-0.10.10.20.3Capital accumulation (y-o-y)0.80.50.40.1-0.3-0.3-0.3-0.2-0.2-0.2-0.1Total factor productivity (y-o-y)0.50.50.60.50.40.30.30.40.50.60.6Current account balance (% of GDP), balance of payments-10.1-10.4-10.1-6.0-1.81.50.10.4...Trade balance (% of GDP), balance of payments-8.4-6.7-7.1-3.70.11.91.11.8...Terms of trade of goods and services (y-o-y)-0.64.8-1.3-2.00.51.71.23.41.1-0.40.0Capital account balance (% of GDP)1.31.21.41.52.11.61.51.2...Net international investment position (% of GDP)-80.0-107.9-104.3-100.7-116.5-116.3-114.9-109.3...Net marketable external debt (% of GDP) (1)-50.5*-74.6*-72.6*-72.9-82.0-81.3-84.6-82.2...Gross marketable external debt (% of GDP) (1)178.0215.3215.3205.7219.1206.8214.5202.2...Export performance vs. advanced countries (% change over 5 years)4.2-0.30.7-0.2-6.71.51.64.97...Export market share, goods and services (y-o-y)-2.20.0-8.90.4-4.56.81.4-1.0...Net FDI flows (% of GDP)0.0-0.8-5.12.5-7.9-1.8-1.6-0.5...Savings rate of households (net saving as percentage of net disposable income)0.62.71.3-0.9-0.5-0.2-3.3-4.0...Private credit flow, consolidated (% of GDP)14.35.35.3-0.9-3.6-1.8-5.8-2.3...Private sector debt, consolidated (% of GDP)179.0204.1201.5204.2211.7204.3192.4181.5...of which household debt, consolidated (% of GDP)83.192.190.790.590.786.382.377.5...of which non-financial corporate debt, consolidated (% of GDP)95.9112.0110.8113.7121.0118.0110.1104.0...Corporations, net lending (+) or net borrowing (-) (% of GDP)-6.1-3.6-1.20.72.73.56.04.32.92.93.7Corporations, gross operating surplus (% of GDP)19.920.820.821.021.221.321.621.821.922.223.1Households, net lending (+) or net borrowing (-) (% of GDP)1.74.43.42.62.93.62.21.01.41.21.1Deflated house price index (y-o-y)-1.11.0-1.0-6.5-8.7-2.73.92.3...Residential investment (% of GDP)5.54.13.63.32.92.52.52.5...GDP deflator (y-o-y)2.71.10.6-0.3-0.42.30.82.11.51.41.4Harmonised index of consumer prices (HICP, y-o-y)2.6-0.91.43.62.80.4-0.20.50.61.31.4Nominal compensation per employee (y-o-y)3.12.42.1-1.8-3.13.6-1.8-0.31.41.21.2Labour productivity (real, person employed, y-o-y)1.4-0.33.40.10.11.8-0.50.2...Unit labour costs (ULC, whole economy, y-o-y)1.62.7-1.2-2.0-3.21.8-1.3-0.51.30.40.3Real unit labour costs (y-o-y)-1.11.6-1.9-1.7-2.8-0.5-2.0-2.5-0.2-0.9-1.1Real effective exchange rate (ULC, y-o-y)0.00.0-2.5-2.3-5.82.6-1.7-3.61.2-0.6-1.4Real effective exchange rate (HICP, y-o-y)0.5-0.6-3.10.7-1.60.3-0.5-2.61.5-1.1.Tax rate for a single person earning the average wage (%)22.422.622.924.522.827.527.228.3...Tax rate for a single person earning 50% of the average wage (%)14.0*13.813.914.211.011.011.011.0...Total Financial sector liabilities, non-consolidated (y-o-y)8.56.76.3-8.4-0.4-4.90.9-1.9...Tier 1 ratio (%) (2).7.57.98.111.011.711.012.1...Return on equity (%) (3).4.26.3-5.4-5.0-11.9-21.8-1.6...Gross non-performing debt (% of total debt instruments and total loans and advances) (4).2.53.75.37.07.812.714.4...Unemployment rate8.710.712.012.915.816.414.112.611.210.19.4Long-term unemployment rate (% of active population)3.64.25.76.27.79.38.47.2...Youth unemployment rate (% of active population in the same age group)20.925.328.230.238.038.134.732.028.2..Activity rate (15-64 year-olds)73.473.473.773.673.473.073.273.4...People at risk of poverty or social exclusion (% total population)25.924.925.324.425.327.527.526.6...Persons living in households with very low work intensity (% of total population aged below 60)6.67.08.68.310.112.212.210.9...General government balance (% of GDP)-4.7-9.8-11.2-7.4-5.7-4.8-7.2-4.4-2.3-2.0-2.2Tax-to-GDP ratio (%)34.533.433.735.534.537.237.137.137.236.936.6Structural budget balance (% of GDP)..-8.5-6.6-3.5-2.9-1.7-2.2-2.2-2.3-2.6General government gross debt (% of GDP)67.783.696.2111.4126.2129.0130.6129.0130.5128.9127.1forecast 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

the 

the 

Semester 

implementation  of 

introduction  of 
2011. 
in 

the 
Progress  with 
recommendations  addressed  to  Portugal 
in 
2016 (7)  has  to  be  seen  in  a  longer  term 
the 
perspective  since 
European 
Portugal 
successfully  completed  the  three  year  EU-IMF 
financial  assistance  programme  in  2014.  In  the 
course of the programme, it adopted a wide range 
of  structural  reforms.  While  implementing  the 
one 
programme, 
received 
country-specific  recommendation 
the 
programme commitments (8). As of 2014, Portugal 
returned  to  the  regular  cycle  of  EU  economic 
surveillance  under  the  European  Semester  and 
received a full set of recommendations.  

only 
to  meet 

Portugal 

an 

and 

carried  out 

for 
ambitious 

the  public  and  private, 
increase 
imbalances  and 

The  reform  efforts  over  the  period  2011-2016 
to  become  more 
have  helped  Portugal 
investors. 
competitive  and  attractive 
fiscal 
Portugal 
consolidation  underpinned  by  a  number  of  fiscal 
governance 
structural-fiscal  measures 
(organisation  of  public  administration,  public 
finance management, tax administration, SOEs and 
PPPs). A number  of  measures  were  carried out  to 
internal  and 
unwind 
external 
the  growth 
potential, while mitigating negative social impacts. 
In  light  of  the  need  of  correcting  the  country's 
imbalances,  the  authorities  introduced  reforms  to 
product  markets 
services, 
telecommunications, and transport), labour market 
time  arrangements, 
(wage 
individual  dismissal,  unemployment  benefits, 
active  labour  market  policies),  education  system 
(increased number of compulsory education years, 
enhanced  vocational  and  professional  training, 
enhanced  external  evaluation  and  transparency), 
business  environment  (licensing,  services  and 
regulated  professions), 
(new 
insolvency,  arbitration,  competition  laws  and  new 
judiciary  map).  Measures  were  also  targeted  at 
strengthening  the  banking  sector.  Despite  those 
reforms, policy gaps persist regarding product and 
services  markets,  corporate  debt  restructuring, 
fiscal  issues  and  selected  areas  of  the  labour 
market. 

(energy,  housing, 

setting,  working 

judicial 

sector 

(7)  For  the  assessment  of  other  reforms  implemented  in  the 

past, see in particular section 4. 

(8)  European Commission, Ex-post evaluation of the economic 
adjustment  programme,  Portugal  2011-2014,  Institutional 
paper 040, November 2016 

Overall, Portugal has made limited progress (9) 
in  addressing 
country-specific 
the  2016 
recommendations. 

revenue 

improving 

There  has  been  limited  progress  towards  making 
public  finances  more  sustainable  (CSR1).  A  solid 
budgetary  consolidation  relies  on  the  timely  and 
strict  implementing  the  budget  framework  law, 
reviewing  and  rationalising  public  spending  and 
further 
collection.  The 
restructuring  of  state-owned  enterprises,  to  make 
them  fiscally  sustainable,  has  not  still  been  fully 
addressed.  The  reliance  of  the  pension  system  on 
budgetary  transfers  has  only  been  reduced  to  a 
limited  extent 
intergenerational 
thus  creating 
inequalities.  In  the  health  sector,  the  government 
has  adopted  measures  aimed  at  promoting  disease 
prevention and public health policies. At the same 
time, given the lack of sound budget planning and 
implementation in hospitals they are not enough to 
guarantee arrears clearance and spending control. 

(CSR2).  After  consulting 

Portugal made limited progress in ensuring that the 
minimum wage is consistent with the objectives of 
promoting employment and competitiveness across 
sectors 
the  social 
partners,  the  government  has  raised  the  minimum 
wage  by  5.1 %,  beyond  inflation  and  average 
increasing 
productivity  developments.  While 
aggregate  demand  and  contributing  to  reducing 
in-work  poverty,  by  growing  faster  than  overall 
compensation  per  employee  and  covering  an 
increasing  share  of  workers,  it  may  make  the 
hiring  of  especially  lower  productivity  workers 
harder. The government has established a structure 
to  monitor 
impact  of  minimum  wage 
developments.  Its  quarterly  reports  are  discussed 
with social partners.  

the 

the 

Some  progress  has  been  made  regarding  the 
labour  market 
recommended  reforms  on 
(CSR3). While limited progress has been observed 
in effectively activating the long-term unemployed 
and  coordinating  employment  and  social  services 
there  is  some  progress  in  reducing  labour  market 
segmentation. A study has been conducted into the 
effectiveness  of  active  labour  market  policies. 

(9)  Information on the level of progress and the actions  taken 
to address the policy advice in each respective subpart of a 
CSR is presented in the Overview Table in the Annex. This 
overall  assessment  does  not  include  an  assessment  of 
compliance with the Stability and Growth Pact. 

11 

 
 
                                                           
                                                           
2. Progress with country-specific recommendations 

Based on its results, the government redesigned its 
employment support programme to promote hiring 
on  open-ended  contracts  though  the  number  of 
people  covered  by  this  measure  is  limited.  At  the 
same time, long-term unemployment remains high. 
The  introduction  of  one  stop  shops  for  both 
employment  and  social  services  is  also  planned, 
but has not yet been implemented.  

Progress  in  the  financial  sector  (CSR4)  remains 
limited.  Despite  some  actions  taken  recently  to 
address  the  high  stock  of  non-performing  loans, 
there  is  no  comprehensive  strategy.  Efforts  to 
provide  alternative  means  of  financing  remain 
limited. The authorities have published a strategic 
plan to support the capitalisation of companies (the 
Capitalizar Programme) which has yet to be fully 
implemented. The debt bias in corporate taxation is 
addressed  by  broadening 
the 
allowance for corporate equity regime.   

the  scope  of 

to 

in 

improvements 

Some  progress  has  been  observed  in  removing 
regulatory  barriers  and  improving  the  business 
environment 
(CSR5).  The  authorities  have 
introduced  some  measures  to  make  the  justice 
system  more  efficient,  especially  as  regards 
organisational 
the  courts. 
However, the sector's overall performance remains 
low, especially where dealing with tax litigation is 
concerned.  Measures  are  ongoing  to  improve 
transparency and reliability of public procurement 
data and practices. The government has established 
quarterly  monitoring  and  reporting  procedures 
related 
local  and  regional  public  private 
partnership and concessions, but the relatively high 
use of direct awards remains a concern. Licensing 
has been reformed, but its uneven implementation 
across different layers of the public administration 
is  detrimental 
investment. 
Existing  regulatory  barriers  in  some  business 
services sectors  still  prevent resources  from being 
allocated  efficiently.  Portugal  is  developing  a  set 
improve  university-business 
of  measures 
cooperation 
commercialisation  of 
the 
knowledge.  The  government  is  currently  working 
on an international revision of the higher education 
system.  Nevertheless,  an  overall  strategy  to  foster 
cooperation  between  universities  and  the  business 
sector has not so far been implemented. 

to  confidence  and 

to 
and 

12 

 
 
2. Progress with country-specific recommendations 

Table 2.1: 

Summary table on 2016 CSR assessment 

Source: Commission Services 

13 

PortugalOverall assessment of progress with 2016 CSRs:  Limited progress[1]Limited progressSome progress in conducting a comprehensive expenditure reviewSomeprogressinensuringthelong-termsustainabilityofthehealthcaresectorandaccesstoprimary care Limited progress in reducing the reliance of pension system on budgetary transfers.No progress in refocusing restructuring plans of State Owned Enterprises   Limited progressCSR2:Inconsultationwithsocialpartners,ensurethattheminimumwageisconsistentwiththeobjectivesofpromotingemploymentandcompetitivenessacrosssectors. (MIP relevant)Limited progress as regards the minimum wage.Some progressLimitedprogressinensuringeffectiveactivationoflong-termunemployedandinimproving the coordination between employment and social services.Limited progressLimited progress in facilitating the cleaning up of the balance sheets of credit institutionsSome progress in reducing the debt bias in corporate taxation.Limitedprogressinimprovingtheaccesstofinanceforstart-upsandsmallandmedium-sized enterprises via the capital marketSome progressSome progress in increasing transparency in public procurement.Limited progress in improving and accelerating licensing procedures by the end of 2016Some progress in accelerating tax litigations by the end of 2016Limitedprogressinreducingregulatorybarriersespeciallyinbusinessservicesbytheendof 2016Some progress in incentivising cooperation between universities and the business sector[1] This overall assessment of CSR1 does not include an assessment of compliance with the Stability and Growth Pact.CSR1:Ensureadurablecorrectionoftheexcessivedeficit,inaccordancewiththerelevantdecisionsorrecommendationsundertheexcessivedeficitprocedure,bytakingthenecessarystructuralmeasuresandbyusingallwindfallgainsfordeficitanddebtreduction.Thereafter,achieveanannualfiscaladjustmentofatleast0,6%ofGDP.Conduct,byFebruary2017,acomprehensiveexpenditurereviewandstrengthenexpenditurecontrol,costeffectivenessandadequatebudgetingatalllevelsofpublicadministration.Ensurethelong-termsustainabilityofthehealthsector,withoutcompromisingaccesstoprimaryhealthcare.Reducetherelianceofthepensionsystemonbudgetarytransfers.Bytheendof2016,refocusongoingrestructuringplansof state-owned enterprises. (MIP relevant)CSR3:Ensuretheeffectiveactivationofthelong-termunemployedandimprovethecoordinationbetweenemploymentandsocialservices.Strengthenincentivesforfirmstohirethroughpermanentcontracts.(MIPrelevant)CSR4:Takemeasures,byOctober2016,tofacilitatethecleaningupofthebalancesheetsofcreditinstitutionsandaddressthehighlevelofnon-performingloans.Reducethedebtbiasincorporatetaxationandimprovetheaccesstofinanceforstart-upsandsmallandmedium-sizedenterprisesviathecapitalmarket. (MIP relevant)CSR5:Increasetransparencyandefficiencyinpublicprocurementasregardspublic-privatepartnershipsandconcessions.Bytheendof2016,improveandaccelerateadministrativeandlicensingprocedures,acceleratetaxlitigationsandreduceregulatorybarriers,especiallyinbusinessservices.Incentivisecooperationbetweenuniversitiesandthebusinesssector. (MIP relevant)Some progress in strengthening incentives for firms to hire through permanent contracts. 
 
 
 
 
2. Progress with country-specific recommendations 

14 

 Box 2.1: Contribution of the EU budget to structural change in PortugalPortugal is a significant beneficiary of European Structural and Investment Funds (ESI Funds), with an allocaton of up to EUR 25.8 billion until 2020. This is equivalent to around 2 % of GDP annually (over 2014-2017) and 73 % of the total public investment1. Out of the EU financing EUR 2.6 billion is planned to be delivered via financial instruments, which is five times higher than the previous period. By 31 December 2016, an estimated EUR 11.4 billion, which represents about 44 % of the total allocation for ESI Funds, have been allocated to concrete projects.  Financing under the European Fund for Strategic Investments, Horizon 2020, the Connecting Europe Facility  and other directly managed EU funds is additional to the ESI Funds. By end 2016, Portugal has signed agreements for nearly EUR 573 million for projects under the Connecting Europe Facility. The EIB Group approved financing under EFSI amounts to EUR 1 billion, which is expected to trigger nearly EUR 3.4 billion in total investments (as of end 2016).  ESI Funds helped progress on a number of structural reforms in 2015 and 2016 via ex-ante conditionalities2 and targeted investment. Examples include the creation of a national system of credits and a national quality assurance system for vocational education and training, and building administrative capacity of the Public Administration, the development of the transport plan which contributes to focus investments on mature and strategic projects, and of specialisation strategies which favour synergies between public and private partners aiming at concentrating efforts and investments on each region’s relative strengths. These reforms have prepared the ground for better implementation of public investment projects in general, including those financed from national sources and from the other EU instruments mentioned above. The fulfilment of ex-ante conditionalities is on track. Administrative reforms support is also available through targeted financing under the European Social Fund, advice from the Structural Reform Support Service and, indirectly, through technical assistance.  The relevant CSRs focusing on structural issues were taken into account when designing the 2014-2020 programmes. Compared to the 2007-2013 programming period, there is a significant increase in innovation, R&D, SME support and low-carbon economy. This renewed focus of the funds reflects the need of rebalancing the Portuguese economy towards a higher share of the tradable sectors while alleviating the effects of the economic adjustment on the most vulnerable parts of the population and reducing social and territorial disparities.  In addition to challenges identified in the past CSRs, ESI Funds address wider structural obstacles to growth, competitiveness and job creation. These include improving the access to finance for small and medium-sized enterprises, incentivising research and cooperation between universities and the business sector, promoting the qualification of human capital and improving the functioning of employment and social services. EU investments are expected to support more than 24 500 enterprises, increasing the share of exports in the SMEs turnover (estimated to reach 27 % of SMEs turnover by 2023) and favouring job creation (more than 35 000 direct jobs estimated) and will incentivize innovative projects favouring cooperation between research institutions and more than 1 300 enterprises. R&D expenditure of companies is projected to rise considerably, from 1.2 % (2012) to 2 % of GVA by 2023, contributing to increase the overall R&D expenditure. https://cohesiondata.ec.europa.eu/countries/PT                                                             1 National public investment is defined as gross capital formation + investment grants + national expenditure on agriculture and fisheries 2 Before programmes are adopted, Member States are required to comply with a number of ex-ante conditionalities, which aim at improving framework and conditions for the majority of public investments areas. For Members States that did not fulfil all the ex-ante conditionalities by the end 2016, the Commission has the possibility to propose the temporary suspension of all or part of interim payments.  
 
 
 
 
 
3.  SUMMARY OF THE MAIN FINDINGS FROM THE MIP IN-

DEPTH REVIEW 

The  2017  Alert  Mechanism  Report  called  for 
further in-depth analysis to monitor progress in 
the  unwinding  of  the  excessive  imbalances 
identified  for  Portugal  in  the  2016  MIP  cycle. 
The  selection  was  also  motivated  by  the  fact  that 
identified  as  having  excessive 
Portugal  was 
imbalances  in  spring  2016,  so  that  a  new  IDR  is 
needed to assess how these imbalances evolve. The 
excessive 
external 
liabilities,  high  levels  of  private  and  public  debt 
levels  and  high  unemployment  in  a  low-growth 
environment.  

imbalances 

from 

arise 

to 

sector,  access 

identified  have  developed. 

Analyses  integrated  in  this  Country  Report 
provide  an  in-depth  review  (IDR)  of  how  the 
imbalances 
In 
particular,  analysis  relevant  to  the  IDR  may  be 
found  in  the  following  sections:  Public  finances 
and  taxation  (see  Section  4.1);  Financial  sector: 
banking 
finance,  private 
indebtedness,  vulnerability  linked  to  the  highly 
negative net international investment position (see 
Section  4.2);  Labour  market:  high  youth  and 
long-term  unemployment 
(see  Section  4.3); 
Investment:  external  competitiveness,  private  and 
public 
investment,  business  environment  (see 
Section  4.4);  Sectoral  policies:  R&I,  competition 
in product and services markets (see Sections 4.5.1 
and  4.5.2);  Public  administration:  efficiency  of 
public administration, public procurement, judicial 
system (see Section 4.6) 

indebtedness  remains  amongst 

still well above prudent levels in a context of also 
high  government  debt  and  low  potential  growth 
and  inflation.  Total  household  non-consolidated 
debt  reached  76 %  of  GDP  in  early  2016  and 
non-consolidated  corporate  debt  was  over  117 %. 
the 
Corporate 
highest  in  the  EU  and  deleveraging  needs  in  this 
sector  are  assessed  at  between  10 %  and  20 %  of 
GDP (10).  The  share  of  non-performing  loans 
(NPLs) has stabilized although at a high level over 
the  recent  quarters,  while  it  is  still  increasing  in 
some sectors, in particular construction, real estate 
and trade.  

The  large  stock  of  corporate  non-performing 
loans,  low  profitability,  exposure  to  sovereign 
debt risks and weak capital buffers are putting 
pressure on the banking sector. The deterioration 
in  the  quality  of  assets,  in  particular  in  the 
corporate  sector  where  the  ratio  of  overdue  loans 
was 16.2 % in the end of first half 2016, weighs on 
the  banking  sector's  aggregate  balance  sheet.  It  is 
one  of  the  factors,  along  with  demand  for  loans 
and  low  capital  buffers  to  impede  the  productive 
allocation of credit and investment.  

(10)  Although  the  exact  figures  differ  among  studies,  it  is 
estimated  that  a  private  debt-to-GDP  level  that  is  higher 
than  90 %  of  GDP  or  110 %  according  to  some  other 
studies  is  negatively  associated  with  growth  performance 
(Cecchetti et al. (2011); Arcand et al. (2012)). 

3.1. 

IMBALANCES AND THEIR GRAVITY 

international 

The  net 
investment  position 
(NIIP)  remains  negative.  It  was  close  to  -110 % 
of GDP in 2015, one of the most negative NIIPs in 
the EU, well beyond its estimated prudential level 
of  -48 %.  Moreover,  its  composition  is  tilted 
towards  marketable  debt  rather  than  more  stable 
FDI  and  equity  components.  Improved  growth 
prospects and continuous current account surpluses 
of  around  1.6 %  of  GDP  per  year  would  be 
required  to  halve  the  negative  NIIP  and  reach  a 
more sustainable position by 2025. 

Some  deleveraging  efforts,  in  particular  for 
households,  notwithstanding, 
the  private 
debt-to-GDP  ratio  remains  high.  Private  debt  is 

15 

 
 
                                                           
 
3. Summary of the main findings from the MIP in-depth review 

Graph 3.1: 

Banking sector situation and domestic debt 
levels 

3.2. 

EVOLUTION, PROSPECTS, AND POLICY 
RESPONSES 

The  net  international  investment  position  has 
improved  somewhat  from  its  low  level.  The 
current  account  has  moved  to  a  broadly  balanced 
position  since  2013.  Small  surpluses  are  expected 
from  2016  onwards,  also  in  cyclically-adjusted 
terms and when controlling for REER effects. The 
NIIP is expected to continue slowly improving on 
the back of moderate nominal growth and modest 
current account surpluses which, on their own, are 
not however sufficient for a rapid return to a more 
sustainable external position. 

levels  of  non-performing 

Private sector debt is slowly declining, while the 
loans 
still  high 
represent  obstacles  to  new  lending.  Private 
sector deleveraging has continued moderately in a 
difficult  situation  characterised  by  low  banks' 
profitability,  high  NPLs  and  reduced  capital 
buffers. Along with most EU countries affected by 
a high level of NPLs these have either stabilised or 
reduced  in  recent  years,  with  the  exception  of  the 
corporate segment of the portfolio, where the NPL 
ratio continued to increase.  

to 

sector,  access 

Measures  have  been  taken  regarding  the 
finance  and 
financial 
insolvency  procedures.  The  level  of  private  debt 
imbalances  remains  high,  while  alternative  means 
of financing are still limited. Key areas of concern 
are  Portuguese  banks'  low  profitability,  asset 
quality (the ratio of NPLs is high and increasing in 
the  corporate  segment), 
thin  capital  buffers, 
exposure  to  sovereign  debt,  and  high  corporate 
debt  overhang.  The  main  challenge  is  to  maintain 
orderly  corporate  deleveraging  while  minimising 
the ensuing burden on the economy. 

Public  debt  has  stabilised  at  a  high  level.  A 
contracting  economy  and  high  budget  deficits  put 
the  gross  public  debt-to-GDP 
ratio  on  an 
increasing  trend  until  2013.  Fiscal  consolidation 
was  difficult  in  a  recessionary  environment.  The 
economic  recovery  has  helped  stabilise  the  gross 
public  debt-to-GDP  ratio  at  around  130 %  since 
2014.  On  the  back  of  the  projected  continued 
moderate  recovery  and  primary  surpluses,  it  is 
expected to decline somewhat, to around 124 % of 
GDP by 2027. Adverse shocks, such as an increase 
in  interest  rate,  may  put  Portugal’s  public  debt 
ratio on an unsustainable path. 

(1) The bubble size represents the magnitude of the public 
and private debt-to-GDP ratio as of year-end 2015. 
Source: Eurostat and ECB 

The  level  of  public  debt  implies  risks  to  fiscal 
sustainability,  making  Portugal  vulnerable  to 
adverse  shocks.  The  government  debt-to-GDP 
ratio  remains  high  at  around  130 %.  Changes  in 
financial 
could 
substantially  increase  financing  costs.  Moreover, 
the  pace  of  downward  adjustment  hinges  on  the 
authorities' ability to maintain fiscal discipline and 
implement  effective  measures  to  guarantee  the 
required fiscal adjustment. 

conditions 

economic 

or 

Portugal  still  faces  challenges  in  the  labour 
market.  Although  unemployment  has  been 
declining,  youth  and  long-term  unemployment 
remain  high.  At  26 % 
in  Q3-2016  youth 
unemployment  is  among  the  highest  in  the  EU. 
Long-term  unemployment  at  6 %  in  the  same 
period  represents  more  than  half  of  all  those 
unemployed.  Moreover, 
market 
segmentation  continues  to  hinder  productivity 
growth,  leaving  young  people  —  who  are  more 
educated  on  average  —  with  unstable  contracts 
while  labour  market  adjustment  has  had  profound 
social  implications.  High  levels  of  long-term  and 
youth unemployment increase the risk that jobless 
people  will  disengage  from  the  labour  market, 
gradually losing their skills and employability. 

labour 

16 

ATBEHRCYCZDKEEFIFRDEELHUIEITLVLTLUMTNLPLPTROSKSIESSEUK-20-15-10-5051015201015202530Return on equity (2015)Tier 1 ratio (Q4-2015)Increasing banking system vulnerability 
 
3. Summary of the main findings from the MIP in-depth review 

future shocks. At the same time reducing corporate 
debt  would  make  the  private  sector  more  flexible 
in  dealing  with  sudden  shocks,  mitigating  the 
spill-overs which shocks to firms have on the rest 
of  the  economy.  Lower  unemployment  would 
prevent  major  negative  impacts  on  aggregate 
demand,  which  could  occur  through  a  decline  in 
consumption  or  an  expansion  in  unemployment 
benefits.  Overall,  these  adjustments  would  also 
help  improve  the  NIIP,  Measures  designed  to 
improve export competitiveness could also help. 

a 

for 

is  a 

there 

challenge 

While  some  progress  has  been  made,  there  is 
further  potential  for  structural  reforms  in 
several  areas.  Progress  has  been  made  so  far  in 
improving  the  efficiency  of  the  Portuguese  public 
lack  of 
administration.  However, 
rationalising and modernising central, regional and 
local  public  administration.  Measures  have  been 
taken  to  improve  the  operation  of  the  judicial 
system, but efficiency indicators remain very poor 
especially  for  tax  courts.  It  is  still  not  possible  to 
evaluate  and  monitor  the  housing  market  reforms 
properly.  There  is  no  systematic  monitoring  and 
reporting underpinned by precise and relevant data 
on  key  drivers  of  that  market.  There  have  been 
improvements in the dedicated online platform for 
public procurement which provides a large amount 
of data on public contracts. However, transparency 
remains 
public-private 
partnerships.  This  is  particularly  applicable  to  the 
local  and  regional 
to  concession 
contracts.  Portugal  has  one  of  the  most  restrictive 
business services regulation in the EU. As a result, 
productivity  growth  remains  limited,  it  is  more 
difficult  for  new  players  to  enter  the  market,  and 
the  price  for  services  is  higher  than  it  should  be. 
to 
There  are  outstanding  barriers 
professions  and  to  more  simplified  authorisation 
which  adversely  affect  external  and 
internal 
competition  within 
the  Portuguese  economy. 
Unfavourable  framework  conditions  and  weak 
links  between  public  and  private  sector  still  limit 
Portugal's 
in 
reforming  the  transport  sector  are  hampering  the 
sector's  competitiveness.  State  owned  transport 
companies lack a long-term financial sustainability 
plan to support future investments. The current rail 
infrastructure is not being used to its full potential 
thus  compromising  the performance  of  the freight 
sector.  The 
renegotiation  of  existing  port 
concession  agreements  and  a  new  framework  for 
port  concessions  aim  at  making  Portuguese  ports 

innovation  performance.  Delays 

level,  and 

to  access 

Although  measures  have  been  taken  to  make 
public  finances  more  sustainable,  challenges 
remain. The financial viability of the State-Owned 
Enterprises  (SOEs)  is  not  yet  ensured.  This  is 
particularly true of highly-indebted SOEs, most of 
which  are  in  the  transport  sector.  In  view  of 
demographic  and  economic  developments,  the 
affordability  of  public  pensions  is  under  pressure 
in  the  short  term.  Even  though  partially  tackled, 
there are also challenges to the short and long-term 
sustainability of the healthcare sector. Historically 
the  health  system  has  run  losses  and  has  been 
unable to clear its arrears. 

Labour  market  duality  remains  an  issue.  The 
Portuguese  economy  continued 
to  add  both 
temporary  and  permanent  jobs  in  2016,  but  job 
creation  on  permanent  contracts  was  not  strong 
enough to lower the share of temporary employees, 
particularly among young workers. Measures were 
taken  in  the  area  of  employment  support  to 
promote  hiring  on  open-ended  contracts,  but  their 
expected impact on reducing segmentation appears 
limited. 

A rebound in potential growth to converge with 
the  EU  average  would  address  medium-term 
challenges. Persistent bottlenecks and rigidities in 
the product and labour markets still imply limits to 
supply and demand of labour and thus to potential 
growth. This refers in particular to obstacles to job 
market access for young people and the long-term 
unemployed.  High  leverage  in  the  private  sector 
and  high  banks'  stocks  of  NPL  weigh  on  new 
credit  to  firms  which  would  allow  for  a  positive 
capital  contribution  to  potential  output.  At  the 
same  time,  a  tight  fiscal  situation  poses  risks  for 
public  debt  sustainability  and  also  limits  the 
productive  use  of  public  capital  resources.  Given 
the  estimated  need  for  deleveraging,  inflows  of 
non-debt  financing  such  as  FDI,  could  make  a 
valuable  contribution  to  expanding  the  country's 
investment and growth potential. 

The  current  imbalances  limit  the  resilience  of 
the  Portuguese  economy  to  shocks,  making  it 
less  capable  to  adapt  to  a  constantly  changing 
environment.  Portuguese  GDP  growth  is  volatile 
relative to the EU average and remains vulnerable 
to  the  high  volatility  of  the  terms  of  trade.  To 
buffer  the  economy  from  these  and  other  shocks, 
reducing the stock of public debt would create the 
fiscal space needed to enable fiscal policy to offset 

17 

 
3. Summary of the main findings from the MIP in-depth review 

no  comprehensive  growth  strategy.  Regulatory 
barriers  and  rigidities  in  labour  and  product 
markets  continue  to  hamper  business  growth, 
competitiveness and investment in Portugal.  

more  competitive.  Yet,  both  are  being  delayed. 
High structural costs in the energy sector together 
with  an  excess  of  installed  capacity  compromise 
the sustainability of the system. The government is 
putting  forward  measures  to  recover  past  undue 
rents  and  eliminate  existing  ones  but  a  high  tariff 
debt and a concentrated retail market put pressure 
on end-user prices. 

3.3.  OVERALL ASSESSMENT 

Portugal  continues  to  face  important  sources  of 
imbalances arising from high external, private and 
government  debt  in  a  context  of  unemployment 
and  low-growth.  Private  debt  is  slowly  declining, 
while  government  debt  has  stabilised  against  the 
background of remaining consolidation needs. The 
competitiveness  gains  that  materialised  over  the 
past  few  years  are  bottoming  out.  The  high  stock 
of  non-performing  loans,  which  has  not  yet 
stabilised,  continues  to  put  pressure  on  bank 
profitability and their workout could imply capital 
gaps that might require state intervention. Various 
policy  measures  have  been  taken  to  help  reduce 
imbalances,  but  significant  gaps  remain.  Despite 
some  improvement  in  relevant  flow  indicators, 
Portugal  still  suffers  from  major  sources  of 
external  and  internal  imbalances.  Besides  very 
high private and government debt levels persistent 
weaknesses  concern,  the  exposure  to  sovereign 
debt  risks,  and  thin  capital  buffers  in  the  banking 
sector,  as  well  as  limited  access  to  finance  for 
corporations  and  SMEs.  A  number  of  policy 
measures  have  been  taken  to  restructure  the 
financial  sector,  ensure  adequate  capital  buffers, 
and support the reduction of non-performing loans. 
restructuring  of  major  banks, 
Despite 
recapitalisation  programmes  and  reforms  of  the 
insolvency 
framework,  progress  with  NPL 
reduction remains slow and further recapitalisation 
needs  remain  likely.  Public  finances  are  not  yet 
firmly on a stable footing; despite some progress in 
moving towards a spending review and addressing 
health  expenditure  sustainability,  action  on  the 
front  of  State-Owned-Enterprises  restructuring 
remain limited. Bottlenecks to productivity growth 
innovation  performance, 
remain 
restrictions 
regulated 
in  some  services  and 
professions, the public administration, and network 
industries.  The  labour  market  is  improving  but 
youth and long-term unemployment still weigh on 
the employment and social recovery. There is still 

related 

the 

to 

18 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3. Summary of the main findings from the MIP in-depth review 

Table 3.1: 

MIP assessment matrix - Portugal 2017 

(Continued on the next page) 

19 

 Gravity of the challenge Evolution and prospects Policy response Imbalances (unsustainable trends, vulnerabilities and associated risks) External balance Portugal has made significant progress in adjusting its external imbalances, including improving competitiveness and current account outcomes. Nonetheless, the net international investment position (NIIP) remains very negative (-110 % of GDP in 2015) (pp.6,7,31, 32), and without significant growth improvements, continuous current account surpluses of around 1.6% of GDP per year would be required to halve the negative NIIP by 2025.   Large past current account deficits have declined significantly to 0.3% of GDP in 2015, although such adjustment has recently slowed down due to import dynamics (pp.7,31,32). A terms-of-trade improvement, not expected to last, has in part contributed to reduce the deficit. The current account should be positive in 2016 and 2017, although still below the level required for significant NIIP adjustment. Cost competitiveness has recovered, but unit labour costs are increasing due to sluggish productivity and rising wages.  External imbalances would decrease if economy-wide productivity and potential growth were to increase. Progress has been made in past years to tackle rigidities in product and labour markets. However, weaknesses remain in key areas, including services, regulated professions, public administration, energy and transport and skills formation (pp.46-53). At the same time, policies aimed at raising domestic demand risk stalling the external rebalancing progress. Structural reforms to boost productivity and to improve cost and non-cost competitiveness are limited. Private debt High private sector non-consolidated debt (about 190% of GDP in early 2016) impedes a further economic recovery. Despite a remarkable deleveraging process since the peak in 2012, the still very high corporate debt is weighing on profitability and impeding investment. The relatively high level of non-performing loans harms financial stability and the productive allocation of credit. High private indebtedness ratios are expected to further decline in 2016 due to weak credit evolution and positive nominal output growth. The NPL ratio remains high, increasing to 19% in Q2 2016. (p.28). The Portuguese banking sector is also pressured by low profitability and relatively low provisioning ratios, which, in a low growth environment, are particularly harmful to the valuation of banks.   The main challenge is to maintain an orderly corporate deleveraging without over-burdening economic recovery. Growth conditions remain weak and negatively impact on debt ratios and productivity that is still locked by delayed reform progress. Limited progress has been made to reduce the corporate debt overhang and to expand the financing alternatives for corporates. The government has recently published a strategy for the capitalisation of firms that includes tax measures aimed at improving the neutrality in the taxation of equity and debt (p.31,41,59) Public debt  Portugal's high public debt should decline only gradually from 2017 onwards (pp.21-22). A source of vulnerability to changes in economic conditions and increasing financing costs, such large stock of debt poses also medium term sustainability risks. Debt-to-GDP ratio has increased during the crisis, due to negative growth and low inflation, and stabilised to 130% since 2013. Under a continued moderate recovery and primary surpluses, debt would gradually fall from 2017 onwards, but without additional consolidation measures it would be at 124% in 2027 (pp.21-22). Budgetary consolidation and growth enhancing structural measures are the basis to ensure debt sustainability over the medium and long term.  Measures have been taken in past years in the area of tax reforms, tax compliance, pensions, healthcare, state-owned enterprises and public administration. Policy gaps, however, persist in all these areas (pp.22-26).    
 
 
 
 
3. Summary of the main findings from the MIP in-depth review 

Table (continued) 

Source: Commission services  

20 

Productivity Weak productivity dynamics weigh on competitiveness and GDP growth. This affects deleveraging, NIIP reduction and the labour market and is linked to rigidities in product and labour markets as well as to weaknesses in public administration and the judiciary.  Labour productivity growth is on a long-term decline and has been low since 2008 (taking into account the upward push from the spike in unemployment during the crisis). While measures have been taken to address rigidities in the labour market and investment barriers from high corporate debt, important challenges remain in these areas. Bottlenecks to productivity growth also remain related to innovation performance, the low skill level of the labour force, restrictions in some services and regulated professions, the public administration, and network industries. Adjustment issues Labour market and unemployment The unemployment rate dropped to 10.5% in Q4 2016. While still high in EU terms it has been steadily decreasing mostly due to job creation and, in smaller part, to outmigration and demographic developments. The working age population is decreasing but the number of employed is still growing due to the decrease in unemployment.  Long-term and youth unemployment remain persistently high at 6.1% and 26.1% respectively in Q3 2016. This risks intensifying labour market disengagement and human capital deterioration, with negative impact on growth potential.   After steadily decreasing since Q2 2013 (pp.4,33), unemployment is expected to fall below 10% in 2017. Despite improvements in the labour market, the share of employment in tradable sectors has not improved over the last year. Low growth contributed to a rise in migration outflows which albeit lower still continues in 2016. If not matched by corresponding inflows it can have a negative impact on potential growth in particular to the extent that emigrants are young and well educated. The impact of the 2011-13 Employment Protection Legislation reform is not clear as labour market segmentation remains. Measures have been taken to improve the effectiveness of active labour market schemes and to improve transition into permanent employment. The minimum wage and its coverage have been increasing; yet, if not matched by productivity growth, minimum wage increases risk affecting job creation and competitiveness. Another main challenge is unemployment reduction, notably long-term, and to ensure that this happens mainly in the tradable sector. Conclusions from IDR analysis  The Portuguese economy is characterised by large imbalances in terms of external and internal debt, both public and private, and continuous problems in the banking sector in a context of low productivity growth. The NIIP is still very negative. Households’ indebtedness has declined but corporate debt still weighs on firms’ performance and a large stock of non-performing loans and low profitability along with thin capital buffers pose risks to banks’ balance sheets. The combination of stock imbalances exposes Portugal to shocks or shifts in investor sentiment.  The tradable sector has gained in importance but rising import demand could delay external rebalancing. The increasing path in public debt is expected to reverse in the short-term. Nonetheless, government debt will remain elevated, implying vulnerabilities to adverse shocks, a high interest burden on public finances and risks to financial stability. Unemployment is on a declining trend but with persistent long-term and youth unemployment. Low productivity growth prevents a faster rebalancing.  Progress has been made in stabilising the financial sector and improving the access to finance, labour market functioning, education and long-term fiscal sustainability. However, policy gaps persist in the areas of product and services markets, corporate debt restructuring, fiscal and in terms of labour market rigidities. Those rigidities are detrimental for sustaining gains in competitiveness, corporate and household deleveraging and fiscal sustainability.   
 
 
 
4.  REFORM PRIORITIES 

4.1.  PUBLIC FINANCES AND TAXATION 

4.1.1.  FISCAL POLICY (PUBLIC DEBT AND DEBT 

DEVELOPMENTS)*(11) 

the  global 

and  2013.  Subsequently, 

General  government  debt  remains  high.  In  the 
context  of 
financial  crisis  and 
subsequent recession, very high fiscal deficits, the 
reclassification  of  off-balance  sheet  items  and 
entities into the general government perimeter and 
stabilising  interventions  in  the  financial  system 
resulted in a steep rise in general government debt 
by  over  30  percentage  points  of  GDP  between 
2010 
the  gross 
debt-to-GDP  ratio  has  stabilised  at  around  130 % 
of  GDP  since  2014,  the  third  highest  public  debt 
level  in  the  euro  area.  The  projections  in  the 
following analysis are based on the Commission’s 
2017  winter  forecast.  Following  the  downward 
revision  in  projected  proceeds  from  sales  of 
financial assets, including Novo Banco, the fall to 
around 126 %, previously expected to take place in 
2016, is now not expected until 2022. The primary 
balance,  projected  to  have  reached  2.1 %  of  GDP 
in  2016,  is  forecast  to  be  at  2.5 %  in  2017  and 
2.2 % 
future 
financing needs.  

thereby  moderating 

in  2018, 

The gross public debt-to-GDP ratio is expected 
to  fall  moderately  in  the  short  term  and  to 
stabilise  in  the  medium  term. While  public  debt 
is considered sustainable under plausible scenarios, 
debt  dynamics  are  vulnerable  to  adverse  shocks. 
Supported  by  the  projected  continuing  economic 
recovery  and  expected  primary  surpluses,  the 
debt-to-GDP ratio is expected to fall from 130.5 % 
in 2016 to 128.9 % in 2017 and 127.1 % in 2018. 
Model simulations of debt sustainability have been 
carried  out  that  incorporate  the  scenario  of  the 
2017 winter forecast until 2018 and other technical 
assumptions  for  the  medium  term (12).  For  the 
that, 
baseline  scenario, 

results  suggest 

the 

following a moderate decline in the short-term, the 
debt  ratio  will  stabilise  in  the  medium  term  at 
around 124 % of GDP (Graphs 4.1.1 and 4.1.2). 

Graph 4.1.1:  Combined interest rate and GDP growth shock 

(chart to be updated) 

Source: European Commission  

reveals 

The  stabilising  debt-to-GDP  trajectory  in  the 
baseline scenario is sensitive to potential rises in 
sovereign  yields  and  vulnerable  to  adverse 
the  debt 
economic  developments.  Overall, 
sustainability  analysis 
the  debt 
that 
stabilisation path of the baseline is broadly robust 
across  a  number  of  reasonable  scenarios.  Yet, 
plausible  shocks  could  considerably  worsen  the 
dynamics  of  Portugal’s  public  debt  (Graph  4.1.1). 
Potential  shortfalls  in  nominal  growth,  sharp 
interest rate rises or decreasing fiscal efforts could 
put the public debt ratio on a non-sustainable path. 
An  unsustainable  debt  trajectory  could  adversely 
affect Portugal’s economic stability and could have 
negative outward spill-overs via the sovereign risk 
channel. 

(11)  * MIP relevant 
(12)  A  structural  primary  fiscal  balance,  before  cost  of  ageing, 
at 1.7 % of GDP surplus as of 2019; inflation converging to 
2.0 %  by  2021  and  the  nominal  long-term  interest  rate  on 
new and rolled-over debt converging linearly to 5 % by the 
end  of  the  10-year  projection  horizon;  real  GDP  growth 
rates of around 1 %; ageing costs in line with the European 
Commission's  2015  Ageing  Report.  More  details  of  the 
assumptions  in  the  different  scenarios  can  be found  in the 
Debt Sustainability Monitor 2016. 

21 

1001051101151201251301351402011201220132014201520162017201820192020202120222023202420252026Baseline no-policy change scenarioStandardized (permanent) negative shock (-0.5p.p.) on GDP growthStandardized (permanent) positive shock (+0.5p.p.) on GDP growthStandardized (permanent) negative shock (-1p.p.) to the short- and long-term interest rates on newly issued and rolled over debtStandardized (permanent) positive shock (+1p.p.) to the short- and long-terminterest rates on newly issued and rolled over debtCombined (permanent) negative shock on GDP growth (-0.5p.p.) andinterest rates (+1p.p.)Combined (permanent) positive shock on GDP growth (+0.5p.p.) andinterest rates (-1p.p.)% of GDP 
 
                                                           
 
4.1. Public finances and taxation 

Graph 4.1.2:  Fiscal consolidation 

4.1.2.  SHORT-, MEDIUM- AND LONG-TERM 

SUSTAINABILITY (INCLUDING PENSIONS 
AND HEALTHCARE)* 

from 

Fiscal risks assessment indicators point to a low 
risk  in  the  short  term  but  higher  risks  in  the 
medium  term.  The  short-term  indicator  for  fiscal 
risk, S0, points to a low risk of fiscal stress, as the 
indicator  for  2016  is  below  its  critical  threshold 
value.  Rather 
the  need  for 
than  expressing 
structural  adjustments,  this  indicator  provides  a 
composite  index  that  highlights  shorter-term  risks 
fiscal,  macro-financial  and 
stemming 
competitiveness  variables.  Despite  this  favourable 
assessment, some vulnerabilities persist, associated 
with the short-term financing needs of public debt, 
the  stock  of  private  debt  and  the  net  international 
investment position. In the medium term, Portugal 
is classified as being at high risk based both on the 
fiscal  sustainability  indicator  S1  and  the  debt 
sustainability  analysis  (see  Debt  Sustainability 
Monitor 
fiscal 
sustainability  indicator  S1  reaches  a  value  of 
6.0 pps.  of  GDP  (based  on  the  Commission  2017 
winter  forecast),  indicating  that  a  cumulative 
improvement  in  the  structural  primary  balance  of 
6.0 %  of  GDP  (relative  to  the  baseline)  would  be 
required over 5 years from 2019 onwards, in order 
to  reach  the  reference  value  of  60 %  of  GDP  by 
2031. These risks are mostly related to the distance 
of the debt-ratio from the 60 % reference value. 

particular, 

2016). 

the 

In 

in 

the 

long 

term.  This 

Long-term  fiscal  risks  in  the  country  are 
assessed  as  low,  largely  thanks  to  pension 
reforms. The S2 indicator for long-term fiscal risk 
assessment shows that an upfront fiscal adjustment 
limited  to 1.2 pps. of  GDP is required  to  stabilise 
low 
public  debt 
sustainability  risk  has  improved  following  recent 
pension  reforms.  Yet,  given  a  structural  primary 
balance  of  1.7 %  of  GDP  in  2018,  the  future 
required level of structural primary balance would 
be 2.9 % of GDP. If age-related expenditure were 
to increase as indicated in the 2015 Ageing Report 
(European  Commission  2015),  the  S2  indicator 
would  require  an  adjustment  of  1.2 %  of  GDP,  to 
make  allowance  for  risks  arising  mainly  from 
healthcare spending.  

Source: European Commission  

The  high  level  of  government  debt  is  a  heavy 
burden  on  public  finances.  High  public  debt 
implies  a  smaller  fiscal  margin  for  manoeuvre  to 
absorb  adverse  macroeconomic  shocks  and  cope 
with  possible  interest  rate  rises.  The  high  interest 
bill  (projected  at  4.3 %  of  GDP  in  2016  as 
compared  to  2.2 %  on  average  for  the  euro  area) 
also restricts scope for public investment spending.  

for 

fiscal 

In  the  absence  of  further  fiscal  consolidation 
structural  reforms, 
and  growth-enhancing 
safeguarding 
and 
sustainability 
significantly  reducing  the  debt  path  will  be  a 
challenge.  The  very  high  debt  ratio  implies  a 
significant  adjustment  burden,  which  requires  the 
conditions 
to  be  steadily 
falling  debt 
maintained  in  the  coming  decades,  including 
sustained  economic  growth.  Sustainability  can  be 
safeguarded 
budgetary 
discipline,  in  line  with  the  requirements  of  the 
Stability  and  Growth  Pact  (Graph  4.1.2).  The 
implementation of the reformed budget framework 
law  and  enhanced  revenue  collection  could 
contribute 
adjustment.  Healthcare 
expenditure  now  accounts  for  the  largest  share  of 
ageing  costs,  with  corresponding  implications  for 
long-term sustainability. Recent reforms appear to 
ensure  the  long-term  sustainability  of  the  pension 
system.  

permanent 

through 

fiscal 

to 

High and rising ageing costs pose still a risk to 
fiscal  sustainability.  In  the  medium  term,  higher 
fiscal risks are expected to be related largely to the 
costs  for  financing  pensions  and  the  need  to 

22 

809010011012013014015020112012201320142015201620172018201920202021202220232024202520262027Baseline no-policy change scenarioNo-policy change scenario without ageing costsStability and Growth Pact (SGP) scenarioStability and Convergence Programme (SCP) scenario% of GDP 
 
4.1. Public finances and taxation 

side  of  the  sustainability of  the  pension  system  in 
the short to medium-term remains unaddressed.  

for  public 

Portugal  has  made  efforts  to  ensure  access  to 
quality healthcare. Several steps have been taken 
to  make  the  healthcare  sector  more  efficient  and 
sustainable.  Procurement  of  goods  and  services  is 
now  centralised,  creating  important  savings  to  the 
National  Health  Service.  The  use  of  generics 
eligible 
reimbursement  has  been 
expanded,  pharmaceutical  prices  have  fallen, 
waiting  lists  have  been  cut  and  the  number  of 
family  health  units  has  increased.  More  recently, 
the authorities have set up a reform working group 
with  a  three  year  mandate.  The  latter  has  focused 
mainly  on  i)  improving  the  IT  system  (including 
eliminating duplicate  records,  records  of deceased 
patients etc.), ii) human resource planning aimed at 
recruiting qualified staff in difficult areas, iii) pilot 
projects  in  areas  with  gaps  in  the  National  Health 
Service.  At  the  same  time,  access  to  primary 
healthcare continues to expand, while the emphasis 
is  increasingly  shifting  on  prevention  measures, 
such as vaccination campaigns (see section 4.3). 

Weak  accounting  and  managerial  controls  lie 
behind  the  rising  stock  of  arrears  in  hospitals, 
which  undermines  the  health  sector's  viability. 
While  the  hospital  reform  continues,  budgetary 
planning  and  implementation  in  the  hospitals 
remain an important issue. Late payments (arrears) 
continue  to  increase,  denoting  weaknesses  in 
accounting  control  mechanisms  and  managerial 
practices. The stock of arrears in the health sector 
has  increased  by  EUR 90 million  from  December 
2015  to  December  2016.  Yet,  in  October  the 
increase 
from  December  2015  was  about 
307 million  (or  68 %)  as  arrear  repayments 
occurred mostly at the end of the year. On the one 
hand,  these  were  possible  thanks  to  the  use  of 
centralised allocation to the reversal of wage cuts, 
the use of some centralised appropriations and the 
authorisation  of  using  cash  balances  at  the  end  of 
the year. On the other hand the extension of the tax 
on  alcoholic  drinks  (IABA)  to  sweetened  drinks 
(the  levy  on  drinks  with  added  sugar  should  be 
worth  EUR 80 million  in  2017)  is  earmarked  to 
address  the  sustainability  of  the  National  Health 
Service.  While  these  measures  sufficed  to  reduce 
the  existing  stock  of  arrears,  they  do  not  entirely 
address 
their  continued 
accumulation. The most recent report on budgetary 
execution  (October  2016)  confirms  the  increasing 

factors  behind 

the 

reverse the ongoing accumulation of arrears in the 
healthcare  sector.  Despite  recent  reforms,  public 
pension spending is expected to rise over the next 
10  years  until  benefit  and  coverage  curbs  take 
effect.  This  leads  to  an  overall  decline  in  pension 
spending of about 0.7pp of GDP between 2013 and 
2060 (European Commission 2015). The situation 
the  healthcare  sector,  which 
is  different  for 
represents  the  largest  share  of  Portugal's  ageing 
costs  and  which  is  expected  to  post  the  EU's 
largest  by  2060  (2.5 %  of  GDP  against  0.9 %  EU 
average).  Further,  the  continued  accumulation  of 
delayed payments in hospitals adds more strains to 
debt  reduction  and  sustainability  in  the  very  short 
term.  

Several  reforms  have  improved  the  long–term 
sustainability of the pension system. Pressure for 
the sustainability of the debt path is mostly related 
to  the  large  distance  of  the  present  debt-to-GDP 
ratio from the 60 % reference value, rather than to 
pension  related  costs.  Past  measures 
include 
introducing  disincentives 
to  early  retirement, 
raising the pensionable age from 65 to 66 for both 
life 
future 
sexes,  and 
expectancy at age 65. The automatic adjustment of 
pension  to  life  expectancy  has  done  much  to 
reduce  pension  costs  in  the  long-term.  Short  to 
medium-term costs however remain high.  

increases 

linking 

to 

New  measures 
in  the  pension  system  are 
explored,  but  it  is  unclear  how  they  will  affect 
cost  reduction.  The  government  has  launched  a 
comprehensive  study  of  the  pension  system  with 
measures  expected  to  be  applied  in  2018,  at  the 
earliest. These measures might entail a reduction in 
the  early  repayment  penalties  for  workers  with 
about or more than 40 years of service. They could 
include  harmonising  current  benefit  schemes  and 
means-testing  procedures.  Overall,  the  authorities 
are  committed  to  issuing  a  package  of  new 
measures  that  will  be  budget-neutral.  It  will  not 
alter  the  current  plan  to  eliminate  extraordinary 
budgetary transfers to the pension system by 2019. 
In  the  meanwhile,  the  2017  budget  includes  the 
earmarking of a new progressive tax on real estate 
assets 
security's  Financial 
Stabilization  Fund  (worth  EUR 160 million  in 
2017  according 
the  2017  Budget).  The 
government  is  presenting  this  earmarking  as  an 
alternative  to  excessive  reliance  on  conventional 
budgetary  transfers.  Yet,  overall  the  expenditure 

social 

the 

to 

to 

23 

 
4.1. Public finances and taxation 

strategic approach. The authorities have started a 
spending review that focuses mainly on the health 
and  education  ministries,  state  owned  enterprises, 
(centralised)  public  procurement  and  real  estate 
management.  This 
falls  short  of  a 
review 
comprehensive  approach  that  would  encompass 
the public sector at large and be guided by a set of 
concrete  savings  targets (14).  On  the  contrary, 
arrears  in  hospitals  have  been  growing  since  the 
beginning of the year, indicating a lack of control 
over spending especially in the health sector. 

There  are  set-backs  in  public  administration 
reforms.  Ongoing  public  employment  reforms 
have  not  led  to  the  expected  containment  of  the 
wage bill. Despite the civil servants rotation policy 
(2:1  replacement  rule)  introduced  in  2016,  the 
wage  bill  is  on  the  rise,  pointing  to  some 
weaknesses  in  the  efficiency  of  this  reform  and 
possible  negative  implications  from  the  return  to 
the  35-hour  working  week  for  public  employees, 
mainly  in  the  healthcare  sector.  The  scope  of  the 
revised  requalification  scheme  has  also  been 
reduced.  Local  administration  reform  measures 
have  been  delayed.  Following  some  delays,  the 
Municipality  Support  Fund  (FAM  –  a  debt 
over-indebted 
workout 
municipalities) 
started 
disbursements.  

mechanism 
has 

recently 

only 

for 

of 

state 

firms 

sector 

sustainability 

There  is  still  no  framework  to  guarantee  the 
financial 
owned 
enterprises.  State  Owned  Enterprises  (SOEs) 
monitored  by  the  Ministry  of  Finance's  UTAM 
unit had a total indebtedness of EUR 32 billion in 
the  second  quarter  of  2016.  However,  there  is  no 
concrete  plan  to  tackle  this  large  debt  stock. 
for  most 
Transport 
indebtedness.  The  rail  and  road  infrastructure 
manager  (IP)  alone  represents  27 %  of  total 
indebtedness  of  SOEs  reaching  62 %  when  added 
to the rail transport company (CP) and the Lisbon 
and  Porto  metros.  IP  has  recently  signed  a 
five-year Public Service Obligation contract, but a 
more long-term operation of sustainability has not 
been  defined.  The  authorities  are  revising  the 
operating and financing model for SOEs providing 
urban transport in Lisbon and Porto. However the 

account 

indebtedness  of  state-owned  hospitals.  Accurate 
and  balanced  budgeting,  enhanced  controls  and 
effective  enforcement  of  the  commitment  control 
law  could  help  improve  efficiency  and  quality  in 
this sector. An inadequate system of incentives for 
the compliant hospitals may lead to overspending.  

strategy 

addressing 

lacks  a 
to 

In spite of short term savings in the health care 
comprehensive 
sector,  Portugal 
long-term 
the 
health-related  costs  of  ageing.  The  health  sector 
is  covered  by  the  recently  launched  spending 
review.  Savings  from  the  sector  are  expected  to 
amount  to  EUR 134 million  between  2017  and19. 
Yet,  there  is  still  a  need  to  clarify  in  more  detail 
how  these  savings  will  be  achieved.  Given  the 
major  cost  compression  undertaken  during  the 
economic adjustment programme, any new saving 
measures  need  to  be  carefully  designed  so  as  to 
avoid compromising access to primary healthcare.  

4.1.3.  FISCAL FRAMEWORK, PUBLIC 
ADMINISTRATION AND SOES* 

and 

align 

Implementation  of 
the  reformed  Budget 
Framework  Law  adopted  in  2015  has  been 
slow.  The  Law  is  designed  to  make  budget  units 
to 
more  accountable,  strengthen  the  medium 
long-term  focus  of  public  finances  by  introducing 
programme-based  budgeting 
the 
deadlines for presenting of the stability programme 
and  the  draft  budget  to  Parliament  with  European 
Semester  requirements.  It  allows  for  a  three-year 
transitional  period  to  apply  most  new  features. 
Albeit  nearly  a  year  late,  the  authorities  have 
recently approved the rules on the operation of the 
implementation 
new  Budget  Framework  Law 
unit (13),  a  first  milestone  in  its  implementation, 
and  have  set  a  timetable  for  2017  activities. 
However,  the  decree  law  setting  up  the  new 
budgetary  programmes  is  still  outstanding.  Given 
the cumulated delays in the implementation of the 
new  Budgetary  Framework  Law,  there  is  a  risk 
that this may not be completed by the 2018 target. 

The  current  spending  review  appears  would 
from  a  more  comprehensive  and 
benefit 

(13)  The  Portuguese  Public  Finance  Council  in  its  capacity  as 
an  independent  institution  for  the  monitoring  of  public 
finance issues is to participate in the technical committee of 
the new Budget Framework Law implementation unit.  

(14)  In September 2016, the Eurogroup endorsed a set of shared 
principles  for  improving  the  quality  of  public  finances 
through spending. 
http://www.consilium.europa.eu/en/press/press-
releases/2016/09/09-eurogroup-statement/ 

24 

 
                                                           
                                                           
4.1. Public finances and taxation 

resulting  from  the  exchange  of  information  with 
other  countries,  limits  on  cash  payments  and  the 
end of bearer shares.  

Dealing  with  taxes 
is  time-consuming  and 
complex.  The  average  number  of  payments 
necessary  to  comply  with  all  tax  obligations  is 
small (8). At the same time, the average number of 
hours  needed  to  meet  such  obligations  (243) 
remains  the  5th  highest  among  EU  countries 
(World Bank, 2016). However, Portugal continues 
to  simplify  its  tax  administration  with  a  view  to 
reduce  tax  evasion  and  improve  tax  compliance. 
Following past efforts to improve the efficiency of 
the  tax  administration,  there  are  plans  for  a  series 
of  new  administrative  simplification  measures  for 
several  taxes  between  2016  and  2017  under  the 
Simplex Programme. A number of measures were 
already  adopted 
in  2016,  (e.g.  non-habitual 
residents  may  register  online  for  Personal  Income 
Tax purposes, and the invoicing rules for the Value 
Added  Tax  (VAT)  special  regime  for  small  and 
medium-sized enterprises were simplified). 

Minor tax policy shifts have been implemented. 
As  set  out  in  the  government  programme  and  the 
2016  budget,  the  introduction  of  a  lump-sum 
allowance  per  child,  replacing  the  family  quotient 
introduced in 2015, is now effective. The reduction 
in VAT on restaurant food to the intermediate rate 
of 13 % took effect on 1 July 2016.  

is  around 

Reduced  VAT  rates  are  still  used  heavily, 
although  VAT  reforms  during  the  crisis  had 
broadened  the  tax  base  to  some  extent (15). 
Portugal's VAT gap as a percentage of theoretical 
VAT liability of 12.5 % is close to the EU average 
of  14.0 %,  indicating  that  the  efficiency  of  VAT 
collection 
the  average.  However, 
Portugal's  VAT  policy  gap  of  50.9 %  is  clearly 
above the EU average of 43.8 %. This is because it 
has  a  high  VAT  rate  gap  (11.1 %  compared  with 
an EU average of 5.3 %), while the exemption gap 
is in line with the EU average. The VAT rate gap 
shows the reduction of revenue (as a percentage of 
GDP)  due  to  the  use  of  reduced  VAT  rates.  The 
still broad use of reduced rates implies significant 
revenue losses. 

Member 

(15)  CASE,  2016,  Study  and  Reports  on  the  VAT  Gap  in  the 
Report 

EU 
TAXUD/2015/CC/131 
https://ec.europa.eu/taxation_customs/sites/taxation/files/2
016-09_vat-gap-report_final.pdf 

States:2016 

Final 

of 

financial 

framework 

reinstatement 

high  debt  and  negative  operational  results  of  the 
cities'  metro  system  remain  worrying  and  their 
long-term  sustainability  is  still  not  ensured.  New 
investments  are  being  planned,  but  a  governance 
scheme  and 
to  ensure 
long-term  sustainability  is  still  being  defined.  In 
the case of Lisbon’s bus transport company Carris, 
it  was  decided  to  transfer  ownership  to  local 
government while the debt will remain with central 
government.  The 
career 
progression  for  employees  of  SOEs  may  further 
adversely affect the firms’ financial situation. The 
burden placed on public finances by public private 
partnerships (PPP) is set to continue. Extraordinary 
subsidies  and  compensatory  payments  to  IP  are 
expected to more than double compared with 2016 
mostly  as  a  result  of  the  five  year  Public  Service 
Obligation  contract  recently  signed.  The  cost  of 
PPP  contracts  until  their  end  has  been  revised  up 
by over EUR 500 million with respect to the value 
estimated in the 2016 budget as the amounts were 
recalculated  using  2017  prices.  The  Court  of 
Auditors  also  recently  drew  attention  to  the  fact 
that  the  current  monitoring  does  not  take  full 
account  of  the  risk  to  public  finances.  The 
Government  intends  to  improve  oversight  of 
spending by SOE's through an ex-ante and ex-post 
assessment  of  investments,  activities  and  their 
financial  impact  together  with  a  more  regular 
monitoring.  But  this  does  not  amount  to  a 
comprehensive  plan  to  tackle  indebtedness  and 
long-term 
setting 
concrete targets. 

financial  sustainability  by 

4.1.4.  TAXATION* 

the 

local  presence.  Measures 

Measures  have  been  proposed  to  improve  tax 
compliance  and 
tax  administration's 
efficiency. The authorities are taking steps to make 
the tax administration more efficient by recruiting 
new tax auditors and gradually reorganising the tax 
administration's 
to 
further  step  up  the  fight  against  tax  evasion  and 
fraud are also under way. The dedicated Taxpayer 
Services  Department  for  large  companies  is  now 
expected to take over wealthier households as well. 
An  annual  plan  for  combating  tax  evasion  and 
fraud  is  set  to  replace  the  current  three-year 
programme,  thus enabling the Tax Administration 
to  strengthen  its  oversight.  Portugal  is  imposing 
further  requirements  as  regards  banks'  obligations 
to provide data on all non-residents bank accounts, 

25 

 
                                                           
4.1. Public finances and taxation 

Commission  within  the  Common  Consolidated 
Corporate Tax Base (17). 

(17)  European  Commission 

(2016a), 

Impact  assessment 
accompanying  the  proposals  for  a  Council  Directive  on  a 
Common Corporate Tax Base and a Common Consolidated 
Corporate  Tax  Base  (CCCTB),  SWD(2016)  341  final. 
European  Commission  (2016b),  Communication  from  the 
Commission  to  the  European  Parliament  and  the  Council, 
'Building  a  fair,  competitive  and  stable  corporate  tax 
system for the EU', COM(2016) 682 final. 

The authorities plan to reform several taxes but 
the timelines are not yet defined. These reforms 
include revising the number of income brackets in 
the  Personal  Income  Tax  and  making  it  more 
progressive while creating a salary supplement for 
lower  wages;  and  other  tax  reforms  addressing 
firms'  chronic  under-capitalisation.  The  2017 
budget includes revenue from the extension of two 
taxes  that  is  going  to  be  fully  earmarked  to  the 
sustainability of the national health system and the 
Social  Security's  Financial  Stabilisation  Fund. 
These are: (i) the extension of the alcoholic drinks 
tax  (IABA)  to  include  sweetened drinks, which  is 
forecast to be worth EUR 80 million in 2017; and 
(ii) 
tax  on  real  estate 
portfolios  (portfolios  above  EUR 0.6 million,  on 
top of the existing recurrent real estate tax IMI that 
has  been  relatively  low  in  EU  comparison)  which 
should yield EUR 130 million in 2017. Despite the 
need to address some outstanding issues, ensuring 
the stability of the tax system is also considered a 
key  aspect  of  the  country's  capacity  to  attract 
investment. 

the  new  progressive 

Despite  some  positive  recent  developments,  the 
debt-equity  tax  bias 
in  corporate  taxation 
remains  a  challenge.  Investments  financed  by 
debt  are  taxed  less  than  those  financed  by  equity. 
As a result, the difference in the cost of capital for 
investments  financed  by  debt  and  equity  in  2016 
was the fifth highest in the EU and well above the 
EU  average (16).  In  recent  years,  the  government 
has tried to tackle this problem by introducing new 
rules  on  limitation  of  interest  deductions  and  an 
Allowance  for  Corporate  Equity  (ACE).  Further 
measures  are  envisaged  as  part  of  a  programme 
adopted  in  July  2016  (Programa  Capitalizar), 
though  they  are  not  yet  in  place.  In  line  with  the 
Capitalizar programme, the 2017 state budget law 
widened  the  scope  of  the  allowance  for  corporate 
equity. The impact of these measures remains to be 
seen and will be closely monitored. The impact of 
an ACE depends on its design features and notably 
its  anti-tax  avoidance  framework.  An  alternative, 
more  robust  measure,  the  Allowance  for  growth 
and  investment,  was  recently  proposed  by  the 

(16)  https://ec.europa.eu/taxation_customs/sites/taxation/files/ 

final_report_2016_taxud.pdf 

26 

 
                                                           
                                                           
4.2.  FINANCIAL SECTOR AND INDEBTEDNESS 

4.2.1.  BANKING SECTOR* 

The  banking  system's  main  challenges  remain 
weak  asset  quality,  thin  capital  buffers,  low 
profitability  and  relatively  high  exposure  to 
Portuguese  sovereign  debt.  While  asset  risk  has 
broadly  stabilised,  banks  profitability  in  2016 
remained  weak  because  of  a  sluggish  business 
environment, high costs for low quality assets, and 
lower  trading  gains  than  in  2015.  In  seeking  to 
optimise  assets'  allocation,  banks  have  slightly 
increased exposure to domestic and higher yielding 
foreign  sovereign  debt  while  some  lenders  have  a 
large  exposure  to  companies  tied  to  emerging 
market 
recently 
underperformed  on  the  market.  However,  the 
structure  of  banks  funding  is  improving,  with  a 
loan-to-deposit 
since 
end-2015,  a  higher  share  of  customer  resources, 
and  slightly  lower  funding  from  the  European 
Central Bank.  

ratio  close 

to  100 % 

economies 

have 

that 

Banks  carry  on  the  deleveraging  of  their 
balance  sheets  while  new  loans  to  households 
are  on  the  increase.  Total  banking  system  assets 
continued to decline, falling by 24 % between the 
end  of  2010,  when  the  deleveraging  started,  and 
Q2-2016.  As  in  previous  years,  the  fall  in  the 
credit  portfolio  contributes  most  to  the  fall  in  the 
system's assets. Looking at recent trends in lending 
volumes,  by  the  end  of  2015,  total  credit  to 
households  shrank  by  2.2 %  year-on-year  driven 
by  the  fall  in  loans  for  house  purchase  (-2.9 % 
year-on-year), whereas loans for consumption and 
other  purpose  rose  by  nearly  1 %.  In  the  same 
period,  loans  to  Portuguese  firms  (adjusted  for 
sales  of  credit  portfolios) 
fell  by  1.3 % 
year-on-year.  Nevertheless,  gross  flows  of  new 
bank loans to households increased considerably in 
2015.  The  volume  of  new  mortgage  loans  is  now 
comparable  with  the  average  last  seen  in  2011. 
Consumer  lending  is  once  again  strong  reflecting 
more  consumer  confidence  and  backed  by  easing 
credit standards and low interest rates. 

Assets  quality and  low  profitability  continue to 
put pressure on the system’s solvency levels. All 
Portuguese  lenders  comply  with  the  minimum 
capital  requirement  of  8 %,  while  the  average  
Common  Equity  Tier  1  (CET1)  ratio  for  the 
banking  system  was  12.1 %  in  Q2-2016,  0.8 
percentage  points  higher  than  at  the  end  of  2014 
and  stable  if  compared  to  the  end  of  2015. 

Nonetheless,  Portuguese  banks  are  currently 
among the weakest-capitalised credit institutions in 
the  Eurozone.  This  highlights  dire  solvency 
pressures  coming  mostly  from  the  difficulty  for 
banks  to  generate  capital  from  internal  resources, 
through  earnings  retention.  Such  pressures  are  set 
to  continue  in  2017.  Portuguese  banks  are  facing 
regulatory  and  prudential  capital 
increased 
requirements  through  additional  capital  buffers 
imposed through Pillar II requirements and also on 
Portugal's systemically important institutions.  

decrease 

just  have  broken  even  as 

The  profitability  of  Portuguese  banks  is  still 
very weak. After four years of losses, the banking 
in  2015,  given  a 
system  became  profitable 
substantial 
and 
impairments 
in 
provisions,  and  large  trading  gains  booked  from 
the  sale  of  sovereign  bonds.  In  2016,  however, 
most  banks 
the 
system-wide  return  on  equity  at  the  end  of  June 
2016 was just 0.3 %. This reflects a significant fall 
in  income  from  financial  operations  and  an 
increase  in  the  flow  of  impairments.  By  contrast, 
net  interest  income  increased,  driven  by  a  larger 
reduction in interest costs than in interest income, 
following the re-pricing of deposits at lower rates. 
The overall differential between the headline credit 
rate  and  the  average  remuneration  rate  paid  by 
banks  on  deposits  is  gradually  rising.  Ongoing 
deleveraging, the relative importance of loans with 
indexed  interest  rates  and  low  spreads  in  the 
banks’ credit portfolios negatively impacted on the 
to  customers.  Overall, 
income 
recurring revenues remain strongly affected by the 
low 
rate  environment  and  subdued 
business  levels.  Other  income  items  such  as  net 
commissions  and 
international 
income 
activity  have  accounted  positively  to  revenue 
generated in 2015 and 2016.  

from  credit 

interest 

from 

Portugal's  banking  sector  compares  rather 
unfavourably  with  most  of  the  euro  area 
countries  when  it  comes  to  efficiency  figures. 
The  cost-to-income  ratio  remains  locked  at  60 %. 
The  average  efficiency  of  banking  operations  has 
hardly  improved with  cost-to-income  at  59.9 %  at 
the  end  of  2015  and  60.4 %  in  mid-2016,  only  a 
fall  of  5.1  percentage  points 
from  2014. 
Nevertheless,  efforts  are  being  made  to  adjust  the 
structure of banking operations and employment to 
the new environment – in that context the top nine 
lenders in the country have cut operational costs by 
6 %  over  the  first  three  quarter  of  2016.  Taking 

27 

 
 
4.2. Financial sector and indebtedness 

credit  granted  to  the  resident  private  sector  at  the 
end of June 2016. However, banks differ in terms 
of  accumulated  impairments  on  NPL:  at  end-Q3 
2016,  the  average  coverage  ratio  for  corporate 
NPLs was close to 80 % and ranged from 50 % to 
95 %. 

Although some actions have been taken recently 
to  address  the  large  stock  of  non-performing 
loans,  there  is  no  comprehensive  strategy  with 
clear deadlines. Early warning systems for viable 
firms  have been  improved  and  a  task  force set  up 
to tackle the core problem. It was decided recently, 
for  tax  purposes  to  write-offs  loans  that  had  been 
overdue  for  more  than  2  years  and  had  100 % 
impairments;  these  write-offs  would  also  have  to 
be  derecognised  from  the  banks'  balance  sheet. 
Moreover, current recapitalisations  and  the arrival 
of  new  shareholders 
large 
Portuguese  banks  may  also  lead  to  a  reduction  in 
such  loans.  The  authorities  have  also  presented  a 
tripartite  strategy  to  tackle  the  problem.  This 
involves: 

in  some  of 

the 

 

 

revising the existing legal and judicial package, 
including  provisions 
to  streamlining  and 
accelerating  processes  under  PER  (Special 
Revitalisation 
SIREVE 
(Extrajudicial  Business  Recovery  System), 
expected to be implemented already in 2017; 

Process) 

and 

relying  on  the  measures  taken  by  individual 
banks in the form of an internal review of each 
non-performing  loan  by  the  banks  under  the 
supervision  of  the  Central  Bank.  This  would 
lead to a clear assessment of the loans' viability 
and  specific  restructuring  arrangements  for 
each  case.  Although  the  granular  examination 
of  these  loans  is  a  step  in  the  right  direction, 
there  is  no  timeline  nor  are  there  any  obvious 
incentives  to  banks  to  undertake  this  costly 
process;  

their  non-performing 
this  would  be  followed  by 

  encouraging  banks  to  partly  outsource  the 
servicing  of 
loans. 
the 
Whether 
establishment  of  a  proper  market  of  distressed 
assets,  including  new  underlying  regulation,  is 
not  clear.  Overall,  an  overarching  strategy  in 
line  with  the  recent  proposals  presented  in  the 
Single 
(SSM) 
Supervisory  Mechanism 
non-performing loan guidance is still missing.  

in 

gross 

limited  capacity 
the 

to 
the  banks’ 
into  account 
generate 
current 
income 
macroeconomic  environment,  the  recovery  in  the 
Portuguese banking system’s profitability is likely 
reducing 
to 
rely  mainly  on 
operational  costs  while  at 
time 
safeguarding  the  integrity  of  the  risk  assessment 
and internal control processes among banks. 

continuously 

the  same 

The  high  amount  of  non-performing  loans 
continues  to  weigh  on  the  banking  sector's 
aggregate  balance  sheet.  The  non-performing 
loan (NPL) ratio (18) remains high (20.1 % against 
19.6 %  in  end-2015)  and  still  rising  for  some 
sectors of the economy, in particular non-financial 
corporations,  active  in  the  construction  and  real 
estate sectors. These corporations have also a high 
share of overdue loans for more than two years. In 
contrast,  bad  loans  in  manufacturing,  hotels  and 
restaurants have stabilised and even improved. The 
quality  of  credit  to  households  is  relatively  of 
better quality and seems to have stabilised over the 
past year. In addition to high levels of NPLs, some 
large  banks  have  a  high  share  of  foreclosed  real 
estate  assets  on  their  balance  sheet,  which  puts 
additional  asset  risk  pressure  on  the  banking 
system  as  a  whole.  Given  moderate  economic 
growth  prospects,  the  ratio  of  non-performing 
loans  is  not  expected  to  improve  substantially. 
Without  decisive  action,  the  stock  of  problematic 
assets  will  remain  very  large  and  costly,  and  will 
jeopardise  the  efficient  reallocation  of  financial 
resources available on banks’ balance sheets. 

The  distribution  of  NPLs  has  been  highly 
unequal  among  Portuguese  banks  with  non-
performing exposure ratios ranging from below 
5 %  to  over  30 %.  Close  to  ¾  of  the  total  non-
performing  loan  stock  and  70 %  of  the  corporate 
NPLs  are  held  by  the  six  largest  banks  in  the 
system  at  the  end  of  2015  with  a  very  high 
concentration of corporate bad debts (over 60 % of 
the  total  exposure)  among  just  two  lenders  in  the 
system.  The  coverage  of  NPLs  has  been  steadily 
increasing  reflecting  the  significant  build-up  of 
credit 
impairment 
impairments on the aggregate balance sheet of the 
banking  sector  represented  about  9.1 %  of  gross 

flows.  The 

accumulated 

(18)  European  Banking  Authority  (EBA)  data.  Note  that  the 
EBA  definition  of  NPLs  here  corresponds  to  the  share  of 
non-performing loans over total loans and is then different 
from  the  EBA  non-performing  exposure  (NPE)  indicator 
which encompasses both loans and debts.  

28 

 
                                                           
4.2. Financial sector and indebtedness 

Compensation  for  the  workmen  is  also  provided, 
which  is  a  line  of  business  specific  to  Portugal. 
Portuguese  insurers  were  heavily  affected  by  the 
economic  and  financial  crisis.  The  crisis  created 
considerable  volatility  in  the  value  of  assets  on 
Portuguese insurers' balance sheet and affected the 
insurance  product  mix  with  sales  of  life  risk 
products  linked  to  banks  loans  plummeting  while 
bank  lending  continued  to  contract.  The  business 
model of the Portuguese insurance sector is based 
on  strong  links  between  banks  and  insurance 
companies. This means it is under pressure, mostly 
because  of  the  challenging  situation  within  the 
Portuguese credit institutions. Faced with crippling 
losses,  in  recent  years,  banks  sold  some  of  the 
biggest insurers in the country, representing about 
40 % of the market. The recession weighed on the 
motor insurance while heavy competition and high 
unemployment  plunged 
the  once  profitable 
workmen compensation segment into heavy losses. 
Life insurance was experiencing a revival prior to 
2014  but  2015  and  2016  saw  a  strong  reversal  as 
economic  uncertainty  took  hold  and  interest  rate 
guarantees  had  to  be  reduced  to  levels  close  to 
zero.  Implementing  Solvency  II  is  challenging  in 
the  current  weak  macroeconomic  environment, 
which is also reflected in the recent EIOPA stress 
test results.  

4.2.3.  HOUSING MARKET 

There  are  signs  of  step-backs  in  the  housing 
market reforms. The original framework aimed to 
make the housing market  more dynamic by better 
balancing  the  rights  and  obligations  of  landlords 
and tenants. Over a period of five years, it phased 
out, the old system of open-ended leases in which 
rents  were  frozen  and  contracts  could  not  be 
terminated by landlords, and provided for rents to 
be updated so as to achieve gradual alignment with 
market levels. It also introduced more flexibility in 
the  choice  of  contract  duration,  set  better 
incentives  for  renovation  and  provided  a  new  and 
fast extrajudicial eviction procedure. A law which 
for 
simplified 
renovation works was adopted as part of the same 
the  current 
package.  Concerns  remain  about 
Parliament's  proposal 
the 
to 
transitional  period  for  certain  categories  for  10 
years  (more  5  years).  In  particular  the  proposal 
concerns "old household" (contracts before 1990), 
namely tenants aged 65 or over or disabled, whose 

further  extend 

administrative 

procedures 

Banks are taking steps to improve their capital 
ratios  through  attracting  some  fresh  equity. 
State owned Caixa Geral De Depositos (CGD), the 
largest  bank  in  Portugal,  is  in  the  process  of 
increasing  its  equity  base  by  some  EUR 5 bn  in 
total. This is being done through a set of measures 
entailing the transfer of EUR 499 m of assets from 
Parcaixa  to  CGD,  the  conversion  into  equity  of 
EUR 945 m  of  Cocos  and  two  other  operations 
planned 
for  March  2017,  namely  a  direct 
recapitalisation  by  the  State  in  the  amount  of 
EUR 2.7 bn  and  a  EUR 0.5 bn 
issuance  of 
subordinated  debt  to  private  investors.  Banco 
Commercial  Portugues  (BCP)  Millennium,  the 
second biggest bank in Portugal, recently raised its 
capital by EUR 1.3 bn in total through the issuance 
of  shares.  For  the  Chinese  financial  conglomerate 
Fosun, this implied an increase in its stake to 23.9 
percent from the 16.7 percent they had previously 
offered  to  buy  for  175  m.  BCP  repaid  EUR  700 
million  CoCos  to  the  state  on  9  February.  Banco 
Portugues 
(BPI)'s  main 
Investimento 
shareholder,  the  Spanish  Caixabank,  launched  a 
takeover  bid  for  the  bank,  a  move  that  was 
welcome  by  investors  following  a  long  standing 
dispute  with  BPI  second  biggest  shareholder 
(Angolan  Santoro  group)  over  BPI's  subsidiary  in 
Angola.  Finally,  Novo  Banco's  sale  process  has 
recently  entered  in  its  final  phase  with  private 
equity  funds  leading  the  acquisition  discussions. 
Additionally,  virtually  all  banks  in  the  system  are 
restructuring their franchise to support earnings in 
parallel  selling  non-core  assets  to  improve  their 
capitalisation  –  these  asset  sales  are  however 
dependent  on  current  market  conditions  and 
valuations. 

de 

4.2.2.  INSURANCE SECTOR  

The  Portuguese  insurance  market  is  open  and 
competitive  but  still  under  pressure  from 
crisis-legacy 
issues.  With  EUR 12.7 billion 
(equivalent  to  7.1 %  of  GDP)  in  underwritten 
premiums  the  value  of  the  Portuguese  insurance 
market  is  about  the  European  average.  The  sector 
consists  of  close  to  80  insurers  with  the  top  five 
firms representing two thirds of the market, 11 000 
employees and a country-wide distribution channel 
including  over  23 000  brokers.  The  insurance 
is  dominated  by 
business 
insurance 
segment, 
representing  about  70 %  of  gross 
premium  income  in  the  non-life  insurance  sector. 

life 

the 

29 

 
4.2. Financial sector and indebtedness 

Graph 4.2.1:  Debt breakdown by sector in 2002-2016 

Source: European Commission 

Graph 4.2.2:  Breakdown of year-on-year changes in 
debt-to-GDP ratios, NFCs 

Source: European Commission 

to 

household income is below a certain threshold. For 
"commercial  lease  contracts"  (from  before  1995), 
it  covers  microenterprises;  entities  of  public, 
national  or  municipal  interest;  student  republics; 
shops  and  entities  of  historical  and  cultural 
interest.  This  change,  on  top  of  those  already 
introduced  after 
the  economic 
the  end  of 
adjustment  programme (19),  would  further  weaken 
the  original  scope  of  the  reform.  All  these 
amendments 
the  original  frameworks  will 
reduce  and  delay  the  full  benefits  of  the  reform, 
which  was  designed  to  be  fully  applicable  from 
2017,  by  extending  the  transitional  period  and 
enlarging  the  scope  of  exemptions.  The  requested 
ex-post  assessment  of  the  lease  reform  has  been 
halted  and  it  is  impossible  to  know  exactly  how 
many contracts that are covered by exemptions and 
benefits for a transitional period. The main reason 
for  this  is  that  existing  monitoring  procedures 
remain 
full 
interoperability  between  different  relevant  data 
sources (registry of buildings, utility contracts, and 
means testing of households). Moreover, it remains 
impossible  to  gather  sound  evidence  on  the 
shadow  economy  in  the  rental  market  in  the 
absence of the comprehensive study on the shadow 
economy  in  that  market  that  the  Portuguese 
authorities  committed  themselves  to  carrying  out 
with  a  view  to  tackling  housing  tax  evasion  and 
fraud more effectively. 

scope,  without 

limited 

in 

4.2.4.  PRIVATE INDEBTEDNESS* 

the 

sector, 

the  private 

to  77 %  of  GDP 

Deleveraging  has  been  proceeding  slowly.  At 
present  the  Portuguese  private  sector  remains  one 
of  Europe's  most  indebted  in  relation  to  GDP. 
stock  of 
Within 
non-consolidated  debt  for  all  household  was 
equivalent 
in  June  2016 
(compared to 82 % at the end of 2014) whereas for 
non-financial corporations this was over 117 % of 
GDP,  down  by  9  pps.  from  the  end  of  2014.  For 
both  households  and  non-financial  corporations, 
the  deleveraging  that  took  place  over  the  last 
quarters  was  due  to  GDP  growth  and  changes  in 
inflation.  The  process  of  deleveraging  was 
particularly  difficult  for  microenterprises  where 
over a third make no profits. 

(19)  European  Commission,  Post-Programme  Surveillance 
Reports,  Portugal,  Winter  2015/2016  (p.  31)  and  Summer 
2016 (pp. 30-31) 

30 

050100150200250300350400450500Q2-2004Q2-2005Q2-2006Q2-2007Q2-2008Q2-2009Q2-2010Q2-2011Q2-2012Q2-2013Q2-2014Q2-2015Q2-2016Financial corporationsGovernmentHouseholdNon financial corporationsPrivate non-financial sector% of GDP-15-10-505101520Q1-2006Q1-2007Q1-2008Q1-2009Q1-2010Q1-2011Q1-2012Q1-2013Q1-2014Q1-2015Q1-2016Credit flowReal growthInflationOther changesD/GDP, changey-o-y % change 
                                                           
 
 
 
 
4.2. Financial sector and indebtedness 

towards marketable debt, rather than FDI and other 
equity  investment,  which  tend  to  be  more  stable, 
allow  for  better  risk  sharing  and  facilitate  the 
transfer  of  expertise.  Since  its  peak  in  2012, 
at  -116.5 %  of  GDP,  the  Portuguese  investment 
position  (NIIP)  gradually  declined  to  -110 %  still 
very high, in 2015, reflecting improvements in the 
trade  balance  (a  compression  of  imports  and 
expansion in export services, particularly tourism), 
the  continuous  though  slow  deleveraging  of  the 
private  sector  and  higher  income  transfers  from 
remittances  further  to  large  migration  outflows. 
Despite  this  adjustment  in  the  current  account,  a 
more  sizeable  adjustment  would  be  needed  to 
reduce  the  NIIP  to  more  sustainable  levels.  The 
Commission estimates that Portugal would need to 
run  average  current  account  surpluses  of  around 
1.6 %  of  GDP  until  2025  to  halve  the  negative 
NIIP  (about  -55 %  of  GDP),  as  compared  to  the 
0.1 %  of  GDP 
in  average  current  account 
adjustment recorded since 2013. 

Graph 4.2.4:  Breakdown of Portugal's Net International 

Investment Position (NIIP) 

Source: European Commission 

Graph 4.2.3:  Breakdown of year-on-year changes in 

debt-to-GDP ratios, households 

Source: European Commission 

to  non-performing 

The authorities see several possible approaches 
to addressing high indebtedness. Apart from the 
loans  discussed 
approach 
above,  these  include  i) the  streamlining  of  the 
procedures  for  debt  restructuring,  in  particular 
more flexibility in the PER and SIREVE schemes 
and stepping up mediation and coordination among 
creditors, ii) creating mechanisms that facilitate the 
debt-to-equity  swap  within  a  recovery  plan, 
iii) early warning systems for companies that are in 
difficulties  but  still  viable,  iv) allocating  more 
resources  to  speeding  up  insolvency  proceedings, 
including  enforcement  of  collateral,  and  v) using 
new  IT  systems  in  the  insolvency  and  liquidation 
procedures.  The  legislation  for  these  measures  is 
expected  to  enter  into  force  by  April  2017.  The 
authorities  are  committed 
the 
retention  of  profits  through  changes  in  the  tax 
system, to allow for early and fast restructuring by 
and 
facilitating 
improving creditor coordination.  

arrangements 

out-of-court 

improving 

to 

4.2.5.  EXTERNAL INDEBTEDNESS* 

Long-term debt (other investment) mostly from 
the  general  government  remains  the  largest 
component  of  the  net  international  investment 
position 
followed  by  net  direct 
investment.  The  overall  composition  is  tilted 

(NIIP), 

31 

-8-6-4-20246810Q1-2006Q1-2007Q1-2008Q1-2009Q1-2010Q1-2011Q1-2012Q1-2013Q1-2014Q1-2015Q1-2016Credit flowReal growthInflationOther changesD/GDP, changey-o-y% change-150-100-50050199920002001200220032004200520062007200820092010201120122013201420152016*Net portfolio invest., equity and investment fund shares/unitsNet portfolio invest., debt securitiesOther invest. (net)Net direct invest.Net financial derivativesNet int'l investment positionMarketable debt (portfolio debt instr., other invest. and res.assets, net)% of GDP 
 
 
 
 
4.2. Financial sector and indebtedness 

Graph 4.2.5:  Current account financing 

Source: European Commission 

is  particularly  sensitive 

A  simulation  of  unfavourable  macroeconomic 
developments  shows  that  an  adverse  interest 
rate  shock  is  the  most  important  risk  to  the 
NIIP.  The  NIIP 
to 
domestic  interest  rates  while  a  negative  shock  to 
GDP growth affects it less (Graph 4.2.6). Keeping 
all  other  relevant  variables  constant,  larger  trade 
deficits  lead  to  a  slower  pace  of  adjustment.  A 
domestic  demand  stimulus  could  thus  lead  to 
higher  trade-balance  deficits,  if  it  is  not  matched 
by measures to increase productive capacity.  

Graph 4.2.6:  NIIP sensitivity to macroeconomic shocks 

Source: European Commission 

32 

-20-15-10-5051015199920002001200220032004200520062007200820092010201120122013201420152016*Capital account (KA)Secondary income balancePrimary income balance  Trade balance - services  Trade balance - goodsTrade balanceCurrent account balance (CA)Net lending/borrowing (CA+KA)% of GDP-150-100-500201320142015201620172018*2019*2020*2021*2022*2023*2024*2025*2026*2027*2028*2029*2030*2031*Net IIP for PT, BaselineNet IIP for PT, Scenario (+1 pp real GDP growth)Net IIP for PT, Scenario (-1 pp real GDP growth)Net IIP for PT, Scenario (1pps domestic  yields)Net IIP for PT, Scenario (-1pps domestic yields)Net IIP for PT, Scenario (+1 pp real GDP growth, 1 pps inflation, +1pps trade balance)Net IIP for PT, Scenario (-2pps trade balance )% of GDP 
 
 
4.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

4.3.1.  LABOUR MARKET AND ACTIVE LABOUR 

MARKET POLICIES* 

improved 

remain.  Unemployment 

labour  market  situation, 
In  an 
challenges 
rates 
continued to fall in 2015 and 2016, as reported in 
Section  1,  but  are  still  higher  than  in  the  years 
before  2008  and  higher  than  the  EU  average. 
Long-term  unemployment  —  which  accounts  for 
over  half  of 
risks 
stabilising  at  a  high  level  The  government  has 
negotiated  with  the  social  partners  a  mid-term 
agreement  on  how  to  improve  labour  market 
conditions.  The  agreement  covers  topics  such  as 
labour  market 
segmentation  and  collective 
bargaining. 

total  unemployment  — 

Graph 4.3.1:  Unemployment by duration 

Source: European Commission 

Labour  market  segmentation  remains  high, 
weighs  on  the  prospects  of  young  people  and 
has  the  potential  to  increase  labour  market 
volatility.  Despite 
the  growth  of  permanent 
contracts,  labour  market  segmentation  remains 
high.  New  entrants,  in  particular,  are  exposed  to 
temporary  and  precarious  contracts:  53.5 %  of 
employees  under  30  work  on  temporary  contracts 
(against an EU average of 33.3 %). This adversely 
affects  young  people’s  career  prospects  and 
incomes,  given  the  wage  gap  between  temporary 
and  permanent  workers.  Such  contracts  are  also 
particularly 
cycle 
sensitive 
thus  reacts 
fluctuations;  youth  unemployment 
more strongly to recessions than unemployment in 
last-in-first-out 
2015).  The 
general 

business 

(Hüttl 

to 

workforce  adjustment  strategies,  often  adopted  by 
firms,  exacerbate  this  effect  (Scarpetta  2012). 
Thus,  extensive  use  of  temporary  contracts  may 
aggravate  volatility  in  labour  markets,  thereby 
failing to dampen economic fluctuations. 

Recent  reforms  notwithstanding,  some  aspects 
of  labour  law  may  still  discourage  firms  from 
hiring  permanent  workers.  The  employment 
protection  legislation  reform  implemented  during 
the  economic  adjustment  programme  lowered 
severance  payments  in  case  of  fair  dismissals.  It 
thereby  improved  employers'  perception  about 
flexibility  of  hiring  and  firing  practices (20). 
However, legislation on unfair dismissals was left 
unchanged.  There  is  a  large  gap  between  the 
level  of  compensation  due  for 
current  high 
dismissals deemed to be unfair and that awarded in 
cases of fair dismissals (21). Moreover, a worker’s 
reinstatement  in  his  or  her  previous  job  can  be 
established  in  court  if  the  dismissal  is  deemed 
unfair. This may create incentives to challenge fair 
in  court (22)  and,  coupled  with 
dismissals 
inefficiencies  in  the  judicial  system,  lead  to 
uncertainty  about  firing  costs.  This  may,  in  turn, 
provide  incentives  for  companies  to  hire  on  a 
temporary  basis  (on 
interaction  between 
the 
judicial  efficiency  and  EPL  strictness,  see 
European  Commission,  2016c).  Since  the  recent 
reforms affect only new employment contracts, the 
full impact of the reform might take time to show 
results  in  terms  of  shifting  the  share  between 
temporary and permanent contracts. 

Additional  reasons  for  persistent  segmentation 
include the structure of employment incentives, 
currently  being  reviewed,  and  the  fact  that 
labour inspections are relatively ineffective. The 
recent 
‘activation’  schemes  has 
contributed to a recovery in employment, but some 
of the available schemes have created incentives to 
boost  fixed-term  employment  (see  below).  This 

increase 

in 

(20)  Employers’ perception about flexibility in hiring and firing 
practices  (World  Economic  Forum's  survey  of  business 
leaders) has improved after the 2012 reform. From 2.38 in 
2012  to  3.27  in  2016  (7  being  the  least  rigid),  the  largest 
increase in the EU over that period.  It is now  close to  the 
(unweighted) EU average of 3.6. 

(21)  Severance  payments  per  year  of  work  amount  to  12  days 
for  open-ended  contracts  and  18  days  for  temporary 
contracts in the event of fair dismissal, and between 15 and 
45 days in the event of unfair dismissal. 

(22)  Portugal  had  the  third  highest  litigation  rate  in  Europe  in 

2013 (European Commission, 2016c). 

33 

01002003004005006007008009001000Q1-2000Q1-2001Q1-2002Q1-2003Q1-2004Q1-2005Q1-2006Q1-2007Q1-2008Q1-2009Q1-2010Q1-2011Q1-2012Q1-2013Q1-2014Q1-2015Q1-2016Total> 6 months> 12 months>24 months> 48 monthsthousand people 
 
 
                                                           
4.3. Labour market, education and social policies 

the  very 

has  prompted  the  Government  to  redesign  in 
January  2017  its  employment  support  programme 
to  promote  hiring  on  open-ended  contracts  while 
restricting  support  for  temporary  contracts  to 
specific  cases  such  as 
long-term 
unemployed.  However  the  expected  impact  on 
reducing  segmentation  seems  limited  as  only 
15 000  people  are  foreseen  to  be  covered  by  the 
programme.  As  regards  labour  inspections,  the 
Authority  for  Working  Conditions  has  launched  a 
public  competition  to  hire  80  additional  labour 
inspectors.  This  additional  capacity,  together  with 
the  planned  interconnection  of  data  between  the 
services of the labour inspectorate, Social Security 
and  Tax  Authorities  should  enable  more  effective 
identification of bogus self-employment and other 
labour infractions. 

and 

average 

Minimum  wage  increases  are  not  aligned  with 
inflation 
productivity 
developments.  The  government  has  increased  the 
monthly minimum wage (paid 14 times a year) by 
5.1 %,  to  EUR 557  as  of  1 January  2017.  This 
increase  overcompensates  for  recent  increases  in 
consumer prices, which rose by 0.6 % in 2016, and 
average 
labour  productivity,  which  remained 
more-or-less stable (European Commission’s 2016 
winter  Forecast).  This  adds  up  to  a  similar 
development  in  the  previous  year.  Moreover,  the 
minimum  wage  rose  faster  than  the  average 
compensation per employee (which rose by 1.4 % 
in 2016), following a trend that started in 2007 (23). 
In  spite  of  the  recent  significant  increases  in  the 
minimum  wage,  average  wage  growth  has  been 
moderate  (and  sometimes  negative)  in  recent 
years, pointing to a limited impact on overall cost 
competitiveness  so  far (24)  but  leading  to  an 
increasing  wage  compression.  The  latter  may 
reduce  the  returns  to  skills  and  therefore  the 
incentives  to  invest  in  them.  The  Government  is 
monitoring 
impact  of  minimum  wage 
developments,  namely  through  quarterly  reports 
which  are  published  and  discussed  with  social 
partners. 

the 

(23)  Between  2011  and  2014  the  minimum  wage  was  frozen. 
See  the  2016  Country  Report  (European  Commission, 
2016)  for  a  detailed  comparison  of  minimum  wage 
developments with relevant economic variables. 

(24)  The  impact  on  average  unit  labour  cost  could  even  be 
negative,  if  increases  in  the  minimum  wage  eventually 
have a negative effect on low-productivity jobs. 

to 

involve  risks 

Increases  in  the  minimum  wage  can  reduce 
increase  aggregate 
in-work  poverty  and 
demand  but  also 
the 
low-wage  groups.  Evidence 
employment  of 
shows  that  minimum  wage  increases  may  help 
reduce  (in-work)  poverty  (European  Commission, 
2016a) (25).  In  2013,  before  the  most  recent 
increases  in  the  minimum  wage,  more  than  20 % 
of minimum wage earners in Portugal were at risk 
of  poverty.  Increases  in  the  minimum  wage  can 
also have a positive impact on aggregate demand if 
not  outpaced  by  possible  negative  employment 
effects,  depending  on  the  relative  position  of  the 
minimum  wage  in  the  wage  distribution.  The 
higher 
the  overall 
distribution, the more binding it is, making it more 
likely  that  some  firms  will  forego  filling  some 
low-productivity 
jobs.  The  potential  negative 
effect  on  employment  is  more  marked  for  groups 
with a higher share of low-wage workers, such as 
young  people  and  low-skilled  workers  (European 
Commission,  2016a).  In  a  context  of  employment 
recovery, these risks have not materialised so far. 

the  minimum  wage 

in 

low-productivity 

The  minimum  wage  covers  a  rising  share  of 
workers increasing the potential negative effect 
on 
jobs.  The  Portuguese 
minimum  wage  was  one  of  the  highest  in  the  EU 
relative to the median wage in 2015 (57 %; OECD 
data).  The  two  recent  increases  also  significantly 
extended  its  coverage.  The  share  of  workers 
earning the minimum wage rose from about 12 % 
to  16 %  in  October  2014,  and  to  around  21 %  in 
the first nine months of 2016. It is expected to rise 
further  in  2017,  as  the  increase  in  the  minimum 
wage  is  higher  than  the  forecast  increase  in 
employees’  compensation.  At  the  same  time,  the 
share  of  workers  earning  the  minimum  wage 
among  new  contracts  increased  from  below  25 % 
in  early  2014  to  around  38 %  by  mid-2016 
(Portuguese  Cabinet  of  Strategy  and  Planning, 
2016).  

More  workers  were  covered  by  new  collective 
agreements in 2016. From January to August the 
share  of  workers  covered  by  newly  signed 
collective  agreements  in  the  private  sector  rose  to 
26 %. It was expected to reach 40 % by the end of 

(25)  The incidence of this effect cannot be assessed yet, as  the 
most  recent  in-work  poverty  figures  reflect  2014  incomes 
(i.e.  before  the  latest  increases  in  minimum  wages).  See 
Section 4.3.2 for details. 

34 

 
                                                           
                                                           
4.3. Labour market, education and social policies 

revoked  and  replaced  by  personalised  schemes, 
including towards long-term unemployed. 

4.3.2.  SOCIAL POLICIES 

the 

fall 

social 

Indicators  of  inequality,  poverty  and  social 
exclusion  have  improved  in  2015 (26),  in  line 
unemployment.  The 
with 
in 
at-risk-of-poverty  or 
rate 
exclusion 
(AROPE)  fell  from  27.5 %  in  2014  to  26.6 %  in 
2015, although it is still nearly 3 percentage points 
above  the  EU  average.  This  is  a  result  of  the 
reduction  in  severe  material  deprivation  (from 
10.6 %  to  9.6 %)  and  in  the  percentage  of  people 
living  in  low-work-intensity  households  (from 
12.2 %  to  10.9 %).  The  ratio  of  total  income 
received  by  the  20 %  of  the  population  with  the 
highest income to that received by the 20 % of the 
population  with  the  lowest  income  (S80 / S20 
indicator)  is  falling,  but  remains  above  the  EU 
average  and  one  of  the  highest  in  the  EU  (see 
Section 1). 

Graph 4.3.2:  Main social indicators 

Source: European Commission 

However,  in-work  poverty  remains  high  and 
has not fallen in the first few years of the labour 
market  recovery.  Historically,  in-work  poverty 
has  been  higher  in  Portugal  than  in  most  EU 
Member  States  but  it  was  on  a  declining  path 
before  2008.  In  2015  (the  data  reflecting  2014 
incomes),  it  stood  at  10.9 %,  against  the  EU 

(26)  The data refer to 2014 incomes. 

2016, compared with 20 % in 2015. This increase 
is  largely  due  to  collective  bargaining  at  sector 
level,  with  90 %  of  workers  covered  by  sector 
agreements.  In  the  first  three  quarters  of  2016, 
wage  increases  agreed  in  collective  agreements 
amounted  respectively  to  0.8 %,  1.4 %  and  1.5 % 
year-on-year  respectively.  This  was  above  the 
consumer price index which increased by 0.5 % on 
average  year-on-year  in  those  quarters  while 
productivity 
slightly  declined.  Nevertheless, 
nominal  wage  growth  in  2016  is  expected  to 
remain  moderate  (see  Section  1).  Administrative 
increased 
extension  of  collective  agreements 
significantly in 2015 and 2016 following the 2014 
flexibilisation of  the representativeness  rule.  They 
remain however still below the pre-crisis level.  

Active  labour  market  measures  continue  to 
foster  transitions  into  employment,  although 
the  share  of  participants  among  jobseekers  is 
falling.  The  percentage  of  registered  unemployed 
people  following  active  labour  market  measures 
fell from an average of 26 % in 2015 to 18.2 % in 
2016.  The  Government  published  a  preliminary 
assessment  study on  active  labour  market  policies 
in  June  2016  (Portuguese  Ministry  of  Labour 
2016).  This  highlights  the  need  to  slow  down  the 
overall supply of active labour market measures, in 
the 
line  with 
European  Social  Fund  (ESF)  until  2020  (active 
labour  market  policies  are  largely  co-financed  by 
the ESF), while focusing these policies on schemes 
that  foster  job  creation  on  permanent  contracts. 
The  study  also  shows  that  38 %  of  trainees  were 
integrated  in  the  labour  market  after  having 
completed a traineeship and 27 % were offered an 
open-ended  contract.  Additionally,  65 %  of  those 
who  were  initially  hired  through  hiring  incentives 
are  employed  one  year  after  the  financial  support 
has ended, but less than 30 % have an open-ended 
contract.  

the  resources  available  from 

the 

is  developing  one-stop  shops  for 
Portugal 
focus  on 
employment,  with  a  particular 
addressing 
long-term 
of 
problem 
unemployment.  Although  still  in  a  definition 
phase,  once  implemented,  these  would  improve 
coordination  between  employment  and  social 
services 
‘activation’  of 
unemployed  people,  in  particular  the  long-term 
unemployed.  The  obligation  for  people  registered 
as  unemployed  to  turn  up  twice  a  month  at  the 
Public  Employment  Services  (PES)  has  been 

increase 

and 

the 

35 

05101520253020052006200720082009201020112012201320142015At-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivationPeople living in low work intensity households% of population 
 
                                                           
4.3. Labour market, education and social policies 

households is marginal, while the monthly increase 
in 
to  single  parent 
households is slightly more significant. 

the  extra  amount  paid 

than 

than 

social 

exclusion 

Older  people  continue  to  show  lower  risk  of 
poverty  and 
the 
working-age population. The impact of the fiscal 
adjustment  in  recent  years  was  sharper  for  young 
and  working-age 
pensioners. 
people 
Government  spending  on  education  and  social 
benefits  for  family  and  children  fell  by  16 % 
between  2007  and  2014,  while  expenditure 
directed  towards  older  people,  such  as  healthcare 
and  pensions,  increased  by  14 %.  In  2015,  the 
AROPE  among  those  aged  65  and  above  was 
21.7 %,  against  25.2 %  among  25-54-year-olds. 
However,  the  risk  of  poverty  or  social  exclusion 
for  older  people  remains  higher  than  the  EU 
average.  In  this  regard,  the  reference  value  of  the 
elderly  solidarity  supplement  was 
increased 
through three legislative changes from EUR 4 909 
in 2015 to EUR 5 084 in 2017. This social benefit 
may help reduce the at-risk-of-poverty rate for the 
elderly,  although  the  number  of  people  benefiting 
from the measure has fallen slightly by comparison 
with  2015.  According 
the  Portuguese 
authorities, some potential beneficiaries are failing 
to  claim  their  entitlements  because  they  are 
unaware  of  the  eligibility  criteria.  In  2016,  the 
authorities 
awareness 
campaign to tackle this issue. 

a  national 

launched 

to 

introduced  for 
A  new  social  benefit  was 
unemployed  who  no  longer  have  access  to 
unemployment  benefits  or  assistance.  This 
benefit, established in March 2016, is payable for a 
maximum  of 180 days.  It  amounts  to 80 % of  the 
the 
last  social  assistance  benefit  paid.  Like 
it 
unemployment 
is 
assistance 
means-tested (28).  According 
the  National 
Reform  Programme,  this  measure  is  designed  to 
reach  70 000  people  until  2020.  Up  until 
November 2016, 3 065 people were covered. 

scheme, 
to 

Overall, the health of the Portuguese population 
is  good  yet  some  indicators  point  to  potential 
inequalities  in  access.  Access  to  primary  health 
care is limited; in 2015, 10 % of the population did 
not have a family doctor. One reason for this is the 

(28)  The household should not have movable assets worth more 
than  EUR  100  613.  Its  monthly  income  per  capita  should 
be under EUR 335. 

average  of  9.5 %.  The  slight  increase  in  in-work 
poverty,  as  compared  to  the  previous  two  years, 
seems to indicate that the first period of the labour 
market  recovery,  which  started  in  early  2013, 
increased  median  income  more  than  that  of 
low-wage  earners.  A  large  proportion  of  atypical 
employment  contracts  and  high 
involuntary 
part-time  employment  may  also  contribute  to  this 
trend.  In-work  poverty  among  individuals  with 
temporary contracts was twice that of people with 
a 
6.5 %, 
respectively) in 2015. In addition, households with 
dependent  children  are  particularly  vulnerable  to 
in-work  poverty  (12.7 %  compared  to  11.2 %  in 
the  EU).  The  minimum  wage  increase  of  October 
2014 is not yet fully reflected in the latest wave of 
social  indicators,  since  they reflect  2014  incomes. 
The same holds for the subsequent increases until 
January  2017,  which  might  potentially  have  a 
reducing effect on in-work poverty. 

permanent 

contract 

(13.3 % 

v 

in  early  2016, 

Several  measures  were  adopted  in  2016  to 
improve  the  income  conditions  of  people  in 
low-income  households.  After  some  measures  to 
widen  the  coverage  of  the  minimum  income 
scheme (27) 
the  number  of 
individuals  benefiting  from  the  scheme  has  been 
increasing steadily since March (when the changes 
became  effective).  The  number  of  beneficiaries 
rose to 214 000 in November 2016, while the mean 
value  rose  to  EUR 252.70  per  household.  Though 
this is considerably below the poverty threshold, it 
represents  an  increase  of  17.9 %  in  the  monthly 
mean  value  per  household 
to 
February.  While  the  minimum  income  on  its  own 
is  not  sufficient  to  reduce  the  risk  of  poverty,  it 
plays  an  important  role  in  mitigating  the  intensity 
and severity of poverty. 

if  compared 

Changes  in  child  benefits  and  in  social  benefit 
for  the  elderly  have  a  positive,  though  limited, 
impact  on  poverty  reduction.  Given  the  large 
proportion  of  children  at  risk  of  poverty  or  social 
exclusion  (29.1 %  in  2015),  in  January  2016  the 
government  increased  monthly  child  benefits  by 
between 2 % and 3.5 % as well as the extra income 
given  to  lone  parent  families  from  20 %  to  35 %. 
However, the increase in general child benefits for 

(27)  In January, the reference value of the Social Support Index 
was  increased  from  42.5  to  43.2 %  and  the  equivalence 
scale  for  calculating  the  minimum  income  scheme  was 
reinstated, widening its coverage. 

36 

 
                                                           
                                                           
4.3. Labour market, education and social policies 

to 

closer cooperation between schools and municipal 
authorities so as to develop specific strategic plans 
adapted  to  their  local  needs.  It  provides  schools 
implement 
teaching  hours 
with  additional 
pedagogical  projects  and  improve  students'  basic 
skills.  In  June  2016,  663  education  centres  had 
joined  this  Plan  most  of  which  will  benefit  from 
100  additional  teaching hours  over  the 2016-2017 
school year. Each school will also benefit from 10 
specific  training  actions  provided  by  91  training 
centres.  This  Plan,  although  it  does  not  preclude 
the  implementation  of  the  Autonomy  Contracts 
signed  over  the  past  three  years  with  more  than 
200  schools  nonetheless  puts  their  renewal  and 
continuation on hold. 

High  rates  of  grade  repetition  weigh  on 
education  costs,  social  inclusion  and  labour 
market  outcomes.  With  31 %  of  students  having 
repeated  an  academic  year,  Portugal  shows  the 
third  highest  rate  in  the  EU  (PISA,  2016).  The 
social  gap  is  significant,  with  rates  over  52 % 
among  disadvantaged  students  and  less  than  9 % 
among  advantaged  ones.  This  is  estimated  to 
increase  public  education  costs  by  EUR  250 
million a year. The upward trend in grade retention 
has  reverted  in  2014-2015  but  remains  high  at 
15 %  in  secondary  school  (National  Education 
retention 
Council  2015a).  Successive  grade 
increases  the  risk  of  dropping  out  of  school  and 
lowers  attainment  expectations  (OECD,  2012), 
translating  into  lower  professional  achievement 
and  wages.  The  previous  programmes  of  basic 
vocational  education  and  training  for  students 
required to repeat several academic years are now 
over.  The  government  proposes  to  tackle  school 
failure  by  improving  tutoring  support  to  students 
and  reasserting  the  value  of  transferable  skills  in 
the  curricula.  Students  experiencing  difficulties 
will  have  four  hours  of  tutoring  a  week  with 
teachers  who  have  received  special  training.  The 
new tutoring system is also expected to help make 
better use of teaching staff and reduce the number 
of teachers without jobs. 

The  composition  of  the  teaching  force  shows 
some  mismatch.  The  failing  demographic  trend 
and  consecutive  reforms  of 
in 
primary  and  secondary  education  have  reduced 
teaching  needs  in  some  areas.  A  significant 
number  of  teachers  have  thus  been  left  with  no 
professional assignment. On the other hand, limits 
to  retraining  these  trainers  as  well  as  budget 

the  curricula 

uneven  geographic  distribution  of  doctors. 
Consolidating current government action to recruit 
family doctors and promote their mobility could be 
beneficial  in  the  context  of  a  well-oriented  health 
care reform. However, it is not yet possible to give 
a full assessment of the results of the reform. There 
is a high share of out-of-pocket expenditure and a 
low  share  of  public  financing  of  pharmaceutical 
expenditure, even though the state covers 100 % of 
spending  in  some  cases  (Eurostat/WHO  data). 
Mortality  due  to  respiratory  diseases  and  healthy 
life years for females rank among the worst in the 
EU.  Portuguese  women  live  longer  periods  with 
disease  or  disability  than  the  EU  average,  which 
shortens their working lives. This could be due in 
part to a shortage of health promotion and disease 
prevention activities which tend to address healthy 
life styles and disease screening. 

4.3.3.  EDUCATION 

their 

improved 

performance 

The Portuguese school system has improved its 
basic  skills  outcomes  but  performance  gaps 
linked  to  students'  socioeconomic  background 
remain  a  challenge.  Portugal  is  continuing  to 
reduce early school-leaving. With a rate of 13.7 % 
in 2015, the country is moving towards the Europe 
2020 national target of 10 %. The 2015 Trends in 
International  Mathematics  and  Science  Study 
shows  that  fourth-year  pupils  (nine-year-olds)  in 
Portugal 
in 
mathematics  between  2011  and  2015.  The  2015 
OECD  Programme 
International  Student 
for 
Assessment  (PISA)  showed  that  Portugal  had 
improved  its  average  performance  levels.  The 
share  of  low  achievers  in  reading,  maths  and 
sciences  among  15-year-olds  dropped.  The 
proportion of low achievers is now lower than the 
EU  average  in  reading  and  science  but  slightly 
higher  in  maths.  The  impact  of  socioeconomic 
status  on  student  performance  is  closer  to  the  EU 
average  but  remains  significant.  Rates  of  low 
achievers  are below  10 %  among  the  upper  social 
quarter but around 30 % among the lower one. The 
gap  in  performance  between  non-immigrants  and 
both  first  and  second-generation  immigrants  is 
small, especially in reading and science.  

The  government  is  implementing  a  plan  to 
promote school success. Approved in March 2016 
it is designed to address education inequalities and 
preventing  school  failure.  The  plan  is  based  on  a 

37 

 
4.3. Labour market, education and social policies 

new  upward  trend  in  enrolment  on  such  courses 
and encourage cooperation with business. Business 
sciences,  computing,  personal 
services  and 
engineering  are  sectors  where  CTeSP  courses  are 
expanding  most.  Universities  have  not  been 
included  in  this  modernisation  effort.  The  low 
mobility  of  academics  in  Portuguese  universities 
also limits their competitiveness in terms of quality 
of  teaching  and  projects,  which  reduces  their 
efficiency  (National  Education  Council  2015b). 
The Government has requested a higher education 
review to explore avenues for reforms in the higher 
education  system.  Few  universities  have  engaged 
in specific cooperation projects with companies at 
regional  level.  However,  the  Government  has 
made  some  efforts  in  encouraging  the  interaction 
between universities and the business sector, but a 
comprehensive  and  integrated  strategy  is  missing. 
The upcoming second phase of the National Skills 
Strategy  project  could  open  up  new  opportunities 
to make progress on this issue.  

The  low  level  of  skills  among  the  Portuguese 
labour  force  is  an  obstacle  to  innovation  and 
economic transformation. The Government's new 
initiative  to  promote  adult  education  Programa 
Qualifica – is based, namely, in the establishment 
of  the  ‘Qualifica’  centres  focused  on  promoting 
adult  qualification  by  recognizing,  validating  and 
certifying prior learning and competences acquired 
by  adults  in  different  life  contects  complemented 
by  vocational  education  and  training  adapted  to 
each individual. The revamped ‘Qualifica’ centres, 
that  replaced  the  previous  network  of  specialized 
Centres  on  adult  qualification,  have  been 
reinforced  with  upskilled  staff.  The  government 
has  also  launched  the  ‘Qualifica  passport’,  a  new 
online tool that not only registers the learning and 
competences acquired by adults, but also allows to 
understand what the adult lacks in order to achieve 
a  certain  qualification.  The  outcomes  of  the 
National  Skills  Strategy  project  could  help  boost 
efforts to tackle adults' skills gaps. The Vocational 
Education  and  Training  system  further  expanded 
the  number  of  people  enrolled  and  the  number  of 
the 
trainings  provided 
programmes 
remaining 
undermines 
its 
effectiveness in terms of labour market integration 
(European Commission 2016b). 

overlap 
between 
the  system's  efficiency  and 

in  2016.  However, 

salaries  and 

constraints to recruiting new teachers have limited 
the  possibility  of  dealing  with  new  requirements, 
such  as 
(National 
special  education  needs 
Education Council 2015b) with specific skills and 
in the regions where those are required. The rise in 
the average age of teachers has also increased the 
average cost of teaching hours since older teachers 
teaching 
have  higher 
schedules.  There  is  also  a  worrying  segmentation 
in terms of contracts. Many new teachers are hired 
on a fixed-term contract, although they are actually 
filling  a  permanent  position.  This  creates 
inefficiencies in human resources management and 
career 
Possible 
for 
teachers. 
improvements 
this  area  will  probably  be 
in 
explored  by 
the  upcoming  School  Resource 
Review on Portugal led by the OECD. 

uncertainty 

shorter 

spending 
to 

While  graduates  have  a  high  employment  rate, 
many  seek  opportunities  abroad,  which  limit 
in  higher 
the  effectiveness  of 
education.  According 
the  Emigration 
Observatory,  Portugal  is  one  of  the  European 
countries with the highest rates of highly qualified 
individuals  who  emigrate  (11 %).  Demand  for 
tertiary  qualifications  is  however  increasing  with 
graduates'  employability  rate  in  the  labour  market 
(81.5 %)  exceeding  that  of  people  with  upper 
secondary  qualifications  (68.3 %) (29).  But  limited 
career  prospects  and  low  wage  levels  limit  the 
economic  return  on  the  education  investment. 
They  make  highly  skilled  youngsters  look  for 
better opportunities abroad (European Commission 
2016b)  and  in  some  cases  might  make  higher 
education  less  attractive.  In  particular  this  may 
have  contributed  to  the  fall  in  enrolment  of  about 
30 %  between  2011  and  2014  (PORDATA). 
Enrolment stabilised in 2015 and rose by 2.2 % in 
2016.  

is 

offer 

higher 

education 

The 
quite 
heterogeneous  and  does  not  necessarily  match 
actual  demand.  So  far,  the  polytechnic  institutes 
have  been  at  the  centre  of  the  strategy  to 
modernise  higher  education.  Decree  Law  No 
63/2016  upgrades  the  higher  education  technical 
vocational  courses  (CTeSP)  by  integrating  them 
into  the  Legal  Regime  of  degrees  and  higher 
education  diplomas.  This  increases  further  an 
already  dispersed  scope  of  higher  education 
programmes. Yet, it is expected to consolidate the 

(29)  Eurostat data (lfsq_ergaed) referring to Q3 2016. 

Digital skills remain a barrier for upgrading the 
labour  force  skills.  About  22 %  of  people  in  the 

38 

 
                                                           
4.3. Labour market, education and social policies 

of 

organisations 

Portuguese  labour  force  have  no  digital  skills 
(mostly  because  they  do  not  use  the  internet 
regularly),  about  double  the  EU  average.  Only 
54 % has basic or above basic digital skills (63 % 
EU  average)  (Digital  Scoreboard  2017,  European 
Commission).  In  a  global  context  of  rapid 
digitisation 
and  work 
environments, insufficient digital skills can hamper 
productivity  and  the  transition  towards  a  higher 
value production structure. The digital skills deficit 
also  applies  to  the  Portuguese  population,  chiefly 
the elderly, low-income and low-education groups. 
This  situation  is  acknowledged  in  the  Portuguese 
Digital  Agenda  Strategy,  although  few  details  on 
implementation  measures  are 
budgeting  or 
currently 
limited 
available.  Together  with 
affordability  and  switching  costs,  it  might  be 
hampering  the  take-up  of  broadband  and  digital 
services (30). 

(30)  Of  Portuguese  households  68 %  subscribe 

to  fixed 
broadband  (EU  74 %).  There  are  55  subscriptions  to 
mobile  broadband  per  100  people  (average  of  84  in  the 
EU). 

39 

 
                                                           
4.4. INVESTMENT 

4.4.1.  UBLIC AND PRIVATE INVESTMENT* 

Graph 4.4.2:  Investment and its components 

Graph 4.4.1:  Investment productivity 

Source: European Commission 

Portugal  suffers  from  low  investment  and, 
during  the  last  years,  from  low  investment 
productivity. Overall, weak growth prospects and 
difficulties  in  the  financial  sector  and  in  the 
business  environment  have  contributed  over  past 
years  to  low  investment  activities.  After  some 
rebound  in  2015,  construction  investment  fell 
again in the first half of 2016 (Box 4.4.1). Over the 
last  quarters, 
in  machinery  and 
equipment  has  fared  better  than  construction 
investment.  Strong  growth  in  transport  equipment 
has been the main contributor to positive dynamics 
of 
in  machinery  and  equipment. 
However,  once  market  saturation  is  reached,  the 
growth  rate  is  expected  to  decline.  Over  the 
medium term, investment is set to gather pace. 

investment 

investment 

Source: European Commission 

Greenfield  foreign  direct 
investment  (FDI) 
remains below pre-crisis levels in Portugal. The 
empirical  results  show  that  FDI  can  have  a 
significant positive impact on growth by enhancing 
domestic  capital  accumulation,  particularly  in  the 
most productive areas. In this respect, an adequate 
public  infrastructure  and  an  investment-friendly 
labour  market  and  reduction  in  the  cost  of  doing 
business could raise the marginal return of capital 
in  general  and  stimulate  foreign  direct  investment 
inflow. 

Subdued  public  investment  has  also  played  a 
role in holding back private investment. From a 
theoretical perspective, public investment can have 
both  positive  and  negative  effects  on  private 
investment.  According 
to  empirical  evidence, 
expansionary effects and crowding-in prevailed in 
Portugal  in  the  past  (Afonso  and  Aubyn  2008). 
Thus,  taking  into  account  the  delay  in  budget 
execution processes over the first half of 2016 and 
the  likely  increase  in  implementation  of  projects 
co-financed by EU funds, a more positive outcome 
in public investment and some positive spillover to 
the  private  sector  could  be  expected  over  the 
forecast horizon. 

40 

-15-10-50510151998-20022004-20092011-2015IrelandGreeceSpainItalyPortugal-5051015202530200320042005200620072008200920102011201220132014201520162017*2018*ConstructionEquipmentOther investmentInventories and Valuables% of GDP 
 
 
 
4.4. Investment 

Graph 4.4.3:  Private and public investments 

Source: European Commission 

4.4.2.  ACCESS TO FINANCE AND INVESTMENT 

INCENTIVES * 

conditions  have  been 

Credit 
gradually 
improving  on  the  demand  and  the  supply  side 
but  access  to  finance  remains  a  major  concern 
for small and medium-sized enterprises (SMEs). 
According  to  the  2016  European  Central  Bank 
Survey  on  access  to  finance  (SAFE),  27 %  of 
Portuguese  SMEs  reported  an  increase  in  bank 
loan  availability  in  2015,  while  in  2016  this 
percentage  fell  to  24 %  (against  a  growing  EU 
average  of  21 %).  Access  to  finance,  however, 
remains  the  fourth  most  important  (and  growing) 
concern  of  11 %  of  Portuguese  SMEs  (compared 
to an average of 9 % at EU level, which is falling). 
Bank  loans  remain  the  most  relevant  form  of 
external  financing  for  57 %  of  Portuguese  SMEs 
(50 % at EU level). Demand for credit went up as 
the  percentage  of  SMEs  who  applied  for  a  bank 
loan rose substantially, from 22 % to 27 %, against 
a  stable  EU  average  of  27 %.  At  the  same  time, 
supply  restrictions  also  seem  to  have  eased as  the 
loan application rejection went down dramatically: 
while, in 2015, 11 % of Portuguese SMEs applied 
for  a  bank  loan  but  were  rejected,  in  2016  the 
number  decreased  to  4 %,  against  a  stable  EU 
average  of  7 %.  However,  the  percentage  of 
Portuguese SMEs which did not manage to get the 
full  amount  of  loan  rose  from  34 %  to  42 %, 
against a falling EU average that reached 30 % in 
2016. 

jointly  with 

In July 2016, the authorities have launched the 
Capitalizar  Programme  designed  mainly  to 
encourage  private  investment.  The  programme 
establishes new credit lines for SMEs, the creation 
of  specialised  funds  that  would  participate  in 
private investments and changes in the tax regime 
to support investment. Credit lines are managed by 
the  Financial  Institute  of  Development  (FDI)  and 
the  European  Structural  and 
financed  by 
Investment  Funds 
the  public 
counterpart.  The  new  lines  enacted  entail  state 
guarantees and higher amounts of credit than those 
granted  in  the  past,  plus  —  in  some  cases—  the 
involvement  of  financial  intermediaries  which 
would  co-invest  in  SMEs.  Investments  in  such 
businesses  would  benefit  from  co-participation 
from  public  funds,  such  as  the  Equity  and 
Quasi-Equity  Funds,  or  Fundo  200M,  which  seek 
to  create  synergies  with  local  and  foreign  private 
investors,  including  through  venture  capital  and 
business  angels  schemes.  As  regards  taxation, 
changes  (also  included  in  the  Budget  Law)  entail 
provisions 
tax 
that  confer  neutrality  on 
treatment  between  debt  and  equity  financing; 
expand  of  the  amount  of  investment  benefiting 
from  tax  credit  and  defer  and  simplify  the  VAT 
payment  for  the  import  of  raw  materials.  Finally, 
the programme also grants tax reliefs to individual 
investors who purchase shares in start-ups or small 
enterprises for at least four-years. 

the 

4.4.3.  BUSINESS ENVIRONMENT/THIRD PILLAR OF 

THE INVESTMENT PLAN* 

After  having  achieved 
some  catching-up, 
Portugal's  business  environment  weakened 
recently in international comparison. Compared 
with  the  previous  report,  the  2016-2017  World 
Economic Forum's Global Competitiveness Report 
underscored  that  Portugal's  relative  ranking  has 
fallen from 38th to 46th out of 138 countries. The 
most  problematic  areas  for  doing  business  in 
Portugal  include  tax  rates  regulations,  inefficient 
government  bureaucracy  and  policy  instability, 
access  to  finance  and  restrictive  labour  regulation 
(graph 4.4.4).  

41 

-0.20-0.15-0.10-0.050.000.050.100.15Q1-2013Q2-2013Q3-2013Q4-2013Q1-2014Q2-2014Q3-2014Q4-2014Q1-2015Q2-2015Q3-2015Q4-2015Q1-2016Q2-2016Public InvestmentPrivate InvestmentTotal investment (y-o-y % change)% of GDP 
 
Graph 4.4.4:  Most problematic factors for doing business 

4.4. Investment 

ratings 

remained 

stable  with 

remain.  According  to  the  World  Bank's  Doing 
Business Report for 2017, in the last year most of 
the 
some 
improvements  in  resolving  insolvency  and  paying 
taxes,  including  by  enhancing  the  online  filing 
system  of  taxes  and  decreasing  the  corporate 
income  tax  rate.  However,  there  are  aspects  of 
taxation  which  may  pose  difficulties  to  investors, 
such  as  the  remaining  debt  bias,  complex  tax 
administration  and  the  risk  of  unpredictable  and 
instable  tax  rules.  Moreover,  challenges  persist  in 
various 
regulated 
professions, and better regulation. 

including 

services, 

areas 

Regulatory  bottlenecks  and  delays  in  adopting 
structural reforms are holding back investment. 
Regulatory  and  administrative  barriers  as  well  as 
cumbersome  approval  procedures  still  impede 
investment  and  growth  potential 
in 
Portugal.  Thus,  the  decline  in  greenfield  foreign 
direct investment since 2008 can be explained only 
partially by a cyclical pattern and financial market 
distress.  Empirical  studies  suggest  that  there  are 
other  factors,  besides  the  Great  Recession  and 
systemic  shocks  hitting  the  euro  area,  behind  the 
collapse in greenfield FDI (31). 

increase 

Graph 4.4.6:  Foreign direct investment 

Source: World Economic Forum, Executive Opinion Survey 
2016 

According to the report, the main problems still lie 
with 
(and 
the  macroeconomic  developments 
related  expectations)  and  financial  markets.  The 
underperforming  macroeconomic 
environment 
reflects  the  fact  that  Portugal  has  been  recovering 
unevenly  from  the  global  financial  crisis  with 
public debt still  at  a  high  level.  Financial markets 
in  Portugal  remain  weak  with  the  banking  sector 
still  burdened  by  high  levels  of  non-performing 
loans. 

Graph 4.4.5:  World Economic Forum's 2016-2017 Global 

Competitiveness Report, Portugal 

Source: European Commission 

Inefficiencies  have  been  identified  in  the  areas 
of  the  judicial  system,  including  insolvency 
public 
implementation, 
framework 
procurement, 
regulations, 
sector-specific 
including  energy  and  transport,  the  business 

Source: World Economic Forum, Executive Opinion Survey 
2016 

Reforms  implemented  in  recent  years  have 
improved  the  businesses'  perception  of  the 
environment  for  doing  business,  but  challenges 

(31)  Canton  E.,  Solera  I,  (2016),  "Greenfield  foreign  direct 
investment  and  structural  reforms  in  Europe:  what  factors 
determine 
Commission, 
at: 
Discussion 
http://ec.europa.eu/economy_finance/publications/eedp/pdf
/dp033_en.pdf  

investments?", 
paper 

Available 

European 

033. 

42 

05101520Foreign currency regulationsCrime and theftPoor public healthInflationInadequate supply of…Poor work ethic in national…Government instabilityCorruptionInsufficient capacity to…Inadequately educated…Access to financingTax regulationsRestrictive labor regulationsPolicy instabilityInefficient government…Tax rates012345671st pillar: Institutions2nd pillar:Infrastructure3rd pillar:Macroeconomicenvironment4th pillar: Health andprimary education5th pillar: Highereducation and training6th pillar: Goodsmarket efficiency7th pillar: Labor marketefficiency8th pillar: Financialmarket development9th pillar:Technologicalreradiness10th pillar: Market size11th pillar: Businesssophistication12th pillar: Innovation0.020.040.060.080.0100.0120.0140.0160.0180.0200.0UKDEFRPLRONLITESIEPTEL2004-20072008-20112012-2015USDbillion-7.1%-43.9%-53,3%-55.8%-37.8%-25.4%-49.0%-27.6%-13.0%-58.2%-64.7% 
 
 
 
                                                           
 
4.4. Investment 

From a deficit of about 12 % of GDP in 2008, the 
current  account  of  Portugal  was  broadly  balanced 
in  2012-2015  and  is  projected  to  post  small 
surpluses  in  the  medium  run.  However,  these  are 
still  far  below 
the  benchmarks  needed  for 
substantial reduction in the large stock of external 
liabilities.  The  current  account  adjustment  during 
the  crisis  years  was  driven  by  a  strong  drop  in 
investment and the parallel consolidation effort by 
fiscal  policy.  A  change  in  the  fiscal  consolidation 
strategy  since  the  end  of  the  programme  with 
relaxed 
structural  consolidation  efforts  and 
emphasis  on  nominal  deficit  targets  leads  to 
expectations of at best lower surpluses. This shows 
the  policy  dilemma  when  aiming  at  surpluses 
which  are  sufficient  to  reduce  external  liabilities: 
to  push 
(Efficient) 
potential  growth  and  help  modernise 
the 
Portuguese  economy.  Consequently,  a  current 
account  surplus  calls  for  increased  savings;  this 
necessarily  entails  a  (temporary)  decrease  of 
consumption. 

is  necessary 

investment 

Graph 4.4.7:  Component contributions to change in CA 

balance 2007-2015 

Source: European Commission 

The  trade  balance  adjustment  is  underway 
though  it  is  proceeding  at  a  moderate  pace.  It 
was composed largely of improvements in exports, 
mainly  services  and  in  particular  tourism,  against 
some  import  compression  resulting  from  weak 
domestic  demand  at  a  time  of  low  disposable 
income. An improvement in the terms of trade has 
had  a  positive  impact  on  the  trade  balance.  The 

environment  and  the  innovation  framework. 
Efficiency indicators for civil, commercial and tax 
litigation  remain  poor  and 
insolvency  court 
proceedings  are  still  long.  Despite  progress,  there 
are  still  shortcomings  as  regards  the  transparency 
and  reliability  of  public  procurement  data  and 
procedures.  Transparency  in  concession  contracts 
and public-private partnerships is still hindered by 
contracting  authorities' 
the  necessary 
expertise  to  manage  complex  contracts.  Reform 
measures  concerning  port  concessions  and  the 
governance  model  for  urban  transports  have  been 
stalled.  The  efficiency  and  sustainability  of  the 
electricity  sector  are  challenging  mainly  due  to  a 
still high tariff debt.  

lack  of 

in 

the 

and 

lack 

burden 

levels  of  efficiency  and  transparency 
Low 
persist in the Portuguese public administration. 
Administrative 
of 
homogeneous  implementing  practices  across  the 
country are delaying the reform of procedures. The 
main  persistent  weaknesses 
the  business 
environment  are  restrictions  on  business  services 
and  regulated  professions.  The  weak  performance 
of  business  services  hampers  a  more  flexible  and 
efficient  allocation  of  resources,  a  faster  adoption 
of  new  technologies  and  the  introduction  of 
innovative  business  models.  All 
this  has  a 
detrimental  impact  on  investment,  growth  and 
employment.  The  possible 
the 
investment  environment  which  EU  Funds  could 
provide has  not yet been  fully  exploited  either.  In 
particular,  financial  instruments  financed  by  EU 
structural  funds  are  still  being  developed  and 
cannot  fully  ease  access  to  finance  for  start-ups 
and small and medium-sized enterprises.  

support 

to 

financial 

conditions 

framework 

and 
Unfavourable 
inadequate  alternative 
incentives 
continue  to  curtail  Portugal's  performance  in 
the  area  of 
Information  and 
communication  technologies  are  lagging  behind 
and 
the  cooperation  between  business  and 
academia  is  not  strong  enough.  This  is  having  a 
negative  impact  on  the  innovation  capacity  of  the 
Portuguese economy.  

innovation. 

4.4.4.  EXTERNAL COMPETITIVENESS* 

The  improvement  in  the  current  account  over 
the past years is still insufficient to bring about 
a  substantial  reduction  in  external  imbalances. 

43 

-30-20-1001020304050FRDEITSIESELIECYPTReal exports contributionReal imports contributionTerms of trade impactIncome and transfers contributionCA/GDP change 2007-15, pp. of GDPReal exports contribution, EA18Real imports contribution, EA18pps. 
 
 
4.4. Investment 

Graph 4.4.9:  Average Quality Rank in the 5 biggest 

exporting manufacturing sectors 

Source: European Commission 

Graph 4.4.10: Dynamism and Competitiveness of Exports 

(goods) on top-10 sector destinations 
(2013-2015) 

in 

the 

the 

started 

tradable 

sector  vis-à-vis 

in  2008  with 

process 
significant 
improvements  in  export  performance.  This  was 
especially  visible  for  goods,  whose  share  in  GDP 
rose from 19 % in 2009 to 28 % in 2015. Between 
2010  and  2013,  improvements  in  export  price 
competitiveness and product quality contributed to 
the  trade  balance  adjustment.  Within  this,  the 
in  price  competitiveness  was 
improvement 
facilitated  largely  by  a  reduction  in  unit  labour 
costs 
the 
non-tradable.  After  2013,  following  sustained 
import  growth, 
trade  balance  stabilised. 
Nonetheless,  recent  data  point  to  some  adverse 
changes  in  price  competitiveness,  as  unit  labour 
costs  started  growing  again  towards  the  end  of 
2015 and accelerated further to 2.5 % year-on-year 
in the third quarter of 2016. Despite some progress 
achieved  in  2012-2013,  the  quality  of  exports 
seems  to  have  deteriorated  especially  as  regards 
food  products.  In  addition,  despite  the  increase  in 
the share of exports over GDP, the market share of 
many  Portuguese  products  continues  to  fall.  Data 
show that Portugal has lost market share in 8 of the 
largest  10  sectors  of  its  economy  between  2013 
and  2015.  In  gross  terms,  the  country's  export 
market  share  improved  substantially  in  2013  and 
2014 but fell by 1 % in 2015.  

Graph 4.4.8:  Nominal unit wage costs by sector 

Source: European Commission 

(1) The size of the bubble indicates the share in total exports. 
Market dynamism is the difference between the annualised 
growth rates of world exports per market and global world 
exports. Competitiveness is the difference between the 
annualised growth rates of Portugal’s exports per market 
and world exports per market. 
(2) The numbers inside the bubbles identify the sectors 
according to sections of HS Commodity Classification as 
follows: 4. Prepared Food stuffs, Beverages, Tobacco; 5. 
Mineral Products; 6. Chemical Products; 7. Plastics and 
Rubber; 10. Pulp Of Wood And Paper; 11.Textiles And Textile 
Articles; 12. Footwear, Headgear, Umbrellas; 15. Base Metals; 
16. Machinery; Electrical Equipment; 17. Vehicles, Aircraft, 
Vessels ; 
Source: European Commission 

44 

4050607080901001101997199920012003200520072009201120132015Agriculture, forestry and fishery productsIndustry excluding building and constructionBuilding and constructionTradable (ISIC A_E, G_J) (National accounts)Non tradable (ISIC F, J_P) (National accounts)Index 2005=1004681012140.00.51.0MotorVehicles,TrailersAnd Semi-TrailersWearingApparelFoodProductsChemicalsAndChemicalProductsRubberAnd PlasticProducts201020152015 share in total  manufacturing exports to EU 28 (rhs)% of totalAverage Quality Rank (1=highest)1617115157461012-8-6-4-20246-5051015Market Dynamism (pp)Competitiveness (pp) 
 
 
 
 
 
 
4.4. Investment 

45 

Box 4.4.1: Investment BoxSection 1. Macroeconomic perspective  Portugal experienced the highest decline of investment in the EU during the economic crisis. According to Eurostat data investment contracted by about 33.8% in real terms between 2006-2008 and 2013-2015, compared with 10.1% in the EU28. Total investment in 2015 accounts for 15% of GDP, 5 pps lower than the EU28 average. The investment contraction was driven mainly by the fall in demand, tight financing conditions, general government deficit and debt constraints as well as low investment efficiency mainly in non-tradable activities such as construction. EU funds are estimated to have a significant impact on investment and, as a consequence, on GDP growth. The share of cohesion policy transfers in total public investment has increased significantly in recent years and is estimated to have reached 71% in 2014-2017. However, the implementation of the new generation of programmes 2014-2020 financed by this policy was still at its first stages in 2016.This is broadly consistent with past experience showing that Cohesion policy payments normally take place slowly at the beginning of a new programming period and then accelerate at a later stage. Section 2. Assessment of barriers to investment and ongoing reforms   In addition to the macroeconomic constraints highlighted above, despite progress in some fields, regulatory barriers and rigidities in product and labour markets continue to hamper business growth, competitiveness and investment in Portugal. Main barriers to investment and priority actions underway  The vulnerability of the financial sector due to a high level of non-performing loans and underdeveloped capital markets limit access of corporations and SMEs to finance and productive lending. The Capitalizar Programme approved in July 2016 is aimed to foster alternatives to bank financing, but it is still too early to assess its impact. In addition, weaknesses in the Portuguese business environment hamper TFP growth, business activities and foreign investment. Still persistent bottlenecks concern inefficiencies in public administration, where the effective coordination between central and local public administration is weak and judicial system:  The competition in public procurement is still a problem and the use of direct awards remains high., The innovation performance is low, and there are still restrictions in some services and regulated professions as well as network industries.  The limited scope for wage bargaining at firm level, in view of a centralised wage setting system, and the low average skill levels among the workforce may weigh on the efficient allocation of labour in the productivity growth. Regulatory/ administrative burdenCSRTaxationCSRPublic administrationAccess to financeCSRPublic procurement /PPPsCSRCooperation btw academia, research and businessCSRJudicial systemFinancing of R&D&IInsolvency frameworkBusiness services / Regulated professionsCSRCompetition and regulatory frameworkRetailEPL & framework for labour contracts ConstructionWages & wage settingCSRDigital Economy / TelecomEducation EnergyLegend:TransportNo barrier to investment identifiedCSRInvestment barriers that are also subject to a CSRSome progressNo progressSubstantial progressLimited progressFully addressedPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education 
 
 
 
 
 
4.5. SECTORAL POLICIES 

4.5.1.  R&D AND INNOVATION* 

affected 

adversely 

Despite  some  progress,  the  economy  does  not 
make  the  most  of  its  scientific  production  and 
related  human  resources.  R&D  intensity  fell 
from  1.58 %  of  GDP  in  2009  to  1.28 %  in  2015, 
diverging  further  from  the  EU  average  of  2.04 % 
and  the  national  target.  The  main  reason  for  the 
decline  was  a  contraction  of  business  enterprise 
R&D expenditures from 0.75 % of GDP in 2009 to 
0.60 %  in  2015.  Public  R&D  intensity  fell  after 
2009,  but  there  are  signs  of  recovery  (2009: 
0.69 %;  2015:  0.66 %).  This  reduction  of  R&D 
investments 
productivity 
growth (32).  Portugal  has  made  much  progress  in 
improving its human resources base in science and 
technology  and  its  scientific  excellence.  The 
country  produces  more  science  and  engineering 
graduates  and  has  more  researchers  in  the  labour 
force than the EU average (Eurostat). Highly cited 
scientific  publications  increased  from  7.6 %  in 
2006  to  9.0 %  in  2013  but  the  country  still  ranks 
only 16th in the EU. However, Portugal ranks low 
(around  one 
the  EU  average)  on 
public-private scientific co-publications and patent 
applications.  This  shows  that  there  are  difficulties 
in  developing  technological  outputs  from  R&D 
activities.  Portugal  occupies  a  very  low  (24th) 
Innovation  Output 
the 
position  as 
Indicator,  which  measures  the  extent  to  which 
ideas from innovative sectors are able to reach the 
market.  This  constrains  the  transition  towards  a 
more innovation-driven economy. 

fifth  of 

regards 

There  is  no  integrated  strategy for  cooperation 
between  academia  and  business  to  deliver  the 
skills and knowledge needed for innovation. The 
governance  and  finance  systems  of  Portuguese 
universities  do  not  provide  the  most  efficient 
environment  for  university-business  cooperation 
and innovation. Career paths in academia are based 
mainly  on  publications,  and  cooperation  with  the 
private sector or work within it is seen as a career 
gap  with  no  impact  on  career  progress (33).  The 
tertiary 
for 
30-34-year-olds  has  risen  substantially  over  the 
past  decade.  Yet  the  country  ranked  only  23rd 
within the EU in 2015. The high emigration rate of 

attainment 

education 

rate 

(32)  During  the  period  2007-2016  total  factor  productivity  has 
declined and then registered a small recovery (AMECO). 
(33)  The  State  of  University-Business  Cooperation  in  Portugal 

(2013). 

the 

graduates  (see  Section  4.3)  further  reduces  the 
labour  market. 
number  actually  reaching 
Moreover,  many  businesses 
lack  absorption 
capacity for the highly educated. For the relatively 
few  firms  in  knowledge-intensive  sectors  that  do 
have  the  absorption  capacity,  universities  do  not 
seem to be supplying enough of the skills needed. 
The Digital Skills and Jobs coalition addresses the 
issue.  The  country  is  among  the  EUs'  worst 
performers  as  regards  new  computer  science 
graduates  among  the  25-34-year-olds  (Eurostat). 
The  increasing  demand  for  ICT  professionals  is 
not  being  met  by  the  current  supply (34).  Firms 
perceive  universities  as  being  too  bureaucratic  to 
invest in. Companies contract only a small amount 
of  R&D  services  from  other  institutional  sectors 
and  R&D  spending  financed  by  national  business 
enterprises  is  only  35 %  of  the  EU  average. 
Additionally,  firms  do  not  perceive  academic 
publications as relevant sources of information for 
innovation  (FCT,  2013).  Nor  are  they  inclined  to 
take  on  more  qualified  human  resources  such  as 
PhD holders despite the tax incentives in place for 
companies  employing  PhD  holders (35).  The  new 
‘Fostering  Scientific  Employment’ 
diploma 
(Decree-Law  57/2016)  was  adopted  in  2016  with 
the  aim  of 
researchers'  working 
conditions  and  career  prospects.  This  is  important 
in a context of highly unstable research careers.  

improving 

for 

commercialising 

In spite of the efforts made, there is still a lack 
of  structured coordination  between the various 
research 
incentives 
outputs.  Portuguese  regional  clusters  encourage 
knowledge  and 
transfer  between 
technology 
universities and low-medium technology-intensive 
manufacturing 
industries.  The  Recognition  of 
(Decree  2909/2015) 
Competitiveness  Clusters 
reshaped  cluster  policy  to  instigate  public-private 
collaborative  partnerships  and  networks  (OECD, 
2016). But value added in high-tech manufacturing 
is  only  0.57 %  of  total  value  added  (EU  average 
1.69 %  2014  Eurostat).  The  National  Innovation 
Agency  funds  R&D  programmes  that  promote 
cooperation  between  universities,  firms  and  R&D 
performing  organisations.  The  National  Reform 
Programme  2016  also  includes  a  set  of  initiatives 

(34)  The  study  "e-skills 

in  Europe-Portugal"  estimates  a 
shortage  of  9.600  ICT  specialists  in  2016,  which  may 
expand to 15.000 by 2020.  

(35)  In  2015  Portugal  ranked  only  17th  in  the  EU  terms  of 
Researchers  (FTE)  employed  by  business  as  %  of  total 
employment. 

46 

 
 
                                                           
                                                           
4.5. Sectoral policies 

to  foster  knowledge  transfer  and  strengthen  the 
link  between  R&D  and  innovation  in  companies. 
for  modernising  and 
The  2016  programme 
focuses  on 
institutes 
upgrading  polytechnic 
matching  R&D  activities  to  regional  needs.  Tax 
credits  to  business  R&D  (SIFIDE)  rose  between 
2006 and 2014 (OECD R&D Tax Incentives). Yet 
there  is  no  regular  and  consistent  monitoring  to 
assess whether the initiatives are effective.  

Framework  conditions  are  not  conducive  to  an 
innovation-friendly environment, as barriers to 
is  a 
competitiveness  still  persist.  Portugal 
"Moderate  Innovator"  in  the  European  Innovation 
Scoreboard  but  ranks  in  the  top  10  in  terms  of 
SMEs  innovating  in-house.  The  government  aims 
to foster balanced development of the collaborative 
economy  showing  willingness  to  accommodate 
innovative  business  models  in  the  regulatory 
framework.  A  framework  for  short-term  rental 
activities  for  tourists  has  been  introduced,  and 
legislation 
to  provide 
to  enable  platforms 
passenger  transport  services  is  being  prepared. 
Portugal  stands  out  from  the  EU  average  in 
entrepreneurial  activity,  especially  in  enterprise 
birth  rates  and  entrepreneurial  intention (36).  This 
is in line with the remarkable progress in "Starting 
a Business" from the World Bank Doing Business 
Report 2016. Nevertheless, business survival rates 
are below 50 % reflecting unfavourable framework 
conditions  for  business  growth,  innovation  and 
scale-up.  High-growth 
innovative  enterprises 
(HGIEs) represented only 0.07 % of firms in 2014, 
half  the  EU  average  and  the  country  dropped  8 
positions  in  the  2016  Global  Competitiveness 
Report.  Firms' 
technological  and  managerial 
capabilities are still holding back competitiveness, 
(European  Commission, 
especially 
2017c). 
for 
Strategy 
National 
Entrepreneurship  (Startup  Portugal)  launched  in 
2016  aims  to  improve  the  business  ecosystem, 
provide alternative ways of financing, and promote 
the internationalisation of start-ups. 

in  SMEs 
The 

4.5.2.  COMPETITION IN PRODUCT AND 

SERVICES MARKETS* 

Administrative  and  regulatory  barriers  still 
for 
restrict 
professional  services.  The  by-laws  regulating 

the  market 

competition 

in 

certain  professions  are  less  ambitious  than  the 
framework  law  in  terms  of  opening  up  these 
sectors to competition. They also raise concerns as 
regards  the  direct  or  indirect  effect  of  restricting 
competition in the market for professional services 
thereby  increasing  prices,  reducing  offer  choice 
and innovation and lowering the overall quality of 
services.  According  to  a  new  indicator  developed 
by the Commission (37), the level of restrictiveness 
in Portugal is higher than the EU average for civil 
engineers,  architects,  accountants,  and 
tourist 
guides. It is lower than the EU average for patent 
agents  and  lawyers,  although  access  to  the  latter 
profession  is  more  tightly  restricted  than  for  any 
other  profession  in  Portugal.  Furthermore,  the 
business churn (or turnover) rate for legal activities 
is lower than both the EU average and the overall 
Portuguese  economy  as  a  whole,  thus  pointing  to 
relatively  low  dynamism  and  competition  in  the 
sector.  However,  according  to  the  national  action 
plan  submitted  in  the  context  of  the  mutual 
evaluation  exercise,  Portugal  is  not  planning  any 
major  reforms  of  regulated  professions.  At  the 
same  time,  there  is  an  ongoing  study  by  the 
National  Competition  Authority,  in  cooperation 
with  the  OECD,  on  the  nature  and  impact  of 
persistent  barriers,  the  results  of  which  are  due  in 
early  2018.  The  regulatory  burden  on  service 
providers  remains  high;  this  includes  reforms  not 
covered in the context of the EU-IMF programme 
of  financial  assistance  or  agreed  upon  under  that 
programme 
or 
implemented (38). In turn, these regulatory barriers 
give  rise  to  lengthy,  complex,  and  expensive 
administrative  procedures  put  in  place  to  control 
compliance  with 
requirements. 
Particular problems in business services stem from 
restrictive reserved activities, as well as from legal 
form, shareholding, management, multidisciplinary 
and  advertising  restrictions.  Corporate  groups  of 
professional companies are banned. Innovation and 
investment are stifled. 

substantive 

approved 

and 

not 

yet 

(37)  The European Commission has developed a new composite 
indicator  on  the  extent  to  which  most  existing  barriers 
restrict access to and the practice of regulated professions. 
It  is  based  on  data  collected  from  Member  States, 
complemented  by  desk  research.  This  new  indicator  has 
many similarities with the Commission indicator of barriers 
in  business  services  published  in  2015,  but  also  differs 
from it in certain ways. COM (2016) 820.  

(38)  Such  as  the  reform  of  legal  services,  university  and 

construction services. 

(36)  "Framework Conditions for HGIEs" (2017) 

47 

 
                                                           
                                                           
4.5. Sectoral policies 

Graph 4.5.1:  Restrictiveness indicator, 2016, Portugal and 

the EU 

Source: European Commission 

for  access 

to  and  operating  on 

Land  regulation  and  construction  fees  might 
create  obstacles  to  investment.  Municipalities 
retain  great  discretionary  power  when  it  comes  to 
implementing  land  use  rules.  Consequently,  the 
time  needed  to  obtain  licenses  varies  across 
municipalities  depending  on  their  effectiveness 
and administrative capacity. There is no consistent 
implementation  strategy  applicable  nationwide. 
the 
Fees 
construction  market  are  higher  than  in  other  EU 
countries.  Moreover,  there  is  no  direct  link  with 
the  underlying  administrative  costs.  This  hampers 
new  investment  in  construction.  At  a  national 
level,  an  evaluation  of  the  fees  and  permit 
procedures  will  not  be  available  until  mid-2017 
which is later than was initially agreed between the 
the  Portuguese 
European  Commission  and 
authorities (i.e. by the end of 2016). According to a 
recent  study(39),  the  system  of  fees  imposed  on 
construction  service  providers  in  Portugal  for 
initial  registration  and  subsequent  renewal  is 
the  category  of 
complex, 
construction  works  to  be  performed  and  to  a 
percentage  of  the  wage  salary  index  for  public 
administration  officials.  Changing  the  category  of 
construction  works  is  subject  to  a  fee  based  on  a 
calculation methodology similar to that applicable 
to  the  initial  fee.  A  recent  reform  has  simplified 

linked  both 

to 

(39)  European  Commission,  Simplification 

and  mutual 
recognition  in  the  construction  sector  under  the  Services 
Directive,  MARKT/2014/087/E,  Final  Report,  November 
2015 

calculation  and  partially  reduced  fees,  but  they 
remain  high  and 
the  category  of 
construction works to be performed, with no direct 
link to the underlying administrative costs. 

linked 

to 

4.5.3.  ENERGY, ENVIRONMENT AND CLIMATE 

CHANGE 

the 

calculations, 

The elimination of the electricity tariff debt and 
phasing-out  of  regulated  prices  are  taking 
longer  than  initially  planned.  According  to  the 
outstanding 
government's 
electricity  tariff  debt  will  be  eliminated  at  the 
earliest in 2022. It might however derail to 2026 in 
a  pessimistic  scenario  diverting  even  further  from 
the  original  2020  elimination  target  and  keeping 
the  upward  pressure  on  energy  prices.  The 
phasing-out of regulated prices has been postponed 
once more, this time to 2020 instead of 2017. The 
consequences  are  uncertain.  On  the  one  hand,  as 
there  is  a  fixed  end  date  for  the  regulated  price, 
consumers are forced to change and might simply 
remain  with  the  incumbent  player.  On  the  other 
hand, keeping the regulated price means that there 
is  a  reference  price  around  which  energy  retailers 
can  set  their  own  price  which  might  decrease  the 
price variety offered by energy retailers.   

to 

investment  costs  due 

Efforts  are  being  made  to  make  the  energy 
system  more  sustainable.  The  remuneration 
method  for  electricity  capacity  mechanisms  is 
being  changed  to  cut  system  costs.  Instead  of  a 
regulated  capacity  payment,  a  more  market-based 
approach will be established based on auctions that 
will  have  a  ceiling  price  in  order  to  control  the 
overall  cost.  Capacity  payments  will  no  longer 
the  current 
cover 
overcapacity, but will be used to ensure short-term 
generation  adequacy.  The  government  is  also 
considering reducing the structural costs associated 
with the current interruptibility schemes by setting 
a  competitive  mechanism  for  the  remuneration  of 
this  service.  New  contracts  for  renewable  energy 
capacity  are  being  remunerated  at  market  price 
based  on  the  result  of  tendering  schemes  with  no 
feed-in  tariff.  The  interest  rate  paid  for  the 
accumulated 
tariff  debt  has  fallen  following 
renegotiation.  An  independent  audit  requested  by 
indications  of  market 
the  Government  gave 
manipulation  by  electricity  incumbent  EDP.  As  a 
result  the  Portuguese  energy  regulator  together 
with  the  competition  authority  proposed  to  the 

48 

0.01.02.03.04.0AccountantArchitectCivil engineerLawyerPatent agentReal estate agentTourist guideEUPT 
 
                                                           
4.5. Sectoral policies 

and 

therefor 

resource 

efficiency 

Portugal's  resource  productivity  is  half  the  EU 
average.  The  opportunities  for  waste  prevention 
and in particular for recycling, that would improve 
the 
the 
competitiveness  of  the  Portuguese  economy,  are 
not  fully  developed.  The  waste  management  tax 
also  seems  to  fall  short  of  providing  the  right 
incentives  for  reducing  waste  for  landfill  or 
incineration.  At  the  current  pace  (16 %  recycled 
and  14 %  composted),  Portugal  would  need  to 
make  an  extraordinary  effort  to  go  from  30 %  to 
the recycling target of 50 % of municipal waste by 
2020. 

4.5.4.  OTHER NETWORK INDUSTRIES 

in 

low 

the  general 

Performance  indicators  for  Portuguese  ports 
remain 
international  comparison. 
Portuguese  commercial  ports  continue  to  increase 
their  freight  throughput.  It  totalled  60  million 
tonnes of freight in the first three quarters of 2016, 
a  5 %  increase  over  the  same  period  in  2015. 
Labour  productivity  increased  in  2013  and  2014, 
as  value  added  was  higher  compared  to  average 
personnel costs. This improvement may be a result 
of  revising  the  port  labour  law  which  aligned  it 
with 
law.  However,  Portuguese 
commercial ports have not yet managed to exploit 
their  strategic  geographical  position  to  the  full. 
Their EU share in goods handled is relatively low 
even  by  comparison  with  ports  in  neighbouring 
countries. Thanks to the 2014 increase port labour 
productivity 
in  Portugal  by 
comparison  with  its  peers,  though  it  is  lagging 
behind German and Belgian ports. In international 
rankings  Portuguese  ports  are  particularly  lengthy 
in  import  and  export  procedures (40).  The  quality 
of port infrastructure ranks lower than for most of 
Portugal's  European  peers.  The  elimination  of  the 
port user tax (TUP Carga) did not contribute fully 
to  reduce  port  user  fees  as  at  least  part  of  the 
savings  seem  to  have  been  absorbed  by  port 
operators.  The  renegotiation  of  port  concessions 
has  re-started  in  the  second  half  of 2016.  It  could 
improve competitiveness and freight throughput if 
it  genuinely  brings  down  costs  for  port  users  not 
only  for  operators.  Concession  contracts  that 
provide 
to  maximise 
throughput  and  create  capacity  to  handle  a  wide 
range  of  cargo  sizes  may  help  increase  port 

is  now  higher 

the  correct 

incentives 

(40)  Trade by Sea index of the World Bank Doing Business. 

a 

of 

recuperation 

Government 
the 
overcompensation  to  guaranteed  production  of 
EDP's  hydro-electric  power  plants.  These 
measures  could help  containing  energy prices  and 
improve  the  functioning  of  the  electricity  market. 
Nevertheless,  they  will  most  likely  have  a  small 
impact  on  the  tariff  debt  reduction.  A  growing 
demand  for  electricity  and  decreasing  renewable 
production  cost  seem  to  be  the  only  factors  large 
enough  to  front-load  the  tariff  debt  elimination 
without price increases. 

limited,  which  poses  obstacles 

Limited electricity interconnection with the EU 
and  fossil  fuel  subsidies  remain  a  barrier  to 
decrease overcapacity in the energy system. The 
Iberian  electricity  market  is  well  integrated  with 
price  convergence  between  the  two  countries  as  a 
result  of 
their  market  coupling.  Electricity 
interconnection  with  the  rest  of  Europe  however 
remains 
to 
exporting the overcapacity resulting from growing 
renewable  production  and  falling  demand.  The 
transport  sector  could  absorb  part  of 
this 
production as it currently uses quite a small share 
of  electricity.  The  Government  is  introducing  an 
open  market  regulation  for  an  automobile  electric 
charging  network  which  could  be  a  step  in  this 
direction.  Fossil  fuels  remain  the  main  source  of 
energy used, which makes it difficult for Portugal 
to reduce its energy dependency. The high level of 
environmentally  harmful  subsidies 
in 
Portugal  also  favours  fossil-fuel  based  solutions, 
such  as  company  cars  and  diesel  over  petrol.  In 
2016,  Portugal  had  the  EU's  third  largest  tax 
exemption  for  diesel  compared  with  petrol  and 
subsidies  to  fossil  fuels  accounted  for  0.2 %  of 
total  government  expenditure  in  2014  (Eurostat). 
Fossil fuel subsidies and other EHS hold back the 
use  of  more  sustainable  energy  sources  such  as 
renewables. In doing so, they also stand in the way 
of  using  the  existing  excess  capacity  in  terms  of 
electricity  production  delaying  the  elimination  of 
the tariff debt. The measure announced in the 2017 
Budget  Law  intended  to  increase  tax  on  diesel 
while cutting on petrol help reduce EHS. Portugal 
is  also  implementing  a  Framework  for  Climate 
Policy  and  a  national  programme  for  climate 
change for the period 2013-2020. 

(EHS) 

Waste  management  impedes  more  efficient 
resource  use.  Portugal  underperforms  in  terms  of 
waste  management.  In  2014  49 %  of  municipal 
(EU  average:  28 %). 
waste  was 

landfilled 

49 

 
                                                           
4.5. Sectoral policies 

competitiveness (41). A general framework for port 
concessions  that  would  contribute  to  a  better 
concession contract design is expected but still not 
in place.  

Graph 4.5.2:  Shares for selected countries of total EU 

maritime transport of goods, 2014 

Source: European Commission 

Graph 4.5.3:  Wage-adjusted labour productivity of the ports 

sector 

Source: European Commission 

also 

been 

below 

sector. Total rail density in Portugal is low and it 
has  been  falling,  with  rail  freight  traffic  intensity 
among  the  lowest  in  Europe.  The  density  of 
electrified  rail  lines  is  also  low  despite  the 
in  electricity  production.  Rail 
overcapacity 
investment 
the 
has 
country-specific  estimated  trends  in  recent  years 
(European  Commission  2016e).  Restrictions  on 
operating  of  long  freight  trains  in  port  rail  access 
remain,  decreasing  the  efficiency  of  both  rail  and 
maritime 
suggest 
possible benefits from improving the networks, in 
particular if investments are well-targeted and take 
advantage  of  interconnections  with  the  already 
dense  network  of 
roads.  The  Government's 
investment  plan  in  the  rail  network  might  be 
positive step in this direction. 

transport.  These 

findings 

Portugal  has  witnessed  a  vast  improvement  in 
water  infrastructure  but  is  lagging  behind  in 
terms  of  asset  management  efficiency  and 
economic  and  financial  sustainability.  Some 
municipalities  have  accumulated  high 
tariff 
deficits  and  debts 
through  economically  and 
financially unsustainable operations. There are also 
visible  inequalities  between  prices  of  services  in 
inland  and  coastal  regions,  hampering  social  and 
territorial  cohesion.  The  authorities 
remain 
committed  to  the  goal  of  water  and  sewerage 
sector  reforms,  but  they  are  being  delayed.  The 
second stage of the water sector reform would help 
shift  the  emphasis  from  building  infrastructure  to 
efficient  asset  management.  The  aim  is  to  merge 
water  and  sewerage  municipal  retail  management 
services  and  promote  the  integration  of  bulk  and 
retail  activities.  This  would  help  ensure  the 
financial  sustainability  of  the  system,  including 
tariff 
arrears.  The  reform  would  allow  for 
harmonisation  at  national  level  plus  economies  of 
scale and scope stemming from higher synergies in 
the  value  chain.  Contrary 
to  what  previous 
intentions  however,  the  State  Budget  contains  no 
commitment to meet the 2017 reform deadlines.  

Investment 
is  not 
optimising  the  performance  of  the  freight 

infrastructure 

in  rail 

(41)  Estudo  sobre  concorrencia  no  setor  portuario  (July  2015), 

Portuguese Competition Authority.  

50 

-505101520PTESITELNLBEUKDETotalInwardsOutwardsGrowth rate 2005-2014%0100200300400500600700PTESITELBENLDE%2011201220132014 
 
 
 
                                                           
4.6. PUBLIC ADMINISTRATION 

Efficiency of public administration* 

climate 

the  business 

Despite progress in reducing the administrative 
burden  on  businesses,  there  are  hurdles  in 
easing procedures across the country. A number 
of  measures  have  been  brought  in  under  the 
economic adjustment programme, the aim being to 
improve 
and  boost 
investment, by lowering firms' costs and increasing 
the  return  on  their  investment.  Despite  some 
progress,  there  have  been  delays  in  simplifying 
local  and  central  administrative  procedures  with 
little  coordination  between  the  various  layers  of 
the public administration. At a central level, there 
is  the  need  to  request  visa  and  approvals  by 
various ministries on a single procedure. At a local 
level,  reforms  seem  to  have  been  implemented  in 
different  ways,  resulting 
in  different  quality 
standards  for  municipal  services.  Moreover,  not 
enough  has  yet  been  done  to  ascertain  the  impact 
of  the  reform  agenda  implemented  so  far,  so  it  is 
impossible  to  assess  the  extent  to  which  this 
matches the original goals and to tackle corrective 
action if necessary.  

Regulatory framework* 

tax 

simplify 

declaration 

The  implementation  of  the  new  administrative 
simplification  programme  seems  to  be  lagging 
behind  ambitions.  The  Portuguese  authorities 
have  approved  a  new  simplification  programme, 
called  SIMPLEX+.  This  contains  a 
fairly 
ambitious  package  of  measures  for  citizens  and 
businesses.  As  regards  business,  the  programme 
introduces  a  cross-cutting  approach 
including 
provisions  to  simplify  business  inventory,  ease 
business information, reduce red tape for exporters 
procedures. 
and 
Responsible declarations by qualified professionals 
and companies are also replacing authorisations of 
in  buildings. 
electricity  and  gas 
promising, 
Although 
implementation of the SIMPLEX + package seems 
to  be  lagging  behind  ambitions.  Most  of  those 
measures  relevant  to  businesses  are  only  to  be 
implemented  from  2017  onwards.  Sector-specific 
reforms  are  not  included.  The  methodology  for 
quantifying 
with 
costs 
administrative  procedures  has  not  been  published 
yet,but  a  scientific  study  is  being  developed  by  a 
Portuguese public University in order to assess the 
impact  of  SIMPLEX  measures,  addressing 
reduction,  compliance 
administrative  burdens 

these  measures 

installations 

associated 

the 

are 

improvement, 
(time  and 
savings  generated 
money), among others. No detailed ex-ante impact 
assessment  has  yet  been  conducted  to  select  the 
adopted measures, on the basis of criteria including 
priority  and  benefits.  Nor  is  there  any  robust 
ex-post  evaluation  system  to  assess  whether  they 
really  help  to  contribute  to  boost  competitiveness 
called 
and  growth.  However, 
"Monitoring  +"  is  being  implemented,  aiming  to 
ensure  a  better  interaction  between  public  entities 
and  both  companies  and  citizens;  a  better 
assessment  of  private  stakeholders’  perception  on 
changes;  as  well  as  to  measure  the  impact  of 
SIMPLEX on people's lives and business activity. 

process 

a 

Transparency and public procurement* 

for 

there 

committee 

to  expect 

that  some 

Portugal  is  making  progress  with  increasing 
transparency  and  combating  corruption 
in 
public  administration,  but 
is  no 
overarching  strategy.  In  March  2016,  an  ad-hoc 
parliamentary 
improving 
transparency in public office was set up to examine 
revisions  of  existing  legislation.  Although  the 
results of its activity are not yet available, it seems 
reasonable 
legislative 
improvements  may  be  necessary  (e.g.  in  the  field 
of  whistle-blower  protection,  asset  declarations, 
conflict  of  interests  and  revolving  doors).  The 
biggest  challenges  so  far  in  making  the  integrity 
framework  work  have  been  enforcing  existing 
provisions  and  building  up  adequate  monitoring 
and sanctioning capacity. Progress has been made 
on the prosecution side. Anti-corruption appears to 
have  become  a  real  priority  for  the  national 
prosecution  services  and  more  efficient  processes 
for  case  and  resource  management  have  been  put 
in  place (42).  Yet,  it  remains  to  be  seen  whether 
these  will  be  reflected  by  improvements  in  final 
conviction  rates  for  high-level  corruption  and  the 
application  of  penalties  that  provide  stronger 
deterrents (43).  On 
the 

the  preventive  side, 

(42)  Examples 

in 

the 

included 

of  measures 

2015 
Anti-corruption  Action  Plan  of  the  General  Prosecutor's 
Office  are:  allocating  a  single  experienced  magistrate  to 
complex  cases,  creating  joint  investigative  units  under  the 
coordination  of  a  prosecutor,  using  secure  information 
gathering  and  sharing  between  law  enforcement  officials, 
securing  continuity  of  resources  between  the  different 
phases  of  the  judicial  process  and  specialised  recruitment 
of  expert  assistance  for  complex  economic  and  financial 
crime cases. 

(43)  The number of convictions in corruption-related cases has 
been  relatively  consistent  over  the  years  2011-2014, 
although there has been a drop in the number of acquittals 

51 

 
 
                                                           
4.6. Public administration 

limiting  the  use  of  direct  awards  to  exceptional 
circumstances.  

to 

Ex-ante  and  ex-post  public  procurement 
controls  remain  limited.  Audit  authorities  in 
Portugal  believe  that  there  are  deficiencies  in  the 
monitoring and control capacities at the execution 
phase  of  contracts.  This  applies  in  particular  to 
public-private  partnerships  where  contracting 
authorities  lack  the  expertise  needed  to  structure, 
negotiate  and  monitor  complex  contracts.  The 
mandate of the Ministry of Finance's unit for PPPs 
(UTAP) is restricted to public-private partnerships 
managed  by  the  central  administration.  There  are 
no plans to expand its remit to cover concessions, 
regional  and  local  public-private  partnerships.  
Since  April  2016,  it  has  been  obligatory  for  all 
local  authorities 
report  all  public-private 
partnerships  and  concession  contracts  to  a  central 
registry  set  up  to  map  those  contracts  more 
satisfactorily.  This  exercise  is  still  ongoing.  The 
Central  Purchasing  Body  (eSPap)  has  awarded 
include  several 
Framework  Agreements 
transparency  and 
suppliers 
to 
the 
competition 
contracting 
these 
agreements.  However,  in  a  broader  perspective, 
Portugal  still 
lacks  a  comprehensive  public 
procurement  policy  covering  all  layers  of  the 
public  administration.  To  fill  this  policy  gap, 
increase  openness  and  avoid  collusion  in  public 
tenders,  the  Portuguese  Competition  Authority,  in 
co-operation  with  eSPap,  is  making  efforts  to 
disseminate  best  practices  and  raise  awareness  of 
public  procurement  issues  within  public  bodies 
However  it  is  doing  this  in  its  advocacy  capacity 
which is non-mandatory. 

the  public  purchase  of 
entering 

in 
authorities 

increase 

into 

that 

the 

Judicial system* 

The  performance  of  the  Portuguese  justice 
system is still below the EU average. In Portugal 
efficiency indicators for civil, commercial and tax 
litigation cases remain poor with a negative impact 
on business dynamics and attracting foreign direct 
tax  and 
investment.  The  efficiency  of 
administrative courts remains challenging in terms 
of  resolution  rate  and  length  of  proceedings  that 
are  still  long (45).  Weaknesses  also  remain  in  the 

the 

(45)  According to most recent data from the Ministry of Justice, 
in  2015,  the  courts  of  first  instance  counted  34 850  new 
proceedings and, out of them, only 27 810 were completed. 

corruption  prevention  plans  set  up  in  each  public 
institution  have  so  far  been  largely  formalistic. 
They are not fully adapted to each organisation nor 
are they complemented by adequate monitoring.  

to 

in 

are 

and 

reliability 

the  2015 

Transparency 
of  public 
procurement data is improving while the use of 
direct  awards  remains  high.  The  authorities  are 
to 
making  efforts 
improve  data  quality  and 
reliability 
the  dedicated  online  public 
procurement  platform  (BASE).  The  Institute  for 
monitoring  public  procurement  (IMPIC)  is  now 
playing  a  more  important  role  using  a  more 
systematic and automated system to correct data in 
BASE.  Warnings  mechanisms 
being 
introduced  to  reduce  entry  errors  and  filling 
mistakes  that,  nevertheless,  remain  significant. 
According 
report  on  Public 
procurement  in  Portugal,  published  in  November 
2016  by  IMPIC,  e-procurement  is  well  developed 
in  the  country.  Nevertheless,  the  e-procurement 
platforms  are  not  yet  genuinely  interoperable  and 
the  costs  for  using  these  platforms  appear  to  be 
high  for  small  companies,  according 
the 
Government  Computer  Systems  Administration 
(CEGER)  which  has  received  a  number  of 
complaints.  The 
authorities  have  proposed 
measures  designed  to  remedy  these  shortcomings, 
within  the SIMPLEX +  Programme.  According  to 
the 2015 IMPIC report which uses BASE data (44), 
contracting  authorities  in  Portugal often  make use 
of the direct award procedure. This holds both for 
contracts  covering  goods  and  services  (90.3 %) 
and  for  public  works  contracts  (87.0 %).  Portugal 
is still in the process of implementing the 2014 EU 
Directives  on  Public  Procurement.  The  relevant 
draft legislation includes a number of provisions to 
increase  the  mandatory  number  of  bidders  and  to 
restrict the use of direct award. If effectively set up 
as  prescribed  by  the  draft  legislation,  biennial 
procurement  plans  would  also  be  a  key  tool  in 

to 

over the same period (from 63 % in 2011 to 30 % in 2014). 
The  ratio  of  suspended  sentences  for  corruption-related 
offences  remains  high,  with  73 %  of  convictions  resulting 
in  suspended  sentences  in  2011,  61 %  in  2012,  74 %  in 
2013, 
at 
http://ec.europa.eu/transparency/regexpert/index.cfm?do=g
roupDetail.groupDetailDoc&id=21215&no=2,  data  from 
2014 pending publication. 

2014.  Data 

available 

73 % 

and 

in 

(44)  BASE  dataset  does  not  include  the  totality  of  awarded 

public contracts.  

52 

 
                                                                                   
 
                                                           
4.6. Public administration 

than 

firms' 

rather 

enforcement  process  where  claims  enforcement 
and  the  capacity  to  resolving  court  backlogs  are 
still  below  the  EU  standards (46).  During  the 
economic  adjustment  programme,  the  Portuguese 
authorities  reformed  the  corporate  insolvency  and 
restructuring  frameworks,  resulting  in  a  stronger 
focus  on 
their 
recovery 
liquidation  by  introducing  out-of-court  insolvency 
frameworks (PER and SIREVE). According to the 
national  statistics  from  the  Ministry  of  Justice  for 
Q2-2016,  PER  proceedings  took  an  average  of  4 
months  and  19  days.  The  implementation  of  PER 
appears to be in line with the benchmark duration 
indicated in the law (a total of 35 procedural days 
and  2  or  3  months  for  negotiations  between  the 
debtor  and  the  creditors).  SIREVE  frameworks 
have  raised  some  doubts  about  their  efficiency.  It 
still takes up to 40 months to conclude insolvency 
court  proceedings.  To  address  implementation 
shortfalls,  the  Ministry  of  Justice  published  an 
initial evaluation of the insolvency tools PER and 
SIREVE in May 2016. This also contained a set of 
recommendations  designed 
their 
implementation  shortfall  and  inefficiencies.  The 
availability  of  judicial  statistics  remains  limited 
and  they  still  do  not  cover  tax  and  administrative 
tribunals.  The  High  Council 
for  Tax  and 
Administrative  Courts  still  produce  no  statistical 
data,  which  impedes  any  in-depth  analysis  of 
case-load metrics. 

tackle 

to 

In addition, pending cases amounted to 75 372 at the end of 
2015. 

(46)  The  proceedings  for  civil  and  commercial  cases  remain 
long (lasting on average 17 months) as well as the average 
duration of enforcement cases that is still 44 months. 

53 

 
 
 
 
 
 
 
 
 
                                                                                   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.6. Public administration 

54 

Box 4.6.1: Selected highlights Socially inclusive education: combating school failure in PortugalOver the past few years, Portugal has set up several successful initiatives to tackle education inequalities, reduce school failure and raise the average level of basic skills of the population.  A first step was to introduce an "improvement contract" as part of the TEIP programme (Educational Territories with Priority for Intervention) the third round of the programme launched in 1996, inspired by the French ZEPs (Priority Intervention Zones). Schools with a large proportion of students at risk of failure, situated in low-income neighbourhoods, with families living in poor conditions, are entitled to an “improvement contract” which provides additional funding and support. In addition, these schools are allowed to recruit their own teachers. They also benefit from special time credits, enabling them to arrange additional learning activities and more individualised teaching, along with counselling and social support initiatives. The “More School Success” programme focuses on alternative and innovative classroom teaching strategies and arrangements. It is an “umbrella” designation introduced in 2009 to provide institutional support to modelsdeveloped at the regional or local level such as “TurmaMais and “Fenix”. These projects, which have proven their effectiveness were not initiated by the education authorities but were developed in schools with the support of education specialists from academia.  The second step was to increase schools’ capacity to draw up policies tailored to local needs which had often been undermined in the past by a highly centralised education system. Schools' autonomy to design and implement measures conducive to high-quality learning is already legally established in Portugal. Introducing autonomy contracts for schools between 2012 and 2015 opened up new opportunities in this area.  The new National Programme for the Promoting School Success launched in March 2016 was a third step designed to reinforce schools’ autonomy and expand it to encompass pedagogic programmes with a focus on teaching and learning issues. The national plan covers local plans drawn-up and implemented by schools with the support and under the supervision of a national committee of experts. It prioritises prevention with 37% of its measures targeting the 1st stage of basic education (from the first to the fourth year of primary school) and 35% of those targeting the first year of primary education. Phase 1 of implementation (April 2016) involved training of 160 local trainers working in schools. Phase 2 enabled these local trainers to support 2 811 headteachers and teachers in developing local plans to tackle school failure, in cooperation with municipal authorities. Today, 99% of all basic and secondary schools in Portugal have a strategic action plan in place to promote school success, accounting for 2 936 measures defined by schools and validated by the programme's committee of experts. In phase 3 which got under way in September 2016 the local plans will be implemented with the full-time support of 1 294 teachers and involvement of 35 000 teachers nationwide.   
 
 
 
 
 
 
 
 
 
 
 
 
 
ANNEX A 

Overview table 

Commitments 

Summary assessment(47) 

2016 Country specific recommendations (CSRs) 

Portugal  has  made  limited  progress  in  addressing  CSR1 
(this  excludes  an  assessment  of  compliance  with  the 
Stability and Growth Pact). 

CSR1:  

Ensure  a  durable  correction  of 
the 
excessive deficit, in accordance with the 
relevant  decisions  or  recommendations 
under the excessive deficit procedure, by 
taking  the  necessary  structural  measures 
and by using all windfall gains for deficit 
and  debt  reduction.  Thereafter,  achieve 
an  annual  fiscal  adjustment  of  at  least 
0,6 %  of  GDP.  Conduct,  by  February 
2017,  a  comprehensive  expenditure 
review 
expenditure 
strengthen 
control,  cost  effectiveness  and  adequate 
levels  of  public 
budgeting  at  all 
long-term 
administration.  Ensure 
sustainability  of 
sector, 
without compromising access to primary 
healthcare.  Reduce  the  reliance  of  the 
pension  system  on  budgetary  transfers. 
By  the  end  of  2016,  refocus  ongoing 
restructuring 
state-owned 
plans  of 
enterprises (SOEs). 

the  health 

and 

the 

Ensure  a  durable  correction  of 
the 
excessive deficit, in accordance with the 
relevant  decisions  or  recommendations 
under the excessive deficit procedure, by 
taking  the  necessary  structural  measures 
and by using all windfall gains for deficit 

  The  compliance  assessment  with  the  Stability  and 
Growth Pact will be included in Spring when final data 
for 2016 will be available. 

(47)  The following categories are used to assess progress in implementing the 2016 country-specific recommendations: 
No  progress:  The  Member  State  has  not  credibly  announced  nor  adopted  any  measures  to  address  the  CSR.  Below  a  number  of 
non-exhaustive typical situations that could be covered under this, to be interpreted on a case by case basis taking into account 
country-specific conditions: 

•  no  legal,  administrative,  or  budgetary  measures  have  been  announced  in  the  National  Reform  Programme  or  in  other  official 
communication  to  the  national  Parliament  /  relevant  parliamentary  committees,  the  European  Commission,  or  announced  in 
public (e.g. in a press statement, information on government's website);  
• no non-legislative acts have been presented by the governing or legislator body;  
•  the  Member  State  has  taken  initial  steps  in  addressing  the  CSR,  such  as  commissioning  a  study  or  setting  up  a  study  group  to 
analyse possible measures that would need to be taken (unless the CSR explicitly asks for orientations or exploratory actions), 
while clearly-specified measure(s) to address the CSR has not been proposed. 

Limited progress: The Member State has: 
• announced certain measures but these only address the CSR to a limited extent; 
and/or 
• presented legislative acts in the governing or legislator body but these have  not been adopted yet and substantial non-legislative 

further work is needed before the CSR will be implemented;  

• presented non-legislative acts, yet with no further follow-up in terms of implementation which is needed to address the CSR. 
Some progress: The Member State has adopted measures that partly address the CSR  
and/or  
the Member State has adopted measures that address the CSR, but a fair amount of work is still needed to fully address the CSR as 
only  a  few  of  the  adopted  measures  have  been  implemented.  For  instance:  adopted  by  national  parliament;  by  ministerial 
decision; but no implementing decisions are in place. 

Substantial progress: The Member State has adopted measures that go a long way in addressing the CSR and most of which have 

been implemented. 

Full implementation: The Member State has implemented all measures needed to address the CSR appropriately. 

55 

 
 
 
                                                           
A. Overview table 

and debt reduction. 

by 

2017, 

February 

Conduct, 
a 
comprehensive  expenditure  review  and 
strengthen  expenditure  control,  cost 
effectiveness  and  adequate  budgeting  at 
all levels of public administration 

that 

involve 

  Some  progress  in  conducting  a  comprehensive 
expenditure  review.  The  authorities  have  started  a 
spending  review  exercise,  mainly  based  on  efficiency 
the  health  and  education 
measures 
ministries;  state-owned  enterprises  and  (centralised) 
public procurement and real estate management). This 
spending  review  still  falls  short  of  a  comprehensive 
approach  since  its  scope  only  covers  the  central 
focused  on  efficiency  savings 
government  and 
stemming from streamlining services. 

Ensure the long-term sustainability of the 
health  sector,  without  compromising 
access to primary healthcare 

Reduce 
system on budgetary transfers.  

the  reliance  of 

the  pension 

By  the  end  of  2016,  refocus  ongoing 
restructuring 
state-owned 
plans  of 
enterprises (SOEs). 

  Some  progress 

in 

the 

ensuring 

long-term 
sustainability of the healthcare sector. As Portugal is 
expected  to  have  the  highest  increase  in  healthcare 
costs  in  the  EU  by  2060,  more  efforts  for  cost 
compression 
including  by 
should  be  pursued 
integrating  primary  care,  hospital  services  and 
continuous  care.  However,  health  care  prevention  and 
access  to  primary  health  care  have  been  improved 
which will definitely help Portugal meet the long term 
challenges  facing  its  health  care  sector,  Nonetheless, 
the increase stock of arrears adds strain to the system's 
fiscal sustainability in the short-term. 

  Limited progress in reducing the reliance of pension 
system  on  budgetary  transfers.  The  draft  budget  for 
2017 includes the earmarking of a new progressive tax 
on real estate portfolios (on top of the IMI) to the social 
(worth 
security's  Financial  Stabilization  Fund 
EUR 160 million  in  2017  according  to  the  2017  draft 
budgetary  plan  2017).  Although  this  earmarking  is 
being presented by the government as an alternative to 
the excessive reliance on classical budgetary transfers, 
this  does  not  address  the  expenditure  side  of  the 
pension system sustainability. 

  No  progress  in  refocusing  restructuring  plans  of 
state-owned enterprises. In terms of their operational 
performance  state-owned  enterprises  fared  well  in 
2016,  as  shown  by  their  positive  EBIDTA  (earnings 
before  interest,  tax,  depreciation  and  amortization). 
However,  indebtedness  remains  very  high  resulting  in 
persistent negative net income. The government so far 
to 
has  not  presented  any  concrete  measures 
significantly restructure state-owned enterprises. 

56 

 
 
 
 
 
 
CSR2:  

that 

the  minimum  wage 

In  consultation  with  social  partners, 
is 
ensure 
the  objectives  of 
consistent  with 
promoting 
and 
employment 
competitiveness across sectors. 

A. Overview table 

Portugal  has  made  limited  progress  in  addressing 
CSR2:  

  Limited  progress  in  ensuring  that  the  minimum 
wage  is  consistent  with  promotion  of  employment 
and  competitiveness.  The  minimum  wage  was  raised 
most  recently  in  January  2017,  from  EUR 530  to 
EUR 557  i.e.  above  expected  inflation  and  average 
productivity  increases.  While  increasing  aggregate 
demand and reducing in-work poverty, in a context of 
low  inflation  and  high  unemployment,  continued 
increases  in  the  minimum  wage  above  productivity 
might  put  upward  pressures  on  the  overall  wage 
structure,  with  the  risk  of  affecting  employment  and 
competitiveness 
government 
established  a  structure  to  monitor  the  impact  of 
through  quarterly 
minimum  wage  developments, 
reports  which  are  published  and  discussed  with  social 
partners. 

perspectives.  The 

CSR3:  

Portugal has made some progress in addressing CSR3 

Ensure  the  effective  activation  of  the 
long-term  unemployed  and  improve  the 
coordination  between  employment  and 
social services. Strengthen incentives for 
firms 
through  permanent 
contracts. 

to  hire 

Ensure  the  effective  activation  of  the 
long-term  unemployed  and  improve  the 
coordination  between  employment  and 
social services 

in 

and 

unemployed 

  Limited progress in ensuring effective activation of 
long-term 
improving 
coordination  between  employment  and  social 
services. The rate of long-term unemployment remains 
one  of  the  highest  in  the  EU,  despite  active  labour 
market  measures  targeted  at  long-term  unemployed 
which have been developed in recent years. To address 
this, the government produced an assessment of active 
labour market policies. However, no specific measures 
targeted  at  integrating  the  long-term  unemployed  into 
the  labour  market  have  been  adopted  since  then.  The 
public  employment  service’s  planned  increased  use  of 
online platforms instead of face-to-face-services should 
enable staff to focus on more personalised services for 
the  long-term  unemployed.  As  part  of  the  ongoing 
administrative  simplification  process,  one-stop  shops 
for  the  long-term  unemployed  are  being  developed, 
although  this  initiative  has  not  yet  reached  the 
implementation phase. 

Strengthen  incentives  for  firms  to  hire    Some progress in strengthening incentives for firms 

57 

 
 
 
A. Overview table 

through permanent contracts. 

redesigned 

through  permanent 

contracts.  The 
to  hire 
Government 
its  employment  support 
programme to promote hiring on open-ended contracts 
while  restricting  the  financial  support  for  temporary 
contracts  to  specific  cases  such  as  the  very  long-term 
unemployed. However, the expected impact of the new 
measure in reducing segmentation is limited in view of 
the low number of people to be covered. 

CSR4:  

Portugal has made limited progress in addressing CSR 
4 

Take  measures,  by  October  2016,  to 
facilitate  the  cleaning  up  of  the  balance 
sheets  of  credit  institutions  and  address 
the  high  level  of  non-performing  loans. 
Reduce 
in  corporate 
to 
improve 
taxation  and 
finance  for  start-ups  and  small  and 
medium-sized  enterprises  via  the  capital 
market. 

the  debt  bias 

the  access 

Take  measures,  by  October  2016,  to 
facilitate  the  cleaning  up  of  the  balance 
sheets  of  credit  institutions  and  address 
the high level of non-performing loans 

  Limited  progress  in  facilitating  the  clean-up  of 
credit  institutions'  balance  sheets  and  addressing 
the high level of non-performing loans. 

to  revise 

taking  action 

the 
is  also 

restructuring"  strand, 

existing  mechanisms 

improve 
the  balance  of  viable 

  By Resolution of the Council of Ministers N. 42/2016 
of  18  August  2016,  the  government  approved  the 
the  programmes's 
Capitalizar  Programme.  Under 
the  government 
"corporate 
for 
intends 
to 
restructuring 
economic 
recovery  of  credits.  The 
enterprises  and 
its 
government 
insolvency regime through the following: mechanisms 
to  control  the  access  to  the  PER  (implementation 
period:  first  quarter  of  2017);  access  of  judicial 
administrators  to  the  Citius  dataset,  the  IT  system  to 
(fully 
support 
implemented);  the  right  of  judicial  administrators  to 
directly  access  the  various  databases  (implementation 
planned  for  the  first  quarter  of  2017);  creation  of 
electronic  certificates  (expected  to  be  implemented  in 
the first quarter of 2017); possibility of exemption from 
holding  a  meeting  of  creditors;  changes  to  the  legal 
framework to the new registration rules on cross-border 
insolvencies and interconnection of registries. 

activities  of 

courts) 

the 

the 

  The tax law has been changed to remove disincentives 
to write-off. The central bank is conducting additional 
including  by  assessing  banks' 
supervisory  work, 
capability to manage non-performing loans, The central 
bank  is  also  providing  guidance  to  banks  on  how  to 

58 

 
A. Overview table 

screen  different  types  of  non-performing  loans,  and 
how  to  manage  them.  They  are  also  considering  an 
external  servicing  of  loans,  although  the  details  have 
not  been  provided  as  to  whether  this  would  entail  the 
creation  of  a  market  of  distressed  assets.  Overall,  a 
comprehensive strategy appears to be lacking. 

  Some  progress 

in  reducing  the  debt  bias 

in 
corporate  taxation.  The  2017  draft  budgetary  plan 
includes  broadening  the  scope  of  the  allowance  for 
corporate  equity  (ACE)  regime.  The  regime  now 
applies  to  all  companies  (previously  it  applied  only  to 
small  and  medium-sized  enterprises)  and  shareholders 
(not only individuals and venture capital investors). In 
addition,  the  allowance  has  been  increased  from  5 % 
during 4 years to 7 % during 6 years. 

Reduce 
taxation and 

the  debt  bias 

in  corporate 

the  access 

improve 
for 
start-ups  and  small  and  medium-sized 
enterprises via the capital market. 

finance 

to 

start-ups  and 

  Limited progress in improving the access to finance 
for 
small  and  medium-sized 
enterprises  via  the  capital  market.  Under 
the 
the  government  has  put 
Capitalizar  Programme, 
forward  measures  to  ease  businesses'  financing  needs. 
A  new  credit  line  with  a  mutual  guarantee  has  been 
made  available  and will  allow  financing  to  companies 
of more than EUR 1 billion in financing for companies. 
In  parallel,  the  government  has  put  in  place  another 
programme 
for 
start ups  and  small  enterprises  in  their  early  stages 
(seed  capital),  helping  them  to  raise  equity  finance  by 
offering tax reliefs, for at least two years, to individual 
investors who purchase new shares in such companies, 
These  programmes  are  expected  to  improve  the 
financing of companies in Portugal, provided that they 
are swiftly and fully implemented. 

(Programa  Semente) 

finance 

to 

CSR5:  

Portugal has made some progress in addressing CSR5 

as 

procurement 

Increase  transparency  and  efficiency  in 
regards 
public 
partnerships 
public private 
and 
concessions.  By 
the  end  of  2016, 
improve  and  accelerate  administrative 
and  licensing  procedures,  accelerate  tax 
litigations and reduce regulatory barriers, 
services. 
especially 
between 
Incentivise 
universities and the business sector. 

business 
cooperation 

in 

Increase  transparency  and  efficiency  in 
regards 
public 
and 
public private 

procurement 

partnerships 

as 

  Some progress in increasing transparency in public 
procurement.  Transparency  and  reliability  of  public 
procurement  data  is  improving.  The  institute  for 
Monitoring  Public  Procurement  (IMPIC)  is  moving 

59 

 
 
A. Overview table 

concessions 

from  a  case by case  approach  on  correcting  data  in 
BASE  to  a  more  systematic  and  automated  system. 
Access to procurement data by control and prosecution 
authorities  is  not  automatic,  because  of  the  legal 
framework on data protection, which hampers efficient 
checks  and  investigations.  By  Decree  N.  18/2016,  the 
government  has  established  quarterly  monitoring  and 
reporting  procedures  related  for  local  and  regional 
public private partnerships and concessions. The use of 
direct awards remains high and there are weaknesses in 
insufficient 
the 
justification  underpinning 
to  direct 
awards; (ii) splitting of contracts; (iii) lack of capacity 
and professionalization an (iv) limited checks. 

to: 
the  recourse 

tender  procedures  due 

(i) 

the  end  of  2016, 

By 
improve  and 
accelerate  administrative  and  licensing 
procedures, 

  Limited  progress  in  improving  and  accelerating 
licensing  procedures  by  the  end  of  2016.  The 
SIMPLEX  +  initiative  includes  some  cross cutting 
simplification  measures,  yet  to  be  implemented,  but 
progress  in  enhancing  the  business  environment  has 
largely stalled in relation to sector specific regulation. 

accelerate tax litigations 

and reduce regulatory barriers, especially 
in business services. 

Incentivise 
universities and the business sector. 

cooperation 

between 

improve 

to  combat  fraud, 

  Some progress in accelerating tax litigations by the 
end  of  2016.  The  Tax  Administration  has  drawn  up  a 
tax 
multiannual  plan 
collection and simplify tax procedures. The 2017 draft 
budgetary  plan  introduced  provisions  for  the  tax 
authorities to: reduce response time for issuing binding 
rulings  (Autoridade  Tributária)  to  a  maximum  of  75 
days  in  all  urgent  requests,  significantly  reduce  the 
deadline for urgent requests; also, assess the possibility 
of reducing the costs of urgent binding ruling. Despite 
these efforts, the tax courts' clearance rate remains low. 

  Limited  progress  in  reducing  regulatory  barriers 
especially  in  business  services  by  the  end  of  2016. 
Previous  reform  efforts  targeting  the  most  restrictive 
business  services,  including  regulated  professions, 
were  halted  and,  in  some  cases,  reversed.  Restrictions 
on  corporate  groups  for  professional  firms  and 
restrictive  regulation  of  legal  professions  (legal  form, 
multidisciplinary, 
shareholding, 
advertising restrictions) set to remain in place. 

management, 

include 

  Some progress in incentivising cooperation between 
universities  and  the  business  sector.  New  initiatives 
announced 
the  creation  of  collaborative 
laboratories, 
technological  centres  for  engineering 
activities  and  new  business  innovation  contracts.  The 
government  is  currently  preparing  a  revision  of  the 
Higher  Education  system.  The  new  programme  to 
modernise  and  revamp  polytechnic  institutes  focuses 

60 

 
A. Overview table 

on  matching  both  R&D  activities  and  dual  VET 
programmes  (CTeSPs)  with  regional  needs.  The 
Innovation  Agency  (ANI)  is  working  to  increase 
innovation  and  has 
knowledge  and  collaborative 
identified  further  potential  players  to  bring  into  the 
innovation  eco-system 
(including  businesses  and 
research  organizations).  It  is  also  pushing  for  more 
collaboration as a priority for further action. However, 
there  is  no  overall  comprehensive  strategy  to  foster 
cooperation  between  universities  and  the  business 
sector:  cooperation  still  relies  mostly  on  isolated 
initiatives from specific universities or businesses. 

Europe 2020 (national targets and progress) 

Employment  rate  target  (20-64  years 
old): 75 %  

69.1 % (2015). It increased compared to 2014 (67.6 %) but 
remains well below the national target for 2020. 

R&D target: 3 % 

Greenhouse gas (GHG) emissions target:  

-National  Greenhouse 
emissions target:  

gas 

(GHG) 

1 %  in  2020  compared  to  2005  (in 
non-ETS sectors) 

R&D  intensity  has  been  declining  since  2009.  The 
situation is particularly worrying for business spending on 
R&D,  which  dropped  significantly  between  2009  and 
2015. 

1.28 % (2015) 

Portugal’s non-ETS emissions decreased by 24 % between 
2005 and 2015. The country has achieved its 2015 target (a 
2 %  emission  reduction)  by  a  22  pps.  gap.  According  to 
the latest national projections based on existing measures, 
non-ETS  emissions  will  decrease  by  25 %  between  2005 
and 2020. 

and 

The  key  measures  being  implemented  are  the  framework 
for  climate  policy  (QEPiC  -  Quadro  Estratégico  da 
Política  Climática) 
the  2013-2020  national 
programme for climate change "Programa Nacional para 
as  Alterações  Climáticas"  (PNAC  2020).  Portugal  is 
implementing  the  2015  green  tax  reform  that  introduced 
transport-related  fiscal  measures  for  the  2020  horizon, 
including  carbon  tax,  higher  taxes  for  vehicles  with  high 
CO2  emission  factors  and  tax  incentives  (Law  82-D, 
2014). 

2020 Renewable energy target:  

31 %  

With a 27.8 % renewable energy share in 2015, Portugal is 
above its 2015/2016 interim target of 25.2 % as established 
in the Renewable Energy Directive (48). 

(48)  Renewable energy shares for 2015 are approximations and not official data, reflecting the available data (04.10.2016). See the 
the  2016  Report  on  Renewable  Energy, 

in  Realisation  of 

Öko-Institut  Report:  Study  on  Technical  Assistance 
http://ec.europa.eu/energy/en/studies 

61 

 
 
 
                                                           
 
A. Overview table 

Energy efficiency target. 

efficiency 

Portugal  has  set  an  indicative  national 
target  of  25 % 
energy 
reduction of final energy consumption in 
2020,  which  implies  reaching  a  2020 
level of 22.5 Mtoe primary consumption 
and 17.4 Mtoe final energy consumption. 

Early school leaving target: 10 % 

Tertiary education target: 40 % 

Portugal  increased  its  primary  energy  consumption  by 
4.9 %  from  20.65  Mtoe  in  2014  to  21.66  Mtoe  in  2015. 
Final  energy  consumption  increased  by  2 %  from  15.77 
Mtoe in 2014 to 16.04 Mtoe in 2015. 

Even  if  Portugal  has  already  achieved  levels  of  primary 
and  final  energy  consumption  which  are  below  the 
indicative  national  2020  targets  (22.5  Mtoe  in  primary 
energy  consumption  and  17.4  Mtoe  in  final  energy 
consumption)  it  would  need  to  make  an  effort  to  keep 
these levels until 2020. 

Portugal is among the three countries that have made most 
progress  in  reducing  early  school  leaving  since  2012 
(Education  and  Training  Monitor  2016).  The  continuous 
positive  decreasing  trend  and  the  possible  impact  of  the 
implementation  of  the  National  Plan  to  promote  School 
Success put the target at reach for the country. 

13.7 % (2015) 

Tertiary education attainment has been stagnating over the 
past years. The modernisation of the polytechnic institutes 
seems to have provided a new boost to tertiary enrolment 
but  the  slowdown  in  the  previous  increasing  trend  keeps 
the target relatively out of reach for 2020. 

34.9 % (Q2 2016) 

Risk  of  poverty  or  social  exclusion 
target:  the  target  envisages  reducing  the 
number of person in or at risk of poverty 
and social exclusion by 200 000 persons 
in 2020. 

The number of people at risk of poverty or social exclusion 
rose by 72 000 between 2010 and 2015. Despite a decrease 
between  2013  and  2015,  the  national  target  remains  far 
from reach.  

62 

 
ANNEX B 

MIP Scoreboard 

Table B.1: 

The MIP Scoreboard for Portugal 

(1)Figures highlighted are the ones falling outside the threshold established by EC Alert Mechanism Report. For REER and ULC, 
the first threshold concerns Euro Area Member States. (1) Figures in italic are not published by Eurostat, due to being 
according to the old standards (ESA95/BPM5), or forecasts. 
Flags: empty: not available, c: confidential; b: break in series; e: estimate; f: forecast (DG ECFIN); k: backcast (DG ECFIN); j: 
note; o: outdated; p: provisional; u: unreliable  
Source:  European Commission, Eurostat and DG ECFIN (for the indicators on the REER) 

63 

Thresholds201020112012201320142015Current account balance, (% of GDP) 3 year average-4%/6%-10.9-8.9-6.0-2.1-0.10.7-35%-104.3-100.7-116.5-116.3-114.9-109.3Real effective exchange rate - 42 trading partners, HICP deflator3 years % change±5% & ±11% -3.1-3.0-4.0-0.6-1.8-2.8Export market share - % of world exports5 years % change-6%-6.6-8.2-16.0-6.8-5.52.8Nominal unit labour cost index (2010=100)3 years % change9% & 12% 4.2-0.6-6.3-3.4-2.70.0e6%-1.0-6.5-8.7-2.73.92.314%5.3-0.9-3.7-1.9-5.9-2.3133%201.5204.1211.7204.4192.4181.560%96.2111.4126.2129.0130.6129.0Unemployment rate3 year average10%10.511.913.615.015.414.416.5%11.5-4.5-1.8-5.3-7.3-1.6-0.2%-0.2-0.3b0.0-0.7-0.40.00.5%1.92.63.53.62.2-0.52%6.88.612.79.94.5-6.0Activity rate - % of total population aged 15-64 (3 years change in p.p)Long-term unemployment rate - % of active population aged 15-74 (3 years change in p.p)Youth unemployment rate - % of active population aged 15-24 (3 years change in p.p)External imbalances and competitivenessNew employment indicatorsNet international investment position (% of GDP)Deflated house prices (% y-o-y change)Total financial sector liabilities (% y-o-y change)Private sector credit flow as % of GDP, consolidatedPrivate sector debt as % of GDP, consolidatedGeneral government sector debt as % of GDPInternal imbalances 
 
 
 
 
 
ANNEX C 

Standard tables 

Table C.1: 

Financial market indicators 

(1) Latest data Q2 2016. 
(2) Quarterly values are not annualised 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

64 

201120122013201420152016Total assets of the banking sector (% of GDP)325.4330.8302.5271.0251.0234.8Share of assets of the five largest banks (% of total assets)70.869.970.369.269.6-Foreign ownership of banking system (% of total assets)21.420.619.420.322.4-Financial soundness indicators:1)              - non-performing loans (% of total loans)5.37.07.812.714.414.6              - capital adequacy ratio (%)9.812.613.712.313.313.1              - return on equity (%)2)-4.2-3.3-9.3-17.20.9-0.6Bank loans to the private sector (year-on-year % change)-3.3-6.0-5.0-5.2-2.6-2.5Lending for house purchase (year-on-year % change)-0.5-2.8-3.5-3.8-3.8-3.7Loan to deposit ratio116.1119.5111.4105.099.394.6Central Bank liquidity as % of liabilities9.711.711.68.17.16.2Private debt (% of GDP)204.1211.7204.4192.4181.5-Gross external debt (% of GDP)1) - public58.482.086.198.792.083.7    - private40.942.544.246.245.447.5Long-term interest rate spread versus Bund (basis points)*763.3905.3472.4259.1192.8304.5Credit default swap spreads for sovereign securities (5-year)*773.9818.7355.9173.0137.4216.7 
 
 
 
 
 
 
 
 
C. Standard tables 

Table C.2: 

Labour market and social indicators 

1 Unemployed persons are all those who were not employed but had actively sought work and were ready to begin working 
immediately or within 2 weeks.       
2 Long-term unemployed are peoples who have been unemployed for at least 12 months.       
3 Not in education employment or training.       
4 Average of first three quarters of 2016. Data for total unemployment and youth unemployment rates are seasonally 
adjusted.       
Source: European Commission (EU Labour Force Survey). 

65 

201120122013201420152016 4Employment rate(% of population aged 20-64)68.866.365.467.669.170.4Employment growth (% change from previous year)-1.9-4.1-2.91.41.41.4Employment rate of women(% of female population aged 20-64)64.663.062.364.265.967.1Employment rate of men (% of male population aged 20-64)73.269.868.771.372.674.0Employment rate of older workers (% of population aged 55-64)47.846.546.947.849.951.8Part-time employment (% of total employment, aged 15-64)10.311.211.110.19.89.4Fixed-term employment (% of employees with a fixed term contract, aged 15-64)22.020.521.421.422.022.3Transitions from temporary to permanent employment28.826.324.027.227.3:Unemployment rate1 (% active population, age group 15-74)12.915.816.414.112.611.4Long-term unemployment rate2 (% of labour force)6.27.79.38.47.26.3Youth unemployment rate (% active population aged 15-24)30.238.038.134.732.028.3Youth NEET3 rate (% of population aged 15-24)12.613.914.112.311.3:Early leavers from education and training (% of pop. aged 18-24 with at most lower sec. educ. and not in further education or training)23.020.518.917.413.7:Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)26.727.830.031.331.9:Formal childcare (30 hours or over; % of population aged less than 3 years)34.034.036.041.0:: 
 
 
 
 
C. Standard tables 

Table C.3: 

Expenditure on social protection benefits (% of GDP) 

1 People at risk of poverty or social exclusion : individuals who are at risk of poverty and/or suffering from severe material 
deprivation and/or living in households with zero or very low work intensity.       
2 At-risk-of-poverty rate : proportion of people with an equivalised disposable income below 60 % of the national equivalised 
median income.        
3 Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay 
their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone.       
4 People living in households with very low work intensity: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months.       
5 For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices = 100 in 2006 (2007 
survey refers to 2006 incomes) 
Source: For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC. 

66 

Expenditure on social protection benefits (% of GDP)201020112012201320142015Sickness/healthcare6.76.16.26.26.1:Disability2.02.01.82.01.9:Old age and survivors12.613.413.714.614.7:Family/children1.31.21.21.21.2:Unemployment1.41.31.71.81.5:Housing0.00.00.00.00.0:Social exclusion n.e.c.0.30.30.30.20.2:Total24.424.224.926.125.5:of which: means-tested benefits2.42.12.22.22.1:Social inclusion indicators201020112012201320142015People at risk of poverty or social exclusion1 (% of total population)25.324.425.327.527.526.6Children at risk of poverty or social exclusion  (% of people aged 0-17)28.728.627.831.731.429.6At-risk-of-poverty  rate2 (% of total population)17.918.017.918.719.519.5Severe material deprivation rate3  (% of total population)9.08.38.610.910.69.6Proportion of people living in low work intensity households4 (% of people aged 0-59)8.68.310.112.212.210.9In-work at-risk-of-poverty rate (% of persons employed)9.710.39.910.510.710.9Impact of social transfers (excluding pensions) on reducing poverty32.229.129.226.727.026.1Poverty thresholds, expressed in national currency at constant prices5499747774565436443724489Gross disposable income (households; growth %)2.8-3.7-3.6-0.2-0.22.5Inequality of income distribution (S80/S20 income quintile share ratio)5.65.75.86.06.26.0GINI coefficient before taxes and transfers52.452.754.454.856.355.5GINI coefficient after taxes and transfers33.834.334.134.234.534.0 
 
 
 
 
C. Standard tables 

Table C.4: 

Product market performance and policy indicators 

1 The methodologies, including the assumptions, for this indicator are shown in detail at: 
http://www.doingbusiness.org/methodology.        
2 Average of the answer to question Q7B_a. "[Bank loan]: If you applied and tried to negotiate for this type of financing over 
the past six months, what was the outcome?". Answers were codified as follows: zero if received everything, one if received 
most of it, two if only received a limited part of it, three if refused or rejected and treated as missing values if the application is 
still pending or if the outcome is not known.       
3 Percentage population aged 15-64 having completed tertiary education.       
4 Percentage population aged 20-24 having attained at least upper secondary education.       
5 Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail at: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       
6 Aggregate OECD indicators of regulation in energy, transport and communications. 
Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation indicators); SAFE (for outcome of SMEs' applications for bank loans). 

67 

Performance indicators201020112012201320142015Labour productivity (real, per person employed, year-on-year % change)Labour productivity in industry7.292.101.020.680.63-1.81Labour productivity in construction-2.743.617.033.26-4.06-0.95Labour productivity in market services2.001.961.951.89-2.54-0.65Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in industry-3.28-0.99-1.310.250.103.57ULC in construction4.97-1.51-4.06-2.002.770.56ULC in market services0.34-1.49-2.37-0.410.021.70Business environment201020112012201320142015Time needed to enforce contracts1 (days)547.0547.0547.0547.0547.0547.0Time needed to start a business1 (days)5.55.55.54.54.54.5Outcome of applications by SMEs for bank loans20.831.131.240.710.680.55Research and innovation201020112012201320142015R&D intensity1.531.461.381.331.291.28Total public expenditure on education as % of GDP, for all levels of education combined5.625.27na5.34nanaNumber of science & technology people employed as % of total employment242729303334Population having completed tertiary education3141617182021Young people with upper secondary education4596568707277Trade balance of high technology products as % of GDP-2.00-1.72-1.60-1.56-1.61-1.53Product and service markets and competition200320082013OECD product market regulation (PMR)5, overallna1.691.29OECD PMR5, retail3.293.971.83OECD PMR5, professional servicesna3.082.92OECD PMR5, network industries63.092.552.18 
 
 
 
 
C. Standard tables 

Table C.5:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2005 prices)  
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)  
          Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)  
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR)  
          Waste intensity: waste (in kg) divided by GDP (in EUR)  
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP    
Weighting of energy in HICP: the proportion of 'energy' items in the consumption basket used for the construction of the HICP  
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change)  
Real unit energy cost: real energy costs as a percentage of total value added for the economy  
Environmental taxes over labour taxes and GDP: from European Commission's database, ‘Taxation trends in the European 
Union’  
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR)   
Real unit energy costs for manufacturing industry excluding refining : real costs as a percentage of value added for  
manufacturing sectors  
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP  
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000–100 000 GJ; figures 
excl. VAT.  
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste  
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP  
Proportion of GHG emissions covered by EU Emissions Trading System (ETS) (excluding aviation): based on greenhouse gas 
emissions  
(excl land use, land use change and forestry) as reported by Member States to the European Environment Agency.  
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value 
added (in 2005 EUR)  
Transport carbon intensity: GHG emissions in transport activity divided by gross value added of the transport sector  
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels  
Aggregated supplier concentration index:  covers oil, gas and coal. Smaller values indicate larger diversification and hence 
lower risk.  
Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies 
and solid fuels  
* European Commission and European Environment Agency  
Source: European Commission (Eurostat) unless indicated otherwise 

68 

Green growth performance201020112012201320142015MacroeconomicEnergy intensity kgoe / €0.140.130.130.130.130.13Carbon intensity kg / €0.430.430.430.420.42-Resource intensity (reciprocal of resource productivity)kg / €1.201.131.080.960.971.00Waste intensity kg / €0.11-0.09-0.09-Energy balance of trade % GDP-3.4-4.2-4.7-3.7-3.5-Weighting of energy in HICP%11.6812.7313.798.597.868.25Difference between energy price change and inflation %4.56.610.92.61.7-1.9Real unit of energy cost% of value added15.317.819.118.618.9-Ratio of environmental taxes to labour taxesratio0.190.170.170.150.16-Environmental taxes% GDP2.42.32.22.22.3-Sectoral Industry energy intensity kgoe / € 0.230.220.200.200.190.19Real unit energy cost for manufacturing industry excl. refining% of value added14.016.016.215.215.5-Share of energy-intensive industries in the economy% GDP8.368.097.907.787.91-Electricity prices for medium-sized industrial users€ / kWh0.090.100.110.110.120.11Gas prices for medium-sized industrial users€ / kWh0.030.040.040.040.040.04Public R&D for energy % GDP0.020.020.020.020.020.02Public R&D for environmental protection% GDP0.030.030.030.030.040.04Municipal waste recycling rate%18.720.126.125.830.4-Share of GHG emissions covered by ETS*%35.837.538.938.237.741.8Transport energy intensitykgoe / €1.141.091.031.041.091.09Transport carbon intensitykg / €2.892.722.542.522.66-Security of energy supplyEnergy import dependency%75.177.779.272.471.277.4Aggregated supplier concentration indexHHI19.626.626.728.128.2-Diversification of energy mixHHI0.350.320.300.310.31- 
 
 
 
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