COMMISSION STAFF WORKING DOCUMENT Country Report Portugal 2018 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 2018 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
Date: 2018-03-07
Institutions: European Commission, Secretariat-General
Subjects: Portugal, economic situation, education, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 7.3.2018 SWD(2018) 220 final  COMMISSION STAFF WORKING DOCUMENT Country Report Portugal 2018  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 2018 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(2018) 120 final}   
 
 
CONTENTS 

Executive summary 

1.  Economic situation and outlook 

2.  Progress with country-specific recommendations 

3.  Summary of the main findings from the Macroeconomic Imbalance Procedure 

in-depth review 

3.1. 

Imbalances and their gravity 

3.2.  Evolution, prospects and policy responses 

3.3.  Overall assessment 

4.  Reform priorities 

4.1.  Public finances and taxation 

4.2.  Financial sector, private indebtedness and housing market 

4.3.  Labour market, education and social policies 

4.4.  Competitiveness, investment and public administration 

4.5.   Sectoral policies 

Annex A: Overview table 

Annex B: Macroeconomic Imbalance Procedure scoreboard 

Annex C: Standard tables 

References 

LIST OF TABLES 

Table 1.1: 

Key economic, financial and social indicators - Portugal 

Table 2.1: 

Summary table on 2017 CSR assessment 

Table 3.1: 

Macroeconomic Imbalance Procedure assessment matrix - Portugal 2018 

Table B.1: 

The Macroeconomic Imbalance Procedure  scoreboard for Portugal (AMR 2018) 

Table C.1: 

Financial market indicators 

Table C.2: 

Headline Social Scoreboard indicators 

Table C.3: 

Labour market, education and social indicators 

Table C.4: 

Social inclusion and health indicators 

Table C.5: 

Product market performance and policy indicators 

Table C.6: 

Green growth 

1 

5 

12 

16 

16 

17 

18 

21 

21 

28 

34 

44 

52 

57 

65 

66 

72 

11 

14 

19 

65 

66 

67 

68 

69 

70 

71 

 
 
 
 
LIST OF GRAPHS 

Graph 1.1: 

Contributions to real GDP growth 

Graph 1.2: 

Contributions to potential growth 

Graph 1.3: 

Activity, employment and unemployment rates (quarterly) 

Graph 1.4: 

Employment by type 

Graph 1.5: 

Labour underutilisation 

Graph 1.6: 

At-risk-of-poverty or social exclusion rate and components 

Graph 1.7: 

Current Account (CA) and Net International Investment Position (NIIP) 

Graph 1.8: 

Return on equity (%), domestic banks 

Graph 1.9: 

Sectoral breakdown of domestic loans to non-financial corporations (NFCs) 

Graph 2.1:  Overall multiannual implementation of 2014-2017 CSRs to date 

Graph 4.1.1: 

Interest rates and GDP growth shocks 

Graph 4.1.2:  Fiscal consolidation 

Graph 4.2.1:  Saving with domestic banks 

Graph 4.2.2:  Valuation gap on price/income, price/rent and fundamental model valuation gaps 

Graph 4.2.3:  Overdue loans as % of total loans by NFC's size 

Graph 4.2.4:  Private sector indebtedness 

Graph 4.3.1:  Employment and employment rate by educational attainment, changes between 

Q3-2014 and Q3-2017, age group 20-64 

Graph 4.3.2:  Disposable income inequality before and after tax and transfers 

Graph 4.3.3:  Early school leavers, NEET and tertiary attainment 

Graph 4.4.1:  Labour productivity growth based on shift-share analysis % changes contributions in 

pps 

Graph 4.4.2:  Labour productivity per hour worked and total factor productivity 

Graph 4.4.3:  Labour productivity growth breakdown, (percentage changes; contributions in pps) 

Graph 4.4.4:  FDI stocks by sectors 

Graph 4.4.5: 

Impact on labour productivity in manufacturing of tackling services restrictions 

LIST OF BOXES 

Box 2.1: Tangible results delivered through EU support to structural change in Portugal 

Box 4.1.1: Impact of the 2018 Personal Income Tax reform: EUROMOD based simulation of the impact 

of the 2018 PIT reform 

Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights 

Box 4.3.2: Green Book on Labour Relations 2016 

Box 4.4.1: Investment challenges and reforms in Portugal 

Box 4.5.1: Policy highlights: Fighting social challenges with innovation 

5 

6 

6 

7 

7 

8 

9 

9 

10 

12 

21 

22 

28 

30 

31 

33 

34 

38 

42 

44 

45 

46 

46 

50 

15 

27 

35 

39 

51 

56 

 
 
 
 
 
EXECUTIVE SUMMARY 

in 

The  Portuguese  economy  has  continued  to 
recover  both 
terms  of  growth  and 
employment.  Economic  activity  has  accelerated 
and  has  become  more  broad-based,  with 
investment  and  exports  picking  up.  Employment 
grew even faster than GDP, particularly in labour-
intensive  services  while  wage  growth  remained 
subdued. Imbalances are receding in the context of 
favourable  macroeconomic 
financial 
conditions,  but  public  and  private  debt  and  the 
negative  net  external  position  remain  at  high 
levels.  Challenges  also  remain  in  terms  of  labour 
productivity,  the  still  high  income  inequality  and 
labour  market  segmentation  as  well  as  the  low 
level  of  investment.  Addressing  these  challenges 
would  reduce  the  risk  of  a  slowdown,  should  the 
external  environment  and  financial  conditions 
become less supportive. (1) 

and 

in  2016,  driven  by  acceleration 

Portugal's recovery has strengthened. Real GDP 
growth  is  estimated  at  2.7 %  in  2017,  up  from 
1.5 % 
in 
investment  and  exports.  Private  consumption 
remains  an  important  contributor  to  growth  but  is 
expected  to  slow  down  slightly  over  the  medium 
term,  and  the  net  external  trade  contribution  to 
growth  is  expected  to  become  broadly  neutral. 
GDP growth is projected to slow down to 2.2 % in 
2018 and 1.9 % in 2019 as positive cyclical effects 
are  projected  to  fade  away  and  output  approaches 
its potential. 

Higher revenue and lower interest rates enabled 
the headline deficit to be further reduced while 
the  structural  deficit  remains  broadly  stable. 
The  favourable  economic  cycle  together  with  the 
decline  in  interest  payments  would  allow  for 
reductions  in  the  structural  deficit  to  ensure  a 
sustainable  budgetary  position  over  the  medium 
term.  However,  the  currently  planned  structural 
adjustment lacks ambition. Containing expenditure 

(1)  This  report  assesses  Portugal’s  economy  in  light  of  the 
European Commission’s Annual Growth Survey published 
on 22 November 2017. In the survey, the Commission calls 
on  EU  Member  States  to  implement  reforms  to  make  the 
resilient  and 
European  economy  more  productive, 
inclusive.  In  so  doing,  Member  States  should  focus  their 
efforts  on  the  three  elements  of  the  virtuous  triangle  of 
economic  policy  —  boosting 
investment,  pursuing 
structural reforms  and ensuring responsible fiscal policies. 
At  the  same  time,  the  Commission  published  the  Alert 
Mechanism Report (AMR) that initiated the seventh round 
of  the  macroeconomic  imbalance  procedure.  The  AMR 
found that Portugal warranted an in-depth review, which is 
presented in this report. 

1 

growth  and  using  gains  from 
lower  interest 
expenditure  would  help  accelerate  public  debt 
reduction.  

the 

2017 

some (2)  progress 

in 
Portugal  has  made 
addressing 
country-specific 
recommendations.  In  the  area  of  public  finances 
there  was  limited  progress  in  improving  the 
financial  sustainability  of  state  owned  enterprises 
and  in  decreasing  health  sector  arrears.  Some 
progress  can  be  seen  in  the  broadening  of  the 
spending review and in the pension system. While 
limited  progress  was  observed  in  measures  to 
promote hiring on open-ended contracts there was 
some  progress 
long-term 
unemployed  people  and  on  the  minimum  wage 
whose  increases  so  far  have  not  affected  job 
creation.  In  the  financial  sector  there  was  some 
progress  in  implementing  a  strategy  addressing 
non-performing  loans  and  improving  access  to 
in 
capital.  Limited  progress  was  observed 
decreasing  administrative  burden  and 
tackle 
regulatory  barriers  in  construction  and  business 
services.  But  some  progress  was  made 
in 
improving insolvency and tax proceedings.   

in  activation  of 

Regarding progress in reaching the national targets 
under  the  Europe  2020  strategy,  Portugal  is 
performing  well  in  greenhouse  gas  emissions 
reduction, renewable energy and energy efficiency 
targets  and  increasing  the  employment  rate  (73% 
in  2017).  The  early  school  leaving  rate  dropped 
in  previous  years,  but  slightly 
significantly 
increased in 2016 and remains well above the EU 
average.  There  are  still  considerable  obstacles  to 
achieving the targets on R&D investment, tertiary 
education attainment and poverty reduction. 

Portugal  faces  challenges  with  regard  to  a 
number  of  indicators  of  the  Social  Scoreboard 
supporting the European Pillar of Social Rights. 
The  high  share  of  people  at  risk  of  poverty  and 
social  exclusion  is  declining,  but  the  impact  of 
social  transfers  (other  than  pensions)  on  poverty 
reduction  is  limited.  Income  inequality  has  also 
started  to  subside  but  remains  high,  in  a  context 
where  household  disposable  income  is  still  below 
pre-crisis 
levels.  While  employment  keeps 
recovering  steadily,  labour  market  segmentation 

(2)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
CSR is presented in the Overview Table in the Annex. 

 
 
                                                           
                                                           
Executive summary 

beyond  prudent  levels  weighing  negatively  on 
investments and potential growth.  

remains  a  serious  challenge,  with  young  people 
particularly  affected.  The  level  of  digital  skills 
among  the  adult  population  is  also  below  the  EU 
average.  On  the  upside,  Portugal  does  well  in 
terms  of  participation  of  children 
in  formal 
childcare  and  has  recently  taken  measures  to 
promote work-life balance. 

findings  of 

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

in-depth 

the 

  The external position has been improving on 
the  back  of  current  account  surpluses  and 
higher nominal growth. The net international 
investment  position  was  still  negative  at            
-104.7 %  of  GDP  at  the  end  of  2016,  but  is 
decreasing  thanks  to  small  but  continuous 
current  account  surpluses  and  a  pickup  in 
growth. Current account surpluses will need to 
be  sustained for  an  extended period of  time  to 
decisively  bring  down  the  still  very  high 
external liabilities. 

in  public 

is  estimated 

  Public  debt  started  decreasing  from  a  high 
level  and  further  fiscal  consolidation  would 
contribute to ensuring a steady decline. With 
no  further  bank  recapitalisations  expected, 
to  have  started 
public  debt 
decreasing  to  reach  126.4 %  of  GDP  in  2017. 
Ensuring  public  debt  sustainability  in  the 
medium  and  long  term  hinges  on  a  structural 
finances  and  a 
improvement 
sustainable  budgetary  consolidation.  In  this 
context,  progress  in  broadening  the  spending 
review  is  set  to  have  a  positive  effect,  which 
could  be  larger  with  even  more  ambitious 
savings  targets.  In  a  similar  vein,  controlling 
expenditure, managing debt and improving the 
financial 
state-owned 
enterprises  are  essential  aspects  to  improve 
the 
public 
sustainability of the pension and health systems 
remains 
important  with  hospital  arrears 
representing a particular challenge. 

finances.  At 

sustainability 

the  same 

time, 

of 

  Private  indebtedness  is  decreasing  at  an 
appropriate  pace  linked  mainly  to  faster 
economic growth though the debt stock is also 
decreasing  in  absolute  values.  Household  and 
corporate  debt  ratios  are declining but are still 

2 

  The  adjustment  process  in  the  Portuguese 
banking  sector  is  ongoing,  but  challenges 
remain,  including  a  declining  but  still  high 
stock  of  non-performing  loans.  Portuguese 
banks  remain  among  the  least  capitalised  and 
have  lower  profits  than  their  EU  counterparts. 
However,  capital  increases  together  with  the 
ongoing  efforts  to  reduce  costs  and  asset 
quality  improvement  are  improving  financial 
sector  prospects.  While  falling  in  absolute 
terms, 
the  still  high  proportion  of  non-
performing  loans  (14.6 %  in  September  2017) 
remains a burden and a risk for banks' financial 
soundness.  If  not  solved,  it  could  be  a  barrier 
for new investments. A comprehensive strategy 
for a faster reduction of non-performing assets 
implemented.  Quicker 
is 
through 
firms 
winding-up  of  non-viable 
insolvency procedures and a secondary market 
for  non-performing  loans  could  free  credit 
supply  for new  investments  and  lower risks  to 
the banking sector. 

therefore  being 

from 

job-rich 

  Employment  is  fast  increasing  contributing 
to  a  decrease  in  total  unemployment  while 
wage  pressure  remains  low.  The  labour 
market  continued  to  improve  strongly  in  2017 
benefitting 
recovery. 
the 
Unemployment  declined  considerably  from 
11.2 %  in  2016  to  9 %  in  2017  and  is  now 
lower 
the  euro  area  average.  The 
employment rate reached its highest level since 
2008.  This  has  not  put  significant  pressure  on 
wages  as  most  of  the  job  openings  were  in 
sectors  with  low-skill  profiles  and  lower-than-
average  salaries.  In  addition,  some  labour 
market  slack  still  persists,  preventing  wage 
growth  from  a  significant  increase.  Youth  and 
long-term unemployment remain a concern. 

than 

  Labour 

growth 

productivity 

remains 
sluggish  in  the  medium  term,  limiting  the 
potential  to  converge  towards  the  EU  average. 
While total factor productivity is estimated as a 
major  contributor  to  potential  growth,  value 
added  per  employee  dropped  further  in  2017 
due mainly to the high number of jobs created 
in  labour  intensive  sectors  such  as  tourism-
related  services  and  residential  construction. 

 
 
The  relatively  low-skill  level  of  the  labour 
force, small size of firms and other bottlenecks 
in  the  product  and  labour  markets  remain 
significant  barriers  to  productivity  increases. 
The  low  share  of  investment  in  GDP  also 
contributed to a labour productivity slowdown. 

Other key structural issues analysed in this report, 
which point to particular challenges for Portugal’s 
economy, are the following: 

  Minimum  wage  increases  have  supported 
the incomes of low-wage workers and do not 
seem  to  negatively  affect  job  creation.  In 
particular,  the  minimum  wage  increases  have 
not  prevented  the  employment  rate  of  low-
skilled  workers  from  rebounding  during  the 
recovery,  also  thanks  to  expansion  in  labour-
tourism  and 
intensive 
sectors 
construction.  Nevertheless, 
remain 
risks 
concerning  the  employability  of  this  segment 
of  workers.  The  compression  of  the  wage 
structure  decreases  the  education  premium, 
reducing  also  the  incentive  for  workers  to 
upgrade  their  skills.  The  Government  and 
social  partners  keep  monitoring  the  impact  of 
minimum wage developments. 

such  as 

  Despite an increase in permanent hiring, the 
proportion  of  workers  on 
temporary 
contracts  is  high.  This  raises  doubts  on  the 
effectiveness  of  recent  measures  to  tackle 
labour market segmentation. Hiring workers on 
temporary contracts is widespread with a large 
wage  gap  between  temporary  and  permanent 
employees.  While  new  measures  to  address 
segmentation  are  subject  to  discussions  with 
social  partners,  no  action  is  currently  planned 
to review the legal framework for dismissals. 

  Poverty  and 

inequality 

indicators  have 
improved  further.  The  at-risk-of-poverty  or 
social exclusion rate is getting closer to the EU 
average  and  the  income  share  of  the  poorest 
20 %  increased  since  2015.  Despite  the  strong 
redistributive  effect  of  the  tax  and  benefit 
system,  the  level  of  income  inequality is high. 
The effectiveness of social transfers (excluding 
pensions)  in  lifting  people  out  of  poverty  is 
low.  The  adequacy  of  the  minimum  income 
scheme has been improved but remains limited 

Executive summary 

while  housing  affordability  is  an  increasing 
challenge for low-income households.  

implemented 

  Programmes  are  being  rolled  out  and 
reforms 
in  Vocational 
Education  and  Training  to  upgrade  the 
skills  of 
the  adult  population.  Their 
effectiveness in upgrading worker's basic skills 
(numeracy,  literacy  and  digital)  and  ultimately 
raising  productivity  will  depend  on 
the 
coverage  and  quality  of  the  training  offered, 
going  beyond  the  mere  recognition  of  skills. 
The  National  Digital  Competences  Initiative 
aims to strengthen digital literacy, yet it  is too 
early  to  ascertain  its  impact.  Early  school 
leaving  has  decreased  significantly  in  the  last 
decade,  but  is  still  above  the  EU  average  and 
slightly increased in 2016. Young people from 
a  disadvantaged  socioeconomic  background 
show 
educational 
average 
attainment  of 
achievements.  While 
qualifications 
is 
education 
increasing, 
recent 
graduates is below average. 

lower 
the 
tertiary 

employability  of 

the 

on 

in 

  Measures 

to 

to 

the 

thanks 

business 
improve 
environment  have  been  put  in  place,  but 
regulatory  restrictions  remain  in  business 
services.  New  credit  lines  and  programmes 
matching  firms  with  equity  investors,  are 
improving the business environment, including 
SMEs  access  to  capital.  Capital  financing  is 
however  limited.  Administrative  burden  is 
decreasing 
simplification 
programmes.  Restrictions  in  business  services 
are being assessed but so far no action has been 
taken  and  regulatory  barriers  in  professional 
services still restrict competition. Case backlog 
in  courts  is  decreasing  but  time  in  court 
remains  long,  in  particular  for  insolvent  firms, 
and  the  system’s  performance  scores  low 
compared  with  the  EU  average.  Construction 
investment is increasing due to raising demand, 
but  sector  restrictions  remain.  Corruption  and 
transparency  in  public  procurement  are  still 
perceived by businesses as areas of concern.   

  Improvements  in  network  industries  and 
business digitisation are visible while there is 
room  for  improvement  in  innovation.  Key 
bottlenecks  remain  in  the  innovation  system, 
for  university-business 
such  as  barriers 

3 

 
 
Executive summary 

cooperation and better synergies between R&D 
and  other  intangible  assets.    Energy  prices  in 
Portugal  and  energy  intensity  in  transport  and 
industry  sectors  are  high.  However,  market 
concentration  is  decreasing.  The  rail  system  is 
still  underused  especially  the  connection  with 
Spain and some projects are facing delays.  

4 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth  

Economic  growth  picked  up 
to  2.9 % 
year-on-year  in  the  first  half  of  2017  and 
moderated  to  2.5 %  year-on-year  in  the  third 
quarter. Full-year growth is estimated at 2.7 % in 
2017,  driven  by  acceleration  in  investment  and 
exports. Private consumption remains an important 
contributor to growth but is expected to slow down 
slightly  over  the  medium  term  along  with  a 
marginal  increase  in  the  household  saving  rate, 
which  remains  well  below  its  historical  average. 
Strong domestic demand also keeps imports robust 
and therefore the net external trade contribution to 
growth  is  expected  to  be  broadly  neutral  over  the 
forecast period (Graph 1.1). Overall, GDP growth 
is  projected  to  slow  down  somewhat  in  the 
medium  term  as  the  positive  cyclical  effects  are 
projected  to  fade  away  bringing  the  actual  output 
closer to its potential. 

Graph 1.1:  Contributions to real GDP growth 

period, as it is not expected to reach the pre-crisis 
level  any  time  soon.  Over  the  medium  term, 
investment  is  expected  to  be  driven  by  improved 
corporate  profits,  a  modest  recovery  in  bank 
lending and some acceleration in implementing EU 
funds (see section 4.4.2). 

increased 
Exports  of  goods  and  services 
substantially  in  2017.  The  positive  cycle  in 
tourism and the automotive industry expansion are 
expected  to  keep  exports  growing  above  global 
trade  volumes  also  in  2018.  Export  growth  is 
however  projected  to  be  more  in  line  with  trade 
partners  over  the  medium  term  as  tailwinds  from 
car  manufacturing  and  tourism  are  likely  to 
weaken while productivity gains are set to remain 
subdued.  Imports  are  projected  to  grow  strongly, 
driven  by  domestic  demand  and  the  large  import 
component  of 
the  export-oriented  automotive 
industry.  Consequently,  the  current  account  is 
projected to retain a small surplus over the forecast 
period.  This  is  also  helped  by  a  decline  in  the 
projected 
to  non-residents, 
following  the  sovereign  rating  upgrades  in  2017 
that  led  to  a  significant  drop  in  the  government 
bond yields. 

interest  payments 

Short  and  medium-term  risks  are  broadly 
balanced, while long-term risks are tilted to the 
downside.  Economic  activity  has 
increased, 
becoming more broad-based, with a strong pick-up 
in  investment  and  exports  which  are  expected  to 
remain  robust  over  the  medium  term.  However, 
weak  productivity  growth,  population  ageing, 
limited  specialisation  in  sectors  with  higher  value 
added, 
and 
deterioration  in  the  capital  stock  might  dampen 
potential growth perspectives (see 4.4.1).   

relatively 

labour 

skills, 

low 

Source: Eurostat 

Potential growth 

in  2017,  equipment 

Investment growth rose strongly from 1.6 % in 
2016 to nearly 10 % in 2017 but its share in GDP 
remained low at around 16 %. Following a strong 
is 
increase 
expected  to  ease  in  2018  before  picking  up  again 
in  2019.  These  fluctuations  are  largely  due  to  the 
large  boost  from  the  capacity  upgrade  in  the 
country’s  biggest  automotive  company  in  2017. 
After  a  strong  rebound  in  2017,  investment  in 
construction  is  set  to  moderate  over  the  forecast 

investment 

5 

Potential  growth  improved  over  recent  years, 
but  convergence  to  the  EU  in  terms  of  income 
and  productivity  remains  weak.  Although 
Portugal is projected to have grown above the EU 
average  in  2017,  this  is  partly  driven  by  cyclical 
improvements.  Furthermore, 
the  medium-term 
outlook,  based  on  potential  growth  estimates, 
shows  that  the  income  gap  relative  to  more 
advanced  Member  States  is  likely  to  remain 
broadly 
structural 
stable  unless 
improvement is achieved. 

further 

a 

-12-10-8-6-4-20246810Q3-2008Q1-2009Q3-2009Q1-2010Q3-2010Q1-2011Q3-2011Q1-2012Q3-2012Q1-2013Q3-2013Q1-2014Q3-2014Q1-2015Q3-2015Q1-2016Q3-2016Q1-2017Q3-2017Real net exportsReal inventoriesReal gross fixed capital formationReal final private consumptionReal final government consumptionReal GDP growth (y-o-y)pps,% 
 
 
1. Economic situation and outlook 

Labour market  

In 
the 
line  with  economic  developments, 
recovery  of  the  Portuguese  labour  market 
continues.  Supported  by  strong  employment 
growth, unemployment dropped considerably from 
11.2 %  in  2016  to  9.0 %  in 2017  (Graph  1.3)  and 
the provisional monthly rate moved to 7.8 % at the 
end  of  the  year.  Unemployment  has  thus  dropped 
to its lowest level since 2004 and is already below 
the  euro  area  average.  The  economy  added  about 
150,000  jobs  in  2017  and  employment  growth 
reached  3.3 %,  continuing  to  grow  faster  than 
GDP. The employment rate increased from 70.6 % 
in  2016  to  estimated  73.0 %  (age  20-64)  in  2017, 
which  is  only  slightly  below  the  pre-crisis  rate  of 
73.4 % in 2008. The recovery has reduced outward 
migration,  but 
imbalance 
resulting  from  past  migration  might  create  labour 
supply  shortages  especially  for  high  skilled 
workers (see Section 4.3). Over the medium term, 
job  creation  is  expected  to  decelerate  becoming 
more  into  line  with  GDP  growth.  Unemployment 
is set to decline further in 2018 and 2019. 

the  demographic 

Graph 1.3:  Activity, employment and unemployment 

rates (quarterly) 

(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, LFS 

the 

significant 

labour  market 
Despite 
improvements  wage  growth  remains  moderate. 
Nominal  wages  are  growing  broadly  in  line  with 
consumer  price 
the  strong 
increase  in  employment.  As  some  labour  market 

inflation  despite 

Total  factor  productivity  and  job  creation 
support  potential  growth.  On  the  other  hand, 
despite the rebound in investment since the second 
the  contribution  from  capital 
half  of  2016, 
accumulation is still slightly negative in 2017 and 
is  expected  to  turn  only  slightly  positive  in  2018 
and 2019. Despite some recent improvements, high 
public and private debt, including a large share of 
non-performing 
loans,  as  well  as  regulatory 
barriers  and  structural  weaknesses  in  product  and 
labour  markets  (see  Section  4)  are  still  having  a 
negative 
investment  and  growth. 
Following  a  significant  deterioration  during  the 
crisis, 
improved 
substantially  since  2014,  becoming  a  positive 
contributor to potential growth (Graph 1.2).  

labour  market 

impact  on 

has 

the 

Graph 1.2:  Contributions to potential growth 

Source: European Commission 

Inflation  

Inflation increased from 0.6 % in 2016 to 1.6 % 
in 2017 due mainly to the impact of energy and 
accommodation  costs.  Inflation  is  set  to  stabilise 
at around 1.5 % over the forecast period, reflecting 
moderate  wage  dynamics  and  subdued  price 
developments in the group of non-energy industrial 
goods.  Some  upward  risks  to  inflation  arise  from 
the impact of tourism on accommodation and other 
tourism-related  services,  particularly  in  off-peak 
periods  where  the  growth  rate  in  foreign  tourist 
visits could be still significant. 

6 

-2.0-1.5-1.0-0.50.00.51.01.52.0200520062007200820092010201120122013201420152016201720182019Capital Accumulation ContributionTotal Factor Productivity ContributionTotal Labour (Hours) ContributionPotential Growthy-o-y % changeforecast0002040608101214161820455055606570758085Q3-2000Q3-2001Q3-2002Q3-2003Q3-2004Q3-2005Q3-2006Q3-2007Q3-2008Q3-2009Q3-2010Q3-2011Q3-2012Q3-2013Q3-2014Q3-2015Q3-2016Q3-2017% of labour force% of populationUnemployment rate 15-74 (rhs)Activity rate 20-64Employment rate 20-64 
 
 
in 

labour 

slack(3)  remains  (Graph  1.5)  and  most 
job 
openings  are  in  sectors  with  lower-than-average 
salaries, only a moderate wage increase is expected 
over the forecast period. The latter also contributed 
to  weak  labour  productivity  performance  (see 
Section 4.4.1) in 2016-2017 due mainly to high job 
intensive  sectors  such  as 
creation 
residential 
tourism-related 
construction. Nominal wage growth is expected to 
remain moderate in 2017 and 2018 and real wages 
are  expected 
line  with 
productivity. It is however possible that the current 
positive economic cycle could build up some wage 
pressure  over  the  medium  term,  particularly  in 
sectors with higher demand for skilled labour. 

to  move  broadly  in 

services 

and 

In  recent  years  new  jobs  were  mainly  created 
on  open-ended  contracts,  but 
temporary 
employment  remains  high.  Employment  growth 
almost exclusively  consisted  of  permanent jobs  in 
the  first  three  quarters  of  2017  (Graph  1.4). 
However,  the  creation  of  permanent  jobs  did  not 
reduce  the  proportion  of  temporary  employees 
which  remained  stable  at  21.9 %  (Q3-2017,  age 
group  20-64),  still  one  of  the  highest  in  the  EU 
(see  Section  4.3.1).  In  addition,  the  broader 
indicators  on 
labour  supply  have  not  fully 
recovered  from  the  crisis  levels  suggesting  that 
some  structural  weakness  in  the  labour  market 
persist (Graph 1.5) (see section 4). 

(3)  Labour  market 

slack 

a  measure  of 

labour 
is 
underutilisation.  It  includes  persons  available  to  work  but 
not seeking work; those seeking work but not immediately 
available; and all involuntary part-time-employed (see also 
European Commission, 2017c).   

1. Economic situation and outlook 

Graph 1.4: 

Employment by type 

(1) Total employment, age 20-64, year-on-year change 
based on non-seasonally adjusted data 
Source: Eurostat, LFS 

Graph 1.5: 

Labour underutilisation 

(1) Break in series between 2010 and 2011. 
Source: Eurostat 

Social developments  

Poverty  indicators  have  significantly  improved 
in  recent  years  on  the  back  of  stronger 
economic  activity  and  employment.  The  at-risk-
of-poverty  or  social  exclusion  rate  has  decreased 
from  26.6 %  in  2015  to  25.1 %,  in  2016,  getting 
closer to the EU average of 23.5 %. This is mostly 
linked to a drop in the share of severely materially 
deprived  people  (from  9.6 %  to  8.4 %)  and  in  the 
percentage  of  people  living  in  low  work  intensity 
households  (from  10.9 %  to  9.1 %).  A  further 
decrease to 23.3 % in 2017 (income reference year 
2016) is estimated based on (preliminary) national 
statistics.  Monetary  poverty  is  also  decreasing, 
although  improved  labour  market  conditions  are 

7 

-250-200-150-100-50050100150200250Q3-2000Q3-2001Q3-2002Q3-2003Q3-2004Q3-2005Q3-2006Q3-2007Q3-2008Q3-2009Q3-2010Q3-2011Q3-2012Q3-2013Q3-2014Q3-2015Q3-2016Q3-2017Permanent employeesTemporary employeesSelf employmentOverallthousand persons y-o-y change051015202530200820092010201120122013201420152016Unemployed personsPersons available to work but not seekingPersons seeking work but not immediately availableUnderemployed part-time workers% of active population 
                                                           
 
 
 
not  leading  yet  to  a  reduction  in  the  in-work 
poverty risk which could be linked to the increase 
in  overall  incomes  (see  Section  4.3.2).  On  the 
other  hand,  the  effectiveness  of  social  transfers 
(except pensions) in lifting people out of monetary 
poverty is still low (see Section 4.3.2).  

Income  inequality  is  improving  but  remains 
high  when  compared  to  the  EU  average.  In 
2016,  the  income  of  the  richest  20 %  of  the 
population was 5.9 times that of the poorest 20 %, 
against  an  EU  average  of  5.1.  This  ratio  has 
slightly  decreased  since  2015,  partly  reversing  an 
upward trend between 2011 and 2014, thanks to an 
increase  in  the  income  share  of  the  poorest  20 %. 
This  is  on  the  back  of  improving  labour  market 
conditions  and  the  positive  impact  of  minimum 
wage  increases  on  lower  incomes.  A  further 
decrease  to  5.7  in  2017  is  estimated  based  on 
(preliminary)  national  statistics.  The  rise 
in 
disposable  income  between  2014  and  2016  has 
affected all income classes, but is more significant 
for  the  lower-income  groups.  The  S80/S20  ratio 
remains  above  its  lowest  level  of  5.6  in  2010.  In 
addition,  health  and  education  inequalities  remain 
issues  of  concern  (see  Sections  4.3.2  and  4.3.3). 
Household  disposable  income  is  still  below  pre-
improved  slightly 
crisis 
income 
between  2010  and  2017,  household 
actually decreased in the same period. This shows 
difficulties  to  achieve  inclusive  growth  in  that 
period  due  to  a  limited  trickle-down  to  improve 
families’ income. 

levels.  While  GDP 

1. Economic situation and outlook 

Graph 1.6:  At-risk-of-poverty or social exclusion rate and 

components 

Source: Eurostat, EU-SILC 

External position and competitiveness 

in 

liabilities  remain  among  the 
Net  external 
highest 
international 
the  EU.  The  net 
investment position (NIIP) decreased in 2015-2016 
but reversed slightly at the end of September 2017. 
This reversal was however due to valuation effects 
from the higher price in government bonds held by 
non-residents while the net impact from the flows 
in  the  current  and  capital  accounts  were  still 
positive.  At  -104.7 %  of  GDP,  NIIP  remains 
significantly beyond the estimated country-specific 
prudential  threshold  of  -48 %(4)  and  the  current 
account,  at  around  0.1 %,  is  below  the  estimated 
benchmark of 2 % for closing the gap to the NIIP 
prudential level over a 10-year period(5). The NIIP 
structure improved meanwhile due to the increased 
net  inflow  of  foreign  direct  investment  (FDI). 
However,  net  FDI  still  plays  a  small  role  in  the 
NIIP  while  net  marketable  external  debt  accounts 

(4)  The country-specific prudential threshold for the NIIP and 
net  marketable  external  debt  (NMED)  is  derived  from  a 
univariate signalling approach that identifies at which NIIP 
level  an  external  crisis  is  likely  to  begin.  The  threshold 
widens  with  increasing  income  per  capita.  See  also 
European  Commission,  2016,  'Refining  the  methodology 
for  NIIP  benchmarks',  LIME  Working  Group,  21  Nov 
2016. 

(5)  The current account required to reach a certain NIIP target 
represents  the  average  current  account  balance  as  %  of 
GDP,  based on Commission T+10 projections for nominal 
GDP, assuming zero cumulated NIIP valuation effects, and 
a  stable  capital  account  balance.  See  also  European 
Commission,  2015,  'Refining  the  methodology  for  NIIP-
based current account benchmarks', LIME Working Group 
17 Jun 2015. 

8 

051015202530200520062007200820092010201120122013201420152016% of populationAt-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivationPeople living in low work intensity households 
 
                                                           
1. Economic situation and outlook 

for 66% of GDP in 2016 (Graph 1.7), indicating a 
continued potential risk to external sustainability.   

strong  performance  is  projected  to  continue  in 
2018,  reflecting  the  above-mentioned  impact  of 
tourism and car manufacturing. 

Graph 1.7:  Current Account (CA) and Net International 

Investment Position (NIIP) 

Financial Sector   

The  adjustment  process  in  the  Portuguese 
banking  sector  is  ongoing.  Portugal  still  has  the 
EU's  third  highest  non-performing  loan  (NPL) 
ratio  (after  Greece  and  Cyprus).  Profitability 
turned positive again in the first half of 2017. The 
capital  ratio  is  one  of  the  EU’s  lowest.  Return  on 
equity improved in the first half of the 2017 but is 
now  only  slightly  positive  leaving  the  Portuguese 
banks still in a weak position. The system’s Tier 1 
capital  ratio  (a  measure  of  a  bank's  core  equity 
capital  to  its  total  risk-weighted  assets)  stands  at 
13.8 %  in  Q2-17,  still  below  the  EU  average,  but 
already 
the 
recapitalisations of the largest banks (see Sections 
3 and 4.2). 

somewhat 

following 

improved 

Graph 1.8: 

Return on equity (%), domestic banks 

(1) For 2014, the data exclude Banco Espírito Santo. 
Source: European Commission 

Private indebtedness 

Private  debt  is  on  a  steady  downward  trend 
since 2012 though it is still above prudent levels. 
In consolidated terms, the share of private debt in 
GDP  fell  to  171.4 %  at  end-2016.  This  is  well 
above  the  estimated  prudential  and  fundamental 
thresholds,  which  lies  in  the  vicinity  of  78 %  and 
105 %,  respectively (6).  Loans  to  tradable  sectors 

(6)  Fundamental-based 

from 
benchmarks 
regressions  capturing  the  main  determinants  of  credit 

derived 

are 

Source: Eurostat 

flows  are  expected 

External 
to  continue 
reducing the stock of external liabilities but at a 
slow  pace.  The  current  account  posted  a  small 
surplus  in  2016  and  is  projected  to  remain  only 
slightly  positive  in  the  medium  term.  Exports  are 
gaining  further  importance  in  the  economy  but 
their  impact  on  the  current  account  is expected  to 
be  offset  by  a  similar  growth  in  imports,  as 
investment demand is picking up from historically 
low levels (see Section 3). 

productivity 

The evolution of unit labour costs is broadly in 
line  with  main  trading  partners.  Despite  past 
increases in the minimum wage and strong labour 
demand, wage developments remain contained and 
to  a  large  extent  offset  the  negative  impact  of  the 
weak 
on 
competitiveness.  Overall, 
latest  economic 
developments  do  not  indicate  immediate  cost 
pressures  on  competitiveness.  Nevertheless,  the 
afore-mentioned  risks  of  a  possible  build-up  of 
wage  pressures  over  the  medium  run  may  also 
pose  risks  of  a  slowdown  in  the  export-led 
recovery  of  the  economy  over  the  medium  and 
long run,  even  if  some  upgrade of  exports quality 
is noticeable. 

performance 
the 

Non-cost  competitiveness  indicators  developed 
positively  over  recent  years,  as  seen  from  the 
increase  in  total  factor  productivity.  Portugal's 
share in global exports increased by 3.5 % in 2016 
and  a  stronger  increase  is  projected  for  2017. 
Exports also exceeded the growth in imports from 
main  trading  partners  by  2 %  in  2016  and  the 

9 

-14-12-10-8-6-4-2024-140-120-100-80-60-40-200204020002001200220032004200520062007200820092010201120122013201420152016Net direct investmentNet international investment position (NIIP)Marketable debt (portfolio debt instruments, other investment and reserve assets) (net)Current account balance (rhs)% of GDP% of GDP-15-10-5051015202007200820092010201120122013201420152016Return on EquityEU (chaning composition)EA (chaning composition)% 
 
 
                                                           
1. Economic situation and outlook 

lower 

investment(7). As the improvement in the headline 
deficit  is  mostly  cyclical  in  nature  and  supported 
by 
interest  expenditure  without  being 
accompanied  by  discretionary  fiscal  consolidation 
measures,  the  structural  balance  is  expected  to 
have improved only slightly in 2017. 

In  2018  and  2019,  the  headline  and  structural 
deficit  ratios  are  expected  to  remain  broadly 
stable  lacking  further  structural  consolidation. 
The headline deficit is forecast to remain stable at 
1.4 %  of  GDP  in  2018  as  higher  recovery-related 
revenue and lower interest expenditure are used to 
compensate  for  increases  in  primary  expenditure 
and reductions in personal income tax revenue. As 
the  impact  of  discretionary  measures  and  savings 
in  interest  expenditure  is  expected  to  be  broadly 
neutral,  the  structural  balance  is  also  projected  to 
remain broadly stable in 2018. Under the forecast's 
no-policy-change  assumption,  the  headline  deficit 
is set to reduce slightly to 1.2 % in 2019 while the 
structural  balance 
largely 
is  set 
unchanged.  The  structural  primary  balance  is 
forecast to deteriorate by about ½ % of GDP over 
the forecast horizon. Risks to the fiscal outlook are 
tilted  to  the  downside,  linked  to  uncertainties 
surrounding  the  macroeconomic  outlook  and  the 
potential  deficit  increasing  impact  of  banking 
support measures in 2017. 

remain 

to 

The  debt-to-GDP  ratio  is  expected  to  have 
started  falling  in  2017  from  very  high  levels. 
is 
Portugal’s  gross  public  debt-to-GDP  ratio 
forecast to have fallen to 126.4 % in 2017, and to 
further  decrease  to  124.1 %  in  2018  and  121.1 % 
in  2019,  due  to  primary  budget  surpluses,  higher 
nominal GDP growth, lower interest payments and 
planned  decreases  in  the  cash  buffer  (see  section 
3). 

(7)  Due  to  better  than  expected  budgetary  execution  towards 
the  end  of  the  year,  the  2017  deficit  might  turn  out  lower 
than the 1.4% of GDP estimated in autumn, excluding any 
potential deficit-increasing impact of 2017 banking support 
measures. 

the 

reflecting 

accounted for about 53 % of total loans at the end 
of June 2017 and increased by 11 pps. since early 
2009, 
stronger  deleveraging 
pressures  in  the  non-tradable  sectors,  particularly 
in construction. The share of manufacturing is still 
quite  low  with  17 %  of  the  total  value  of  loans 
although credit growth to the manufacturing sector 
accelerated  in  2017.  On  the  other  hand,  this  low 
level  may  also  reflect  the  fact  that  manufacturing 
companies  depend  less  on  bank  lending,  as  they 
have  access  to  alternative  sources  of  financing 
such as bonds, equity or financing through foreign-
owned parent companies. The overdue loan ratio in 
the tradable sector remains around 10 %, which is 
10 pps. below the value in the non-tradable sector 
in  Q2-2017.  The  increasing  share  of  loans  to  the 
rate  of  NPLs 
its 
tradable  sector  and 
contributed to the reallocation of resources, which 
is  essential  for  successfully  rebalancing 
the 
Portuguese economy (see Section 3). 

low 

Graph 1.9: 

Sectoral breakdown of domestic loans to 
non-financial corporations (NFCs) 

Source: Bank of Portugal 

Public Finances 

Public  finances  are  benefitting  from  the  strong 
recovery  and  substantially  decreasing  interest 
expenditure.  The  headline  deficit  is  projected  to 
have  decreased  from  2.0 %  in  2016  to  1.4 %  of 
GDP in 2017 according to the Commission's 2017 
autumn  forecast,  mainly  due  to  the  accelerated 
interest 
economic 
lower-than-budgeted  public 
expenditure 

recovery, 
and 

decreasing 

the  probability  of  a  banking  crisis 

growth and taking into account a given initial stock of debt. 
Prudential  thresholds  represent  the  debt  threshold  beyond 
is  high, 
which 
minimising the probability of missed crisis and that of false 
alerts.  See 
(2017), 
"Benchmarks for the assessment of private debt", Note for 
the Economic Policy Committee 

also  European  Commission 

10 

010203040506070Q1-2009Q2-2009Q3-2009Q4-2009Q1-2010Q2-2010Q3-2010Q4-2010Q1-2011Q2-2011Q3-2011Q4-2011Q1-2012Q2-2012Q3-2012Q4-2012Q1-2013Q2-2013Q3-2013Q4-2013Q1-2014Q2-2014Q3-2014Q4-2014Q1-2015Q2-2015Q3-2015Q4-2015Q1-2016Q2-2016Q3-2016Q4-2016Q1-2017Q2-2017Q3-2017TradableNon-tradableConstruction and real estateManufacturing% of total 
 
                                                                                   
 
 
                                                           
1. Economic situation and outlook 

Table 1.1: 

Key economic, financial and social indicators - Portugal 

(1) NIIP excluding direct investment and portfolio equity shares.         
(2) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches.         
Source: Eurostat and ECB as of 30 Jan 2018, where available; European Commission for forecast figures (Winter forecast 2018 
for real GDP and HICP, Autumn forecast 2017 otherwise) 

11 

2004-072008-122013-1420152016201720182019Real GDP (y-o-y)1,7-1,4-0,11,81,52,72,21,9Potential growth (y-o-y)0,9-0,3-0,70,30,71,31,41,5Private consumption (y-o-y)2,0-1,60,52,32,1...Public consumption (y-o-y)1,5-1,1-1,21,30,6...Gross fixed capital formation (y-o-y)0,6-7,7-1,45,81,6...Exports of goods and services (y-o-y)6,11,65,76,14,1...Imports of goods and services (y-o-y) 5,7-2,66,28,54,1...Contribution to GDP growth:Domestic demand (y-o-y)1,8-2,8-0,12,61,7...Inventories (y-o-y)0,2-0,20,20,1-0,1...Net exports (y-o-y)-0,31,5-0,2-0,90,0...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)-0,3-1,0-0,70,20,50,80,70,6Capital accumulation (y-o-y)0,80,3-0,3-0,2-0,20,00,10,2Total factor productivity (y-o-y)0,50,50,30,30,40,50,60,7Output gap-0,3-1,2-3,7-1,7-0,90,41,11,4Unemployment rate8,712,015,312,611,29,28,37,6GDP deflator (y-o-y)3,00,61,52,01,41,31,41,4Harmonised index of consumer prices (HICP, y-o-y)2,51,90,10,50,61,61,61,5Nominal compensation per employee (y-o-y)3,20,40,90,42,11,61,71,8Labour productivity (real, person employed, y-o-y)1,80,60,60,4-0,1...Unit labour costs (ULC, whole economy, y-o-y)1,3-0,20,30,02,21,90,80,9Real unit labour costs (y-o-y)-1,6-0,8-1,2-2,00,70,6-0,6-0,5Real effective exchange rate (ULC, y-o-y)-0,1-2,10,4-3,42,22,10,8-0,7Real effective exchange rate (HICP, y-o-y)0,4-0,8-0,1-2,61,50,41,3.Savings rate of households (net saving as percentage of net disposable income)1,00,3-1,8-3,2-2,3...Private credit flow, consolidated (% of GDP)13,94,3-3,3-1,8-2,2...Private sector debt, consolidated (% of GDP)174,7203,3196,6179,7171,4...of which household debt, consolidated (% of GDP)81,690,583,976,772,5...of which non-financial corporate debt, consolidated (% of GDP)93,1112,7112,7103,098,9...Gross non-performing debt (% of total debt instruments and total loans and advances) (2)1,24,110,714,414,4...Corporations, net lending (+) or net borrowing (-) (% of GDP)-5,3-2,14,72,81,00,50,60,3Corporations, gross operating surplus (% of GDP)19,820,921,521,921,121,422,022,6Households, net lending (+) or net borrowing (-) (% of GDP)1,73,02,91,91,92,02,02,0Deflated house price index (y-o-y)-1,6-2,90,62,16,1...Residential investment (% of GDP)5,73,72,52,42,5...Current account balance (% of GDP), balance of payments-9,7-8,10,80,10,70,40,30,4Trade balance (% of GDP), balance of payments-8,1-5,41,51,82,2...Terms of trade of goods and services (y-o-y)-0,1-0,11,43,21,0-0,40,00,0Capital account balance (% of GDP)1,41,51,51,21,0...Net international investment position (% of GDP)-76,2-104,9-116,9-112,0-104,7...Net marketable external debt (% of GDP) (1).-69,5-76,8-73,0-65,8...Gross marketable external debt (% of GDP) (1).212,9214,8205,3196,4...Export performance vs. advanced countries (% change over 5 years)5,5-1,50,24,02,8...Export market share, goods and services (y-o-y)-2,0-3,54,0-1,03,5...Net FDI flows (% of GDP)0,2-2,5-1,6-0,7-1,8...General government balance (% of GDP)-4,9-7,6-6,0-4,4-2,0-1,4-1,4-1,2Structural budget balance (% of GDP).-6,2-2,3-2,3-2,0-1,8-1,8-1,9General government gross debt (% of GDP)66,797,8129,8128,8130,1126,4124,1121,1Tax-to-GDP ratio (%)34,334,437,137,036,937,136,736,7Tax rate for a single person earning the average wage (%)22,323,127,328,327,6...Tax rate for a single person earning 50% of the average wage (%)13,913,411,011,011,0...forecast 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

the 

the 

introduction  of 

implementation  of 

the 
Progress  with 
recommendations  addressed  to  Portugal 
in 
2017(8)  has  to  be  seen  in  a  longer  term 
the 
perspective  since 
European  Semester  in  2011.  Looking  at  the 
multi-annual  assessment  of  the  implementation  of 
the  Country  Specific  Recommendations  (CSRs) 
since these were first adopted in 2014(9), 65 % of 
all  the  CSRs  addressed  to  Portugal  have  recorded 
at least 'some progress' while 35 % of these CSRs 
recorded 'limited' or 'no progress' (see Graph 2.1). 
Most  progress  was  observed  for  CSRs  where  the 
challenges posed to the Portuguese economy were 
also  larger.  These  relate  to  the  reform  of  labour 
contracts, some aspects of social assistance as well 
as  reduction  in  private  indebtedness.  However, 
given the dimension of the remaining challenges in 
these areas, further work is still warranted. 

Graph 2.1:  Overall multiannual implementation of 2014-

2017 CSRs to date 

(1) The overall assessment of the country-specific 
recommendations related to fiscal policy excludes 
compliance with the Stability and Growth Pact. (2) The 
multiannual CSR assessment looks at the implementation 
until 2018 Country Report since the CSRs were first adopted. 
Source: European Commission 

corrected 

Portugal  has  progressively 
its 
headline  deficit  and  made  some  progress  in 
carrying  out  an  expenditure  review.  Following 
the financial crisis, Portugal went through a period 
ratio  and  a 
of  an 

increasing  debt-to-GDP 

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

past, see in particular section 4 

(9)  Between  2011  and  2014  Portugal  was  under  an  economic 
adjustment  programme  and  received  only  one  country-
specific 
the 
programme commitments. 

recommendation  which  was 

to  meet 

worsening budget  balance  leading  to  an  excessive 
deficit.  With  the  consolidation  effort  that  took 
place during the adjustment programme and in the 
years after, in 2016 the deficit went below the 3 % 
threshold for the first time in more than a decade. 
In  2017,  Portugal  is  expected  to  have  reached  a 
government  budget  deficit  of  1.4 %  of  GDP  and 
the  debt-to-GDP  ratio  to  start  dropping  after 
having  stabilised  around  130 %.  In  the  last  two 
years  Portugal  started  an  expenditure  review  that 
has been progressively broadened to several policy 
areas  and  in  recent  years  has  made  efforts  to 
improve  the  sustainability  of  the  pension  system 
and  of  the  financial  situation  of  state-owned 
enterprises. Some progress has also been achieved 
in  terms  of  improving  tax  compliance.  An  area 
where  sustainability  challenges  remain  is  the 
health  sector  and  in  particular  the  permanently 
high arrears.  

Over  the  past  years  Portugal  improved  debt 
restructuring mechanisms and reduced the debt 
bias. The high private indebtedness and large share 
of  non-performing  loans  accumulated  during  the 
crisis  increased  the  need  for  debt  restructuring 
mechanisms.  These  have  been  put 
in  place 
allowing  viable  firms  to  engage  in  restructuring 
processes  at  an  early  stage.  In  order  to  provide 
incentives  for  firms  to  use  more  capital  financing 
Portugal has also reduced the debt bias in taxation. 
Measures  have  also  been  taken  to  improve  the 
sustainability of State Owned Enterprises but their 
indebtedness remains high.  

have 

authorities 

Significant progress was made in improving the 
attractiveness  of  vocational  training  and  the 
coverage  of  social  assistance.  To  tackle  the  low 
skill  level  of  the  adult  population  in  Portugal, 
Government 
significantly 
improved  the  vocational  and  education  training 
system  in  terms  of  quality  and  coverage.  In  order 
to  dampen  the  negative  social  effects  of  the 
economic  crisis,  Portugal  broadened  the  coverage 
of social assistance including the minimum income 
scheme, partly reverting earlier measures going in 
the  opposite  direction.  Some  progress  was  also 
observed  in  improving  the  efficiency  of  public 
employment services to facilitate the activation of 
the  unemployed.  An  evaluation  of  reforms  in  the 
employment protection system was carried out and 
measures  were  taken  to  increase  incentives  to 
hiring  on  open-ended  contracts,  although  their 

12 

No Progress2%Limited Progress33%Some Progress48%Substantial Progress11%Full Implementation6% 
 
 
                                                           
2. Progress with country-specific recommendations 

in 

regulations 
the  business  and  construction 
services sectors, as no regulatory reform has been 
yet  put  in  place  for  the  various  professional 
business services and for the construction sector as 
a whole.  

ESI  Funds  are  pivotal 
in  addressing  key 
challenges to inclusive growth and convergence 
in  Portugal,  notably  by  improving  the  business 
environment  via  facilitating  access  to  finance  for 
SMEs, promoting synergies between academia and 
business,  and  stimulating  entrepreneurship  and 
innovation  to  favour  job  creation.  ESI  Funds  also 
help  strengthen  links  between  vocational  training 
and  labour  market  needs;  they  help  reduce  early 
school  leaving  and  improve  coordination  between 
social  and  employment  services  and  support  the 
provision of adequate social protection coverage. 

impact is still not sufficient to tackle labour market 
segmentation.   

and 

and 

firms 

authorities 

cooperation 
Competition 
between 
universities  were 
strengthened  and  the  efficiency  of  network 
industries  has  improved.  Cooperation  between 
universities  and  the  business  sector  could  still  be 
improved  but  measures  have  been 
to 
links.  More  resources  have  been 
strengthen 
ensured 
the 
competition  authority.  Measures  to  improve  the 
sustainability  of  the  energy  system  and  reduce 
costs  have  been  implemented.  Progress  has  also 
been  made  to  improve  efficiency  in  the  transport 
sector namely in rail and ports.  

regulators  and 

the  national 

taken 

to 

Some  progress  has  been  achieved  in  increasing 
transparency  and  improving  the  efficiency  of 
the judicial system. Measures have been taken to 
reduce  the  case  backlog  in  terms  of  proceedings 
with  the  number  of  cases  being  finalised  higher 
than  those  entering  courts.  Transparency  has 
increased  in  particular  regarding  concessions  and 
public  private  partnerships  even  though  direct 
awards remain high.  

the 

2017 

ensuring 

in 
and 

Portugal  has  made  some (10)  progress 
in 
country-specific 
addressing 
recommendations.  In  the  area  of  public  finances 
there  was  overall  limited  progress  with  a  more 
positive  evolution  seen  in  the  broadening  of  the 
line  with  euro  area 
review 
spending 
recommendations 
pension 
sustainability.  Limited  progress  was  observed  in 
promoting  hiring  on  open-ended  contracts  but 
some  progress  is  observed  in  activation  of  long-
term  unemployed  and  as  concerns  the  minimum 
wage  that  in  spite  of  recent  increases  has  not 
hampered  job  creation.  Overall  some  progress  in 
the  financial  sector  namely  for  addressing  non-
performing loans and improving access to capital. 
Although 
simplifications  have  been 
introduced  for  business-administration  relations 
(such as E-government initiatives) and new studies 
aimed  at  assessing  regulatory  restrictions  are  on-
going, limited progress was observed in reforming 

some 

(10)  Information  on  the  level  of  progress  and  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. 

13 

 
                                                           
 
 
2. Progress with country-specific recommendations 

Table 2.1: 

Summary table on 2017 CSR assessment 

Source: Commission Services 

can 

and 

from 

request 

implement 

the 
Member  States 
Commission  technical  support  to  prepare, 
design 
growth-enhancing 
structural  reforms.  The  Structural  Reform 
Support  Service  (SRSS)  provides,  in  cooperation 
with  the  relevant  Commission  services,  tailor-
made technical support, which does not require co-
financing  and  is  provided  at  a  Member  State's 
request. The support addresses priorities identified 
in  the  context  of  the  EU  economic  governance 
process  (i.e.,  implementation  of  country-specific 
recommendations),  but  the  scope  of  the  SRSS 
support is wider as it can also cover reforms linked 
reforms 
to  other  Commission  priorities,  or 
undertaken at the initiative of Member States.  

Portugal  has  requested  technical  support  from 
the  SRSS  to  help  implement  reforms  in  various 
areas  such  as:  revenue  administration  and  public 
financial management and growth and the business 
environment.  In  particular,  the  SRSS  provides 
support  to  help  develop  a  framework  for  the  new 
budget 
implement  an  accounting 
framework  based  on  international  public  sector 
accounting  standards.  It  is  also  providing  support 
to  improve  the  functioning  of  an  inter-ministerial 
coordination platform and to reduce administrative 
burden in the national regulatory framework. 

law  and 

14 

PortugalOverall assessment of progress with 2017 CSRs:  Some progress[1]Limited progress in adressing the fiscal-structural part of CSR 1Some progress in broadening the expenditure reviewLimitedprogressinstrengtheningexpenditurecontrol,costeffectivenessandadequatebudgeting,inparticularinthehealthsectorwithafocusonthereductionof arrears in hospitals Some progress in ensuring the sustainability of the pension systemLimitedprogressinincreasingthefinancialsustainabilityofstate-ownedenterprisessetsector-specificefficiencytargetsintimeforthe2018budget,improvingstate-ownedenterprises’overallnetincomeanddecreasingtheburdenon the state budget. Some progress in addressing CSR 2Limitedprogressinpromotinghiringonopen-endedcontracts,includingbyreviewing the legal framework. Some progress in ensuring the effective activation of the long-term unemployedSomeprogressinensuringthatminimumwagedevelopmentsdonotharmemployment of the low-skilled. Some progress in addressing CSR 3Someprogressincleaningupthebalancesheetsofcreditinstitutionsbyimplementingacomprehensivestrategyaddressingnon-performingloans,includingby enhancing the secondary market for bad assets.Limited progress in addressing CSR 4Limitedprogressinimplementingaroadmaptofurtherreducetheadministrativeburden Limitedprogressintacklingregulatorybarriersinconstructionandbusinessservices by the end of 2017.Some progress in increasing the efficiency of insolvency and tax proceedings. [1] This overall assessment of CSR1 does not include an assessment of compliance with the Stability and Growth Pact.CSR1:Usewindfallgainstoacceleratethereductionofthegeneralgovernmentdebt-to-GDPratio.Stepupeffortstobroadentheexpenditurereviewtocoverasignificantshareofgeneralgovernmentspendingacrossseveralpolicies.Strengthenexpenditurecontrol,costeffectivenessandadequatebudgeting,inparticularinthehealthsectorwithafocusonthereductionofarrearsinhospitalsandensurethesustainabilityofthepensionsystem.Toincreasethefinancialsustainabilityofstate-ownedenterprisessetsector-specificefficiencytargetsintimeforthe2018budget,improvingstate-ownedenterprises’overallnetincomeanddecreasingtheburdenontheStatebudget(MIPrelevant)CSR3:Stepupeffortstocleanupthebalancesheetsofcreditinstitutionsbyimplementingacomprehensivestrategyaddressingnon-performingloans,includingbyenhancingthesecondarymarketforbadassets.Improvetheaccesstocapital,inparticularforstart-upsandsmallandmedium-sizedenterprises.(MIPrelevant)CSR4:Implementaroadmaptofurtherreducetheadministrativeburdenandtackleregulatorybarriersinconstructionandbusinessservicesbytheendof2017.Increasethe efficiency of insolvency and tax proceedings. (MIP relevant)Some progress in improving the access to capital, in particular for start-ups and small and medium-sized enterprises. CSR2:Promotehiringonopen-endedcontracts,includingbyreviewingthelegalframework.Ensuretheeffectiveactivationofthelong-termunemployed.Togetherwithsocialpartners,ensurethatminimumwagedevelopmentsdonotharmemploymentofthelow-skilled (MIP relevant) 
 
 
 
 
2. Progress with country-specific recommendations 

Box 2.1: Tangible results delivered through EU support to structural change in Portugal 

Portugal  is  a  beneficiary  of  significant  European  Structural  and  Investment  Funds  (ESI  Funds) 
support and can receive up to EUR 25.8 billion until 2020. This represents around 2 % of GDP annually 
over the period 2014-2018 and 77% of public investment (1). By 31 December 2017, an estimated EUR 16.8 
billion (65 % of the total) was allocated to projects on the ground. This has paved the way for over 8 500 
enterprises  to  receive  support  with  over  1  000  to  introduce  new  products  and  450  enterprises  cooperating 
with  research  institutions.  EU  investments  contribute  to  raising  the  capacity  of  childcare  infrastructure  to 
accommodate  an  additional  32  000  children,  and  to  improve  health  services  for    more  than  2.7  million 
people; 76 000 higher education students have benefited from grants and 17 000 adults are participating in 
professional education and training courses;  40 000 youngsters and 11 000 adults have been integrated in 
the labour market; over 3 000 people with disabilities are also receiving support to help them participate in 
the labour market. Over 43 000 young people have been supported; more than 29 000 young people 'Not in 
Education,  Employment  or  Training'  have  benefited  from  traineeships  and  14  000  from  support  in 
employment, education or training.  Out of the EU financing, EUR 2.6 billion is planned to be delivered via 
financial instruments, which is a five-fold increase compared to the 2007-2013 period.   

ESI  Funds  help  address 
implement  country-specific 
structural  policy  challenges  and 
recommendations. Actions financed cover promoting R&D and synergies between academia and business;  
improving  access  to  finance    for  small  and  medium-sized  enterprises,  stimulating  entrepreneurship  and 
innovation in order to favour job creation and rebalance the economy towards a higher share of the tradable 
sector;  improving  the  effectiveness  of  the  justice  system;  enhancing  efficiency  and  safety  in  the  railways 
sector;  supporting  women's'  participation  in  the  labour  market;  strengthening  links  between  vocational 
training and the labour market and adult learning development. ESI Funds are contributing to addressing the 
alignment of salaries with productivity; the reduction of early school leaving and improving the coordination 
between social and employment services and providing adequate social protection coverage. 

Various  reforms  were  undertaken  already  as  precondition  for  ESI  Funds  support (2).  Smart 
Specialisation  Strategies  for  research  and  innovation  were  developed  to  focus  efforts  on  product 
specialisation  with  strong  market  potential  and  to  concentrate  investments  on  each  region’s  relative 
strengths.  This  has  also  helped  improve  cooperation  between  enterprises  and  public  research  institutions. 
The  national  and  regional  transport  plans  have  allowed  to  focus  investments  on  mature  and  strategic 
projects, implemented not only with support from ESI Funds, but also from the Connecting Europe Facility 
(CEF)  and  national  funding.    Reform  of  public  procurement,  including  e-procurement  is  increasing  the 
efficiency of public spending and building administrative capacity.  

Portugal  is  advancing  the  take  up  of  the  European  Fund  for  Strategic  Investments  (EFSI).  As  of 
December  2017,  overall  financing  volume  of  operations  approved  under  the  EFSI  amounted  to  EUR  1.9 
billion,  which  is  expected  to  trigger  total  private  and  public  investment  of  EUR  5.5  billion.  More 
specifically,  18  projects  involving  Portugal  have  been  approved  so  far  under  the  Infrastructure  and 
Innovation  Window  (including  6  multi-country  projects),  amounting  to  EUR  1.1  billion  in  EIB  financing 
under the EFSI. This is expected to trigger about EUR 3.2 billion in investments. Under the SME Window, 
10  agreements  with  financial  intermediaries  have  been  approved  so  far.  European  Investment  Fund 
financing enabled by the EFSI amounts to EUR 801 million, which is expected to mobilise approximatively 
EUR  2.3  billion  in  total  investment.  Over  2  000  smaller  companies  or  start-ups  will  benefit  from  this 
support. SMEs rank first in terms of operations and volume approved, followed by environment. 

Funding under Horizon 2020, the Connecting Europe Facility and other directly managed EU funds is 
additional to the ESI Funds. By the end of 2017, Portugal has signed agreements for EUR 678 million for 
projects under the Connecting Europe Facility.  

(1)  Public investment: gross fixed capital formation + investment grants + national spending on agriculture and fisheries 
(2)  Before  programmes  are  adopted,  Member  States  are  required  to  comply  with  a  number  of  so-called  ex-ante 

conditionalities, which aim at improving conditions for the majority of public investments areas. 

15 

 
 
3.  SUMMARY OF THE MAIN FINDINGS FROM THE 

MACROECONOMIC IMBALANCE PROCEDURE IN-DEPTH 
REVIEW 

Introduction 

for 

in-depth  review 

The 
the  Portuguese 
economy  is  presented  in  this  report.  In  spring 
2017,  Portugal  was  identified as  having  excessive 
macroeconomic  imbalances,  in  particular  relating 
to stock variables and the pace of their adjustment. 
This  refers  in  particular  to  external,  public  and 
private  debt,  banking  sector  vulnerabilities  and 
weak labour productivity along with labour market 
segmentation  and  a  high,  albeit  decreasing,  share 
of  long-term  unemployment.  The  2018  Alert 
Mechanism Report (European Commission, 2017f) 
concluded  that  a  new  in-depth  review  should  be 
undertaken  for  Portugal  to  assess  developments 
relating to identified imbalances. Analyses relevant 
for  the  in-depth  review  can  be  found  in:  Public 
finances  and  taxation  (Section  4.1);  Financial 
sector:  banking  sector,  access  to  finance,  private 
indebtedness,  highly  negative  net  international 
investment  position  (Section  4.2);  Labour  market: 
high  youth  and  long-term  unemployment  (Section 
4.3); Investment: external competitiveness, private 
and  public 
investment,  business  environment 
(Section  4.4);  Sectoral  policies  such  as  R&D  and 
energy (Sections 4.5.1 and 4.5.2) (11).  

3.1. 

IMBALANCES AND THEIR GRAVITY 

international 

The  country's  net 
investment 
position  (NIIP)  remains  a  significant  source  of 
vulnerability, as its level of -104.7 % at the end of 
2016  is  one  of  the  most  negative  in  the    EU  and 
goes  beyond 
the  estimated  prudential  and 
fundamentally-explained  thresholds,  which  stand 
at  of  -48 %  and  -34 %,  respectively (12).  The 
structure  of  external  liabilities  remains  dominated 
by  marketable  debt,  which  is  a  riskier  type  of 
external  financing,  despite  the  shift  towards  FDI 

(11)  An  asterisk  indicates  that  the  analysis  in  the  section 

contributes to the in-depth review under the MIP. 

(12)  The country-specific NIIP level explained by fundamentals 
represents  the  NIIP  that  would  result  if  a  country  had  run 
its  current  account  'norm'  since  1995.  It  derives  from 
cumulated current account 'norms', which in turn represent 
the  impact  of  fundamentals  on  the  current  account.  See 
European  Commission,  2016,  'Refining  the  methodology 
for NIIP benchmarks', LIME Working Group, 21/11/ 2016. 

financing  flows  over  the  past  years.  The  ratio  of 
net  external  debt  to  GDP  is  also  declining  but 
remains high. 

'norm'(13) 

surpluses  are 
Sustained  current  account 
necessary to improve the NIIP to more prudent 
levels.  Aided  by  the  private  sector  deleveraging 
process,  the  current  account  moved  to  a  small 
surplus  in  2016-2017  that  is  close  to  the  current 
account 
fundamentals. 
Sustaining this surplus over the long run is crucial 
to address the highly negative NIIP along with the 
assumed  positive  balance  in  the  capital  account. 
Yet, even if the surplus were to be kept at current 
levels,  the  NIIP  would  only  reach  the  prudential 
threshold by around 2030. 

implied  by 

Private debt is on a steady downward path but 
still remains above prudential and fundamental 
thresholds. Both the corporate and household debt 
ratios  are  beyond  the  estimated  country-specific 
prudential thresholds. For households, a debt ratio 
of 73 % compares with a prudential value close to 
30 %  of  GDP.  For  corporations,  the  debt  ratio  of 
99 %  is  approximately  twice  as  much  as  the 
estimated  prudential  ratio.  In  addition,  the  legacy 
of  non-performing  loans  (NPLs)  stands  out  as  a 
key weakness in the financial system although the 
scope  of  the  imbalance  is  declining.  The  risk 
exposure  is  mainly  to  the  corporate  sector,  which 
accounts for 65 % of all NPLs. The capacity of the 
financial  sector  to  deal  with  NPLs  is  further 
limited  by  weak,  albeit  improving,  profit  margins 
and capital buffers. 

Public  debt  remains  high  and  the  underlying 
interest  rate burden  continues  to  inhibit public 
investments. The ratio of public debt to GDP has 
been  relatively  stable  at  around  130 %  of  GDP 
since  2014.  Better  credit 
ratings  are  also 
contributing to lower debt service costs. However, 

(13)  The  current  account  'norm'  benchmark  is  derived  from 
regressions  capturing  the  main  fundamental  determinants 
of  the  saving-investment  balance  (e.g.  demographics, 
resources),  as  well  as  policy  factors  and  global  financial 
conditions.  See  also  European  Commission,  2017, 
'Empirical  current  account  benchmarks:  modelling  the 
impact  of  demographic  variables',  LIME  Working  Group, 
24 April 2017. 

16 

 
 
                                                           
 
                                                           
4.1. Public finances and taxation 

to  foreign  direct  investment  (FDI).  The  FDI 
component  in  the  NIIP  widened  to  33.0 %  as  of 
September  2017  relative  to  29.9 %  at  the  end  of 
2016 and 26.3 % at the end of 2015. The share of 
net  external  debt  to  GDP  meanwhile  contracted 
from 100.8 % at the end of 2015 to 94.5 % at the 
end of 2016 and 92.3 % as of September 2017 (see 
Section 1). 

in 

improving 

Policy  measures  aimed  at 
the 
business environment have taken place that can 
contribute  to  improving  competitiveness.  This 
the  area  of  administrative 
was  mainly 
simplification,  identifying  ways  to  further  reduce 
restrictions  in  business  services  and  regulated 
professions,  and  efforts  to  reduce  the  backlog  in 
the judicial system. Measures have also been taken 
to 
improve 
competitiveness  by  addressing  issues  related  to 
internationalisation  of  SMEs,  labour  skills  and 
innovation. 

investors 

foreign 

attract 

and 

the  overall  interest  burden  on  the  government 
budget remains one of the highest in the EU. 

The  recent  strong  increase  in  job  creation  has 
substantially  improved  the  country's  labour 
market. Most indicators improved considerably as 
headline  unemployment  dropped  to  9 %  in  2017. 
also 
Long-term 
decreased  significantly,  bringing  the  scope  of 
imbalances to a much lower level. 

and  youth  unemployment 

Productivity in Portugal has been below the EU 
average  over  recent  years.  Although  total  factor 
productivity  has  been  a  major  contributor  to  the 
country's  potential  growth,  weak  performance  in 
labour productivity keeps income levels below the 
EU average. Labour productivity is still restrained 
by  product 
structural 
weaknesses,  including  a  high  share  of  low-skilled 
employees  and  labour  market  segmentation.  This 
is  despite the ongoing  adjustment  towards export-
oriented sectors.  

labour  market 

and 

sector  appear 

Risks  linked  to  renewed  dynamism  in  the 
to  be  contained 
housing 
currently.  The  rebound  in  house  prices  in  2016 
and  2017  is  seen  as  a  correction  from  previously 
low  levels  of  valuation  and  construction  activity 
and  is  currently  not  considered  indicative  of  an 
imbalance.  Nevertheless,  it  would  warrant  closer 
monitoring  if  the  current  rapid  pace  of  real house 
price growth is sustained over the medium term. 

3.2. 

EVOLUTION, PROSPECTS AND POLICY 
RESPONSES 

Portugal's net international investment position 
improved  from  -112.0 %  of  GDP  at  the  end  of 
2015  to  -104.7 %  at  the  end  of  2016  but 
reversed to -105.2 % as of September 2017. This 
reversal  is  due  to  valuation  changes  (estimated  at 
3 %  of  GDP)  from 
increased  price  of 
the 
Portuguese  government  bonds  held  by  non-
residents.  The  pace  of  adjustment  is  expected  to 
improve  the  external  position  at  a  relatively  slow 
pace, as the current account is forecast at a surplus 
of 0.1 % of GDP in 2017 and 0.2 % in both 2018 
and  2019.  This  is  against  an  estimated  annual 
surplus of 2 % of GDP needed to bring the NIIP to 
its  estimated  prudential  level  of  48 %  over  a  10-
year  period.  The  structure  of  external  liabilities 
improved over recent years due to a shift from debt 

Private debt has declined over recent years and 
the  outlook  remains  favourable.  In  consolidated 
terms,  the  private  debt-to-GDP  ratio  fell  from 
210.3 %  at  end-2012  to  171.4 %  at  end-2016, 
declining  in  both  the  corporate  and  the  household 
sectors. Data for 2017 confirm that the process of 
deleveraging  continues  (see  Section  1).  This 
impact  of 
reflects 
economic  growth  on  debt 
(passive 
deleveraging) and a slight decrease in the absolute 
value  of  household  and  corporate  debt  (active 
deleveraging).    The  pace  of  adjustment  appears 
adequate but it nevertheless weighs on investment 
and potential growth. 

the  positive  denominator 

ratios 

The high NPL stock remains a key weakness in 
the financial system and is being addressed by a 
three-pronged strategy. The aggregate NPL ratio 
dropped to 14.6 % in September 2017 from 17.6 % 
a  year  earlier,  according  to  ECB  data  covering 
domestic  and  foreign-owned  banks.  However,  it 
remains  among  the  highest  in  the  EU  and  well 
above  the  EU  average.  Corporate  NPLs  are  a 
particular  concern  as  they  account  for  about  two-
thirds  of  the  total  NPL  stock.  The  strategy  to 
reduce the burden of corporate NPLs is detailed in 
section 4.2.1. The strategy is being rolled out, but 
some  of  the  measures  have  been  only  recently 
approved  or  are  being  implemented.  The  banks 
with  the  largest  NPL  ratios  have  submitted  plans 

17 

 
4.1. Public finances and taxation 

for substantial reduction in bad loans by 2021 (see 
Sections 1 and 4.2). 

growth  is  skewed  to  low-wage  sectors  and  some 
slack on the market appears still in place. 

in  macroeconomic  variables, 

Public  debt  declined  from  130.1 %  of  GDP  at 
end-2016 to estimated 126.4 % at end-2017. The 
ratio is projected to drop further by an average of 
around  3 pps  in  2018  and  2019.  The  recent 
in 
improvement 
particular nominal and potential GDP growth, has 
made  the  structural  adjustment  needed  to  ensure 
compliance  with  the  transitional  debt  rule  less 
demanding.  The  public  spending  review  in  place 
since  March  2016  is  slowly  being  translated  into 
implemented measures. The review was originally 
focused  on  education,  healthcare,  state-owned 
enterprises,  public  real  estates  and  centralised 
public  procurement,  to  which  the  government  has 
since  committed  to  add  the  justice  and  internal 
affairs  sectors.  Despite  progress  in  the  spending 
review,  hospital  arrears  continue  rising  with  the 
implementation  of  cost-reducing  measures  still 
pending (see Section 1). 

Labour  productivity  declined  slightly  in  2016-
2017 but is set to improve as of 2018. The weak 
performance  in  both  2016  and  2017  is  mostly 
cyclical  due  to  the  high  rate  of  job  creation  in 
labour  intensive  sectors  such  as  tourism-related 
services  and  residential  construction.  The  forecast 
recovery as of 2018 is based on expectations for a 
less  strong  and  more  broad-based  increase  in 
employment. Other factors behind the weak labour 
productivity  performance  are  linked  to  the  low 
investment  levels  and  some  product  and  labour 
markets' rigidities such as restrictions remaining in 
business 
resource 
allocation  as  shown  by  the  high  labour  market 
segmentation. The low level of qualification of the 
adult population also plays an important role.  

services  and  barriers 

to 

The  labour  market  continues  to  improve  at  a 
strong pace. Unemployment dropped from 11.2 % 
in  2016  to  provisionally  estimated  9.0 %  in  2017, 
supported  by  strong  employment  growth.  This 
positive trend is expected to continue in 2018 and 
2019,  though  at  a  slower  pace.  The  activity  rate 
also  improved  and  while  the  share  of  long-term 
total 
unemployed  people 
in 
unemployment, 
indicators 
absolute 
improve,  there  is  no  evidence  yet  of  wage 
overheating,  as  a  large  part  of  the  employment 

it  decreased  substantially 
labour  market 

is  almost  half  of 

terms.  As 

Activation  and  training  measures  can  help 
improve  some  of  the  remaining  labour  market 
weaknesses.  On  top  of  various  measures  taken  in 
recent  years  to  promote  activation,  the  one-stop-
shops  for  employment  planned  for  Q1-2018  will 
provide  integrated  services  to  individuals  and 
employers,  giving  options  depending  on  their 
profile and ensuring coordination with other public 
services.  The  goal  is  to  improve  the  effectiveness 
of  activation  measures,  focusing  on  the  long-term 
unemployed  and  younger  workers.  A  programme 
to  improve  adults'  qualifications  (Qualifica)  is 
being 
improvement 
It 
compared  with  previous  programmes  since  it 
includes a stronger training component. It also has 
broad  coverage,  through  an  expanded  network  of 
qualification  centres  expecting  half  a  million 
participants  until  2019  focusing  on  low-skilled 
adults.  

implemented. 

is  an 

3.3.  OVERALL ASSESSMENT 

The  balance  of  risks  improved  over  the  past 
year.  In  terms  of  flows,  most  imbalances  are 
the  more  positive 
reverting,  also  helped  by 
economic environment. This is particularly true for 
employment  conditions,  which  have  improved 
rates  now 
significantly  with  unemployment 
of 
levels.  The 
reaching 
deleveraging in the private sector is also advancing 
at a steady pace while the government debt ratio is 
expected to drop gradually as from 2017. 

pre-crisis 

pace 

Stock imbalances remain high, mainly in terms 
of  NPLs,  public  and  external  debt.  Despite  the 
improvement,  Portugal’s  vulnerabilities, 
recent 
which  are  mostly  of  a 
long-lasting,  stock-
significant.  The 
remain 
imbalance  nature, 
government and external debt ratios are still high. 
The  large,  albeit  decreasing,  level  of  NPLs,  low 
profitability  and 
low  capital  ratios  highlight 
vulnerabilities  in  the  banking  sector.  Adjustment 
issues  in  the  labour  market  have  been  to  a  large 
extent  resolved,  reflecting  the  strong  employment 
growth and the fall in unemployment, and the risks 
labour 
linked 
there  are  mostly 
productivity, which remains a major weaknesses of 
the Portuguese economy. 

low 

the 

to 

18 

 
4.1. Public finances and taxation 

Table 3.1: 

Macroeconomic Imbalance Procedure assessment matrix - Portugal 2018 

(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 made significant progress in adjusting its external imbalances, including improving competitiveness and current-account flows. Nonetheless, the net international investment position remains very negative (-104.7% of GDP at the end of 2016) with market debt liabilities still dominating its composition. Sustained external surpluses and a long period of strong economic growth are needed for correcting the large external imbalances. The current account is forecast to remain only slightly positive over the medium run and still short of the estimated 1.5 % of GDP per year that would be required to halve the negative NIIP over a 10-year period. Market shares have improved over the past years but unit labour costs are projected to increase at rates similar to those in trading partners that could gradually weaken the  country's trade balance over the medium term unless structural improvements are achieved. External imbalances would decrease with higher productivity and potential growth. Progress has been made in past years to tackle rigidities in product and labour markets. But further measures to boost productivity, shift external funding towards FDI, and improve cost and non-cost competitiveness are essential to a significant external balance improvement. Risks that the positive economic cycle increases upward pressure on ULCs and slows down the export-led recovery warrant caution from policy makers to balance income growth and competitiveness targets.   Private debt High private sector debt is still weighing negatively on investment and growth. However, the pace of deleveraging is strong.  Consolidated private debt fell from a peak of 210.3% of GDP at end-2012 to 171.4% at end-2016. Both the corporate and household sectors are contributing to the deleveraging process. The relatively high level of non-performing loans harms financial stability and bank lending capacity. High private indebtedness ratios are expected to further decline in 2017 due to weak credit evolution and positive nominal output growth. The NPL ratio remains high at 14.6% in September 2017 but declined from 17.6% in September 2016.  The Portuguese banking sector is deleveraging and actively reducing costs. In terms of capital position, NPL ratios and profitability, Portuguese banks continue to compare unfavourably with EU peers but recent trends are positive.     The main challenge is to maintain an orderly corporate deleveraging without over-burdening economic recovery and investment. The issue of high NPLs is being addressed by a three-pronged strategy (see Section 4.2.1). The recovery process of viable firms is being facilitated but the proceedings for insolvent firms remain long. Following the bank failures that have been stressing the Portuguese financial sector since mid-2014, the Portuguese government is aiming to revamp the financial oversight.  Public debt  Portugal's high public debt should decline gradually from 2017 onwards. A source of vulnerability to changes in economic conditions and increasing financing costs, the large stock of debt poses also medium-term sustainability risks. The debt-to-GDP ratio has increased during the crisis, due to large deficits, negative growth and low inflation, and stabilised around 130% from 2013 to 2016. Under a continued reinforced recovery and primary surpluses, debt would gradually fall from 2017 onwards. Without additional consolidation measures it is forecast at 121% of GDP at end-2019. 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.   
 
 
 
 
 
4.1. Public finances and taxation 

Table (continued) 

Table (continued) 

(Continued on the next page) 

Source: Commission Services 

20 

Productivity Weak productivity dynamics weighs on competitiveness and potential growth, limiting the capacity to bridge the income gap relative to the EU average. This is also linked to low investment levels. Labour productivity growth has been below the EU average over the last few years.  Productivity is likely to drop slightly in 2017 as employment is increasing faster than GDP but it is expected to improve gradually over the medium term, yet from a low base.  While measures have been taken to address labour market rigidities investment barriers from high corporate debt, important challenges remain in these areas.  Bottlenecks to productivity growth remain related to weak innovation performance, low skill level of the labour force, and restrictions in some services and regulated professions, public administration, and network industries. Adjustment issues Labour market and unemployment The unemployment rate has already converged to the euro area average after falling down from 11.2% in 2016 to 9.0% in 2017. Long-term and youth unemployment rates are also rapidly decreasing  but still account for a substantial part of total unemployment. Other structural weaknesses also persist such as low skills and labour market segmentation, but overall the scope of imbalances is already relatively low.   Unemployment has been decreasing at a strong pace since 2013 and is projected to drop further to less than 8% by 2019. Long-term and youth unemployment rates are expected to decline accordingly, yet from a high base, and employers are facing shortage of skills in certain sectors. Net emigration has slowed down significantly but has not completely turned around yet. Despite the 2011-13 reforms to the Employment Protection Legislation, labour market segmentation remains high. Financial incentives and better inspections are now being put in place but these do not tackle the remaining rigidities in terms of individual dismissals, which remain a barrier to better resource allocation and hiring on open-ended contracts. The minimum wage and its coverage have been increasing. If not matched by productivity growth, this risks affecting job creation (notably of the low skilled) and competitiveness. These effects are being monitored, but are not emerging so far.   Conclusions from IDR analysis  The Portuguese economy is characterised by a large stock of imbalances in terms of external and internal debt, both public and private, and  banking sector problems in a context of low productivity growth. On the other hand, the pace of adjustment is advancing at a sound pace but the distance to the relevant prudential benchmarks remains substantial, with the exception of the labour market where most of the imbalances have been corrected. The process of deleveraging is more significant in the private sector and less pronounced in the public and external sectors. The current account has retained only a small surplus over the past years contributing to some improvement in the NIIP, which remains very negative. In addition, the large stock of non-performing loans and low profitability along with thin capital buffers still pose risks to banks’ balance sheets.  Private indebtedness is on a steady downward path since its peak in 2012 and the outlook remains favourable. The increasing path in public debt seems to have halted and started reversing in 2017. If the expected pace of reduction by 3pps in 2017 and 2018 does not increase in the mid-term, it will take a long time until the debt-to-GDP ratio goes back to sustainable levels. The combination of stock imbalances exposes Portugal to shifts in the investor sentiment. Unemployment is on a clear declining trend and is already reaching pre-crises levels. Long-term and youth unemployment remain high but are also decreasing. Low productivity growth is still preventing faster improvements in competitiveness and potential growth.  Progress has been made in stabilising the financial sector by adopting a strategy for non-performing loans, taking measures to reduce the administrative burden on firms and upgrading the qualifications of the adult population. Policy gaps persist in the areas of product and services markets, fiscal structural measures in particular the health sector and in terms of labour market segmentation. Slow action in these areas is detrimental for sustaining gains in competitiveness, corporate and household deleveraging and fiscal sustainability.   
 
 
 
 
 
 
 
4.1. Public finances and taxation 

4.  REFORM PRIORITIES 

4.1.  PUBLIC FINANCES AND TAXATION 

4.1.1.  FISCAL POLICY (PUBLIC DEBT AND DEBT 

DEVELOPMENTS)* 

into 

items  and  entities 

is  projected  to 
General  Government  debt 
decline  in  the  short  and  medium  term  but 
remains  very  high.    In  the  context  of  the  global 
financial crisis and subsequent recession, very high 
fiscal  deficits,  the  reclassification  of  off-balance 
the  general 
sheet 
government perimeter and stabilising interventions 
in  the  financial  system  resulted  in  a  steep  rise  in 
general  government  debt  by  over  30 pps.  of  GDP 
between  2010 and 2013.  Following  a  stabilisation 
at  around  130 %  of  GDP  from  2014  to  2016,  the 
country's  gross  debt-to-GDP  ratio  is  projected  to 
have  seen  a  first  substantial  decline  to  126 %  of 
GDP  in  2017  while  remaining  one  of  the  highest 
public debt levels in the euro area. The projections 
in 
the 
the  following  analysis  are  based  on 
Commission’s 2017 autumn forecast. Following an 
acceleration  of  GDP  growth  and  substantial 
decreases  in  interest  payments  and  supported  by 
planned  decreases  in  the  cash  buffer,  the  debt-to-
GDP  ratio  is  projected  to  continue  its  decline  by 
around  2.5 pps.  per  year  in  2018  and  2019 
reaching  121 %  at  the  end  of  2019.  The  primary 
balance is projected to have reached 2.5 % of GDP 
in 2017 and forecast to decrease to 2 ¼ % in 2018 
and  2019,  increasing  future  financing  needs  (see 
sections 1 and 3).  

Following a more pronounced fall in the short-
term,  the  gross  public  debt-to-GDP  ratio  is 
expected  to  decline  moderately  in  the  medium-
term  and  to  stabilise  towards  the  end  of  the 
projection  horizon.  Model  simulations  of  debt 
sustainability  have  been 
that 
incorporate  the  scenario  of  the  2017  autumn 
forecast until 2019 and other technical assumptions 
for  the  medium  term  (14).  Under  the  baseline  no-

carried  out 

(14)  These  assumptions  comprise  i)  a  structural  primary  fiscal 
balance, before cost of ageing, at 1.6 % of GDP surplus as 
of 2020; (ii) inflation converging to 2.0 % by 2022 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;  (iii)  real  GDP  growth  rates  of  around 
1 %;  and  (iv)  ageing  costs  in  line  with  the  European 
Commission's  2015  Ageing  Report.  More  details  on  the 
assumptions  in  the  different  scenarios  can  be found  in the 
Debt Sustainability Monitor 2017. 

policy  change  scenario,  the  results  suggest  that, 
following the more pronounced decline until 2019, 
the  debt  ratio  will  only  decline  moderately  by 
around 1pp per year over the medium term before 
stabilising at around 115 % of GDP towards 2028 
(see Graphs 4.1.1 and 4.1.2). 

Graph 4.1.1:  Interest rates and GDP growth shocks 

Source: European Commission 

declining 

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

The very high government debt is a burden on 
public  finances.  High  public  debt  implies  a 
smaller  fiscal  margin  for  manoeuvre  to  absorb 
adverse  macroeconomic  shocks  and  cope  with 
possible  rises  in  interest  rates.  The  still  relatively 
high,  albeit  declining,  interest  bill  (projected  at 
3.9 %  of  GDP  in  2017  as  compared  to  2.0 %  for 

21 

10010511011512012513013520122013201420152016201720182019202020212022202320242025202620272028Baseline no-policy change scenariostandardised (permanent) negative shock (-1 pp.) to the short- and long-term interest rates on newly issued androlled over debtstandardised (permanent) positive shock (+1 pp.) to the short- and long-term interest rates on newly issued androlled over debtstandardised (permanent) negative shock (-0.5 pp.) on GDP growthstandardised (permanent) positive shock (+0.5 pp.) on GDP growthCombined (permanent) negative shock on GDP growth (-0.5 pp.) and interest rates (+1 pp.)Combined (permanent) positive shock on GDP growth (+0.5 pp.) and interest rates (-1 pp.)% of GDP 
                                                           
 
4.1. Public finances and taxation 

few  years,  notably  through  the  increase  in  the 
statutory retirement age from 65 to 66 years and by 
linking  future  increases  to  the  evolution  of  life 
expectancy(15),  as  well  as  by  restricting  access  to 
early  retirement.  Some  recent  measures  are 
however  expected  to  contribute  to  higher  pension 
spending in the short term. In October 2017 a new 
early retirement scheme without penalty for people 
who  had  very  long  careers  entered  into  force.  It 
allows people who  are now 60  years or  older  and 
that  have  made  contributions  for  48  years  or 
more(16)  to  the  social  security  or  the  legacy  civil 
service pension system to retire without penalty. It 
will  be  fully  operational  from  2018.  According  to 
the  Portuguese  authorities,  the  change  is  expected 
to result in a one-off surge of about 11 500 people 
in 2018 who had been waiting to retire, while the 
effect  on  subsequent  years  should  be  smaller. 
Moreover,  in  addition  to  the  regular  pension 
indexation linked to inflation and GDP growth, an 
extraordinary update of lower pensions was carried 
out  in  2017.  It  will  be  carried  out  again  in  2018, 
with  a  particular  focus  on  those  pensions  not 
updated  between  2011  and  2015.  The  index  for  a 
range  of  welfare  transfers  affecting  pensions  was 
also unfrozen in 2017 so it can develop in line with 
inflation and economic growth.  

social  contributions 

Supported by the economic upswing, budgetary 
transfers to the social security system are set to 
end in 2018. For the first time in recent years, the 
extraordinary  transfers  from  the  state  budget  to 
finance the social security deficit will end in 2018. 
The  end  of  the  extraordinary  transfers  will  be 
enabled primarily by the projected strong increase 
in 
(+5.6 %  or  around 
EUR 900 million)  linked  to  the  positive  economic 
environment  and  the  improvements  in  the  labour 
market.  Given  the  simultaneous  increase  in  the 
social  security  system's  spending  on  pensions  of 
5.1 %  (around  EUR 800 million),  combined  with 
the  end  of  extraordinary  transfers,  the  surplus  of 
the social security system is projected to fall from 
around  EUR 1.5 billion 
to  around 
EUR 1 billion in 2018.  

in  2017, 

Certain  revenues  are  being  earmarked  to  the 
Social Security Financial Stabilisation Fund. In 

(15)  The  statutory  retirement  age  will  rise  to  66  years  and  4 

months in 2018. 

(16)  Or those at 60 years or more with 46 years of contributions 
or  more  if  they  also  started  making  contributions  to  the 
Social Security when they were 14 years or less. 

the  euro  area)  also  restricts  the  scope  for  public 
investment spending.  

and 

ratio 

reduction 

continuing 

sustainability 

In  the  absence  of  further  fiscal  consolidation 
and  reforms  to  boost  growth,  safeguarding 
fiscal 
to 
sufficiently reduce debt will be a challenge. The 
implies  a  significant 
very  high  debt 
adjustment  burden,  which  requires  the  conditions 
that  enable  debt 
to  be  steadily 
maintained  in  the  coming  decades,  including 
sustained  economic  growth.  Sustainability  can  be 
budgetary 
safeguarded 
discipline,  in  line  with  the  requirements  of  the 
Stability  and  Growth  Pact  (see  Graph  4.1.2).  The 
implementation of the reformed budget framework 
law  and  strengthened  revenue  collection  could 
contribute 
adjustment.  Healthcare 
expenditure  now  accounts  for  the  largest  share  of 
ageing  costs,  posing  corresponding  implications 
for  long-term  sustainability.  Recently  adopted 
reforms  may  affect  the  medium  and  long-term 
sustainability of the pension system. 

permanent 

through 

fiscal 

to 

Graph 4.1.2:  Fiscal consolidation 

Source: European Commission 

4.1.2.  FISCAL SUSTAINABILITY (INCLUDING 
PENSIONS AND HEALTHCARE)* 

Several reforms have reduced risks to the long-
term sustainability of the pension system, while 
the  government  has  expressed  its  commitment 
to  duly  factor  sustainability  into  any  new 
initiatives.  The  long-term  sustainability  of  the 
pension  system  has  been  strengthened  in  the  last 

22 

809010011012013014020122013201420152016201720182019202020212022202320242025202620272028Baseline 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 

introduced,  as  well  as  multi-year  contracts  with 
state-owned hospitals. Starting in 2018, authorities 
will  start  rolling  out  the  integrated  responsibility 
centres  (attributing  more  autonomy  to  hospital 
teams  in  an  effort  to  promote  efficiency  and 
organisational  innovation).  In  addition,  a  joint 
Budget  Analysis  Unit  by  health  and  finance 
ministries is expected to tackle the hospital arrears 
problem  and  to  increase  the  quality  of  budget 
planning.  Plans  to  introduce  financial  incentives 
for  hospitals  to  reach  their  targets  are  also 
currently  being  discussed  within  the  Ministry  of 
Finance. Overall, it remains unclear whether these 
reforms will be sufficient to prevent further arrears 
and ensure robust control over spending.   

The  burden  of  healthcare  spending  on  the 
budget  is  projected  to  be  among  the  largest  in 
the  EU  in  the  long  term.  In  the  long  run, 
pressures  from  the  costs  of  ageing  point  to 
increased public spending on health from 5.9 % of 
GDP in 2016 (below the EU average of 6.8 %) to 
8.3 % in 2070, which represents a 2.4 pp increase 
compared to the projected EU average increase of 
0.9  pp.  A  comprehensive  strategy  to  tackle  the 
health-related  costs  of  ageing,  including  chronic 
diseases,  would  be  beneficial.  Future  pressures 
from  investment  needs  are  also  substantial  given 
that a large part of the equipment in the NHS is out 
of  date.  A  detailed  discussion  on  access  to 
healthcare is presented in Section 4.3.2. 

in 

Significant  measures  are  continuously  taken  to 
improve  cost-effectiveness 
the  National 
Health  Service.  The  value  of  goods  and  services 
purchased  centrally  in  the  health  sector  continued 
its  increase  in  2017,  and  is  expected  to  grow 
further  in  2018.  Data  for  the  first  quarter  of  2017 
estimated  EUR 35 million  of  savings  due  to  the 
centralisation  of  NHS  purchasing.  Progress  has 
also been made with digitisation, to strengthen the 
integration  of  the  health  system  and  to  reduce 
redundancies,  such  as 
those  associated  with 
repeated  medical  exams.  Although  the  market 
share  of  generic  medicine  in  the  NHS  market  has 
increased  greatly  compared  to  the  2011  level,  the 
share  seems  to  have  broadly  stabilised  in  recent 
years.  The  market  share  of  certain  biosimilar 
medicines(17), however, grew largely over the last 
two  years.  This  development  is  being  promoted 

(17)  A  biosimilar  is  a  biological  medicine  highly  similar  to 

another already approved biological medicine 

the 

from 

authorities 

Portuguese 

revenue  collected 

started 
2017, 
the 
earmarking 
the 
additional real estate tax (Adicional ao IMI) to the 
reinforcement  of  the  Financial  Stabilisation  Fund. 
From  2018  onwards,  every  year  an  additional 
0.5 % of the corporate income tax revenue will be 
earmarked to the Fund, progressively reaching 2 % 
in  2021.  The  Financial  Stabilisation  Fund  is  not 
meant  to  be  used  until  the  mid-2020s,  when  it  is 
supposed  to  cover  the  social  security  system's 
deficit.  Earmarking  revenues in  this way does  not 
address the underlying issue of increased spending 
on  pensions,  in  particular  when  the  earmarking 
does not relate to new revenues.  

of 

release 

extraordinary 

The  short-term  sustainability  of  the  health 
system is not ensured. Hospital arrears continued 
to increase by EUR 293 million in 2017 in spite of 
an 
around 
EUR 400 million  for  the  clearance  of  arrears  in 
December.  The  average  payment  period  of  State 
Owned  Enterprises  (SOEs)  in  the  health  sector 
increased by 9 days to reach 112 in the first half of 
2017.  This  is  against  the  overall  SOE  average 
payment period which increased by 2 days to reach 
72 over the same period. Among the 10 SOEs with 
the  highest  increases  in  operating  expenses,  9  are 
in  the  health  sector.  The  continuing  accumulation 
of  arrears  in  certain  hospitals  highlights  problems 
with under-budgeting, monitoring and enforcement 
practices,  along  with  personnel  expenses  and 
increasing  demand  pressures  also  being  cited  as 
factors.  The  announced  capital  injections  into 
hospitals  of  EUR 500 million  both  at  the  end  of 
2017  and  in  early  2018  should  help  decrease 
arrears  in  the  coming  months.  The  pattern  of 
periodic  injections  of  funds  for  clearing  arrears, 
however, does not appear to tackle the underlying 
hospital  management  issues  which  result  in  their 
accumulation.  

While measures are being implemented to try to 
contain  hospital  expenditure,  their 
impact 
remains to be seen. The financial management of 
the  regional  health  administrations,  which  in  the 
past  has  led  to  delayed  payments  and  sometimes 
heavy financial  penalties,  has  been  centralised  for 
a  range  of  areas.  Hospitals  have  increased  their 
efficiency  by  setting  up  a  shared  resource 
management  platform  so  as  to  enable  the  use  of 
National  Health  System  facilities  and  reduce 
reliance on the private sector. External evaluations 
the  boards  of  directors  have  also  been 
of 

23 

 
                                                           
4.1. Public finances and taxation 

2018 

amounts 

the  spending  review 
projected  savings  from 
exercise 
around 
to 
in 
EUR 290 million (0.14 % of GDP) in a single year, 
compared  to  the  expected  cumulative  savings  of 
0.1 % of GDP over 3 years announced in the 2017 
budget. Overall, the inclusion of additional sectors 
and  the  introduction  of  more  ambitious  savings 
targets  are  welcome  improvements.  A  broadening 
of  the  exercise  to  cover  an  even  larger  share  of 
general  government  spending  would  represent 
another positive step forward. 

at 

In 

all 

and 

(18). 

There are further delays in implementing of the 
reformed  Budget  Framework  Law 
(BFL). 
Together  with  an  integrated  accrual-based  public 
accounting  system,  the  BFL  aims  to  improve 
management  ownership,  and  ensure  effective 
budgeting  and  budget  implementation,  as  well  as 
monitoring 
public 
reporting 
administration  levels  focussing  more  strongly  on 
medium  to  long-term  accountability.  Preparatory 
work,  mostly  the  setting-up  of  IT  systems,  has 
been  progressing,  especially  concerning  the  state 
accounting  entity  project 
terms  of 
regulatory preparation a series of decree laws will 
require  adjusting  and  consolidating.  While  the 
effective  application  of 
the  new  accounting 
framework should start in January 2018, the 2019 
budget  will  not  yet  be  prepared  under  the  new 
framework  due  to  the  accumulating  delays  in 
implementing  the  BFL  so  far.  As  full  completion 
by  the  2018  target  is  no  longer  achievable,  the 
full  BFL 
three-year 
application will have to be extended with a phased 
postponement  in  applying  most  of  the  new  BFL 
features.  Overall,  while  the  preparatory  steps  for 
thoroughly 
have 
progressed,  albeit  more  slowly  than  originally 
planned, it would appear important to maintain an 
ambitious timeline in the upcoming amendment in 
order 
for 
keep 
implementation in the short term.  

transition  period 

the  momentum 

implementing 

the  BFL 

for 

up 

to 

the 

financial  position  of  SOEs 

While 
is 
improving the lack of a systematic approach to 
budgetary  transfers  to  SOEs  remains  an  issue. 
The  government  estimates  a  net  income  for  non-
financial public companies of EUR -461 million in 
2017,  projected  to  fall  to  EUR -118 million  in 
in  2014. 
2018  down 

from  EUR -1.3 billion 

through  minimum-market  share  objectives  for 
specific  biosimilars 
in  hospitals,  as  well  as 
improved  information  about  both  generics  and 
biosimilars  to  prescribers.  More  generally,  annual 
medicine  price  revisions  and  agreements  with 
suppliers continue to yield savings. 

4.1.3.  FISCAL FRAMEWORK AND SOE* 

The spending review exercise is gradually being 
expanded  into  new  sectors.  The  expenditure 
review  continues  to  cover  education,  healthcare, 
state  owned  enterprises  (SOEs),  public  sector  real 
estate  management 
centralised  public 
and 
procurement, with justice and internal affairs being 
the  most  recent  additions.  Some  progress  has 
already  been  made  in  the  justice  sector,  with 
advancements  in  the 
'Closer  Justice'  Plan  to 
strengthen efficiency, due to be completed in 2019; 
as  well  as  the  'Tribunal+'  project  which  aims  to 
optimise  the  working  time  of  justice  officers.  In 
addition,  there  are  plans  to  reduce  the  costs  and 
inefficiencies associated with the legal treatment of 
seized  vehicles  are  in  development.  A  series  of 
reforms in the internal affairs sector have also been 
planned  but  are  not  yet  ready  to  be  implemented. 
The  reforms  include  the  outsourcing  of  support 
functions  to  free  up  resources  for  operations  and 
eliminating 
replicated 
administrative tasks.  

redundancies 

and 

Improved  human  resource  management  to 
reduce absenteeism was presented as a priority 
for  the  2018  spending  review.  The  authorities 
estimate  that  EUR 60 million (10  in  the  education 
sector,  50  across  other  sectors)  will  be  saved  by 
reducing  absenteeism  in  2018.  The  focus  will 
initially be on the education sector, where a review 
of medical panels, combined with the introduction 
of a new monitoring system, is expected to enable 
unnecessary  sick  leaves  to  be  identified.  If  the 
approach  proves  successful,  the  intention  is  to 
apply  the  new  measures  across  the  remaining 
public  administration  sectors.  A  performance-
related scheme aiming to incentivise civil servants 
to  develop  new  ways  of  reducing  expenditure 
without  compromising  public  service  provisions 
has also been adopted. This scheme does not apply 
to SOEs, and therefore not to hospitals either. 

Ambitious savings targets for the 2018 spending 
review  are  a  positive  development.  The  total 

(18)  A  first  opening  balance  sheet  is  planned  to  be  established 

for 1 January 2019. 

24 

 
                                                           
4.1. Public finances and taxation 

Furthermore,  SOE  investments  will  be  evaluated 
by UTAM on a case-by-case basis. 

4.1.4.  TAXATION ISSUES INCLUDING TAX 

ADMINISTRATION* 

tax 

Net revenues of new taxes appear limited while 
the  government  intends  to  ensure  the  broad 
stability  of  corporate 
legislation.  The 
revenue  from  the  new  tax  on  sugary  drinks  up  to 
October  2017  seems  in  line  with  expectations 
regarding  the  EUR 80 million  target  for  2017. 
However, the progressive additional real estate tax 
introduced  in  2017  and  earmarked  for  the  Social 
Security's  Financial  Stabilisation  Fund  may  bring 
significantly  lower  net  revenue  than  expected. 
While  gross  revenues  of  around  EUR 130 million 
are  expected  for  2017  only  EUR 50 million  has 
effectively been assigned to the Stabilisation Fund. 
The  reduced  transfer  to  the  Fund  reflects  the 
expected 
the 
additional  real  estate  tax  for  rented-out  properties 
in  personal  income  tax  declarations.  Corporate 
income  tax  (CIT)  rules  have  been  broadly  kept 
stable  in  2017  except  for  a  limited  broadening  of 
the scope of the tax allowance for corporate equity 
(ACE) intended to decrease the corporate debt bias 
(see  below).  While  the  2018  draft  budget  did  not 
include  any  major  changes  to  CIT  rules  either, 
Parliament  adopted  an  increase  of  the  State 
surcharge  from  7 %  to  9 %  for  large  companies 
with  profits  exceeding  EUR 35 million.  This  was 
accompanied  by  a  measure  increasing  incentives 
for reinvesting profits. 

the  deductibility  of 

impact  of 

A  new  reform  of  personal  income  tax  (PIT)  is 
set  to  significantly  affect  revenue  from  direct 
taxation  as  of  2018.  In  addition  to  the  already 
previously  planned  full  abolishment  of  the  PIT 
surcharge  also  for  higher  tax  brackets,  new  PIT 
reform  measures  were  introduced  in  the  2018 
budget that aim to lower the tax burden on low-to-
middle  income  earners(21).  The  reform  measures 
include inter alia an increase in the number of tax 
brackets  and  an  increase  in  the  level  of  the  net 
income  guarantee  ('mínimo  de  existência').  The 

(21)  In 2016 the tax wedge (at 100% of the average wage) was 
41.5%  in  PT  compared  to  42.8%  EU  average.  For  low 
incomes (50% of the average wage) the PT tax wedge was 
28.1%  compared 
to  32.2%  EU  average  (European 
Commission tax and benefit database). 

to 

included 

Operational  results  also  continue 
improve 
(except  in  the  health  sector),  albeit  more  slowly 
than  in  previous  years,  and  despite  the  rising 
personnel costs linked to the unfreezing of wages. 
total  non-consolidated  debt  of  public 
The 
corporations 
in  general  government 
remains  high,  however,  at  19.0 %  of  GDP 
in  September 
(approximately  EUR 36 billion) 
2017.  This  represents  a  fall  of  1.3  pp  of  GDP 
relative  to  September  2016  (Bank  of  Portugal, 
2017).  According  to  the  DBP,  authorities  have 
committed  to  limit  the  overall  growth  of  public 
company  debt  to  2 %  per  year(19)  (net  of  capital 
increases  and  the  financing  of  new  investments), 
although  a  more  ambitious  debt  reduction  target 
could  be  considered.  A  debt  management  and 
recapitalisation plan for SOEs is ongoing to reduce 
indebtedness and lower interest costs. The current 
ad-hoc  practice  of  budgetary  transfers  to  SOEs 
would  benefit  from  being  more  predictable, 
however,  in  order  to  minimise  moral  hazard; 
promote the right incentives; and underpin a solid, 
long-term improvement in SOE sustainability.   

from 

draw 

information 

Measures  to  improve  SOE  monitoring  are 
ongoing  although  their  impact  remains  to  be 
seen.  The  upgrade  of  the  SIRIEF(20)  system  to 
automatically 
the 
accounting  systems  of  public  companies  will  be 
widely applied in 2018. Activity and Budget Plans 
submitted  by  SOEs 
to  UTAM  (Ministry  of 
Finance's  task  force  on  SOE  monitoring),  are 
beginning  to  be  evaluated  more  comprehensively 
and with a longer time horizon (3 years). In 2018 
the analysis of the impact of these plans on public 
accounts  will  no  longer  be  limited  to  larger 
companies  or  groups,  and  will  be  carried  out  in  a  
more  regular  and  systematic  way.  Beginning  in 
2018,  instruments  ensuring  that  the  Activity  and 
Budget Plans are properly implemented will be put 
in place. These include early warning mechanisms 
and  an  assessment  methodology  allowing  public 
companies to be ranked by their degree of risk so 
as to prioritise the follow-up effort. A detailed cost 
reduction programme can be required from at-risk 
improved 
SOEs.  Accountability  will  also  be 
through  the  introduction  of  incentives  for  good 
objectives. 
governance 

reaching 

and 

for 

(19)  According  to  UTAM,  the  debt  target  limit  for  individual 

SOEs is of 3% per year. 

(20)  Information system that collects financial data from SOEs. 

25 

 
                                                           
                                                           
 
4.1. Public finances and taxation 

monitoring  and  evaluation  of  the  performance  of 
these  two  measures  would  allow  to  ascertain  if 
further refinements are needed. 

in  Portugal 
recent 

is 
still 
Dealing  with 
taxes 
burdensome,  despite 
simplification 
efforts. In addition to past measures on improving 
tax  administration's  efficiency  (European 
the 
Commission  e),  a  series  of  new  administrative 
simplification  measures  are 
included  under 
Programa  Simplex.  Some  of  them  were  already 
introduced  in  2016  (such  as  the  online  registry  of 
non-habitual  residents  for  PIT).  Moreover,  in  the 
framework  of  the  strategic  plan  against  tax  fraud 
for  2015-2017,  other  measures  have  been 
implemented.  The  number  of  e-invoices  issued 
during  2016  increased  by  3.6 %  compared  to  the 
previous  year,  and  taxpayers  largely  make  use  of 
online  declaration  of  PIT  forms  (94.97 %  of  the 
total). Other initiatives include the almost full pre-
filling  of  personal  income  tax  returns  and  a  new 
digital service for obtaining investment tax  codes. 
These  new  processes  have  significantly  reduced 
for  handling  procedures, 
time 
the  elapsed 
reduced 
satisfaction  and 
taxpayer 
increased 
administration  costs.  However, 
the  average 
number  of  hours  needed  to  comply  with  tax 
obligations  (243  hours)  remains  the  fifth  highest 
among  EU  and  EFTA  countries  (World  Bank, 
2017b).  Moreover,  the  recurrent  budget  allocated 
to IT, expressed as % of the total recurrent budget 
of the tax administration, was only 5.7 % in 2015 
and 
(OECD). 
coordination between the different services within 
the  tax  administration  remains  a  priority.  Close 
monitoring  of  the  overall  impact  of  the  measures 
would help ensure the cohesion of the system and 
identify weaknesses and areas for improvement. 

Increasing 

efficiency 

the 

Improving  the  efficiency 
in  collecting  tax 
arrears  remains  a  challenge.  Significant  court 
backlogs remain regarding tax proceedings, which 
hamper the administration's efficiency in collecting 
tax arrears. In 2015, the % of total Portuguese tax 
debt  that  was  older  than  12  months  remained 
among  the  highest  in  the  EU  (87.5 %  of  CIT-, 
84.8 %  of  PIT-,  and  90.9 %  of  VAT-related  tax 
debt),  which  suggests  the  current  procedures  are 
not  agile.  Moreover,  the  total  year-end  tax  debt 
(including debt considered not collectable) as a % 
of  total  net  revenue  was  36.34 %  in  2015,  which 
represents  an  increase  of  6.79 pps  in  the  period 
2011-2015 (OECD). 

corresponding reductions in PIT revenue could be 
somewhat higher than projected in the 2018 Draft 
Budget  report  (see  Euromod-based  simulation  in 
Box 4.1.1). As the withholding tax tables may not 
already fully reflect the reform as of January 2018, 
part  of  the  revenue  losses  may  however  only 
materialise  when  the  2018  PIT  declarations  are 
made in spring 2019. The PIT reform is estimated 
not to have an income inequality-reducing impact, 
as  most  of  the  benefits  would  be  concentrated  on 
the top half of the income distribution (Box 4.1.1). 

(11.46 %),  measuring 

Despite  attempts  to  broaden  the  tax  base 
reduced  VAT  rates  are  widely  used.  The  VAT 
gap  of  Portugal 
tax 
collection  efficiency  is  slightly  below  the  EU 
average (12.77 %) and has decreased to its lowest 
level  since  2011  according  to  the  last  available 
data  (2015).  However,  the  VAT  policy  gap  of 
Portugal,  which  measures  the  impact  of  reduced 
rates  and  exemptions  on  VAT  efficiency,  remains 
considerably higher than the EU average (50.75 %, 
compared to an average of 44 %, see CASE, Study 
and  Reports  on  the  VAT  Gap  in  the  EU-28  2017 
Final Report, TAXUD/2015/CC/131, 2017, p.54.). 
This      needs  to  be  assessed  in  light  of  recent 
changes  to  the  VAT  legislation  that  are  not  yet 
reflected  in  the  indicators  above,  which  have 
the  application  of  reduced 
further  extended 
rates(22). Hence, it appears worthwhile for Portugal 
to  consider  comprehensively  assessing  the  impact 
of past changes on VAT system efficiency.  

tax  system 

Recent  measures  have  been  enacted  to  tackle 
the corporate debt bias in taxation. Historically, 
the 
itself  has  encouraged  debt 
financing,  through  a  differential  corporate  tax 
treatment  of  debt  and  equity,  which  incentivised 
businesses  to  accumulate  excessive  amounts  of 
debt.  Since  January  2017,  deductible  interest 
expenses will be limited to the higher limit of 30 % 
of cash flow income or EUR 1 million. In addition 
to the recently revised ACE rules, this is expected 
to  have  some  positive  impacts  in  lowering  the 
corporate debt bias, especially for companies with 
very  high  amounts  of  debt.  The  new  ACE  rules 
apply  only  to  new  equity  investment.  They  avoid 
brining undue benefits to pre-existing investments, 
in  scope.  Consistent 
while  being  extended 

(22)  In  2016  the  rate  applicable  on  restaurant  and  catering 
services  was  reduced  from  the  standard  rate (23 %) to  the 
higher reduced rate (13 %). 

26 

 
                                                           
4.1. Public finances and taxation 

Box 4.1.1: Impact of the 2018 Personal Income Tax reform: EUROMOD based simulation of 
the impact of the 2018 PIT reform 

In 2018 Portugal is implementing a Personal Income Tax (PIT) reform affecting the number of tax brackets 
and  the  net  income  guarantee,  in  addition  to  the  previously  decided  full  reversal  of  the  surcharge  for  the 
higher  tax  brackets.  The  size  of  the  ensuing  revenue  and  distributional  effects  were  measured  using 
EUROMOD (1) in a simulation exercise by the Joint Research Centre and DG ECFIN. 

The most important new element of the 2018 PIT reform is the redesign of the tax bracket structure via the 
introduction  of  two  additional  brackets  (dividing  into  two  the  previous  second  and  third  brackets)  and  a 
decrease of the lower limit of the fourth tax bracket. Thus, the marginal tax rates for the lower parts of the 
previous  second  and  third  brackets  have  been  reduced  from  28.5 %  to  23 %  and  from  37 %  to  35 % 
respectively. At the same time the lower limit of the previous fourth tax bracket with a marginal tax rate of 
45 % has been reduced from EUR 40 522 to EUR 36 856. In addition to the tax brackets redesign the second 
major new element is the update of the tax-exempted net income guarantee ('mînimo de existência') that is 
now linked to the social support index (IAS). Further to the update of the IAS to EUR 428.90 EUR for 2018, 
the net income guarantee has thus risen from EUR 8 500 in 2017 to EUR 9 006.90 in 2018 (i.e. 1.5 IAS x 14 
months).  A  third  element  is  the  abolition  of  the  PIT  surcharge.  In  line  with  the  political  decision  taken 
already in the 2017 budget discussions, the PIT surcharge, that was still applicable at reduced rates for the 
full 2017 income for the higher tax brackets, has been fully abolished for all tax brackets for 2018 income 
(in terms of withholding tables it had already been gradually phased out by 1 December 2017).   

The simulation used 2017 Portuguese tax-benefit calculation rules as a baseline scenario. In order to isolate 
the effects of the full surcharge abolishment, the change in the tax bracket structure and the rise in the net 
income  guarantee,  these  three  elements  have  been  simulated  in  separate  incremental  steps.  The  full 
abolishment  of  the  PIT  surcharge  for  2018  revenue  also  for  higher  tax  brackets  results  in  a  negative 
Government revenue impact of around EUR 140 million. The change in the tax brackets and the rise in the 
net  income  guarantee  imply  additional  revenue  losses  of  around  EUR 440  million  and  EUR 30  million 
respectively.  Thus,  the  total  implied  revenue  losses  as  compared  to  the  2017  baseline  would  add  up  to 
around EUR 610 million, i.e. around 5 % of the baseline PIT revenue. The revenue losses of around EUR 
470 million related to the change in the tax brackets and the rise in the net income guarantee are somewhat 
above the estimate of around EUR 385 million included in the draft budget report.  

All  three  measures  have  positive  effects  on  the  mean  equivalised  household  disposable  income (2)  in 
aggregated terms. In distributional terms, both the full reversal of the surcharge for the higher tax brackets 
and  the change in  the  bracket  structure lead to  increases  in the Gini  coefficient,  implying a  more  unequal 
distribution of income, which is only marginally offset by a minor decrease of the coefficient induced by the 
rise in the net income guarantee. The surcharge abolishment for high brackets benefits basically only the last 
decile  of  the  income  distribution.  As  the  lower  five  deciles  were  already  mostly  exempted  from  personal 
income  tax  or  paying  the  lowest  bracket  rate,  the  change  of  the  structure  for  the  intermediary  brackets 
mostly  benefits  the  upper  five  deciles.  The  rise  in  the  net  income  guarantee  mainly  benefits  the  mean 
equivalised disposable income for the fifth decile. The overall distributional impact thus shows a regressive 
pattern, with the main beneficiaries being the households on the top-half of the income distribution.  

(1)  EUROMOD  is  the  tax-benefit  microsimulation  model  for  the  EU.  It  simulates  individuals'  and  households'  benefit 
entitlements and tax liabilities (including social security contributions) according to the rules in place in each Member 
State.  Simulations  are  based  on  representative  survey  data  from  the  European  Statistics  on  Income  and  Living 
Conditions  (EU-SILC)  and  cover  the  main  elements  of  direct  taxation,  social  contributions  and  non-contributory 
benefits. Data of 2015 with incomes reported in the survey referring to 2014. 

(2)  All deciles were constructed based on the equivalised household disposable income corresponding to the "total income 
of  a  household,  after  tax  and  other  deductions,  that  is  available  for  spending  or  saving,  divided  by  the  number  of 
household  members  converted  into  equalised  adults;  household  members  are  equalised  or  made  equivalent  by 
weighting each according to their age, using the so-called modified OECD equivalence scale". 

27 

 
 
 
4.2.  FINANCIAL SECTOR, PRIVATE INDEBTEDNESS AND 

HOUSING MARKET 

4.2.1.  BANKING SECTOR* 

is 

in 

but 

and 

traced 

Strong 

slowly 

improving 

improving. 

profitability 

capitalisation 

of 
The 
Portuguese banks are below EU peers, but asset 
quality 
economic 
performance,  lower  unemployment  and  improved 
the 
consumer  confidence  can  be 
gradually  improving  outlook  for  the  banking 
sector. Better prospects for the financial sector also 
reflect  capital  increases,  the  restructuring  efforts 
taking place throughout the banking sector, and the 
asset-quality 
weak 
indicators. Yet, profitability forecasts remain poor, 
due  to  the  following  factors:  the  high  amount  of 
non-performing loans (NPLs) on the balance sheet 
of  Portugal's  lenders,  the  relatively  weak  credit 
conditions  and  the  low  interest  rate  environment 
(see below). Despite the weak profits, which have 
been  preventing  banks  from  generating  capital 
organically  and  led  to  equity  increases  directly 
from 
are 
gradually converging towards European peers. The 
business  model  followed  by  many  Portuguese 
banks consists of increasing fees and the prices of 
banking operations. In the long term, this could be 
threatened  by  digitisation 
trends  which  will 
increasingly  provide  lower  cost  service  solutions 
for consumers.      

capitalisation 

shareholders 

levels 

to  allow  banks 

Tackling the bad asset problem is a priority for 
both banks and national authorities. Throughout 
2016  and  2017  banks  managed  to  bolster  their 
capital  levels  through  a  variety  of  measures  and, 
more importantly, to attract international investors. 
The  authorities  in  turn  took  several  important 
decisions 
their 
profitability  and deal  more  efficiently  with  legacy 
bad  debt.  Key  measures  included  extending  the 
duration of the loan to the national resolution fund, 
the sale of Novo Banco and the announcement of a 
comprehensive three-pronged strategy to deal with 
bad  assets.  The  three  largest  banks  holding  a 
substantial  share  of  all  NPLs,  created  a  credit 
management platform explained further down. 

improve 

to 

Savings  still  grow  despite  the  lowest  deposit 
remuneration  on  record  (see  Graph  4.2.1). 
Aggregate  deposits  are  still  growing  and  account 
for  the  vast  majority  of  the  Portuguese  banks’ 
funding.  Contrary 
to  other  Member  States, 
Portuguese  banks  are  forbidden  by  law  to  charge 

negative  interest  rates,  even  to  large  companies. 
This  increases  the  incentives  for  multinationals  to 
deposit excess liquidity in Portugal. 

Portugal  has  one  of  the  highest  NPL  ratios  in 
the EU. By the end of September 2017 the overall 
NPL  ratio  was  14.6 %  (European  Central  Bank) 
compared to 17.2 % at end-2016. In absolute terms 
NPLs  decreased  by  EUR  10.2  billion  since  the 
peak,  mainly  due  to  NPL  portfolio  sales  and  a 
diminished  flow  of  new  NPL.  Nonetheless  the 
ratio  is  still  approximately  three  times  the  euro 
area  average  (European  Central  Bank,  Q3-2017). 
Without  the  reduction  in  total  loans  (denominator 
effect)  the  ratio  would  have  come  down  faster. 
Broken down by sector, non-performing exposures 
of  mortgage  loans  amount  to  6.5 %,  consumer 
loans  9.6 %  whereas  corporate  NPLs  are  still 
27.5 %; compared to 7.2 %, 12.4 % and 30.3 % in 
June  2016  respectively.  On  the  back  of  falling 
NPLs in absolute terms the average coverage ratio 
rose slightly to 45.9 % (ECB), 2.7 pps higher than 
in June 2016 (EU average is 45 %).  

Graph 4.2.1:  Saving with domestic banks 

Source: Bank of Portugal 

assets 

The  strategy  to  address  NPLs  already  covers 
the  most  important  aspects,  and  some  steps 
have been taken to facilitate their recovery. The 
issue  of 
is 
legacy  non-performing 
recognised by the authorities as a key vulnerability 
of the financial system. The focus is on NPLs from 
non-financial  corporations,  which  make  up  65 % 
of  all  NPLs  and  were  valued  at  around  EUR  25 
billion.  This  issue  is  being  addressed  by  a  three-
pronged  strategy: (i)  changes  to  the judicial,  legal 
(ii)  prudential/supervisory 
tax 
and 
measures 
the  Single  Supervisory 
Mechanism  (SSM);  and  (iii)  NPL  management 

systems, 
led  by 

28 

-10-5051015208090100110120130140150160170180Jan-2008May-2008Sep-2008Jan-2009May-2009Sep-2009Jan-2010May-2010Sep-2010Jan-2011May-2011Sep-2011Jan-2012May-2012Sep-2012Jan-2013May-2013Sep-2013Jan-2014May-2014Sep-2014Jan-2015May-2015Sep-2015Jan-2016May-2016Sep-2016Jan-2017May-2017Sep-2017HHs depositsNFC depositsAggregate deposits (rhs)HHs deposits (rhs)EUR billiony-o-y% change 
 
 
4.2. Financial sector, private indebtedness and housing market 

to  lowered  deposit  remuneration  –  the  lowered 
flow  of  impaired  loans  in  2017  explains  why 
profitability  improved  somewhat.  Banks  cut  costs 
through  closing  branches  and  early  retirement 
schemes,  both  of  which  have  high  up-front  costs 
while  only  yielding  benefits  later.  Consequently 
the  cost-to-income  ratio  remains  high  at  62.5 % 
(EBA  data  for  the  biggest  banks)  in  June  2017. 
Given  that  Portugal  still  has  one  of  the  highest 
branch  densities  in  the  EU  more  consolidation 
efforts  seem  warranted.  Concerning  return  on 
equity ECB data from June 2017 shows 0.2 % for 
the  Portuguese  banks  as  a  whole,  compared 
to -0.6 % in June 2016.  

Portuguese banks  managed  to  issue  shares  and 
attract  shareholders  yet  their  capital  base 
remains  low.  The  system's  capital  and  reserves 
amounted to EUR 36.3 billion in September 2017, 
increasing  from  EUR  29.8  billion  in  December 
together 
2016.  CGD,  BCP  and  Montepio 
strengthened  their  capital  in  2017  by  more  than 
EUR 6 billion  in  total.  Still,  Portuguese  banks  are 
amongst  Europe's  least  capitalised.  Banco  de 
Portugal  cites  CET1  with  13.2 %  in  June  2017. 
Further  increases  are  planned.  Lone  Star,  who 
bought Novo Banco in October, has injected EUR 
1  billion  during  2017.  Novo  Banco  will  have  to 
issue  EUR  400  million  in  subordinated  debt  until 
the end of 2018. CGD also plans another EUR 430 
million  Additional  Tier  1  bond  issue  in  2018. 
These  additional  injections  will  not  change  the 
picture  substantially  but  contribute  to  bridge  the 
gap to EU peers. Nevertheless, if Portuguese banks 
are  to  become  more  profitable,  they  may  have  to 
generate  capital  organically  and  dispose  more 
quickly of NPLs. 

Improved  profitability  prospects  attracted 
foreign  investors  to  invest  in  Portuguese  credit 
institutions. Foreign investors play an increasingly 
important  role  in  the  Portuguese  banking  sector. 
BPI  continued  deconsolidating 
its  Angolan 
exposure  and  in  February  2017  the  Spanish 
CaixaBank  group  reinforced  its  position  in  the 
bank,  which  now  amounts  to  84.5 %.  Millennium 
BCP,  the  second  biggest  bank  in  the  system, 
and 
increased 
the  Chinese 
conglomerate  Fosun 
list  of  strategic 
to 
shareholders.  Santander  Totta,  owned  by  the 
Spanish  Santander  group,  continues  to  grow  its 
balance  sheet  through  consolidating  its  operations 
with  Banco  Popular’s  Portuguese  subsidiary, 

added 
its 

capital 

is 

for 

various 

applying 

solutions  (discussed  in  the  next  paragraph).The 
strategy’s  legal  strand  is  essentially  focused  on 
enabling  the  early  restructurings  of  firms,  while 
ensuring  that  non-viable  companies  are  prevented 
from 
pre-insolvency 
proceedings  and  thus  benefitting  from  creditors’ 
protection — often used as a strategy to delay the 
inevitable  liquidation.  Also,  the  strategy’s judicial 
pillar 
insolvency 
focused  on  expediting 
proceedings  (see  Section  4.4.4).  The  secondary 
market  for  bad  assets  was  further  boosted  by  the 
Credit  Recovery  Funds,  which 
the 
divestment  of  some  of  the  assets  that  were  in  the 
funds. The strategy’s supervisory strand focuses on 
providing guidance to banks on how to efficiently 
decrease NPLs. In addition, steps have been taken 
to tackle constraints to the recovery of NPLs. They 
target (i) the ability for banks to fiscally recognise 
write-offs;  and  (ii)  the  incentive  for  creating  a 
secondary  market  for  NPLs,  by  enabling  new 
servicing  companies  to  enter  the  market.  The 
success  of  this  strategy  heavily  depends  on  how 
well it is implemented. 

started 

Banks  are  taking  measures  to  address  their 
high  level  of  NPLs.  Banks  have  submitted  five-
year  NPL  reduction  plans  to  the  supervisor.  The 
plans  are  based  on  SSM  guidance  and  include 
measures  such  as  cash  recoveries,  foreclosures, 
sales of NPLs and write-offs, and the use of SSM 
guidance  on  NPLs.  Furthermore,  various  NPL 
management solutions are part of the third pillar of 
the  comprehensive  strategy  to  tackle  the  banking 
system’s  legacy  NPLs.  Among  these,  a  relevant 
initiative  being  put  forward  by  banks  is  the 
‘coordination platform’. This platform is a specific 
approach  to  deal  with  NPLs  from  non-financial 
corporations  (NFCs),  which  aims  to  promote 
strengthened  creditor  coordination  to  expedite 
credit  restructuring.  The  platform  also  intends  to 
attract both public and private funds and technical 
assistance  to  restructure  viable  businesses  but  it 
remains to be seen how it will be operationalised. 
While this platform will not solve once for all the 
NPL  problem,  it  will  be  helpful  in  the  medium 
term for more challenging cases.  

Profitability  remains  very  low  seen  from  a 
European  perspective,  in  part  due  to  non-
and  high 
recurring 
impairment  levels,  hampering  the  build-up  of 
organic capital. While net intermediation income 
remained  relatively  stable  –  predominately  thanks 

restructuring 

costs 

29 

 
the 

following 
resolution  of  Banco  Popular 
Español.  Following  a  three-year  process  Novo 
Banco’s sale was completed in October 2017 when 
US private equity fund Lone Star closed the deal to 
acquire  75 %  of  the  bank  in  exchange  for  Novo 
Banco being recapitalised by EUR 1 billion. Fully 
Portuguese  owned  banks  such  as  the  sector’s 
biggest  bank  CGD  and  Montepio,  the  country’s 
sixth  largest,  also  carried  out  capital  increases, 
which in the case of CGD was conducted through 
public recapitalisations as it is a 100% state-owned 
bank.  Montepio  changed  into  a  limited  liability 
reinforces 
company, 
shareholding,  governance  and 
strategic 
orientation of the bank. 

status 

legal 

that 

the 

a 

4.2.2.  HOUSING MARKET* 

Graph 4.2.2:  Valuation gap on price/income, price/rent 

and fundamental model valuation gaps 

4.2. Financial sector, private indebtedness and housing market 

average. Yet they are only around a quarter of the 
2003 to 2007 average. Consequently amortisations 
still  outweigh  new  mortgages  and  their  stock  still 
shrinks  with  2.3 %  year-on-year  by  the  end  of 
Q3-2017. If adjusted for all non-transaction related 
issues (23) the decrease is 1.4 %. 

and 

demand 

external 

Prices are still recovering from the crisis slump 
with  price  hikes  mostly  restricted  to  tourist 
areas. Concentration of price hikes in tourist areas, 
including  projects  for  transforming  residential 
properties  into  accommodation  facilities  suggest 
that the housing market is currently mainly driven 
by 
tourism-related 
investments. 
  Domestic  factors  appear  much 
weaker  as  the  stock  of  mortgage  loans  is  still 
declining. The price increase in 2016-2017 comes 
after a long period of decline and is so far seen as a 
correction  of  past  undervaluation  rather  than  an 
accumulation  of  new  imbalances.  Based  on  the 
synthetic  valuation  gap  (an  average  of  a  model-
based  assessment  and  deviations  from  price-to-
income  and  price-to-rent ratios),  real  house  prices 
are still deemed slightly undervalued. Nonetheless, 
the  rapid  price  increases  are  affecting  internal 
demand  and  might  aggravate  the  issue  of  housing 
affordability 
Remaining 
restrictions  in  the  construction  sector  should  be 
assessed  to  understand  if  they  are  a  barrier  for 
increasing housing supply (see Section 4.4.3). 

(Section 

4.3.2). 

Source: European Commission 

Real  estate  prices  are  back  to  2009  levels  and 
the  pace  of  mortgages  decrease  slowed  down. 
House  price  inflation  rose  from  7.1 %  in  2016  to 
10.4 %  year-on-year  in  Q3-2017.  The  deflated 
house price index increased by 6 % in 2016 and is 
estimated  to  have  risen  even  more  in  2017.  Real 
estate  prices  are  back  to  2009  levels  implying  a 
20 %  real  appreciation  since  2013  following  a 
depreciation  of  17 %  between  2010  and  2013. 
Commercial  real  estate  prices  grow  slower  than 
those  for  residential  housing.  Newly  granted 
mortgages  between  January  and  September  2017 
their  2012-2013 
more 

than  quadrupled  from 

4.2.3.  ACCESS TO FINANCE* 

The  amount  of  bank  loans  granted  to  the 
corporate sector continued to contract but at a 
slower  pace.  Overall  private  sector  loans  fell  by 
4.0 %  between  September  2016  and  September 
2017.  Company  loan  stock  fell  by  6.7 %.  As 
Portuguese  banks  have  off-loaded  some  NPL 
portfolios, the adjusted decline is only 1.2 %. The 
loan-to-deposit  ratio  fell  slightly  from  80.9 %  in 
Q2-2016  to  79.4 %  in  Q2-2017  —  by  shrinking 
loans  rather 
than  by  growing  deposits.  The 
contraction  in  providing  credit  affects  both  SMEs 
and  large  companies.  In  September  2017  the 
proportion  of  debtors  with  overdue  credit 
amounted  to  26.4 %  (Bank  of  Portugal).  The 

(23)  The ECB computes annual growth rates as the differences 
in  outstanding  amounts  adjusted  for  all  non-transaction 
related 
i.e.  revaluations,  reclassifications,  and 
exchange rate adjustments. 

issues, 

30 

-20-15-10-5051015201995199619971998199920002001200220032004200520062007200820092010201120122013201420152016Model-based valuations gapPrice to income vs. hist. avg.Price to rent vs. hist. avg. 
 
                                                           
4.2. Financial sector, private indebtedness and housing market 

affect  investment  demand.  Highly  indebted  firms 
are  particularly  exposed  to  rising  interest  rates 
(Antonecchia  et  al.,  2016),  since  their  profits  are 
primarily  channelled  to  repay  debts.  Higher  rates 
could  fully  jeopardise  their  capacity  to  invest, 
which  would  in  turn  have  a  negative  impact  on 
economic  growth.  Therefore,  policies  aimed  at 
facilitating  the  exit  of  non-viable  businesses  and 
enhancing  business  dynamics  would  reduce  the 
risk  of  inefficient  capital  allocation  and  by  the 
same  token  reduce  the  flow  of  new  NPLs  in  a 
higher interest rate environment. 

low-risk  business  model.  On 

Through  increased  risk  differentiation  banks 
redirect credit towards less indebted firms with 
promising  business  models.  Banks  increasingly 
differentiate  loan  supply  across  credit  risk  levels 
and high NPLs do not seem to have much impact 
on  the  loan  supply  to  healthy  firms  with  a 
promising, 
the 
contrary, there is intense competition among banks 
for  the  best  risks  and  the  corporate  loan  interest 
rates  halved  since  2012.  The  median  mark-up  for 
the best risk quartile was below 2 % in September 
2017. Banks increased their lending to this quartile 
by  5 %  year-on-year.  Loan  stocks  concerning  the 
second  best  risk  quartile  stayed  flat  whereas  they 
decreased  for  the  two  worst  risk  quartiles  – 
partially  through  write-offs  and  NPL  work-out. 
Analysis  from  Banco  de  Portugal  shows  that 
companies  which  reduced  investment  since  2011 
had an average debt to total assets ratio of around 
36 % in 2011 and fell roughly 2 pps. Those which 
increased investment had a debt to total assets ratio 
around 28 % in 2011 and increased 1 pp. This is a 
to  macro-
welcome  development  as 
financial  stability,  helps 
its 
deleveraging path and – through channelling funds 
to  the  more  productive  sectors  –  contributes  to 
resource reallocation towards growing sectors.  

it  adds 
the  country  on 

There  are  significant  efforts  being  made  to 
improve  SMEs’  access  to  finance.  In  2017, 
access  to  finance  was  the  most  important  concern 
for  10 %  of  Portuguese  SMEs  (7 %  at  EU 
level)(24). This figure fell considerably from 19 % 
in  2013.  Portugal  provided  new  and  earmarked 
funds for SMEs, not only for working capital and 
company growth, but also for capitalising indebted 
companies.  New  legislative  initiative  and  public 
support  schemes  have  been  introduced  such  as 

(24)  Survey on the Access to Finance of Enterprises 

deleveraging process is ongoing with an aggregate 
reduction of private debt.  As a result firms' access 
to  bank  loans  is  reduced.  Additionally,  interest 
rates in Portugal are among the highest in the euro 
area (2.75 % in September 2017 against 1.57 %).  

Portuguese  SMEs  are  highly  dependent  on 
bank credit. Loans to micro-companies and SMEs 
accounted for the largest share of the total loans to 
Portuguese  NFC.  SMEs  have  higher  NPL  ratios 
(Graph  4.2.3).  Micro  and  small  corporates  are 
somewhat  riskier  than  bigger  corporates,  which 
firstly is reflected in the higher NPL rations on that 
segment  and  secondly  explains  also  the  higher 
interest  rates  they  receive.  Big  corporates  face 
fewer  impediments  to  finance  through  alternative 
sources such as issuances of bonds and equity. 

Graph 4.2.3:  Overdue loans as % of total loans by NFC's size 

Source: Bank of Portugal 

A  high  level  of  NPLs  is  making  banks  more 
prudent when allocating credit. While corporate 
loans attributed to firms in the best risk quartile are 
growing  among  heavy 
interbank  competition, 
loans  to  heavily  indebted  firms  are  on  the  other 
hand  decreasing.  Still,  Portuguese  companies 
benefited  in  general  from  the  low  interest  rate 
environment  which  facilitates  to  a  certain  extent 
and  alongside  other  factors  the  survival  of  over-
indebted  firms.  According  to  recent  estimates, 
around 14 % of the capital stock was sunk into so 
called  "zombie  firms"  in  2013  in  Portugal  (see 
McGowan et al., 2017). Once interest rates are on 
the  rise  again,  some  of  these  firms  may  find  it 
increasingly  difficult  to  pay  back  loans,  which  in 
turn would heighten the default risk and negatively 

31 

051015202530Q1-2009Q3-2009Q1-2010Q3-2010Q1-2011Q3-2011Q1-2012Q3-2012Q1-2013Q3-2013Q1-2014Q3-2014Q1-2015Q3-2015Q1-2016Q3-2016Q1-2017Q3-2017Micro corporationsSmall corporationsMedium-sized corporationsLarge companies% of total  
 
                                                           
4.2. Financial sector, private indebtedness and housing market 

guarantees  for  bank  loans,  credit  lines  and  funds. 
For instance, in January 2017 a new credit line of 
EUR1.6  billion  was  launched  to  support  SMEs, 
including  a  partial  guarantee  from  private  mutual 
guarantee  societies  and  a  partial  public  counter-
guarantee.  It  comes  on  top  of  a  EUR  1  billion 
credit line launched in 2016. Concerning the 2018 
Budget,  new  financial  instruments  have  been 
launched  under  the  programme  Capitalizar  (see 
section  4.4.3):  an  upgrade  of 
the  Linhas 
Capitalizar (some additional EUR 1.6 billion) and 
two  new  credit  lines:  for  exporting  companies 
(EUR  600  million),  and  for  the  financing  of  mid-
cap  companies  (EUR  400  million).  Bank  loans 
alongside  credit  lines  remain  the  most  relevant 
sources  of 
for  Portuguese  SMEs. 
Improving  access  to  capital  may  increase  the  low 
company  survival  rates.  During  2014-2020  there 
will be EUR 5 billion EU funds to support SMEs. 
In  the  last  two  years,  the  approval  of  financial 
incentives  to  SME  support  projects  significantly 
increased  with  almost  3.5  EUR  billion  committed 
and half the projects already implemented.  

financing 

Firm survival rates remain low. Only 46.5 % of 
firms established in 2008 were in business in 2010, 
whereas  only  50.6 %  of  those  established  in  2012 
survived to 2014. The survival rate did not change 
substantially  after  the  crisis  while  the  number  of 
companies established in 2012 was far lower than 
in  2008.  This  suggests  that  in  Portugal  there  are 
significant  difficulties  for  companies  trying  to 
survive  (see  Felix,  S.  2017).  Limited  access  to 
capital (both in terms of availability of capital and 
entrepreneurs’ awareness of existing opportunities) 
may  be  one  of  the  main  determinants  for  the  low 
competitiveness of new firms.  

Alternative  sources  of  finance  are  still  of  little 
relevance to Portuguese firms. In 2016 all private 
equity  investments  were  well  below  the  EU 
average.  Moreover,  as  regards  equity  capital,  in 
2017  only  3 %  of  SMEs  considered  it  relevant  or 
used it. Start-up Portugal (an umbrella programme 
for  entrepreneurship)  was  set  up 
to  offer 
loans.  The  programme 
alternatives 
promotes  new  financing  methods  such  as  equity 
crowdfunding,  peer-to-peer 
lending  and  co-
investment  with  key  national  and  international 
investments  as  a 
investors.  Venture  capital 
proportion  of  GDP  are  low  (0.008 %  in  2016 
according to Invest-Europe). Portugal Ventures the 
entity  responsible  for  public  venture  capital 

to  bank 

to 

intervene 

investment  has 
in 
the  capacity 
strategic  sectors  such  as  IT,  life  sciences,  tourism 
and  in  projects  at  a  stage  whereby  the  risk  is 
perceived to be too high for private investors. The 
total equity ratio on total assets for companies was 
32 % in 2015 (Banco de Portugal 2017a) which is 
low by EU standards. Almost a third of Portuguese 
(29 %), 
companies  are 
particularly smaller ones.  

in  negative  equity 

Venture  capital  funding  fell  since  the  crisis, 
hindering  the  growth  potential  of  Portuguese 
firms. Venture capital investments as a percentage 
of  GDP  have  not  yet  recovered  to  the  pre-crisis 
level.  Traditionally  some  of  the  most  significant 
venture capital investors in the country come from 
the  banking  sector,  which  is  typically  more  risk-
averse,  channelling 
to  more  mature, 
funds 
predictable (less risky)businesses. Venture Capital 
comes  mainly  from  state  and  bank  sources  both 
accounting  for  around  two-thirds  of  the  country´s 
venture  capital  investments.  The  information  and 
communications  technology  (ICT)  sector  is  the 
most  represented  sector  both  in  the  amount 
received  and  the  number  of  companies  receiving 
support  (Invest-Europe).  Portugal  Ventures,  a 
public  venture  capital  company,  invests  in  seed 
rounds of Portuguese startups in tech, life sciences 
and tourism and has invested more than EUR 260 
million  in  116  companies  since  its  creation  in 
2012.  It  has  announced  that  another  EUR  10 
million  will  be  provided  for  tech-based  start-ups. 
However,  the  stock  market  does  not  have  much 
appeal as there were not any initial public offerings 
since 2014 (Euronext New Listings Lisbon). Since 
some  venture  capitalists  aim  to  get  quick  returns 
on  investment  (e.g.  through  an  initial  public 
offering) boosting the stock market is key. 

Smaller firms are being helped to access capital 
markets. Within the Capitalizar programme there 
are  new  regulatory  initiatives  to  enable  firms  to 
access  capital  market  financing  and  to  provide 
wider  investing  options  for  investors.  On  the 
equity  side,  in  June  2017,  a  new  legal  investment 
tool  was  created  to  allow  SMEs  to  indirectly 
access  stock  market  financing.  This  new  type  of 
investment  tool  is  specially  designed  for  indirect 
investments  in  SMEs  which  are  pooled  into  a 
corporate  collective  investment  scheme  which  is 
allowed  trade  in  a  regulated  market.  On  the  debt 
side,  a  new  type  of  money  market  security  was 
created,  the  short-term  debt  certificates,  which 

32 

 
4.2. Financial sector, private indebtedness and housing market 

also  the  ongoing  adjustment  is  strong.  In  the 
corporate  sector,  the  consolidated  debt  ratio  of 
98.9 %  at  end-2016  exceeds  the  prudential  and 
fundamental  benchmarks  estimated  in  the  vicinity 
of  47 %  and  75 %  respectively  in  2016.  In  the 
household  sector,  the  debt  ratio  of  72.5 %  stands 
against  estimated  benchmarks  that  are  close  to 
30%.  Furthermore,  debt  sustainability  indicators 
suggest that the saving rate of the household sector 
would have to increase in order to ensure medium 
to long-term sustainability of its balance sheet(26).  

Graph 4.2.4:  Private sector indebtedness 

Source: Eurostat 

The  debt  structure  is  improving  but  problems 
persist.  The  debt  structure  highlights  some 
vulnerability in the private sector but is improving. 
The main issue is the large, albeit declining, share 
of NPLs (see Section 4.2.1). The problem is more 
pronounced in the corporate sector, accounting for 
about  two-thirds  of  all  NPLs.  In  the  household 
sector,  the  burden  of  NPLs  is  less  pronounced. 
However, the rate of debt reduction takes place in 
the  context  of  low  saving  rates,  which  are 
estimated to have risen only marginally to 6.2 % in 
2017  from  5.8 %  in 2016  that  is still significantly 
below  historical  values.  The  debt  burden  and 
related structural issues are thus having a negative 
impact  on  investments  and  growth  that  is  partly 
offset by the increasing role of FDI inflows, whose 
share in the country's net external position is rising 
(see Section 4.4.3).  

(26)  Debt sustainability indicators correspond to the permanent 
adjustment in the savings rate to (i) reach the fundamental 
benchmark  for  debt  within  15  years  (S1)  and  (ii)  ensure 
that net financial liabilities are eventually reimbursed (S2). 
See  also  European  Commission  (2017),  "Benchmarks  for 
the  assessment  of  private  debt",  Note  for  the  Economic 
Policy Committee".. 

broaden  the  range  of  debt  securities  available  to 
issuing SMEs, which are eligible for investment by 
mainstream 
investment  funds.  Both  measures 
enable  companies  to  diversify  their  sources  of 
funding  beyond  debt,  while  offering  more  choice 
to investors (Decree-Law 77/2017, 30 June). 

4.2.4.  PRIVATE INDEBTEDNESS* 

Private  debt,  though  elevated,  is  on  a  steady 
downward trend. In consolidated terms, the share 
of  private  debt  in  GDP  fell  from  210 %  at 
end-2012  to  171 %  at  end-2016.  The  distance  to 
the  indicative  MIP  threshold  of  133 %  was  thus 
nearly  halved  dropping  1/8th  annually,  which  is 
fast if compared to the public debt reference pace 
(the  Stability  and  Growth  Pact  adjustment 
benchmark  of  1/20th  annually).  At  end-2016, 
consolidated corporate debt accounted for 58 % of 
the  total  private  debt  a  similar  value  compared 
with  four  years  earlier, 
that  both 
household  and  corporate  sectors  are  deleveraging 
at  a  similar  pace.  Using  quarterly  Banco  de 
Portugal  data  on  the  stock  of  non-consolidated 
debt, the largest debt levels as of September 2017 
are 
(23 %  of  GDP), 
trade 
manufacturing  (22 %),  and  utilities  (18 %).  The 
amounts  for  construction  and  real  estate  stand  at 
13 % in each sector. The debt levels are declining 
in  all  sectors  but  the  steepest  drop  is  recorded  in 
construction.  The  debt  accumulated  by  large 
companies  accounts  for  43 %  of  GDP  while  the 
value  for  micro-firms  is  34 %  of  GDP.  Both 
groups  are  reducing  their  debt  burden  at  similar 
rates. 

indicating 

reported 

in 

While the pace of deleveraging looks adequate, 
private  debt  remains  well  above  the  estimated 
prudential  and  fundamentals  benchmarks(25). 
Both of the benchmarks for Portugal are estimated 
as  more  stringent  than  the  MIP  threshold  (see 
Section  3).  However,  the  pace  of  reduction  in  the 
debt ratios appears significant. Moreover, the latest 
improvement  in  the  bank  capitalisation  ratios  and 
macroeconomic performance and outlook is likely 
to  increase  both  the  prudential  and  fundamental 
benchmarks with a positive impact on the pace of 
debt  adjustments.  These  conclusions  apply  for 
corporate  and  household  sectors  alike  where  the 
distance  to  the  said  benchmarks  is  significant  but 

(25)  See footnote 5 in Section 1. 

33 

506070809010011012013020002001200220032004200520062007200820092010201120122013201420152016Series1Series2% of GDP 
                                                           
 
                                                           
4.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

4.3.1.  LABOUR MARKET* 

a 

Labour  market  conditions  keep  improving, 
thanks  to  the  economic  recovery  but  youth 
unemployment 
challenge. 
remains 
Unemployment  keeps  falling  steadily  and  the 
employment  rate  reached  its  highest  level  since 
2008 (see Section 1). Youth unemployment is also 
decreasing but remains high at 22.8 % in Q4-2017, 
(compared to 16.2 % in the EU). At the same time 
the  rate  of  young  people  not  in  education, 
employment,  or  training (NEET)  is below  the  EU 
average at 10.6 % in 2016 mostly due to the lower 
share 
Long-term 
unemployment has fallen rapidly, and is now at the 
same level as the euro area. As a proportion of the 
in 
active  population, 
Q3-2017 down from a peak of 9.3 % in Q3-2013. 
Older unemployed people find it  more difficult to 
get work. Almost three-quarters of 50-64 year olds 
have been unemployed over the long term.  

it  amounted 

to  4.3 % 

NEETs. 

inactive 

of 

Wage  growth 
slowed  down 
in  Portugal 
significantly  in  the  wake  of  the  economic  and 
financial  crisis  in  2008.  Nominal  wage  growth 
resumed in 2015 and returned to levels broadly in 
line  with  developments  in  productivity,  inflation 
and  unemployment  (see  Section  1  and  European 
Commission, 2017c). Compensation of employees 
per  hour  worked 
is  significantly  below  EU 
average,  despite  improving  between  2015  and 
2016.  This  reflects  sluggish  productivity  and 
moderate  wage  growth  over  the  last  decade,  as 
well as the large proportion of (comparatively low-
paid) temporary employees.  

Recent  minimum  wage 
increases  have 
supported  the  incomes  of  low-wage  workers, 
but led to a compression of the wage structure. 
The 2017 increase of the minimum wage (fixed at 
EUR  557  per  month)  was  the  third  since  2014, 
pointing  to  a  cumulative  increase  of  14.2 %.  The 
government  also  decided  to  further  increase  it  by 

4.1 %  to  EUR  580  per  month,  as  of  1  January 
2018.  In  absolute  levels,  the  minimum  wage 
remains  low  around  EU  675  per  month  on  a  12-
months  basis  (since  it  is  paid  14  times  a  year) 
when compared to the EU average. However, it is 
high  when  compared  to  the  Portuguese  average 
and  median  wage  levels  (of  which  it  represents 
respectively  47.2  %  and  65.3  %  in  2016)(27). 
Recent  increases  led  to  a  substantial  rise  in  the 
number of employees covered, up to 21.6% in the 
third  quarter  of  2017  (Government  of  Portugal, 
2017) further compressing the wage structure. The 
ongoing  compression  reduces  the  skills  wage 
premium,  in  particular  between  low  and  mid-
skilled  workers,  lowering  incentives  for  the  low 
skilled  to  invest  in  education  and  training.  Skill 
upgrading  is  a  major  concern  in  a  context  where 
almost  half  the  labour  force  is  low  skilled  (see 
section 4.4.3).  

Graph 4.3.1:  Employment and employment rate by 

educational attainment, changes between 
Q3-2014 and Q3-2017, age group 20-64 

Source: Eurostat, LFS 

(27)  Based on Eurostat data [earn_mw_avgr2]. 

34 

-4-202468-100-50050100150200250300High-skilledMedium-skilledLow-skilledTotalEmployment change (thousand)Change in employment rate (percentage points, right scale) 
 
 
                                                           
4.3. Labour market, education and social policies 

Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights 

The  European  Pillar  of  Social  Rights,  proclaimed  on  17  November  2017  by the European  Parliament,  the 
Council  and  the  European  Commission,  sets  out  20  principles  and  rights  to  benefit  citizens  in  the  EU.  In 
light of the legacy of the crisis and changes in our societies driven by population ageing, digitalisation and 
new ways of working, the Pillar serves as a compass for a renewed process of convergence towards better 
working and living conditions. 

Portugal  faces  challenges  with  regard  to  a  number  of  indicators  of  the  Social  Scoreboard (28) 
supporting the European Pillar of Social Rights. The country shows a positive yet moderate progress in 
terms  of  poverty  and  social  exclusion,  although  the  impact  of  social  transfers  (other  than  pensions)  on 
poverty  reduction  is  limited.  Notwithstanding  recent  reforms,  the  challenge  of  income  inequality  also 
remains  prominent,  in  a  context  of  disposable  income  still  below  pre-crisis  levels.  After  being  heavily 
affected by the crisis, the labour market continues its quick recovery, and the employment rate records on 
the  EU  average,  with  a  very  limited  gender  employment  gap.  Labour  market  segmentation  and 
unemployment remain a challenge, with youth being particularly affected. The health status of Portuguese 
people is relatively good but health inequalities remain.  

Albeit  from  high  levels,  the  early  school  leaving 
rate decreased significantly, and is on track to reach 
Europe  2020  national  target  of  10 %.  The  rate  fell 
from  34 %  in  2008  to  14 %  in  2016,  also  thanks  to 
recent  policy  efforts.  Educational  outcomes  keep 
improving,  but  concerns  remain  over  equity.  The 
adult population is still characterised by low levels of 
skills, including digital skills.  

childcare 

supporting 

Portugal has recently taken steps improving work-
life  balance.  47.2 %  of  children  aged  0-3  were  in 
formal 
equal 
in  2016, 
opportunities in the labour market. Policy measures to 
promote  work-life  balance,  namely  on 
further 
extension  of  parental  leave  rights  have  been  recently 
taken.  In  particular,  Portugal  recently  extended  the 
period  of  paternity  leave  to  up  to  25  working  days 
(formerly  20  working  days),  15  of  which  are 
mandatory  (previously  10) and must  be  taken  during 
the first month after the birth.  

(28) The Social Scoreboard includes 14 headline indicators, of which 12 are currently used to compare Member States performance. 
The indicators "participants in active labour market policies per 100 persons wanting to work" and "compensation of employees 
per hour worked (in EUR)" are not used due to technical concerns by Member States. Possible alternatives will be discussed in 
the relevant Committees. Abbreviation: GDHI – gross disposable household income. 

Minimum wage  increases  continue  in  a context 
of strong job creation. While the number of low-
skilled  workers  employed  has  fallen  by  about 
42 000  since  2014,  the  number  of  low-skilled 
people of working  age has  fallen  even  more  (as  a 
result of the ongoing upskilling of the population) 
(Graph  4.3.1).  Thus,  their  employment  rate  has 

actually increased by 5.9 pps. This is more than the 
increase recorded for medium-skilled workers (5.3 
pps). The employment rate of low-skilled workers 
is  comparatively  high  in  Portugal  (68.4 %  in  the 
third quarter of 2017 in the age group 20-64), but it 
has  fallen  by  almost  3  percentage  points  in  10 
the 
years.  Meanwhile  over 

the  same  period 

35 

Early leavers from education and training (% of population aged 18-24)Critical SituationGender employment gapOn averageIncome quintile ratio (S80/S20)To watchAt risk of poverty or social exclusion (in %)On averageYouth NEET (% of total population aged 15-24)On averageEmployment rate (% population aged 20-64)On averageUnemployment rate (% population aged 15-74)To watchGDHI per capita growth To watchImpact of social transfers (other than pensions) on poverty reductionTo watchChildren aged less than 3 years in formal childcareBest performersSelf-reported unmet need for medical care On averageIndividuals' level of digital skillsTo watchSocial protection and inclusionEqual opportunities and access to the labour marketPORTUGALMembersStatesareclassifiedaccordingtoastatisticalmethodologyagreedwiththeEMCOandSPCCommittees.ThemethodologylooksjointlyatlevelsandchangesoftheindicatorsincomparisonwiththerespectiveEUaveragesandclassifiesMemberStatesinsevencategories(from"bestperformers"to"criticalsituations").Forinstance,acountrycanbeflaggedas"betterthanaverage"iftheleveloftheindicatorisclosetoEUaverage,butitisimprovingfast.Formethodologicaldetails,please consult the draft Joint Employment Report 2018, COM (2017) 674 final.NEET:neitherinemploymentnorineducationortraining;GDHI:grossdisposablehousehold income.Dynamic labour markets and fair working conditions 
  
                                                           
4.3. Labour market, education and social policies 

similar workers shows that this wage gap increased 
from 14 % in 2010 to 15 % in 2014, and is among 
the  highest  in  the  EU  (European  Commission, 
2017c). The wage gap increases along with income 
quintiles,  and  is  highest  for  the  top  20 %  of  the 
country's  income  distribution.  This  suggests  a 
challenge especially for highly educated workers.  

the  conversion  of 

Measures  taken  to  promote  the  creation  of 
permanent  jobs  proved  effective  but  with 
limited coverage. In January 2017 the government 
reviewed  its  employment  support  programme  to 
promote  hiring  on  open-ended  contracts.  Two 
measures  were  introduced  to  promote  hiring  on 
(Contrato-Emprego)  and 
permanent  contracts 
support 
into 
traineeships 
permanent  contracts  (Prémio-Emprego).  These 
measures  were  effective  but  their  coverage  is 
limited.  Exemptions  of  social  contributions  for 
hiring people belonging to vulnerable groups (e.g. 
long-term  unemployed  and  young  people)  on 
open-ended  contracts  were  also  introduced.  Also 
more  labour  inspectors  are  being  recruited  and 
greater coordination between labour inspection, tax 
and social security services is being promoted. 

Possible  measures  to  address  labour  market 
segmentation  will  be  subject  to  tripartite 
discussions.  Following  the  publication  of  the 
Green  Book  on  Labour  Relations  (see  Box  4.3.2) 
the  government  began  discussions  with  social 
partners  on  possible  measures  to  further  tackle 
segmentation, including a possible reduction of the 
maximum  cumulative  duration  of  fixed-term 
contracts  and  limiting  the  legal  reasons  for  their 
use.  No  action  is  currently  planned  to  review  the 
legal framework for dismissals which, as discussed 
in  the  2017  country  report  and  in  OECD  (2017c) 
can  act  as  discouraging  elements  to  open-ended 
hiring, as well as cumbersome court procedures. 

to  suspend 

increasing  but 
Collective  agreements  are 
remain  below  pre-crisis  levels.  The  government 
and  the  majority  of  social  partners  agreed  in 
January  2017 
the  ‘expiry  rule’ 
(according to which expired collective agreements 
can  be  terminated  at  the  request  of  one  of  the 
parties) for 18 months, to promote social dialogue 
and  revive  collective  bargaining.  Data  for  2017 
actually  points  to  an  acceleration  in  collective 

employment  rate  of  medium-skilled  people  has 
increased  by  around  7  pps.  Overall,  this  evidence 
suggests  that,  while  the  minimum  wage  increases 
did  not  stop  the  employment  rate  of  low-skilled 
workers  from  rebounding  during  the  recovery, 
helped  by  expansion  in  labour-intensive  sectors 
such 
the 
and 
employability  of  these  workers  (which  is  affected 
by  long-term  structural  changes  in  the  economy) 
remains  at  risk.  Quarterly  reports  to  monitor 
minimum wage developments are published by the 
government and discussed with social partners. 

construction, 

tourism 

as 

Despite  the  recent  large  increase  in  permanent 
contracts, labour market segmentation remains 
high. The share of workers on temporary contracts 
is among the highest in the EU (see Section 1). In 
2016,  85.5 %  of  temporary  employees  (aged  20-
64)  were  in  this  situation  involuntarily.  Self-
employment (without employees) is on a long-term 
decline;  it  dropped  from  more  than  18 %  of  total 
employment  at  the  beginning  of  the  2000s  to 
11.4 %  in  2016.  This  trend  is  mostly  due  to  a 
decrease in agriculture and manufacturing, while a 
moderate  increase  is  recorded  in  professional 
services  and  other  service  activities.  This  may  be 
related, 
self-
employment.  According  to  analysis  by  Eurofound 
(2017),  34 %  of  self-employed  people  in  Portugal 
(one  of  the  highest  shares  in  the  EU)  have  this 
status because there is no other work available. 

some  cases, 

‘bogus’ 

to 

in 

increasing, 

While transitions from temporary to permanent 
jobs  are 
temporary  contracts 
remain the norm for unemployed finding a job. 
The  annual  transition  rate  from  temporary  to 
permanent  employment  has  increased  during  the 
recovery. It was about 30 % in 2016 up from 24 % 
in 2013 and higher than the EU average of 23.7 % 
in 2015 (EU-SILC data). Meanwhile the transition 
rate  from  temporary  contracts  into  unemployment 
fell  by  around  a  third  (from  17.4 %  in  2014  to 
11.3 %  in  2016,  although  slightly  higher  than  the 
EU average of 9.9 % in 2015). It is still much more 
likely for an unemployed person to get a temporary 
rather  than  a  permanent  contract  (18.3 %  v  4.7 % 
in  2016;  the  ratio  among  the  two  values,  3.9,  is 
among the largest in the EU). 

temporary  and 
The  wage  gap  between 
permanent  employees 
is  very  high  and 
increased  during  the  crisis.  In  particular,  the 
measure  that  allows  a  comparison  of  otherwise 

36 

 
4.3. Labour market, education and social policies 

20.6 %  regained  employment  (14.2 %  in  the  EU). 
However,  this  percentage  was  lower  for  people 
with  low  education  and  those  aged  55-64.  Recent 
national data point to an increase in the proportion 
of  recipients  of  unemployment  benefits  integrated 
into the labour market (from 12.8 % in November 
2014  to  17.5 %  in  November  2017).  In  addition, 
the average number of months that recipients were 
registered  with  the  Public  Employment  Services 
decreased from 16.7 in November 2014 to 12.7 in 
November  2017.  The  Government  plans 
to 
implement  one-stop  shops  in  the  first  quarter  of 
2018  to  provide  integrated  services  to  individuals 
and  employers  and  ensure  coordination  of  Public 
Employment Services with other services. Portugal 
is  also  developing  measures  to  offer  combined 
support to recruitment of young and older workers, 
mainly long-term unemployed (Contrato-Geração). 

Portugal’s  recent  economic  and  labour  market 
recovery  has  reduced  outward  migration.  Net 
emigration  continues  to  fall  (from  around  37 300 
in  2012  to  8 300  in  2016)  but  remains  negative. 
The  crude  net  emigration  rate  has  decreased  over 
the same period from 3.6 % to 0.8 %. Still, 40.5 % 
of  permanent  emigrants  in  2016  were  highly 
qualified  (against  29.9 %  in  2015).  The  economic 
recovery  will  probably  not  be  enough  to  reverse 
the  accumulated  net  outflow  of  migrants  over 
recent  years.  Shortages  in  labour  supply  for  low 
and  high  skilled  workers  might  emerge  if  not 
compensated  through  migration  inflows.  In  the 
health sector a significant number of professionals 
were  recruited  from  EU  and  non-EU  countries 
(e.g.  1 836  non-national  doctors  in  Portugal  in 
2015  -  European  Centre  of  Expertise  Expertise  in 
the  field  of  labour  law,  employment  and  labour 
market policies, 2017). 

While the employment gender gap remains low, 
the  difference  in  pay  between  women  and  men 
is  increasing  fast.  The  difference  between  the 
employment  rates  for  women  and  men  amounted 
to 6.8 pp in 2016, below the EU average. The gap 
narrowed  during  the  crisis  years,  and  has  not 
widened  during  the  recovery.  On  the  contrary  the 
(unadjusted)  gender  pay  gap  recorded  the  largest 
increase  in  the  EU  (by  4.5 %)  between  2013  and 
2015,  reaching  17.8 %  (now  higher  than  the  EU 
average  of  16.3 %).  The  gender  pay  gap  is  wider 
among  individuals  with  higher  education  levels. 
The  Government  is  enforcing  an  agenda  for 
equality in the labour market. This includes a law 

drops 

(although 

agreements(29),  with  208  signed  in  2017  (with 
46 %  at  firm  level)  compared  to  a  total  of  146  in 
2016.  In  June  2017,  the  rules  on  extending 
agreements  were  also  changed.  The  new 
framework  introduces  the  analysis  of  economic 
variables, 
loose) 
fixed 
representativeness criteria and introduces a swifter 
to  publish  extension 
administrative  deadline 
ordinances  (35  working  days  -  RCM  82/2017, 
09/06).  The  impact  of  the  new  rules  on  wage 
setting practices (see Post-Programme Surveillance 
Report  Summer  2017)  will  be  monitored  over  the 
following  quarters.  The  proportion  of  extensions 
for  published  agreements  increased  in  2017  to 
41 % (from 24 % in 2016) but remains below 2008 
level (46 %).   

The  Youth  Guarantee  measures  have  helped 
lower  youth  unemployment.  On  average  during 
2016 almost 6 out of every 10 NEETs aged under 
25 were registered in the Youth Guarantee scheme 
(compared to an EU average of 42.5 %). This is a 
noticeable  improvement  on  2015  (48.8 %).  More 
than half of those who left the Youth Guarantee in 
2016  (56 %)  were  in  employment  or  in  education 
and  training  within  6  months.    Follow-up  data  on 
the  long-term  outlook  suggest  that  outcomes  are 
sustainable.  However,  achieving  the  target  of 
providing  an  offer  within  4  months  is  proving 
difficult  with  follow-up  data  showing  this  is  not 
being reached. Since 2014 the percentage of young 
people still in the preparatory phase after 4 months 
has  increased  (by  more  than  32  pps)  and  stood  at 
55 % in 2016, above the EU average (49 %). 

tailor-made  personalised  plan, 

Some progress has been made to improve active 
labour  market  policies  and  address  long-term 
unemployment.  In  October  2016  a  model  of 
personalised  support  was  introduced  in  Public 
Employment  Services.  The  aim  is  to  ensure 
personalised and integrated support to users on the 
in 
basis  of  a 
particular for the long-term unemployed, until they 
are  effectively  integrated  into  the  labour  market. 
The  monitoring 
the  Council 
Recommendation  on  integrating  the  long-term 
unemployed (European Commission d) shows that 
almost all registered long-term unemployed people 
had  a  job  integration  agreement  in  2016  (98.3 %, 
against  an  EU  average  of  56.2 %).  Among  them, 

framework  of 

(29)  Boletim Estatístico Novembro 2017 (GEP), figures refer to 
the sum of sectoral agreements and firm-level agreements. 

37 

 
                                                           
4.3. Labour market, education and social policies 

income 

The  redistributive  capacity  of  the  tax  and 
benefit  system  contributed  to  reducing  market 
inequality  and  thus 
inequality.  As 
evident  in  Figure  4.3.3,  market  income  inequality 
(as  measured  by  the  Gini  coefficient (31)  before 
taxes  and  transfers)  had  been  rising  constantly 
from 2011 to 2014 up to 56.3 (among the highest 
in  the  EU).  This  reflected  deteriorating  labour 
market  conditions  up  to  2014  and  increasing 
then  started 
labour  market  segmentation. 
decreasing 
the  Gini 
coefficient  after 
transfers  remained 
relatively stable during the crisis and has decreased 
since  2014,  down  to  33.9  in  2016.  This  suggests 
that  the  tax  and  benefits  system  played  an 
important  role  in  combatting  income  inequalities, 
notably  in  the  last  5  years  (see  IMF  2017; 
European Commission 2017c). (32) 

in  2015.  Conversely, 

tax  and 

It 

Graph 4.3.2:  Disposable income inequality before and after 

tax and transfers 

on  gender  quotas  to  ensure  a  balance  between 
women  and  men  on 
the  administrative  and 
supervisory  boards  of  public-sector  firms  and 
listed  companies  (Law  62/2017).  The  national 
Parliament  is  discussing  a  bill  to  promote  equal 
pay between women and men. 

4.3.2.  SOCIAL POLICIES 

suggest 

in  poverty  and 

Improvements 
inequality 
continue.  Poverty  indicators  improved  since  the 
beginning  of  the  recovery,  although  inequality 
remains  high  (see  Section  1).  The  latest  national 
data  and  Eurostat  projections 
that 
improvements  are  continuing.  The  at-risk-of 
poverty  rate  is  set  to  decline  from  19 %  in  2016 
(referring  to  2015  incomes)  to  18.3 %  in  2017 
(referring to 2016 incomes) according to the latest 
national  data  (provisional).  Also,  Eurostat  flash 
estimates(30)  show  a  decrease  in  this  indicator, 
driven  by  rising  disposable  incomes  of  lower-
income households. Preliminary national data also 
suggest  a  recent  reduction  in  inequality,  namely 
the ratio of incomes earned by the top 20 % to the 
bottom  20 %  of  the  income  distribution  is  set  to 
decrease from 5.9 in 2016 to 5.7 in 2017.  

improvement 

In-work  poverty  remains  high,  also  due  to  the 
overall 
in  median  disposable 
income.  Stable  at  10.9 %  in  2016,  it  slightly 
reduced  to  10.8 %  in  2017  (provisional  data  for 
2016  income),  remaining  higher  than  the  EU 
average (9.5 % in 2016). It is a particular problem 
for  workers  on  temporary  contracts  (13.5 %  v 
6.6 %  for  workers  on  a  permanent  job)  and  for 
families  with  children  (13.0 %  vs  8.3 %  for 
households  without  dependent  children).  The  low 
impact so far of the minimum wage in reducing in-
work poverty can be linked to the entire population 
having their disposable income improved since the 
poverty  line  is  measured  as  60 %  of  median 
equivalised disposable income. 

(30)  Eurostat produced experimental flash estimates for income 
reference  year  2016,  which  can  be  used  in  preliminary 
analysis until the final EU-SILC data becomes available. 

Source: European Commission calculations with Eurostat, 
SILC data. 

(31)  Indicator  between  0  and  1,  lower  values  indicate  higher 
equality. To take into account the impact of differences in 
household  size  and  composition,  the  total  disposable 
household income consider is after tax and deductions.  
(32)  Fiscal  policy  can  help  enhance  redistribution  by  reducing 
both  disposable  (post-tax-and-transfer)  and  market  (pre-
tax-and-transfer) income inequalities. 

38 

303540455055602007200820092010201120122013201420152016Gini coefficient of equivalised disposable income post tax and social transfersGini coefficient of equivalised disposable income before tax and socialtransfers% 
                                                           
 
                                                           
4.3. Labour market, education and social policies 

Box 4.3.2: Green Book on Labour Relations 2016 

The Green Book on Labour Relations, commissioned by the Ministry of Labour, was published in December 
2016  and  is  a  portrait  of  the  Portuguese  labour  market.  The  main  goal  is  to  contribute  to  an  informed 
discussion of the last decade of Portuguese labour market developments and to involve social partners and 
political decision makers (among others) in the analysis to support a tripartite discussion on labour market 
regulation and collective bargaining. 

According to Green Book, Portugal had an increase in flexible working conditions between 2008 and 2013 
and a large decrease in the index of employment protection of workers with permanent contracts between 
2010 and 2013. Also, these reforms did not solve the issue of labour market segmentation and were actually 
followed by a proliferation of non-permanent employment. Some forms of individual dismissal in place are 
not used because they remain too complex, namely dismissal due to inadaptation. 

Regarding unemployment, the Green Book points out a significant increase of active measures in the labour 
market  between  2011  and  2015  with  almost  half  of  these  directed  to  the  creation  of  fixed-term  contracts 
(46.4 %). Relevant changes in the labour legislation are also mentioned, such as changes in the redundancy 
regime  (on  the  amounts  of  compensation  due  in  case  of  termination  of  employment  contracts  and  in 
dismissal for maladjustment) and in the working time arrangements (with the creation of the individual hour 
bank, reduction of the remuneration due for overtime work and elimination of compensatory rests). 

Regarding collective labour relations, the Green Book highlights stagnation in the number of work councils 
constituted  and  their  activity.  A  significant  decrease  between  2011  and  2014  of  collective  bargaining 
instruments is also mentioned, as well as a drop in collective labour agreements and workers covered since 
2011. Recent social tripartite agreements regarding minimum wage are also highlighted.  

in 

result 

the  decline 

Recent  measures  to  improve  social  safety  nets 
could  help  reverse 
the 
effectiveness of social transfers in lifting people 
out  of  poverty.  The  impact  of  social  transfers 
(other  than  pensions)  on  poverty  reduction  lies 
below  the  EU  average  and  has  been  decreasing 
during recent years, from 32.2 % in 2010 to 24 % 
from 
in  2016.  This  decrease  might 
increasing incomes, and lead to an increase in the 
poverty  threshold. The  indicator  is based on  2015 
incomes that do not reflect the most recent policy 
measures aimed at increasing social safety nets for 
low-income  earners.  In  2016  and  2017  Portugal 
aimed  to  strengthen  its  social  protection  system 
through a comprehensive strategy. Policy changes 
introduced in 2016 clearly had a progressive effect 
on  the  income  distribution  (Euromod,  2017) (33). 
Updates  have  been  put  in  place  concerning  the 
amounts 
the  solidarity 
supplement  for  the  elderly,  low  pensions  and 
family benefits. In 2017, the indexing reference of 
social support (the Social Support Index-IAS) was 

in  minimum 

income, 

(33)  Households’  disposable  income  increased  0.19 %  and  the 
first  income  decile  grew  almost  11 %  due  to  changes  in 
minimum  income  and  other  means  tested  like  the  Elderly 
Social Supplement or child benefits (Euromod, 2017). 

updated  for  the  first  time  since  2011,  from  EUR 
419 to 421.  

income 

Despite  efforts  made,  the  adequacy  of  the 
minimum income scheme is limited. Following a 
first  reform  in  2016  focused  on  the  equivalence 
scales  for  the  calculation  of  the  minimum  income 
benefits,  Portugal  made  important  changes  to  the 
minimum 
legal  scheme  (Rendimento 
Social  de  Inserção)  in  2017,  to  reinforce  its 
capacity  to  integrate  and  protect  persons  living  in 
poverty, without discrimination by nationality (34). 
Despite  an  increase  of  the  total  of  recipients  by 
1.8%  (in  November  2017  –  Social  Security 
Statistics)  over  the  previous  year,  the  level  of 
coverage in Portugal ranks among the lowest. The 
net  incomes  of  minimum-income  recipients  are 
very 
the  poverty 
threshold  and  net  incomes  of  low-wage  earners. 
This remains a challenge as the European Pillar of 
Social  Rights  emphasizes  that  ensuring  access  to 
minimum  income  benefits  is  essential  for  groups 
lacking  sufficient  resources,  as  is  the  right  to 

low  when  compared  with 

(34)  Requirements  and  general  conditions  of  entitlement,  with 
regard  to  legal  residence  in  Portugal  were  changed  in 
response  to  the  declarations  of  unconstitutionality  decreed 
by the Constitutional Court (decree law 90/2017). 

39 

 
                                                           
                                                           
4.3. Labour market, education and social policies 

access  enabling  goods  and  services.  In  contrast, 
Portugal  ranks  close  to  or  above  EU  average  for 
indicators  related  to  coverage  and  adequacy  of 
unemployment benefits (35). 

The coverage of self-employed people and those 
holding  atypical  jobs  by  the  social  protection 
system remains limited, but action was recently 
taken to address this issue. Portugal is one of the 
countries with the highest percentage of employed 
people  aged  15-64  at  risk  of  not  being  entitled  to 
sickness  benefits  (over  10 %)  though  universal 
access to healthcare is provided for (ESPN, 2017). 
New 
legislation  aiming  at  enlarging  social 
protection  coverage  for  self-employed  workers 
was adopted in January 2018, to be effective in the 
course  of  the  year.  It  reduces  the  waiting  time 
period to access the sickness subsidy from 30 to 10 
days.  It  also  introduces  a  new  unemployment 
benefit  regime  for  workers  considered  to  be 
economically dependent, with a reduced minimum 
contribution  period  from  720  to  360  days  (the 
criteria  for  being  classified  as  economically 
dependent  were  also  made 
less  strict).  The 
Government  estimates  an  increase  in  the  number 
of  potential  beneficiaries  from  68,000  to  95,000 
people. 

independence 

A  new  social  inclusion  benefit  and  a  scheme  to 
support 
for  people  with 
disabilities  have  been  recently  approved.  The 
latter  targets  people  with  disabilities  who  are 
over18 and have a disability above 60 %, aiming to 
help  them  access  employment.  Under  this  new 
measure,  in  addition  to  receiving  the  new  social 
benefit  (approximately  EUR  264,  non-means-
tested 
for  single  beneficiaries)  people  with 
disabilities  will  be  able  to  earn  up  to  a  certain 
amount  of 
from  work,  potentially 
increasing  their  employability  and  reducing  the 
risk  of  poverty.  This  scheme  to  support  to  an 
independent life is to be launched as a pilot project 
and aims to test a model of assistance that enables 
people  with  disabilities  to  become  independent 
(both at personal and professional level).  

income 

Housing  affordability  may  become  an  issue  for 
low-income  households 
in  view  of  recent 
in  house  prices.  Despite  a  slight 
increases 

(35)  Benchmarking  exercise  on  unemployment  benefits  and 
active labour market policies conducted within the EMCO 
Committee. See draft Joint Employment Report 2018.  

decrease when compared to 2015 (33.5 %) almost 
30 %  (29.1 %)  of  the  resident  population  with 
lower 
incomes  are  overburdened  by  housing 
costs (36).    In  addition,  the  recent  rise  in  housing 
prices  is  likely  to  worsen  the  situation  for  people 
who  have  low  incomes  and  are  socially  deprived, 
particularly  in  the  country’s  two  largest  cities 
the 
(Section  4.2.2).  To  address 
government is implementing ‘a new generation of 
housing  policies’  (several  measures  have  recently 
been  approved)  which  intend  to  introduce  tax 
incentives  for  owners  to  rent  at  lower  prices. 
Portugal  performed  well  concerning  housing 
deprivation,  yet  10.3 %  of  people  lived  in  a 
condition  of  insufficient  living  space,  the  same 
percentage  as  the  2  previous  years  (below  EU 
average). However, the severe housing deprivation 
rate decreased between 2014 and 2016. 

issue, 

the 

The  pension  system  provides  wide  coverage 
except  for  people  with  intermittent  careers. 
According to the 2018 Pensions Adequacy Report 
(forthcoming) 
the  Portuguese  pension  system 
provides  wide  coverage.  However  it  risks  being 
unable  to  ensure  the  elderly  are  appropriately 
protected  against  poverty  and  social  exclusion  in 
cases  of  intermittent  careers  even  if  pension 
adequacy  indicators  show  improvements  between 
2008  and  2016.  If  labour  market  segmentation  is 
not  reduced,  this  problem  can  worsen  given  the 
large  proportion  of 
temporary  workers  who 
typically have more periods without work. As this 
is  affecting  mainly  younger  cohorts,  it  has  an 
impact  in  their  pension  contribution  careers  and 
lead to weaker protection in old age. On the other 
end  of  the  spectrum  are  people  with  very  long 
contribution  careers.  Therefore,  the  government 
started  rolling  out  an  early  retirement  reform  (see 
Section  4.1.2)  applying  softer  or  no  penalties  to 
workers  who  started  working  at  an  early  age  and 
paid social contributions for many years. 

The  health  status  in  Portugal  is  above  the  EU 
average but health inequalities remain a general 
problem. At the age of 65, Portuguese women can 
expect  to  live  only  a  quarter  of  their  remaining 
years free of disability, while for men the figure is 
two-fifths.  Self-reported  unmet  needs  for  medical 

(36)  Proportion  of  people  living  in  households  where  the 
housing  costs  represent  more  than  40 %  of  disposable 
household  income  (net  of  housing  allowances).  Eurostat  - 
EU-SILC survey (2017). 

40 

 
                                                           
                                                           
4.3. Labour market, education and social policies 

rates 

Early school leaving in Portugal remains higher 
than  the  EU  average  but  recent  improvements 
in  education  outcomes  could  be  the  result  of 
greater  efficiency  in  education  provision.  The 
early school leaving rate fell from 34 % in 2008 to 
13.7 %  in  2015  and  increased  slightly  to  14 %  in 
2016.  While  some  of  the  decrease  might  come 
from  emigration  of  pupils  not  recorded,  it  is  still 
something  to  be  monitored.  The  gender  gap  in 
terms of school attainment however, is also above 
the  EU  average,  with  higher  early  school  leaving 
rates  for  men.  Several  measures  are  being 
implemented to encourage educational success and 
reduce  drop-out 
throughout  basic  and 
secondary education. These include: the promotion 
of full-time schooling; the national programme for 
("Programa 
fostering 
Nacional  de  Promoção  do  Sucesso  Escolar"- 
PNPSE);  and  the  enhancement  of  the  capacity  of 
teachers  and  directors  and  the  development  of 
strategies  adapted  to  the  specific  difficulties  of 
individual  students.    A  tutoring  system  for  early 
dropout  reached  80 %  of  all  eligible  students, 
engaging  2.700  tutors.  The  progress  of  several 
education system indicators set against the reduced 
level  of  spending  seems  to  indicate  a  certain 
success  in  the  reforms  implemented.  Possible 
improvement in this area is being explored by the 
Commission-supported  OECD  Portugal  School 
Resources Review started in 2017. The final report 
will be released by spring 2018. 

educational 

success 

activities 
In  addition, 

Decentralisation of the school system is ongoing 
and  autonomy  is  being  promoted.  Building  on 
the  successful  pilot  of  transferring  pre-school  and 
primary  school  competences  to  municipalities 
(meals,  social  assistance  and  transport),  a  number 
signed  with 
of  new  contracts  are  being 
municipalities.  They  deal  with  non-teaching  staff, 
and 
complementary 
educational 
equipment  management. 
inter-
administrative  contracts  are  being  signed  focused 
on  administrative  autonomy,  staffing  of  special 
projects, 
and 
community engagement. This significant coverage 
is promising but it may be challenging as concerns 
securing the necessary resources both at local and 
national  levels.  Within  the  national  programme 
PNPSE,  schools  can  propose  on  voluntary  basis 
new pedagogical initiatives adapted to their student 
population  and  receive  additional  resources  to 
develop 
first  year  of 
implementation  98.6 %  of  all  schools  joined  the 

them.  During 

infrastructures 

logistic 

and 

the 

care  equal  the  EU  average  and  reflect  efforts 
undertaken  so  far.  Only  3 %  of  the  Portuguese 
population report unmet needs due to cost, distance 
or waiting time (Eurostat) but there are differences 
between  income  groups.  Despite  a  system  of 
exemptions on user charges to ensure equal access 
to health, the recorded rate of user charges in 2015 
was  10  times  higher  for  the  lowest  income  group 
(6.4) than for the highest income group (0.6). User 
charges were reduced for the first time in 2016 and 
expanded  the  groups  eligible  for  exemptions, 
including  unemployed,  pregnant  women,  children 
and  those  with  certain  medical  conditions.  Its 
impact has yet to be evaluated.  

Despite  universal  coverage,  geographical  gaps 
in providing services hinder access. Government 
measures  have  tried  to  simplify  the  recruitment 
process for general practitioners. By end-2016 the 
proportion  of  National  Health  System  users 
registered  with  a  general  practitioner  reached 
92.1 %  of 
the  population.  Remaining  key 
challenges  are  (i)  ensuring  health  workers  are 
appropriately 
different 
geographical areas and (ii) providing incentives to 
retain  and  motivate  staff  with  the  required  skills. 
There  are  significant  differences 
in  health 
indicators between the large metropolitan areas of 
Lisbon and Oporto and the interior regions. People 
living  in  rural  areas  face  barriers  in  accessing 
healthcare  which  are  mainly  geographic,  such  as 
being too far from a central hospital that can treat a 
wide variety of diseases, notably oncological. 

distributed 

across 

4.3.3.  EDUCATION, VOCATIONAL TRAINING 

AND SKILLS* 

Educational  outcomes  keep 
improving,  but 
there are equity concerns. The proportion of low 
achievers  in  Portugal  decreased  in  all  subjects 
tested (PISA, 2015) and the country is now above 
the  OECD  and  EU  averages  for  the  first  time. 
Despite these positive trends, the proportion of low 
achievers  among  students 
the  bottom 
socioeconomic  quartile  is  25  pps  higher  than  that 
from the top socioeconomic  quartile. Portugal has 
the third highest rate of grade repetition in the EU 
(31 %).  The  gaps  between  non-migrants  and 
people with a migrant background — as measured 
by  early  school  leaving  rates,  PISA  performance 
and grade retention — are comparatively small. 

from 

41 

 
plan and over 50 % of them implemented between 
80 % to 100 % of planed actions.  

The  employment  rate  of  recent  graduates 
remains  below  the  EU  average,  but  tertiary 
attainment  keeps  growing.  Tertiary  attainment 
was  34.6 %  in  2016  (age  30-34),  approaching  the 
EU  average  of  39.1 %.  However,  the  national 
target  of  40 %  by  2020  might  be  difficult  to 
achieve. Despite the high employability of science, 
engineering, 
and  mathematics 
graduates,  there  is  a  low  student  uptake  in  these 
(Governo  de  Portugal,  2016).  The 
fields 
employment  rate  of  recent 
tertiary  graduates 
increased to 77.8 % in 2016, but remains below the 
EU average of 82.8 % and below the national pre-
crisis  level.  The  tertiary  education  attainment  rate 
for  people  with  disabilities  is  low  in  Portugal. 
(20.9 % vs 29.4 % in the EU-SILC 2015). 

technology, 

Graph 4.3.3:  Early school leavers, NEET and tertiary 

attainment 

4.3. Labour market, education and social policies 

also  highlights  the  importance  of  having  broad 
coverage  in  vocational  education  and  training 
(VET)  programmes  to  promote  lifelong  learning. 
Adult participation in training was 9.6 % in 2016, 
below the EU average of 10.8 %. Also, only 50 % 
of citizens in 2017 possessed basic or above basic 
digital  skills  and  27  %  had  no  digital  skills  at  all 
(mostly because they do not use the internet or do 
so seldom), whereas the EU average stood at 57% 
and  17%  respectively.  The  risk  of  certain  groups 
being  digitally  excluded  such  as  the  elderly 
particularly  in  rural  areas,  those  on  low  incomes 
and those with low education levels, is particularly 
high in Portugal. Only 31 % of people belonging to 
these  groups  had  at  least  basic  digital  skills  in 
2017,  9  pps  below  the  EU  average  (European 
Commission,  Digital  Scoreboard).  INCoDe.2030, 
which was launched in 2017, aims to stimulate and 
reinforce digital literacy (see section 4.5.3) but it is 
too early to ascertain its impact. 

to 

initiatives  aim 

Recent 
increase  VET 
attractiveness  and  boost  participation  in  upper 
secondary  vocational  programmes.  While  the 
proportion of upper secondary students (ISCED 3) 
enrolled in VET remained stable in 2015 at 44.9 % 
(below  the  EU  average  47.3 %),  the  employment 
rate  of  recent  VET  graduates  increased  from  68.6 
%  in  2015  to  69.8  %  in  2016,  but  below  the  EU 
average of 75 %. The publication in early 2017 of 
increase 
the  national  credit  system  aims 
transparency 
and 
and 
fragmentation of VET programs. Nevertheless, the 
system  is  only  applicable  to  double  certification 
training  within 
the  national  qualifications 
catalogue. The recently launched ‘Qualifica Portal’ 
may help obtain information easier, enabling users 
to consult programme-related services and tools. 

to 
overlaps 

address 

(1) Early leavers from education and training, age 18-24 
(2) NEET. Not in employment, education or training, age 
15-24 
(3) Tertiary educational attainment, age 30-34.  
All in % of population  
Source: Eurostat, LFS 

Portugal’s labour force is still characterised by 
relatively  low  skill  levels.  In  2016  only  52 %  of 
those  employed  in  Portugal  were  mid-or  high-
skilled compared with an EU average of 82 %. The 
problem  is  more  acute  for  people  over  40  (44 % 
against  an  EU  average  of  80 %)  than  for  younger 
people  (67 %  against  EU  87 %).  This  prevents 
productivity  increases  and  investment  in  higher 
value-added  productions  (Sections  1  and  4.4).  It 

The effectiveness of the Qualifica Programme in 
boosting  adult  education  will  depend  on  the 
coverage  of  the  training  component.  There  are 
300 Qualifica centres and the authorities launched 
the  ‘Qualifica  passport’,  a  technological  tool  that 
organises  the  educational  and  training  courses 
already carried out and suggests new qualification 
courses,  identifying  different  targets  adjusted  to 
the profile of each user. The Qualifica Programme 
objectives  are  similar  to  previous  qualification 
recognition  programmes  (Novas  Oportunidades 
2005-2012  or  Centros  para  a  Qualificacao  e 
Ensino  Profissional  2013)  but  has  a  stronger 
towards 
training  component. 

It  contributes 

42 

05101520253035400510152025303540455020002001200220032004200520062007200820092010201120122013201420152016Tertiary education 30-34 (rhs)NEET 15-24 (lhs)Early school leavers 18-24 (lhs)% of population% of population 
 
4.3. Labour market, education and social policies 

the  objectives  of 

achieving 
the  Upskilling 
Pathways  Recommendation.  It  is  still  early  to 
assess  the  adequacy  and  impact  of  Qualifica  in 
increasing literacy, numeracy and digital skills but 
recent  national  data  show  that  the  programme 
(launched 
the 
expected  targets  so  far.  The  capacity  of  this 
programme  in  effectively  upgrading  the  skills  of 
the  labour  force  will  depend  on  the  coverage  and 
quality  of  the  training  component,  going  beyond 
the mere recognition of competences.  

in  March  2017) 

is  exceeding 

43 

 
4.4.  COMPETITIVENESS, INVESTMENT AND PUBLIC 

ADMINISTRATION 

4.4.1.  COMPETITIVENESS* 

The  share  of  exports  in  GDP  keeps  increasing. 
Exports  rose  from  30 %  of  GDP  in  2007-2010  to 
40 %  in  2016  and  are  projected  at  43 %  in  2017 
and 45 % in 2018. There are signs of improvement 
in  the  value-added  structure  of  export  industries 
though  part  of  the  increase  is  also  driven  by 
cyclical factors, particularly tourism, or temporary 
developments such as the large capacity upgrade in 
the car production industry. Yet, the share of high-
technology products in total exports remains small 
though  gradually  rising  from  a  historical  low  of 
3 %  in  2010  to  the  latest  reported  3.8 %  in  2015 
against a non-weighted EU average of 12.3 %.  

to 

improvement 

in  2018  due 

Unit  labour  costs  (ULC)  have  been  growing 
broadly  in  line  with  trading  partners.    The 
indicator  dropped  6 %  between  2010  and  2014 
following a very long period of steady increase. In 
2015,  ULC  were  stable  and  started  to  increase 
again in 2016. The growth slowed in 2017 due to 
moderation  in  wages,  despite  the  increase  in  the 
minimum  wage,  and  it  is  expected  to  moderate 
further 
in 
productivity.  Overall,  ULC  are  expected  to  grow 
broadly  in  line  with  trading  partners  over  the 
medium  run.  The  latest  dynamics  do  not yet  pose 
risks to cost competiveness as the country's export 
market share in global trade increased by 3.5 % in 
2016 and is projected to increase in 2017 and 2018 
the 
together  with 
corporate sector. However, there are risks that the 
positive  economic  cycle,  particularly  in  tourism, 
can  add  upward  pressure on ULC  and  slow  down 
the 
recovery.  Therefore,  policy 
export-led 
the  business 
measures  aimed  at 
environment  are  important  for  both  cost  and  non-
cost  competitiveness  and  for  a  further  shift  from 
debt to FDI financing. 

improved  profitability 

improving 

in 

chains 

in  global  value 

Participation 
is 
increasing  but  from  low  base.  In  the  last  five 
years  there  was  a  rebalancing  towards  exports, 
supported  also  by  foreign  investments.  Yet,  the 
share of domestic value added created from global 
value  chains  is  relatively  small  (Amador  and 
Stehrer  2014,  data 
Intermediate 
production levels especially assembly are likely to 
add  less  value.    In  2014  Portugal  displayed  a 
weaker  participation  in  exports  of  goods  with 

for  2011). 

higher  value  added  and  kept  its  comparative 
advantage  in  production  of  labour-intensive  and 
low-  to  medium-value  added  activities.  The  later 
contributes  to  only  a  modest  catching-up  in 
productivity  vis-à-vis  the  EU.  In  terms  of  global 
value  chains  Portugal  seems  to  be  positioned  in 
upstream  input  on  services  and  downstream  on 
manufacturing.  The  share  of  manufacturing  in 
gross  exports  is  higher  than  in  added  value.  In 
2014  in  Portugal  the  share  of  gross  intra-EU 
exports  in  low-tech  manufacturing  was  40 % 
vis-à-vis  a  share  of  27 %  in  value  added  and  in 
high-tech 32 % vis-à-vis 14 %. The opposite is true 
for services, for example logistics represent 9 % of 
gross  exports  but  23 %  in  value  added  and  the 
share  of  business  services  in  gross  exports  is  2 % 
vis-à-vis 10 % in value added. 

Graph 4.4.1:  Labour productivity growth based on shift-

share analysis % changes contributions in pps 

Source: European Commission 

reallocation 

The  positive  structural  effect  on 
labour 
productivity  increased  since  the  crisis.  Of  the 
1.4 %  average  productivity  increase  in  Portugal 
between  1995  and  2007,  structural  change  from 
sectorial 
(or  shift  effect)  only 
accounted for less than 0.2 pps (Graph 4.4.1). This 
impact  nearly  doubled  in  2008-2016  although  the 
change  took  place  mostly  in  the  first  part  of  this 
period  as  the  recent  expansion  in  labour-intensive 
sectors, particularly tourism as well as construction 
in  2017  is  having  an  opposite  impact.  Improved 
is  still  having  a 
productivity  within  sectors 
labour 
stronger  positive 

impact  on 

total 

44 

0.00.20.40.60.81.01.21.41.61995-20072008-2016Change in total labour productivity in Euro AreaChange in total labour productivity in PTSectorial productivity growth in PTStructural changes in PT% 
 
 
4.4. Competitiveness, investment and public administration 

In 

respect, 

in the service sector (see OECD (b)). Conversely, 
low firm-level productivity may as well be keeping 
their  size  relatively  small  as  productivity  growth 
often  precedes  increases  in  firm  size  (see  Moral-
Benito  2016). 
regulatory 
this 
restrictions  in  certain  sectors  (e.g.  services),  and 
barriers  to  company  growth  hamper  productivity 
and hurt business dynamics. Indeed, administrative 
and  regulatory  barriers  still  restrict  competition  in 
services.  Furthermore,  constraints  in  the  access  to 
capital  for  SMEs  may  also  negatively  impact 
productivity  growth  (see  Ferrando  and  Ruggieri 
2015 and section 4.2).  

4.4.2.  INVESTMENT SITUATION AND 

CHALLENGES* 

financed  primarily 

Private 
investments  and  profitability  are 
increasing. Private investment is expected to reach 
14.5 % of GDP in 2017, reflecting a strong impact 
from  the  capacity  upgrade  in  the  automotive 
industry 
through  external 
sources.  Nevertheless,  the  level  of  investments 
remains among the lowest in the EU and continues 
to be restrained by the large stock of indebtedness 
and  deleveraging  needs.  Portuguese  corporates 
started  to  recover  from  deep-seated  structural 
indicators  of  NFC's 
problems.  Profitability 
improved significantly in Q2-2017, but still remain 
below (except transportation and storage activities) 
the  pre-crisis 
results 
(EBIDTA)  over  total  assets  indicator  reports  a 
stronger  drop  and  weaker  recovery  in  the  non-
tradable  industries  such  as  construction.  The 
attractiveness of the tradable sector is increasingly 
contributing  to  the  shift  from  non-tradable  to 
tradable sectors in terms of resources reallocation. 

level.  An  operational 

The  decrease  in  labour  productivity  in  recent 
years  could  be  also  linked  to  lower  investment 
levels. Investment is an important driver of labour 
productivity  growth.  Capital  deepening  (i.e.  the 
amount  of  fixed  capital  per  worker)  up  to  2013, 
positively  contributed 
labour  productivity 
evolution  during  that  period.  During  the  crisis, 
strong  labour  shedding,  in  a  context  of  slowdown 
in the investment rate mitigated the drop in capital 
deepening.  During  the  recovery  fast  employment 
creation  lead  to  a  decline  in  capital  deepening, 
despite  some  recovery 
investment  and  a 
slowdown in labour productivity in recent years.  

in 

to 

productivity but its role has declined in the period 
of 2008-2016 relative to the previous ten years. 

Labour  productivity  is  expected  to  remain 
below the average level in the euro area in both 
2016  and  2017.  Portugal's  GDP  per  employee  in 
purchasing power standards is estimated at 78 % of 
the euro area average in 2016 and at 68% for GDP 
per hours worked. Labour productivity dropped by 
0.1 % in 2016 in terms of value added per worker 
and  improved  by  0.5%  in  terms  of  hours  worked. 
Moreover, labour productivity is projected to drop 
again  in  2017  as  employment  grew  faster  than 
GDP.  This  is  largely  due  to  the  above-mentioned 
strong  and  partly  cyclical  expansion  in  labour 
intensive  sectors  such  as  tourism  and  tourism-
in 
related  services  as  well  as 
residential  construction.  Although  the  impact  of 
productivity  on  competitiveness  is  offset  by  the 
moderate  wage  developments,  it  is  limiting  the 
the 
country's  potential 
average EU levels. On the other hand, total factor 
productivity  retains  a  positive  trend  since  2012 
indicating  that  efficiency  gains  in  other  factors  of 
recent 
production  are  partly  offsetting 
deterioration in labour productivity. 

to  converge 

the  rebound 

towards 

the 

Graph 4.4.2:  Labour productivity per hour worked and total 

factor productivity 

Source: European Commission 

The low level of labour productivity in Portugal 
could be linked to the relatively small firm size. 
Productivity is particularly low for micro-firms (1-
9  employees)  in  the  services  sector.  Furthermore, 
in  recent  years,  labour  productivity  growth  of 
small  firms  has  been  lower  than  that  of  their 
counterparts  in  other  Member  States,  in  particular 

45 

909510010511011512012513020002001200220032004200520062007200820092010201120122013201420152016Labour productivityTotal factor productivityIndex 2000= 100 
 
4.4. Competitiveness, investment and public administration 

Graph 4.4.3:  Labour productivity growth breakdown, 

Graph 4.4.4:  FDI stocks by sectors 

(percentage changes; contributions in pps) 

(1) Capital deepening: rate of change in capital stock per 
worker.  
Source: European Commission 

Source: European Commission 

Foreign direct investment is increasing and can 
contribute  to  reduce  imbalances  and  foster 
overall  investment.  Private  investments  reached 
historical  lows  of  around  13 %  of  GDP  over  the 
2012-2015  period  but  increased  to  14 %  in  2016, 
helped  by 
improved  corporate  profits  and 
increased FDI inflow. The steepest increase in net 
FDI took place in 2012-2014 when the net stock of 
FDI widened from 18.6 % of GDP at end-2011 to 
31.2 % at end-2014. The growth rate slowed down 
somewhat afterwards, reaching 34.7 % of GDP as 
of  September  2017.  It  should  be  also  noted  that 
real  estate  purchases  by  non-residents  had  a 
substantial  weight  on  FDI  inflows  particularly  in 
2015-2016.  Shifting  external  debt  towards  FDI 
instruments can contribute to reduce imbalances. 

European  funds  have  contributed  to  attenuate 
cyclical effects. The European cohesion policy has 
provided, in relative terms, a higher support in bad 
economic times, playing thus a very much needed 
counter-cyclical  role.  The  share  of  the  policy  in 
total  public investment  has varied  considerably; it 
has been around 40 % before the crisis while it has 
increased  dramatically  in  recent  years,  mostly 
because  of  the  intense  fall  of  public  investment 
financed  by  the  national  and  local  budgets.  Over 
the  three  years  2015–2017,  EU  funding  under 
Cohesion policy was equivalent to more than 75 % 
of total government spending on investment (EU is 
8.5 %). 

4.4.3.  BUSINESS ENVIRONMENT, SERVICES AND 

CONSTRUCTION* 

initiatives 

launched  positive 

Portugal 
to 
improve the business environment. In June 2017, 
20  new  measures  were  added  to  the  Capitalizar 
programme (37). In addition to new credit lines (see 
Section  4.2.3);  the  new  measures  are  expected  to 
be  implemented  during  the  first  quarter  of  2018. 
These  include:  the  development  of  early  warning 
and  out-of-courts  mechanisms  (see  Section  4.4.4) 
for  insolvent  firms;  the  creation  of  a  Business 
Gateway  website  by  the  IAPMEI  (Portuguese 
SMEs Public Agency) to centralise the information 
on financial support; the reversion of the burden of 
proof 
insolvency 
administrators  regarding  the  company’s  tax  debit; 
and  the  launch  of  business  training  to  promote 
interaction  between  firms  and  new  stakeholders. 
Moreover,  in  November  2017  Portugal  approved 
the Internacionalizar programme to accelerate the 
internationalisation of SMEs. The main objectives 
are increasing: the value of exports up to 50 % of 
GDP by 2020; the number of exporting SMEs; and 
the  gross  national  value  added.  Other  initiatives 
focus  on  entrepreneurship,  (such  as  the  Start-up 
Portugal  programme),  and  on  digitising 
the 
economy (including Programa Industria 4.0).  

for  new  management  and 

(37)  Capitalizar  was  introduced  in  2016  with  64  measures  to 

support firm capitalisation and restructuring. 

46 

-1.0-0.50.00.51.01.52.02.51996 -  20002001 - 20072008 - 20122013 - 20162017 - 2019Capital deepeningTotal factor productionLabour productivity growthpps., %forecast020 00040 00060 00080 000100 000120 000140 00020152016Q3-2017OtherFinancial and insurance activitiesNon financial servicesConstruction + Real estateManufacturing and gasmillion EUR 
 
 
                                                           
4.4. Competitiveness, investment and public administration 

the 

from 

central 

Simplification  measures  are  also  ongoing  to 
the  administrative  burden.  Nova 
reduce 
University  evaluated 
impact  of  selected 
the 
Simplex+  2016  measures  (strategy  for  simplifying 
public  administration)  on  firms,  resulting  in  EUR 
624 million in savings for companies and 490 000 
hours  of  work  saved  in  the  public  administration. 
An evaluation of Simplex+ 2017 is ongoing. Some 
planned  measures  under  Simplex+  2017  include: 
expanding Espaço Empresa(38) to local investment 
desks  run  by  municipalities,  with  back  office 
supported 
administration; 
replacing  paper  files  for  digital  files  for  tax 
inspection;  introducing  pre-filled  VAT  forms  for 
micro-firms.  The  SMEs  test  was  implemented 
through the programme ‘Custa Quanto?’, although 
its impact  is not yet fully clear. The shift towards 
e-procurement 
increase  SME 
participation in public tenders. At the same time, e-
government  applications  (Estratégia  TIC”  (ICT 
Strategy),  PNR  (National  Program  of  Reforms), 
the Citizen Spot and Citizen Shop Network and the 
Simplex Program support the national strategy for 
reorganising 
public 
administration  services.)  aim  to  make  public 
administrative  services  more  efficient.  To  tackle 
the  complexity  of  licensing  and  administrative 
procedures,  Portugal  promoted  the  adoption  of 
policy  measures  in  line  with  the  ‘responsive 
administration  principle’.  Improvements  in  the 
business environment can help to attract more FDI 
thereby  shifting  the  composition  of  Portugal's 
external  financing  structure  towards  lower  risk 
instruments. 

is  expected 

modernizing 

and 

to 

control 

Administrative  and  regulatory  barriers  still 
restrict competition in the professional services. 
Portugal  is  one  of  the  Member  States  with  the 
highest  number  of  regulated  services  sectors. 
Moreover, 
the  regulatory  burden  on  service 
providers, along with the administrative burden of 
high. 
schemes, 
related 
Professional  regulations  are  significantly  higher 
than  the  EU  average,  according  to  Commission 
guidance issued in January 2017. The by-laws for 
highly regulated professions introduced restrictions 
such  as  the  prohibition  of  professional  companies 
corporate  groups  or,  mainly  regarding 
legal 
professions,  kept 
longstanding  restrictions  on 
advertising or even multiple and overlapping legal 

remains 

(38)  Espaco  Empresa,  is  a  public  multichannel  network, 

providing customised services for businesses. 

management 

shareholding, 

restrictions.  Reserves 

and 
form, 
multidisciplinary 
of 
activities to highly regulated professions subject to 
this  restrictive  legal  framework  are  extensive 
keeping  out  competitors  wishing 
to  provide 
ancillary  services.  There  are  also  concerns  on  the 
effect  of  this  restrictive  legal  framework  on 
competition  in  the  professional  services  market 
which  could  result  in:  prices  increasing;  choice, 
innovation  and  the  quality  of  services  being 
lowered. A study by the OECD and the Portuguese 
Competition Authority will assess by mid-2018 the 
need  to  further  simplify  regulations  for  Ports  & 
Maritime services, for the transports sector and its 
professions 
highly-regulated 
professions. 

and 

for 

13 

Regulatory  and  administrative  restrictions  in 
construction  services  may  restrict  supply, 
including  in  the  housing  sector.  Although  the 
market  access  regime  for  construction  services  in 
general has been simplified in 2015, in the context 
of  the  financial  assistance  programme,  for  both 
establishing and temporary cross-border providers, 
the  fee  system  for  registration  remains  complex 
compared 
is  not 
to  other  countries,  and 
proportional  to  the  administrative  cost  of  the 
approval  process.  Services  providers  are  also 
subject  to  an  annual  fee  for  the  duration  of  the 
registration. The fees system for building controls, 
on  the  other  hand,  is  determined  at  national  level 
while the rates are fixed at local level. The number 
of authorities involved in the process of approving 
submission  demands  necessary  for  a  building 
permit  under  the  regular  procedure  is  far  higher 
than  other  EU  countries.  Additionally,  Portugal 
does  not  have  fully  adopted  performance  based 
standards for building works and most of existing 
standards  use  prescriptive  approaches.  In  2017 
Portugal ranked 32nd in ‘dealing with construction 
permits’  (World  Bank,  2017a).  Actions  taken  to 
simplify  the  regulatory  burden  to  the  construction 
the  2016  SIMPLEX+ 
environment 
programme  although  with 
regulatory 
impact,  and  recent  amendments  of  the  Public 
Procurement  Code  (see  section  4.4.4).  Foreign 
providers  face  several  authorization  procedures  to 
operate  in  the  Portuguese  construction  market 
regarding  several  construction  segments  such  as 
installation  services.  Registration  for  temporary 
cross border services providers for those segments 
is  similar  to  that  of  permanent  ones,  albeit 
generally lighter. Although expected soon, mutual 

include 

limited 

47 

 
                                                           
4.4. Competitiveness, investment and public administration 

recognition  of  insurances  is  not  yet  operational. 
Such restrictions can be a barrier to FDI.  

4.4.4.  PUBLIC ADMINISTRATION* 

Restrictions for certain regulated professions in 
the  construction  sector  are  high  and  skills 
shortages  may  intensify  in  the  short  term. 
Restrictions  to  accessing  regulated  professions  in 
the  construction  sector  are  higher  than  the  EU 
average  for  professionals  such  as  civil  engineers 
and  architects,  whereas  the  field  involving  real 
estate  agents  has  been  deregulated  in  2013. 
Although  the  number  of  job  vacancies  in  the 
construction  sector  decreased  significantly  since 
2010,  the  pattern  started  to  change  in  2014. 
Regarding  skills  supply,  students  enrolled  in 
construction 
as 
engineering,  manufacturing,  architecture)  dropped 
by 23.4 % in the period 2010-2015. Only a third of 
civil engineers required in the sector enter the job 
market  every year  and  there  will  be  an  increasing 
need  of  foreign  skilled  workers  if  this  shortage 
persists  (Order  of  Engineers).  The  sector  also 
suffers  shortages  in  manpower.  Around  240 000 
Portuguese workers in the construction sector have 
emigrated  (Association  of  Civil  Engineering  and 
Public Works Professionals). 

disciplines 

related 

(such 

Portugal  is  a  front-runner  in  developing  a 
regulatory  framework  for  collaborative  short-
term  accommodation  services.  All  hosts  renting 
out  private  properties  are  now  obliged  to  register 
electronically  and  comply  with  basic  standards 
registration 
fire  safety.  Mandatory 
including 
allows  authorities  to  check  properties,  verify 
income tax payments and monitor effects on local 
communities.  Registration  is  not  costly  and  no 
authorisation  is  required.  The  scheme  has  helped 
Portugal  to  quickly  develop  as  a  major  tourism 
destination.  It  especially  helped  long-established 
accommodation  providers  who  were  unable  to 
meet 
increasing  consumer  demand.  However, 
collaborative  urban  passenger  transport  services 
are  not  well  developed  due  to  access  restrictions 
and uncertainty over licenses (Frazzani, 2016). As 
a result, hired transport is dominated by traditional 
services.  The  Portuguese  Competition 
taxi 
Authority  has  proposed  to  remove  or  relax  the 
barriers  to  increase  competition  in  the  sector  (cf. 
Autoridade da Concorrencia 2016).  

for 

first 

instance 

The  Portuguese  justice  system  continues  to 
improve  its  efficiency  although  the  length  of 
proceedings remains a problem. The disposition 
time  for  first  instance  administrative  law  cases 
continued to be long in 2016 (911 days), although 
it  had  fallen  from  2015  (989  days).  Disposition 
time 
litigious  civil  and 
commercial  cases  also  decreased  slightly  in  2016 
(289  days)  compared  to  2015  (315) according  to 
2018  EU  Justice  Scoreboard.Various  measures 
aimed  at  increasing  the  efficiency  and  quality  of 
justice have been undertaken. In 2017 a number of 
legislative  measures  were  carried  out  to  increase 
the  Courts  human  resources  and  to  enable  better 
access  to  justice (39).  In  parallel,  a  number  of 
technical  and  administrative  measures  were  also 
undertaken  in  2017,  such  as:  establishing  an 
interface  between  the  tax  authority  and  the  fiscal 
courts’  computer  systems;  launching  a  dedicated 
website  for  legal  representatives;  optimising  the 
administrative  and 
information 
system;  and  improving  the  training  courses  for 
judges. 

fiscal  courts’ 

A number of measures slated for adoption have 
the  potential  to  improve  efficiency  and  quality 
of  the  justice  system.  For  example,  further 
specialisation  within  existing  courts  like  new 
sections  in  the  administrative  court  dealing  with 
public  officials’  claims  and  the  creation  of  two 
sections  in  the  tax  courts  (one  for  tax  execution 
and  one 
the  administrative 
infringement procedures). Other proposals include: 
creating an advisory body (high judges, academics, 
lawyers) within the Council of the Judiciary; rapid 
reaction teams of judges for solving pending cases; 
the  strengthening  of  management  powers  of  court 
presidents;  and  increased  recruitment  of  judges, 
prosecutors and court clerks. 

reviewing 

for 

The  recovery  process  of  viable  firms  is  being 
facilitated.  New 
the  extrajudicial 
restructuring  of  firms  (PER)  aim  at  preventing 
it.  New 
non-viable 
requirements  include  a  certification  issued  by  an 

from  misusing 

firms 

rules 

for 

(39)  Government  Ordinance  211/2017  vacancies  of  judges  and 
prosecutors in the 1st instance Courts; 290/2017 vacancies 
of judges and prosecutors in the superior Courts; 288/2017 
vacancies  in  the  Supplementary  body  of  judges;  289/2017 
vacancies  in  the  Permanent  body  of  inspectors;  178/2017 
one-stop court services Administrative and Fiscal Courts. 

48 

 
                                                           
4.4. Competitiveness, investment and public administration 

Conference  on  Digital  Government.  This  signals 
the country's active involvement in this area.   

The new Public Procurement Code can improve 
competition  in  public  procurement.  The  new 
Code  (Código  dos  Contratos  Públicos)  was 
adopted in August 2017 (Decree-Law 111-B/2017) 
with  the  objective  of  transposing  the  European 
Public Procurement Directives (40) and entered into 
force  in  January  2018.  The  new  rules  aim  at 
promoting transparency and better management of 
public  contracts.  In  particular  a  contract  manager 
figure is created to give support in technically and 
financially  complex  contracts.  The  revision  also 
brings  stricter  restrictions  on  the  use  of  direct 
awards and it includes a prior consultation of three 
for  higher  value  non-
tenders  mandatory 
competitive procedures.  

Imobiliário 

Direct  awards  and  the  use  of  non-competitive 
procedures  remained  high  and  ex-ante  and 
ex-post  public  procurement  controls  are  still 
weak  (see  European  Commission  Country  Report 
2017).  According  to  the  IMPIC  (Instituto  dos 
e  da 
Mercados  Públicos,  do 
Construção,  I.P.)  monthly  reports  which  use  data 
from  the  dedicated  online  public  procurement 
platform  (BASE) (41)  contracting  authorities  in 
Portugal  often  make  use  of  the  direct  award 
procedure.  Audits 
of 
by 
Finance (42)     also  identified  a  frequent  use  of  the 
direct awards (in 85% of the procedures published 
in  BASE  between  2013  and  2015)  and  an 
insufficient  justification  according  to  material 
criteria.  The  notion  of  extreme  urgency 
is 
sometimes  interpreted  in  a  too  broad  manner, 
leading  to  an  unduly  use  of  direct  awards.  The 
Public Procurement Code aims at addressing these 
issues  by  for  example  reducing  the  threshold  for 
direct  awards.  Transparency  and  reliability  of 
public procurement data are however improving.  

the  Ministry 

(40)  Amends the Public Procurement Code and introduces into 
Portuguese  law  the  European  Directives:  2014/23/EC, 
2014/24/EC, 2014/25/EC, and 2014/55/EC 

(41)  BASE  dataset  does  not  include  the  totality  of  awarded 
public contracts (according to the IGF Report approved on 
the 22nd June 2016 by the State Secretary for the Budget, 
on  average,  only  15%  of  the  total  value  of  the  awarded 
public  contracts  is  published  in  BASE).  Additionally,  on 
direct  awards,  previous  publication  of  contracts  on  the 
portal is mandatory, with penalty of nullity otherwise. 
(42)  IGF  Report  approved  on  the  22nd  June  2016  by  the  State 

Secretary for the Budget. 

insolvent  firms.  If 

accountant  or  auditor  that  the  company  is  not 
insolvent and a first proposal of the recovery plan 
with  the  agreement  minimum  10 %  of  creditors. 
The  objective  is  a  clearer  split  with  viable  firms 
recurring  to  PER  and  court  insolvency  processes 
mainly  used  by 
it  will 
incentivise  the  use  of  out-of-court  proceedings 
remains  to  be  seen:  while  PER  and  judicial 
liquidation  are  enforceable 
towards  everyone, 
currently  out-of-court  arrangements  are  only 
binding 
towards  participating  creditors.  The 
Business  Recovery  Mediator  providing  assistance 
to  SMEs  and  a  legal  framework  for  out-of-court 
collateral 
firm 
restructuring.  

repossession  can  also  help 

Most  difficulties  remain  on  proceedings  for 
insolvent  firms.  While  the  number  of  pending 
cases  in  insolvency  courts  is  decreasing,  the 
average  duration  of  insolvency  processes  is  still 
high,  around  40  months  in  2016  and  has  been 
increasing  since  2012  most  likely  also  as  a  result 
of  the  economic  crisis.  It  is  a  very  long  judicial 
process  with  complex  proceedings  for  a  credit 
recovery  rate  lower  than  8 %.  The  recovery  rate 
could  improve  if  the  insolvency  process  from 
when  the  company  becomes  insolvent  until  the 
case  is  closed,  would  be  faster  and  if  insolvent 
companies could be declared insolvent earlier. 

(European 

Commission 

Digital  solutions  are  helping  to  modernise 
Portugal's  public  administration.  The  country 
remains  among  the  EU  leaders  in  the  area  of 
digital public services in terms of both demand and 
supply 
Digital 
Scoreboard).  However,  there  are  difficulties  in 
further  increasing  uptake  in  a  context  where 
segments  of  the  population  lack  the  necessary 
digital  skills.  The  Council  for  Information  and 
Communication Technologies is developing a new 
governance  model 
Public 
for 
Administration  (in  alignment  with  Simplex+,  see 
Section  4.4.3)  to  help  reduce  administrative  costs 
for  citizens  and  companies.  Several  sectoral 
digitisation measures have likewise been launched 
(e.g.  Plano  de  Ação  Justiça  +  Próxima)  and 
promising  initiatives  have  been  put  in  place,  such 
as  the  use  of  electronic  medical  prescriptions  and 
pre-filled  tax  returns  (see  also  section  4.1.4).  In 
2017,  Portugal  hosted  the  Sharing  &  Reuse 
Conference 
European 
Commission 
Administrative 
Modernisation  Agency  as  well  as  the  European 

organised 
and 

by 
the 

ICT 

the 

in 

49 

 
                                                           
4.4. Competitiveness, investment and public administration 

to 

adapted 

preventive  side,    prevention  plans  set  up  in  each 
public institution have been largely formalistic and 
not 
nor 
each 
complemented  by  adequate  monitoring,  but  some 
efforts  are  being  done  by  the  Council  for  the 
Prevention  of  Corruption  and  some  ministries  to 
improve 
in  public 
institutions.   

the  culture  of 

organisation 

integrity 

performing 

country  would 

Improvements  in  institutional  quality  amplify 
the  gains  of 
tackling  service  restrictions. 
Structural reforms are more likely to succeed with 
well-functioning institutions and good governance. 
Lifting  governance  indicators  to  the  level  of  the 
best 
generate 
productivity  gains  that  are  on  average  one  and  a 
half  times  that  of  tackling  services  restrictions 
alone  (cf.  Curnis  and  Manjón  Antolín  2017). 
Aspects 
to  corruption  control  and 
accountability are of particular relevance. Reforms 
in these areas could amplify the productivity gains 
in  manufacturing  of  tackling  service  restrictions. 
The  sectors  that  would benefit  the  most would  be 
food and textiles industries, which represent over a 
third of Portugal's manufacturing added value.  

related 

Graph 4.4.5:  Impact on labour productivity in 

manufacturing of tackling services restrictions 

Portuguese  firms  believe  that  illegal  practices 
are  widespread  in  public  procurement,  most 
notably 
tailor-made  specifications  for  certain 
companies  (74%,  EU  average  61%),  conflicts  of 
interests  in  evaluation  of  bids  (69%,  EU  average 
54%).  In  the  EU,  Portugal  shows  the  highest 
number  of  businesses  who  believe  that  abuse  of 
emergency  grounds  to  justify  the  use  of  non-
competitive  or 
in  are 
widespread  in  public  procurement  in  Portugal  in 
the  EU  (76%,  EU  average  46%)  and  one  of  the 
highest  proportion  of  companies  who  believe  that 
the  abuse  of  negotiated  procedures  is  widespread 
(66%, EU average 48% - Eurobarometer 2017).   

fast-track  procedures 

Corruption is an area of concern for businesses 
in  Portugal,  but  reforms  are  slow.  A  2017 
Eurobarometer survey shows that 58 % of business 
representatives  in  Portugal  consider  corruption  a 
problem  for  their  company  (EU  average:  37 %), 
while  favouritism  and  nepotism  is  considered  a 
problem  by  55 %  of  companies  (EU  average: 
40 %).  70 %  of  businesses  operating  in  Portugal 
think that the only way to succeed in business is to 
have  political  connections  (EU  average:  42 %). 
The ad hoc parliamentary committee for improving 
transparency in public office set up in March 2016 
has  not  yet  concluded  its  work  and  many  of  the 
the 
anticorruption 
government  programme  (Governo  de  Portugal 
2015)  have  not  yet  been  adopted.  These  include 
dedicated lobbying regulation, a code of conduct to 
political offices holders, senior public officials and 
civil  servants,  a  public  registry  of  interests  for 
local  government  officials  and  a  ban  on  the 
acceptance  of  judicial  cases  against  public  bodies 
for Members of Parliament’s work as lawyers. 

introduced 

pledges 

in 

investigations  by  digitalizing 

Progress  continues  in  repressing  corruption, 
but  efforts  need  to  be  stepped  up  as  regards 
prevention.  The  Prosecutor  General  continues 
efforts  to  improve  the  effectiveness  of  anti-
corruption 
the 
collection  and  analysis  of  evidence.  A  number  of 
individuals  and  companies  have  recently  been 
indicted in a single large high-level case, which is 
ongoing.  The  Prosecutor  General  is  strengthening 
cooperation  with  audit  and  control  bodies  to 
improve  the  detection  of  corruption.    On  the 

(1) Services restrictions: OECD Product Market Regulations; 
Institutional quality: World Bank governance indicators.  
Source: European Commission; Curnis and Antolín 2017 

50 

0510152025Manufacture of rubber and plasticproductsManufacture of wood and of productsof wood and cork, except furniture;manufacture of articles of straw andplaiting materialsManufacture of food products;beverages and tobacco productsManufacture of basic metalsRepair and installation of machineryand equipmentManufacture of textiles, wearingapparel, leather and related productsManufacture of basic pharmaceuticalproducts and pharmaceuticalpreparationsManufacture of other non-metallicmineral productsNo PMR restrictions with no changes incontrol of corruptionNo PMR restrictions lifitng level of control ofcorruption to best in class% 
 
 
 
4.4. Competitiveness, investment and public administration 

Box 4.4.1: Investment challenges and reforms in Portugal 

1. Macroeconomic Perspective 

Portugal experienced a substantial decline in investment over the period of 2000 -2013 followed by a modest 
recovery in 2014-2016 and a more substantial increase during 2017. Yet, investment is expected to remain at 
16% of GDP in 2017, one of the lowest in the EU and a substantial decline from the 28% peak in 2000 when 
it was among the highest in the EU. The high public and private debt stock restraints investments imposing 
significant  deleveraging  needs.  Non-debt  financing  such  as  FDI  and  EU  funds  are  therefore  of  major 
importance and both played a positive role for the 2017 rebound along with improved corporate profitability. 
The  positive  cycle  in  tourism  boosting  construction,  and  the  capacity  upgrade  in  the  major  automotive 
producer also contributed to the rebound. Public sector investments remain low at 2% of GDP and heavily 
dependent on the EU funds cycle.  

2. Assessment of barriers to investment and ongoing reforms 

Main barriers to investment and priority actions underway 

In addition to macroeconomic constraints, restrictions in some business services and regulated professions as 
well as network industries still play an important role in Portugal. Innovation performance remains low and 
there  is  still  little  R&D  investment.  The  current strategy  of  fiscal  consolidation  through  decreasing  public 
investment can have negative spillovers to the rest of the economy. The increasing house prices highlight the 
need  to  reduce  barriers  to  construction  services.  Some  aspects  of  the  legal  framework  for  individual 
dismissals  may  prevent  a  better  resource  allocation  which  has  impacts  on  productivity  and  investment 
capacity. The fact that there is a large share of micro and small firms also means that many firms have little 
capacity to invest. 

Deleveraging  needs,  a  high  level  of  non-performing  loans  coupled  with  underdeveloped  capital  markets 
limit the investment capacity of many over indebted firms. Faster insolvency procedures for non-viable firm 
together with a smooth restructuring of still viable companies could improve capital allocation. 

R&D investment remains low and concentrated on the public sector. Synergies between R&D investments 
and other intangible assets remain untapped. Public and private investments in competencies such as training 
and  organisational  capital  as  %  of  GDP  are  below  EU  average.  The  share  of  ICT  investments  in  GDP 
declined since 2000.  

51 

Table 2:Regulatory/ administrative burdenCSRTaxationPublic administrationAccess to financeCSRPublic procurement /PPPsCooperation btw academia, research and businessJudicial systemCSRFinancing of R&D&IInsolvency frameworkCSRBusiness services / Regulated professionsCSRCompetition and regulatory frameworkRetailEPL & framework for labour contracts CSRConstructionCSRWages & 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 * 

R&D investment remains low and concentrated 
on  the  public  sector.  R&D  intensity  has  not 
recovered to the pre-crisis level of 1.58 % of GDP 
and  was  only  1.27 %  in  2016.  At  the  same  time, 
this reflected the first increase in R&D since 2009. 
The  decline  in  business  R&D  after  2009,  from 
0.75 %  to  only  0.61 %  of  GDP  in  2016,  largely 
explains that negative evolution, mostly driven by 
a  contraction  of  investments  in  services.  Within 
this  sector, 
the 
telecommunications  registered 
though  showing  some  signs  of 
biggest  fall 
recovery in 2016. Public R&D expenditure as % of 
GDP  remained  relatively  stable  during  the  crisis 
but is still below the EU average in 2016 (0.64 % 
in  Portugal  and  0.69 %  in  the  EU).  The  public 
sector  is  responsible  for  the  funding  of  47 %  of 
R&D expenditure in Portugal, as compared to 42% 
of funding by the private sector. In most other EU 
countries  R&D  is  instead  concentrated  on  the 
private 
(Eurostat  R&D  data).  The 
government has the ambition to achieve a level of 
overall  R&D  investment  of  3 %  by  2030  with  a 
relative  share  of  1/3  public  and  2/3  of  business 
expenditure. 

sector 

investments 

Synergies between R&D investments and other 
intangible  assets  remain  untapped.  Public  and 
private 
in  competencies  such  as 
training  and  organisational  capital  as  %  of  GDP 
are  below  EU  average.  The  share  of  ICT 
since  2000 
in  GDP  declined 
investments 
(European  Commission,  2018  and  OECD  data  on 
ICT investments). These developments undermine 
potential  increases  in  firm  productivity  and  their 
capacity  to  reap  the  benefits  from  digitalisation. 
This  may  widen  the  gap  between  the  most 
productive firms and the laggards which is already 
significant  (Gouveia  et  al,  2017).  Nonetheless,  it 
should  be  underlined  that  the  government  has 
launched  the  initiative  "Industry  4.0"  to  increase 
the capacity of firms to cope with digitalisation in 
key  strategic  sectors  and 
to 
stimulate and guarantee the development of digital 
competences  and  encouraging  entrepreneurship  in 
young people. The IAPMEI-SME Academy focus 
is  on  training  to  develop  professional  skills  and 
managerial capabilities in SMEs. 

INCoDe.2030, 

Structural change towards knowledge-intensive 
sectors  has  not  kicked-off  though  certain 
sectors  are 
traditional, 

low-medium 

tech 

creating  more  value.  Portugal  experienced  a 
decline in the aggregate value-added share of high 
and  medium-high-tech  manufacturing 
and 
knowledge-intensive  services  between  2000  and 
2015  (European  Commission  2018  and  Eurostat). 
The  relatively  lower  business  R&D  intensity  of 
these sectors hinders the upgrade of the economic 
productive  structure  of  the  country.  This  impacts 
the technological composition of the export sector 
and  on  the  overall  upgrade  of  the  economic 
structure. (European Commission e) 

The  human  resources  base  in  Science  and 
Technology  is  expanding  but  weakened  by 
emigration.  The  emigration  of  highly-qualified 
researchers  limits  the  positive  impact  of  that 
development to boost the scientific excellence and 
innovation output performance of the country. The 
number  of  science  and  engineering  graduates  per 
thousand  population  increased  between  2007  and 
2014, with Portugal ranking 8th in the EU in 2014. 
The share of researchers in total employment also 
expanded between 2000 and 2015. Yet, especially 
since  the  crisis,  the  country  struggles  to  retain 
qualified  graduates  and  researchers  (Gomes  et  al, 
2015). The shortage of skilled staff relevant to the 
development needs of firms in certain sectors such 
as ICT is lacking. Scientific quality is nonetheless 
stable  over  time  and  the  openness  of  science  has 
increased.  Highly-cited  publications 
remained 
relatively constant between 2007 and 2014, amid a 
significant  growth  in  absolute  publication  levels, 
although  below  the  EU  average.  The  openness  of 
research  in  Portugal,  as  measured  by  its  share  of 
international  co-publications  in  total  publications, 
has  increased  from  51.7 %  in  2007  to  60.9 %  in 
2016 also in line with the EU positive trend. 

links 

academia-business 

hamper 
Weak 
knowledge 
transfer  and  commercialisation. 
Public-private  co-publications  decreased  between 
2008 and 2015 and Portugal ranked only 21st in the 
EU in 2015. There was also no substantial progress 
in relation to public expenditure on R&D financed 
by  businesses.  A  low  number  of  large  and 
multinational  companies  in  the  country,  when 
compared  to  other  Member  States,  limit  this 
cooperation.  Moreover,  links  between  scientific 
research  and  SMEs  remain  suboptimal.  While  in 
the  EU  the  share  of  innovative  SMEs  involved  in 
cooperation was 31.5 % in 2014, for Portugal this 
share was around half of the EU average (Eurostat, 
CIS  2014).  This  can  be  partially  traced  back  to 

52 

 
 
4.5. Sectoral policies 

low-medium  tech  companies  being  unaware  or 
unable to benefit from such collaboration.  

4.5.2.  ENERGY, CLIMATE CHANGE AND 

ENVIRONMENT * 

trust  between  universities 

and 
Mutual 
businesses is not sufficiently incentivised. Career 
progression  still  follows  a  rigid  and  pyramidal 
track  mostly  based  on  publications  not  allowing 
researchers to explore avenues of “entrepreneurial 
research”. Firms in general do not recognise added 
value  in  cooperating  with  universities.  There  is  a 
lack  of  short-cycle  vocational 
training  and 
education  (Hasanefendic  et  al.  2016),  which 
TESPs  (Curso  Técnico  Superior  Profissional) 
want to tackle. Incentives and rewards to engage in 
such cooperation are underdeveloped. The lack of 
contractual  standardisation  in  the  management  of 
Intellectual  Property  rights  hinders  the  economic 
exploitation of the results from scientific research. 
The  public sector  still  employs around  two out of 
three  of  the  available  researchers  in  Portugal 
(Eurostat data for researchers FTE). Efforts by the 
government  to  set  up  new  policy  instruments  to 
foster  the  employment  of  PhDs  in  academic  and 
non-academic  sectors  are  noticeable,  including 
through  the  public  programme  "INTERFACE", 
launched 
the 
ambition  to  support  300  new  PhDs  in  interface 
centres,  500  new  PhDs  in  businesses  and  400 
researchers to work on applied research.  

in  2017.  The  programme  has 

in 

fast-growing  enterprises 

Entrepreneurial activity is improving, although 
innovation  performance  remains  moderate. 
Portugal had the fifth highest enterprise birth rates 
of  the  EU  in  2015  (Eurostat).  Entrepreneurial 
intention  is  on  the  rise  though  still  more  due  to 
necessity  than  opportunity-driven  (GEM,  2017). 
Employment 
in 
innovative sectors is below the EU average but has 
increased.  Portugal 
the 
Innovation  Output  indicator  2017.  ´Ease-of-doing 
business´ 
improved  between  2010  and  2017 
(World  Bank,  2017a)  but  product  markets 
efficiency and intellectual property protection  can 
still  be  improved  (WEF,  2017).  Risk  capital  for 
innovation  in  2016  was  significantly  below  the 
(section  4.2.3).  Regarding 
pre-crisis 
participation  in  Horizon2020,  Portugal  has  an 
applicant success rate similar to EU average. 

ranks  only  24th 

level 

in 

While  integration  of  the  Portuguese  electricity 
market  with  Spain  is  on  track,  integration  in 
gas  is  weaker.  The  Portuguese  electricity  system 
is  directly  connected  to  the  Spanish  system  and 
electricity 
France. 
to 
indirectly 
The 
interconnection 
level  with  Spain  should  be 
achieved  with  the  finalisation  of  ongoing  Projects 
of  Common  Interest.  The  low  interconnection 
capacity  between  Spain  and  France 
limits 
Portugal's potential export of renewable electricity 
beyond  the  Iberian  Peninsula.  The  Iberian  Gas 
Market  MIBGAS  started  operation  in  December 
2015,  with  the  aim  of  achieving  in  the  future  one 
single  market  with  Portugal,  similarly  to  the 
electricity  sector  (based  on  bilateral  agreements 
between both Member States). During its first year 
of  operation,  some  progress  has  been  made,  but 
MIBGAS  liquidity  is  still  far  below  the  liquidity 
levels of the main European gas hubs (only 2 % of 
the  domestic  demand  was  negotiated  in  MIBGAS 
in 2016). Measures were taken to increase market 
liquidity,  including  the  appointment  in  January 
2017  of  a  market  creator  (Gunvor  International 
BV) but integration so far remains weak.   

in  Portugal  remain  high. 
Energy  prices 
Wholesale  electricity  prices  are  slightly above  the 
EU  average  and  from  2013  to  2016  decreased  by 
9.6 %  while  the  EU  average  saw  a  14.8 % 
reduction. Wholesale gas prices are also above the 
EU average and between 2013 and 2016 decreased 
40.2 %  but  less  than  the  EU  average  price 
decreased  (46.3 %).  Retail  electricity  and  gas 
prices  are  above  the  EU  average.  In  the  period 
2013-2016,  household  electricity  prices  increased 
in  nominal  terms  by  7.8 %.  One  of  the  major 
drivers  of  this  increase  were  taxes  and  levies, 
which in 2016 represented almost half of the total 
final price of electricity. These include not only the 
fiscal  taxes  but  also  energy  system  levies  for 
network  costs,  renewable  energy  subsidies  and 
repayment  of  the  tariff  debt.  National  gas  prices 
for households are also amongst the highest in the 
EU,  which  can  be  explained  mainly  by  lack  of 
competition  and  a  limited  development  of  the 
MIBGAS. Nevertheless, for the period 2011-2016, 
nominal  gas  prices  decreased  12.6 %,  while  on 
average the EU by only 10 %. 

53 

 
4.5. Sectoral policies 

in 

the  energy  market 

Concentration 
is 
decreasing. Portugal has one of the highest annual 
supplier  switching  rates  in  Europe  (26.6 %  on  its 
electricity  retail  market),  above  the  EU  average 
(6.2 %). Since 2005 the concentration level of the 
electricity  power  generation  market  has  improved 
substantially  and  is  now  slightly  below  the  EU 
average. Concentration in the gas supply market is 
high but below the EU average. The entry in force 
of 
in 
the  digital  platform  “Poupa  Energy” 
November  2017,  which  informs  consumers  about 
domestic  electricity  and  gas  market  offers,  could 
further enhance transparency and competition. 

Still  on  track  to  reach  the  national  energy 
efficiency  target  in  2020,  but  efforts  needed. 
Final  and  primary  energy  consumption  slightly 
increased  in  2016  compared  to  the  previous  year, 
despite  an  overall  decreasing  trend  in  the  period 
from  2005  to  2015.  As  the  achieved  energy 
savings  are  possibly  linked  to  the  slowdown  in 
economic  activity,  Portugal  might  need  to  make 
additional  efforts  to  ensure  that  the  levels  of 
primary  and  final  energy  consumption  are  kept  in 
line with the indicative national 2020 targets. 

The  transport  and  industry  sectors  have  space 
to  lower  their  energy  intensity.  Primary  energy 
intensity  in  Portugal  remained  on  the  level  of  the 
previous  year  while  primary  energy  intensity 
throughout the EU decreased. Only a minor energy 
intensity  reduction  was  recorded  in  the  industrial 
sector, which remains above EU average. In 2016 
in  Portugal,  transport  was  the  biggest  energy 
consuming  sector  with  around  42 %  share  in  the 
total  final  energy  consumption,  above  the  EU 
average  of  33 %.(43)  The  energy  consumption  of 
Portugal's  industry  sector  was  in  2016  at  around 
27 %  in  total  final  energy  consumption.  The 
energy consumption of the residential sector (16%) 
is  substantially  below  the  EU  average  (25 %) 
which  can  be  explained  by  a  mild  climate,  high 
energy  prices  which  impact  affordability  and 
consequently  the  level  of  the  energy  poverty.  On 
the  services  sector  consumption  is  slightly  below 
EU  average,  with  a  share  in  total  final  energy 
consumption  of  13 %.  A  positive  development 
concerns  the  use  of  the  European  Fund  for 
Strategic  Investments  to  finance  the  construction 
of  nearly-zero-energy  buildings  in  Portugal.  The 

(43)  Eurostat  provisional  figures  in  the  remaining  of  the 

paragraph. 

use  of  EU  Cohesion  funds  in  energy  efficiency 
demonstrations  in  public  infrastructure  projects 
and 
the  operational 
programme,  is  also  expected  to  deliver  important 
energy savings. 

in  SMEs, 

line  with 

in 

Portugal  is  among  the  best  renewable  energy 
to 
performers.  In  2016,  Portugal  continued 
experience  an 
increasing  share  of  renewable 
energy  in  its  final  energy  consumption.  The 
country's  overall  renewable  energy  share  for  that 
year is expected to have reached 28.5 %, above its 
indicative  interim  target  (25.2%).  In  2016  more 
than  half  of  electricity  consumption  (54.1 %(44) 
came  from  renewable  sources,  mostly  hydro  and 
wind.  In  May  2016,  the  country’s  electricity 
demand  was  met  by  renewable  energy  alone  for 
four and a half days straight on. In the heating and 
cooling  sector,  the  renewables  share  increased  for 
the  first  time  since  2009  and  is  expected  to  have 
reached  35.1%.  On  the  transport  sector,  even 
though  levels  in  2015  (7.4 %)  have  shown  a 
significant increase on the previous year (+3.4 %), 
Portugal  still  has  to  make  an  effort  to  reach  the 
10 % target by 2020. 

includes 

framework 

Strategies are in place for the long term energy 
and  carbon  policy.  Portugal  aims  at  becoming 
carbon  neutral  by  2050  and  has  launched  the 
Carbon  Neutrality  Roadmap  2050.  The  existing 
policy 
the  National 
Programme  for  Climate  Change  and  the  National 
to  Climate  Change. 
Strategy  on  Adaptation 
Portugal  foresees  by  2030  a  reduction  in  total 
GHG  emission  between  30%-40%  compared  to 
2005  (dependent  on  the  outcome  of  the  EU  2030 
climate legislation). Between 2015 and 2016, GHG 
emissions  decreased  by  2.5 %  and  7.9 %  in  ETS 
sectors.  The  largest  sectors  in  terms  of  GHG 
emissions  were  the  energy  sector  (25.6 %  of  total 
GHG  emissions),  followed  by  transport  (24.5 %), 
industry  (21 %),  agriculture  (10  %)  and  waste 
(9.6 %).  As  of  2018,  Portugal  initiated  the  phase 
out of the exemptions on excise duties on coal for 
power production and began the application of the 
carbon tax on coal for that purpose.  . 

Portugal  is  heavily  affected  by  forest  fires  due 
to  more  extreme  weather  conditions  and 
changes  in  land  use.  Since  2000,  forest  fires 
affected  over  24,000  km2  or  nearly  25 %  of  the 

(44)  Eurostat provisional figures. 

54 

 
                                                           
                                                           
4.5. Sectoral policies 

who  in  2017  used  the  internet  at  least  weekly 
continues  to  be,  at  71 %,  well  below  the  EU 
average  of  81%.  In  the  same  year,  22 %  of  the 
Portuguese  adult  population  had  never  used  the 
internet compared with about 13 % for the EU as a 
whole. This is partly explained by low digital skills 
levels  (section  4.3.3).  The  share  of  people  in  the 
active  labour  force  with  no  digital  skills  in 
Portugal  is,  at  18 %  (mostly  because  they  do  not 
use  the  internet  or  do  so  seldom),  nearly  twice  as 
high  as  the  EU  average  (European  Commission, 
Digital  Scoreboard).  In  April  2017,  Portugal 
launched  a  new  National  Digital  Competences 
Initiative  (INCoDe.2030)  as  well  as  the  Strategy 
and  Action  Plan  for  Digital  Employability.  It 
includes  measures  to  fight  digital  inclusion  and 
promote  digital  literacy  as  well  as  to  further 
develop  training,  reskilling  and  advanced  digital 
technology  specialisation  and  R&I.  It  also  sets 
quantitative  targets  for  2020,  2025  and  2030. 
Several  'flagship  projects'  have  been  presented  as 
part of the first phase of implementation. 

in 

than 

their 

this  respect 

Although Portugal fares relatively well in terms 
of  uptake  of  digital  technologies  by  businesses, 
there is room for further progress, particularly 
among  SMEs.  About 25 %  of  Portuguese 
companies can be considered to have high or very 
high levels of digital intensity, compared to an EU 
average of 21.5 % (2017 data, Digital Scoreboard). 
Conversely,  the  share  eCommerce  in  corporate 
turnover  (16  %)  is  almost  2  pp.  below  the  EU 
average, and the share of companies selling online 
is  flattening  out,  with  SMEs  being  significantly 
less  active 
larger 
counterparts.  The  national  digital  agenda  includes 
a target to increase by 55 % by 2020 the number of 
companies  using  e-commerce  (baseline  2011)  as 
well as measures to increase SME participation in 
the  digital  economy.  In  January  2017,  the  Prime 
Minister  presented  the  national  strategy  for  the 
digitisation  of  the  economy,  Indústria  4.0.  It 
encompasses  64  measures  involving  both  public 
and private sector actors and has a strong focus on 
human  capital  development.  It  is  expected  to 
including 
EUR 4.5 billion, 
mobilise 
EUR 2.26 billion from the ESI Funds over the next 
four  years  and  benefit  about  50,000  enterprises 
operating in Portugal. Implementation has already 
begun, with five calls for applications closed as of 
end-2017 (actions to promote digitisation of SMEs 
via  technology  upgrades,  productive  innovation 
and training and re-skilling).  

total  country  area.  The  total  number  of  wildfires 
has  gone  down  during  the  last  15  years,  but  the 
country  still  suffers  from  episodes  of  catastrophic 
'megafires'  which  burn  very  large  areas  and  are 
almost  impossible  to  extinguish  unless  weather 
conditions  change.  In 2017, Portugal  recorded  the 
worst fire season in history in terms of burned area 
(about 5,000 km2) property damages and above all 
of  loss  of  human  lives.  Extreme  weather  such  as 
heatwaves,  severe  droughts  and  strong  winds  are 
expected to occur more frequently in the context of 
climate change.   

Policy  and  management  options  for  reducing 
forest  fires  need  to  address  their  root  causes. 
Changes  in  land  use  and  forest  management 
favoured the accumulation of large amounts of fuel 
and  increased  the  fire-proneness  of  forests  and 
therefore  also  fire  risk  and  magnitude.  Examples 
are  abandonment  of  pastoralism  and  agriculture, 
neglect of traditional forest management leading to 
compact  forest  and  shrub  masses  or  significant 
expansion  of  fire  prone  eucalyptus  or  pine 
plantations.  Apart  from  investments  into  restoring 
the  forests  affected,  more  efforts  are  needed  to 
prevent  the  outbreak  of  wildfires  and  to  minimise 
the  conditions  for  their  spread  and  progression. 
This  should  include  policies  to  strengthen  forest 
resilience  and  avoid  highly  fire-prone  forests, 
particularly if left unmanaged. 

for  Portugal: 

Portugal  faces  environmental  challenges  in  the 
area  of  water  and  waste  management,  air 
quality and nature protection. The Commission's 
Environmental  Implementation  Review,  published 
identified  as  main 
in  February  2017,  has 
challenges 
improving  waste 
management  and  developing  the  potential  of  the 
circular 
effective 
protection  of  the  Natura  2000  network,  and 
following  up  on  the  implementation  of  marine 
strategies  to  meet  a  good  environmental  status  of 
marine  waters.  As  mentioned  before  climate 
change  causing  more  extreme  weather  such  as 
heatwaves and droughts is an added challenge for 
water management. 

enhancing 

economy, 

the 

4.5.3.  TRANSPORT AND DIGITAL SECTOR 

Low  digital  skills  increase  the  risks  of  digital 
exclusion  and  can  slowdown  productivity 
improvements.  The  share  of  Portuguese  citizens 

55 

 
4.5. Sectoral policies 

Box 4.5.1: Policy highlights: Fighting social challenges with innovation 

"Portugal  Social  Innovation"  is  an  example  of  an  advanced  initiative  investing  in  social  innovation  and 
entrepreneurship  projects,  making  Portugal  a  pioneer  in  the  development  of  social  innovation  with  the 
support  of  the  ESF.  Portugal  2020  is  the  main  national  strategy  framing  this  initiative  and  mobilising 
approximately  € 150 million  aimed  at  creating  an  ecosystem  of  social  innovation  and  entrepreneurship.  It 
has a particular emphasis on facilitating investment in the social economy and finding innovative solutions 
for social challenges. Some examples of good practices with a social innovation component already running 
on  the  ground  are  addressed  to  unemployed  young  people  from  different  backgrounds,  including  young 
NEETs  (who  are  not  in  employment,  education  or  training),  whose  main  objective  is  to  increase  the 
employability  and  socio-professional  inclusion,  have  developed  effective  training-program  methodologies 
and reached out very significant employability rates. 

The State Budget for 2018 also includes a fiscal incentive measure towards Social Innovation for the first 
time. In November of 2017, the Portuguese Parliament approved a tax benefit that encourages investment in 
"Social  Impact  Bonds".  This  new  tax  benefit  is  an  incentive  to  stimulate  the  involvement  of  national 
companies in the development of innovative solutions to solving social problems. From 2018 onwards, all 
the  financial  flows  that  companies  invest  in  Social  Impact  Bonds  will  be  recognized  in  IRC  (corporate 
income tax) as expenses of that fiscal year with an increase of 130 %. The Social Impact Bonds are one of 
the  four  financial  instruments  of  the Portugal Social  Innovation initiative that  supports  projects within  the 
areas of Employment, Social Protection, Health, Justice and Education.  

also  port 

Albeit  slowly,  port  concessions  renegotiations 
are  progressing  and  the  reform  of  the  port 
labour  law  is  bringing  positive  results.  The 
Leixões  port  concession  has  been  renegotiated, 
seemingly  yielding  positive  results  in  terms  of 
lower  port  user  charges  and  further  investment  in 
the  port.  The  renegotiation  of  the  concession  of 
Lisbon Containers Terminal is under progress and 
expected  to  be  concluded  in  the  first  semester  of 
2018. The renegotiation of Sines Port concession is 
expected to start in Q1-2018. The renegotiations of 
port  concessions  foresee  performance-oriented 
objectives,  economic  and  financial  sustainability 
efficiency  objectives.  The 
and 
renegotiations  need 
line  with  EU 
to  be 
procurement  legislation,  in  particular  Directive 
2014/23/EU.  The  port  labour  reform  of  2013  has 
substantially  improved  the  competitiveness  of 
Portuguese  ports,  but  also  led  to  some  social 
instability. Achievements of the port labour reform 
made in particular regarding ensuring competition 
in the provision of port services would need to be 
safeguarded.  This  is  particularly  relevant  in  view 
of  recent  developments  concerning  the  reform  of 
port  labour  in  Spain.  A  ruling  considered  that  the 
trade union monopoly provision of port services in 
Spain  was  illegal.  Spanish  trade  unions  have 
subsequently  strongly  resisted  efforts  by 
the 
Spanish  authorities  to  open  up  the  port  labour 
market to comply with the ruling of the European 
Court of Justice.       

in 

Railways  are  still  widely  underused  in  the 
connection  with  Spain.  A  detailed  joint  strategy 
by Portugal and Spain including the deployment of 
rail interoperability in the Iberian Peninsula and its 
connection  with  the  French  rail  network  is  still 
missing. A comprehensive plan would include the 
identification  of  the  intermediate  steps,  terminals, 
the 
interconnections  needed 
Spanish  network  upgrade  and  the  development  of 
the  international  gauge.  This  could  boost  the 
international  rail  performance,  which  is  crucial  to 
address  the  peripheral  situation  of  Portugal  and 
exploit  the  potential  of  Portuguese  ports,  so  far 
harmed by a "road-only" model. Freight rail traffic 
intensity remains among the lowest in Europe. 

to  benefit  from 

regarding 

in  railway 

Delays 
investments  present  a 
problem  given  the  county's  low  rail  density. 
Ambitious  yet 
rail 
realistic  plans 
infrastructure  projects  are  essential  in  a  context 
where Portugal has among the lowest rail densities 
in  the  EU.  The  main  projects  co-funded  by  the 
Connecting  Europe  Facility  (CEF)  are  facing 
delays  which  in  some  cases  cannot  be  overcome. 
There seems to be insufficient capacity in terms of 
skilled  personnel  involved  in  the  development  of 
projects  co-funded  by  the  CEF.  Investment  has 
improved  compared  to  2007-2013,  when  most 
grant agreements had to be cancelled leading to an 
overall underinvestment in rail infrastructure, but it 
is still sub-optimal.      

56 

 
ANNEX A: OVERVIEW TABLE 

Commitments  

Summary assessment  (45)  

2017 Country-specific recommendations (CSRs)  

Portugal  has  made  Limited  Progress 
addressing CSR 1. 

in 

This  overall  assessment  of  CSR  1  does  not 
include  an  assessment  of  compliance  with  the 
Stability and Growth Pact.   

to  accelerate 

CSR 1: Ensure the durability of the correction of the 
excessive  deficit.  Pursue  a  substantial  fiscal  effort  in 
2018  in  line  with  the  requirements  of  the  preventive 
arm  of  the  Stability  and  Growth  Pact,  taking  into 
account  the  need  to  strengthen  the  ongoing  recovery 
and  to  ensure  the  sustainability  of  Portugal’s  public 
finances.  Use  windfall  gains 
the 
reduction  of  the  general  government  debt-to-GDP 
ratio.  Step  up  efforts  to  broaden  the  expenditure 
review  to  cover  a  significant  share  of  general 
government 
several  policies. 
Strengthen expenditure control, cost effectiveness and 
adequate  budgeting,  in  particular  in  the  health  sector 
with  a  focus  on  the  reduction  of  arrears  in  hospitals 
and  ensure  the  sustainability  of  the  pension  system. 
To increase the financial sustainability of state-owned 
enterprises  set  sector-specific  efficiency  targets  in 
time  for  the  2018  budget,  improving  state-owned 
enterprises’  overall  net  income  and  decreasing  the 
burden on the state budget.  

spending 

across 

(45)  The following categories are used to assess progress in implementing the 2017 country-specific recommendations (CSRs): 

No  progress:  The  Member  State  has  not  credibly  announced  nor  adopted  any  measures  to  address  the  CSR.  This  category 
covers a number of typical situations, to be interpreted on a case-by-case basis taking into account country-specific conditions. 
They include the following: 
 

no legal, administrative, or budgetary measures have been announced  
 
 

in the national reform programme, 
in  any  other  official  communication  to  the  national  Parliament/relevant  parliamentary  committees  or  the  European 
Commission,  

 
 

  publicly (e.g. in a press statement or on the government's website);  
no non-legislative acts have been presented by the governing or legislative 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 to be taken (unless the CSR explicitly asks for orientations or exploratory actions). However, 
it has not proposed any clearly-specified measure(s) to address the CSR. 

Limited progress: The Member State has: 
 
 

announced certain measures but these address the CSR only to a limited extent; and/or 
presented legislative acts in the governing or legislative body but these have not been adopted yet and substantial further, 
non-legislative work is needed before the CSR is implemented;  
presented non-legislative acts, but has not followed these up with the implementation needed to address the CSR. 

 

Some progress: The Member State has adopted measures  
 
 

that partly address the CSR; and/or  
that address the CSR, but a fair amount of work is still needed to address the CSR fully as only a few of the measures have 
been  implemented.  For  instance,  a  measure  or  measures  have  been  adopted  by  the  national  Parliament  or  by  ministerial 
decision, but no implementing decisions are in place. 

Substantial progress: The Member State has adopted measures that go a long way towards addressing the CSR and most of 
them have been implemented. 

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

57 

 
 
                                                           
 
 
 
 
 
 
 
A. Overview table 

Ensure the durability of the correction of the excessive 
deficit.  Pursue  a  substantial  fiscal  effort  in  2018  in 
line with the requirements of the preventive arm of the 
Stability  and  Growth  Pact,  taking  into  account  the 
need to strengthen the ongoing recovery and to ensure 
the  sustainability  of  Portugal’s  public  finances.  Use 
windfall  gains  to  accelerate  the  reduction  of  the 
general government debt-to-GDP ratio.  

Step  up  efforts  to  broaden  the  expenditure  review  to 
cover  a  significant  share  of  general  government 
spending across several policies.  

  Some  Progress.  The  savings  from 

the 
spending review in 2018 are more ambitious 
than previously at EUR 290 m. The exercise 
is  also  being  expanded  into  new  sectors,  as 
justice  and  internal  affairs  have  been  added 
to the existing areas of education, healthcare, 
SOEs,  public  sector  real  estate  management 
and  centralised  public  procurement.  Some 
progress has already been made in the justice 
sector, such as the introduction of efficiency-
enhancing reforms in the courts, while plans 
to  reduce  the  costs  associated  with  the  legal 
treatment  of  seized  vehicles  are  under 
development, 
extent  of 
estimated savings from the latter are unclear. 
A  series  of  reforms  in  the  internal  affairs 
sector  are  being  planned  but  have  not  yet 
reached the stage of implementation. Human 
resource  management  more 
generally 
(including recruitment procedures, incentives 
for staff to innovate) is being presented as a 
cross-sectorial  area  for  savings,  with  a 
particular  focus  on  reducing  absenteeism. 
Broadening the review to cover an even more 
significant  share  of  general  government 
spending  across  several  policy  areas  would 
represent another positive step forward.  

although 

the 

Strengthen expenditure control, cost effectiveness and 
adequate  budgeting,  in  particular  in  the  health  sector 
with a focus on the reduction of arrears in hospitals  

  Limited  Progress.  Limited  progress  has 
been  achieved  on  the  reduction  of  hospital 
arrears,  which  keep 
increasing.  Certain 
initiatives  have  been  announced,  such  as  a 
new  Budget  Analysis  Unit  as  well  as  the 
implementation  of  Integrated  Responsibility 
Centers in 2018, although it remains unclear 
whether  these  efforts  will  be  sufficient  to 
address  the  hospital  arrears  problem.  Some 
progress has been made however in terms of 
increasing  cost-effectiveness  in  the  National 
Health  Service,  for  instance  through  an 
increased reliance on centralised purchasing, 
increasing digitisation and through efforts to 

58 

 
 
and ensure the sustainability of the pension system.  

A. Overview table 

increase the use of generics and biosimilars. 

  Some  Progress. A  far-reaching proposal for 
early  retirement  reform  was  announced  in 
spring  2017  with  the  potential  to  deteriorate 
the sustainability of the pension system. The 
scope of the reform, however, has since been 
limited  to  the  first  phase  concerning  only 
very  long  careers  (with  a  limited  fiscal 
impact).  The  potential  implementation  of 
further  phases  (with  a  substantial  fiscal 
for  2018 
impact)  originally 
onwards has been suspended.  

scheduled 

  For  the  first  time  in  recent  years,  the 
extraordinary transfers from the state budget 
to finance the social security deficit will end 
in  2018.  The  end  of  the  extraordinary 
transfers  will  be  enabled  primarily  by  the 
projected 
social 
contributions. Certain discretionary measures 
are,  however,  also 
increasing  pension 
expenditure  in  2018  (early  retirement  for 
very  long  careers,  extraordinary  pension 
increases.) 

increase 

strong 

in 

  A portion (0.5%) of the corporate income tax 
revenue  is  set  to  be  earmarked  to  the 
Financial  Stabilisation  Fund  in  2018.  This 
earmarking  is  planned  to  increase  in  a 
progressive way by 0.5 pps. per year until it 
reaches  2%  in  2021.  This  is  projected  to 
transfer  EUR  70  m  to  the  Fund  in  2018. 
Earmarking  funds  in  this  way  does  not, 
however,  represent  new  sources  of  revenue 
as such.   

To increase the financial sustainability of state-owned 
enterprises  set  sector-specific  efficiency  targets  in 
time  for  the  2018  budget,  improving  state-owned 
enterprises’  overall  net  income  and  decreasing  the 
burden on the state budget.  

  Limited  Progress.  The  SIRIEF  system's 
upgrade  to  automatically  draw  information 
from 
the  accounting  systems  of  public 
companies  will  be  widely  applied  in  2018. 
Activity  and  Budget  Plans  submitted  by 
SOEs  to  UTAM  (the  Ministry  of  Finance's 
force  on  SOE  monitoring),  are 
task 
beginning 
evaluated  more 
comprehensively,  with  new  tools  such  as  an 
SOE  risk  assessment  methodology  to  be 
deployed in 2018. While the DBP committed 
to limit the overall growth of public company 
debt to 2% per year (net of capital increases 
and  the  financing  of  new  investments),  total 
non-consolidated debt of public corporations 

be 

to 

59 

 
A. Overview table 

included  in  general  government  remains 
high, and is only falling slowly. The State is 
continuing  its  recapitalisations  of  SOEs  in 
order  to  reduce  indebtedness  and  improve 
financial results. The 2018 DBP projects the 
total  net  income  of  non-financial  public 
companies to remain negative but to continue 
to  improve  (EUR  -118  m  in  2018),  an 
improvement  from  the  very  large  losses 
previously  incurred  (EUR  -461  m  in  2017 
and  EUR  -1293  m  in  2014).  Operational 
(EBITDA)  of  SOEs  generally 
results 
improved  between  Q2-2016  and  Q2-2017, 
particularly  in  the  transport  sector,  although 
the 
the  health  sector  are 
results 
worsening.  

for 

CSR  2:  Promote  hiring  on  open-ended  contracts, 
including  by  reviewing  the  legal  framework.  Ensure 
the effective activation of the long-term unemployed. 
Together  with  social  partners,  ensure  that  minimum 
wage  developments  do  not  harm  employment  of  the 
low-skilled.  

Portugal has made Some Progress in addressing 
CSR 2  

Promote hiring on open-ended contracts, including by 
reviewing the legal framework.  

  Limited  Progress.  On  promoting  hiring  on 
there  are  planned 
open-ended  contracts, 
measures 
like  Contrato-Geração  (support 
granted  for  hiring,  as  a  general  rule,  on 
permanent  contracts),  the  revision  of  labour 
law to restrict the use of fixed-term contracts 
(with  ongoing  discussions  with 
social 
partners)  and  tax  incentives  for  the  use  of 
permanent  contracts.  In  2018  negotiations 
will be initiated between the Government and 
the 
the  Permanent 
Committee  for  Social  Dialogue  in  order  to 
the  main 
responses 
find  concerted 
challenges  identified  in  the  Green  book  on 
Labour Relations and to include measures to 
reduce market segmentation work.  

social  partners 

in 

to 

Ensure  the  effective  activation  of  the  long-term 
unemployed.  

all 

almost 

registered 

  Some  Progress.  The  monitoring  framework 
of 
the  Council  Recommendation  on 
integrating the long-term unemployed shows 
long-term 
that 
unemployed  people  had  a  job  integration 
agreement in 2016, of which 20.6% regained 
employment.  The  implementation  of  one-
stop  shops  for  Public  Employment  Services 
and  Social  Services  is  planned  in  the  first 
quarter  of  2018.  This  measure  has  been 
included in the Budget for 2018. The planned 

60 

 
A. Overview table 

Contrato-GeraÃ§Ã£o  also  addresses  long-
term  unemployed  in  the  form  of  cumulative 
incentives  for  the  simultaneous  recruitment 
of  young  unemployed  people  (or  the  ones 
searching  for  their  first  job)  and  the  long-
term unemployed, aiming to focus support on 
the  ones  with  greatest  difficulty  in  entering 
or returning to the labour market. According 
to  Portuguese  authorities,  PES’s  structures 
and  measures  to  support  the  creation  of 
entrepreneurial projects and self-employment 
will  also  be  evaluated  and  the  re-evaluation 
of  the  Contratos  Emprego-InserÃ§Ã£o  will 
be implemented with the purpose of bringing 
them back to their original goal in activating 
the unemployed and the inactive.  

Together  with  social  partners,  ensure  that  minimum 
wage  developments  do  not  harm  employment  of  the 
low-skilled.  

  Some  Progress.  Minimum  wage  increased 
three times since October 2014, pointing to a 
cumulative  increase  of  14.2%.  A  further 
increase    happened  in  January  2018  (EUR 
580).  In  absolute  level,  the  minimum  wage 
remains low when compared to the EU but it 
is  high  when  compared  to  the  Portuguese 
average  and  median  wage.  This  compressed 
wage structure has led to a substantial rise in 
the  number  of  employees  covered  (from 
19.6% in October 2014 to 23.3% in October 
2016).  The  employment  rate  of  low-skilled 
workers  is  comparatively  high  in  Portugal 
and  minimum  wages  increases  have  not 
prevented 
from 
their  employment 
rebounding.  The  Portuguese  government 
publishes  quarterly 
to  monitor 
minimum  wage  developments,  which  are 
discussed  with  social  partners.  In 
this 
context,  the  Portuguese  Government  takes 
into  account  the  quarterly  monitoring  of 
minimum  wage  increases  impacts,  which 
have  been  developed  within 
the  CPCS 
(standing committee for social dialogue).  

reports 

rate 

by 

credit 

institutions 

CSR 3: Step up efforts to clean up the balance sheets 
of 
a 
comprehensive  strategy  addressing  non-performing 
loans,  including  by  enhancing  the  secondary  market 
for  bad  assets.  Improve  the  access  to  capital,  in 
particular  for  start-ups  and  small  and  medium-sized 
enterprises.  

implementing 

Portugal has made Some Progress in addressing 
CSR 3  

Step up efforts to clean up the balance sheets of credit 
implementing  a  comprehensive 
institutions  by 

  Some  Progress.  Following  an  exhaustive 
analysis  of  the  banks'  bad  loans  by  type, 

61 

 
strategy  addressing  non-performing  loans,  including 
by enhancing the secondary market for bad assets.  

A. Overview table 

tax 

legal 

vintage, size and sector of activity, the issue 
of  non-performing  loans  is  being  addressed 
by  a  three-pronged  strategy:  changes  to  the 
systems; 
and 
judicial, 
prudential/supervisory  actions  led  by  the 
central  bank  following  SSM  guidance  and 
NPL  management  solutions.  Many  of  the 
measures so far announced have already been 
either  approved  or  implemented.  In  that 
context  a  simplified  regime  aiming 
to 
facilitate  the transfer of NPL portfolios is in 
the  legislative  pipeline.  The  regime  will 
allow  mass  registration  of  the  transfer  of 
collateral  and  the  mass  communication  to 
courts in insolvency proceedings.  

Improve  the  access  to  capital,  in  particular  for  start-
ups and small and medium-sized enterprises.  

  Some Progress The government took several 
actions to improve access to capital. Among 
them, in 2017 new financial instruments have 
been 
the  Capitalizar 
in 
introduced 
implementation  of 
the 
programme,  and 
several  announced  measures  is  expected  in 
the course first of quarter of 2018, including 
a Business Gateway website to centralize the 
financing support information. Moreover, the 
authorities 
the  new 
recently  approved 
programme Internacionalizar, which foresees 
financial 
to  support  SMEs, 
notably  to  foster  exports.  However,  for  the 
time  being,  alternative  sources  of  finance 
remain  overall  of 
for 
Portuguese firms, and venture capital did not 
yet recover to the pre-crisis level.  

instruments 

relevance 

little 

CSR  4:  Implement  a  roadmap  to  further  reduce  the 
administrative burden and tackle regulatory barriers in 
construction and business services by the end of 2017. 
Increase 
tax 
proceedings.  

the  efficiency  of 

insolvency  and 

Portugal  has  made  Limited  Progress 
addressing CSR 4  

in 

Implement  a 
administrative burden  

roadmap 

to 

further 

reduce 

the 

some 

introducing 

  Limited  Progress.  The  SIMPLEX  program 
is 
administrative 
simplification  for  public  procurement  and 
some horizontal issues relevant for business-
administration  relations,  mainly  through  e-
Government  initiatives  of  digitalisation  and 
implementation  of  the  once-only  principle. 
However,  SIMPLEX 
includes 
amending applicable procedural rules such as 
competent 
shorter 
authorities 
tacit 
approval,  reduction  of  document  submission 

fewer 
inclusion  of 

deadlines, 

involved, 

seldom 

62 

 
A. Overview table 

requirements.  Development  of  the  Point  of 
Single Contact remains slow.  

and  tackle  regulatory  barriers  in  construction  and 
business services by the end of 2017.  

  Limited  Progress.  No  reform  was  put  in 
place  regarding  business  services  however 
some  authorisations 
the  construction 
sector for gas and electrical installations were 
replaced  by  declarations  of  responsible 
professionals.  

in 

Increase 
proceedings.  

the  efficiency  of 

insolvency  and 

tax 

  Some  Progress  Disposition  time  for  first 
instance litigious civil and commercial cases 
decreased  slightly 
in  2016  (289  days) 
compared  to  2015  (315  days).  A  range  of 
measures aiming at increasing the efficiency 
and quality of justice has been undertaken in 
2017 and a number of measures are planned 
for 2018.  

Europe 2020 (national targets and progress)  

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

R&D target: 3% 

1.27%  (2016) 

Greenhouse gas (GHG) emissions target:  

-National Greenhouse gas (GHG) emissions target:  

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

2020 Renewable energy target:  

31%  

The employment rate (age 20-64) increased from 
70.6 % in 2016 to 73.0 % in 2017.  The target is 
thus expected to be reached. 

Since  2009  R&D  intensity  in  Portugal  has  been 
on  decline,  from  1.58%  in  2009  to  1.24%  of 
GDP in 2015. However, 2016 is the first year in 
which  this  negative  trend  is  reverted,  with  a 
R&D  intensity  of  1.27%  of  GDP  due  to  a 
recuperation in the business R&D intensity. 

Portugal  non-ETS  emission  decreased  by  17  % 
between  2005  and  2016,  and  has  achieved  its 
2016  target  (an  emissions  increase  of  no  less 
than  3  %)  by  a  20  pps  gap.  According  to  the 
latest  national  projections  based  on  existing 
measures,  non-ETS  emissions  will  decrease  by 
17 % between 2005 and 2020. The 2020 target is 
consequently  expected 
to  be  met  by  18 
percentage points. 

Portugal is on track to meet its target for 2020. In 
2016,  the  country's  overall  renewable  energy 
share  is expected to have reached 28.5 %, 

renewable  energy  share 

transport 
The 
continued to increase and in 2016 is expected to 
have reached 7.5 %. However, Portugal still has 
to  make  an  effort  to  reach  the  10%  target  by 

in 

63 

 
 
A. Overview table 

2020.  

Energy efficiency target. 

Portugal  has  set  an 
indicative  national  energy 
efficiency  target  of  25%  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. 

Portugal  is  on  track  to  meet  its  national  target. 
The  slowdown  of  the  economic  activity  might 
also have contributed to this.  

The  primary  and  final  energy  consumption  has 
been decreasing steadily between 2005 and 2015 
by  13%  and  15,6%  respectively.  However,  in 
2016  both  energy  consumption  levels  increased 
slightly  (by  1.84%  and  0.63%)  reaching  a  level 
of  22,1  Mtoe  and  16,1  Mtoe,  respectively   
Portugal  might  need  efforts  to  keep  energy 
consumption  in  check  in  the  coming  years  and 
ensure that the levels of primary and final energy 
consumption 
indicative 
national 2020 targets. 

remain  below 

the 

Early school leaving target: 10% 

14,0%  (2016) 

Early  school  leaving  has decreased  significantly 
in  the  last  decade  and  Portugal  is  on  track  to 
reach  its  Europe  2020  national  target  of  10  %, 
Although  this rate is still  above  the  EU  average 
and slightly increased in 2016 

Tertiary education target: 40% 

34.6%   (2016)  

Tertiary  attainment  in  Portugal  has  significantly 
increased  over 
is 
approaching  the  EU  average,  but  the  national 
target  of  40%  by  2020  might  be  difficult  to 
achieve. 

the  past  decade  and 

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 reduced in 163.000, meaning less than 
half-way  towards  achieving  200.000  persons  in 
2020. 

64 

 
 
 
 
ANNEX B: MACROECONOMIC IMBALANCE PROCEDURE 

SCOREBOARD 

Table B.1: 

The Macroeconomic Imbalance Procedure  scoreboard for Portugal (AMR 2018) 

Flags: b:Break in series. p:Provisional.           
1) This table provides data as published under the Alert Mechanism Report 2018, which reports data as of 24 Oct 2017. Please 
note that figures reported in this table may therefore differ from more recent data elsewhere in this document. 
2) House price index: e = source NCB. 
Source: European Commission 2017, Statistical Annex to the Alert Mechanism Report 2018, SWD(2017) 661. 

65 

Thresholds201120122013201420152016Current account balance, % of GDP 3 year average-4%/6%-8.9 -6.0 -2.1 0.0 0.6 0.3 Net international investment position% of GDP-35%-100.7 -116.5 -116.3 -117.5 -112.0 -104.7 Real effective exchange rate - 42 trading partners, HICP deflator3 year % change±5% (EA) ±11% (Non-EA)-3.0 -4.0 -0.6 -1.8 -3.0 -1.9 Export market share - % of world exports5 year % change-6%-8.5 -16.3 -7.1 -5.7 2.5 5.8 Nominal unit labour cost index (2010=100)3 year % change9% (EA) 12% (Non-EA)-0.6 -6.3 -3.4 -2.7 0.5 0.9pHouse price index (2015=100), deflated 1 year % change6%-6.4 -8.8 -2.7 3.9 2.1 6.1 Private sector credit flow, consolidated% of GDP14%-0.9 -3.9 -1.6 -5.0 -1.8 -2.2pPrivate sector debt, consolidated% of GDP133%204.1 210.3 202.4 190.8 179.7 171.4pGeneral government gross debt% of GDP60%111.4 126.2 129.0 130.6 128.8 130.1 Unemployment rate3 year average10%11.9 13.6 15.0 15.4 14.4 12.6 Total financial sector liabilities, non-consolidated1 year % change16.5%-4.5 -3.0 -5.4 -7.5 -1.8 -0.2 Activity rate - % of total population aged 15-643 year change in pp-0.2 pp-0.3b0.0 -0.7 -0.4b0.0 0.7 Long-term unemployment rate - % of active population aged 15-743 year change in pp0.5 pp2.6b3.5 3.6 2.2 -0.5 -3.1 Youth unemployment rate - % of active population aged 15-243 year change in pp2 pp8.6 12.7 9.9 4.5 -6.0 -9.9 External imbalances and competitivenessInternal imbalancesEmployment indicators 
 
 
 
 
 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial market indicators 

1) Latest data Q3 2017. Includes not only banks but all monetary financial institutions excluding central banks 
2) Latest data Q2 2017. 
3) As per ECB definition of gross non-performing debt instruments 
4) 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). 

66 

201220132014201520162017Total assets of the banking sector (% of GDP)(1)330.8302.5271.4250.3231.2207.4Share of assets of the five largest banks (% of total assets)69.970.369.272.371.2-Foreign ownership of banking system (% of total assets)(2)22.520.320.523.322.530.4Financial soundness indicators:2)              - non-performing loans (% of total loans)(3)7.07.813.614.414.412.9              - capital adequacy ratio (%)12.613.712.313.312.314.4              - return on equity (%)(4)-3.3-9.3-3.50.9-5.50.2Bank loans to the private sector (year-on-year % change)(1)-6.0-5.0-5.2-2.6-2.1-1.8Lending for house purchase (year-on-year % change)(1)-2.8-3.5-3.8-3.8-2.3-1.4Loan to deposit ratio(1)119.5111.4104.999.393.690.5Central Bank liquidity as % of liabilities--8.17.16.37.1Private debt (% of GDP)210.3202.4190.8179.7171.4-Gross external debt (% of GDP)(2) - public82.086.498.491.978.876.1    - private42.543.946.845.950.450.1Long-term interest rate spread versus Bund (basis points)*905.3472.4259.1192.8308.3284.5Credit default swap spreads for sovereign securities (5-year)*818.7355.9173.0137.4216.7136.1 
 
 
 
 
 
C. Standard tables 

Table C.2: 

Headline Social Scoreboard indicators 

† The Social Scoreboard includes 14 headline indicators, of which 12 are currently used to compare Member States 
performance. The indicators "participants in active labour market policies per 100 persons wanting to work" and 
"compensation of employees per hour worked (in EUR)" are not used due to technical concerns by Member States. Possible 
alternatives will be discussed in the relevant Committees. 
(1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).       
(2) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within two weeks.       
(3) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2018.       
(4) Reduction in percentage of the risk of poverty rate, due to social transfers (calculated comparing at-risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation).       
(5) Average of first three quarters of 2017 for the employment rate and gender employment gap. 
Source: Eurostat 

67 

201220132014201520162017 5Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)20.518.917.413.714.0:Gender employment gap (pps)6.86.47.16.76.87.5Income inequality, measured as quintile share ratio (S80/S20)5.86.06.26.05.9:At-risk-of-poverty or social exclusion rate1 (AROPE)25.327.527.526.625.1:Young people neither in employment nor in education and training (% of population aged 15-24)13.914.112.311.310.6:Dynamic labour markets and fair working conditions†Employment rate (20-64 years)66.365.467.669.170.673.4Unemployment rate2 (15-74 years)15.816.414.112.611.29.0Gross disposable income of households in real terms per capita3 (Index 2008=100) ::92.094.797.5:Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction429.226.727.026.124.0:Children aged less than 3 years in formal childcare:38.045.047.249.9:Self-reported unmet need for medical care3.33.03.53.02.4:Individuals who have basic or above basic overall digital skills (% of population aged 16-74):::48.048.0: 
 
 
 
 
C. Standard tables 

Table C.3: 

Labour market, education and social indicators 

1) Long-term unemployed are people who have been unemployed for at least 12 months.       
(2) Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included.       
(3) PISA (OECD) results for low achievement in mathematics for 15 year-olds.       
(4) Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science. 
(5) Average of first three quarters of 2017, unless for the youth unemployment rate (annual figure). 
Source: Eurostat, OECD 

68 

Labour market indicators201220132014201520162017 5Activity rate (15-64)73.473.073.273.473.7:Employment in current job by durationFrom 0 to 11 months11.411.913.214.214.4:From 12 to 23 months6.86.26.26.97.6:From 24 to 59 months14.714.213.111.912.9:60 months or over67.067.867.566.965.1:Employment growth* (% change from previous year)-4.1-2.91.41.41.63.3Employment rate of women(% of female population aged 20-64)63.062.364.265.967.469.8Employment rate of men (% of male population aged 20-64)69.868.771.372.674.277.3Employment rate of older workers* (% of population aged 55-64)46.546.947.849.952.156.2Part-time employment* (% of total employment, aged 15-64)11.211.110.19.89.58.9Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)20.521.421.422.022.322.0Transition rate from temporary to permanent employment(3-year average)28.226.425.826.2::Long-term unemployment rate1 (% of labour force)7.79.38.47.26.24.7Youth unemployment rate (% active population aged 15-24)38.038.134.732.028.223.8Gender gap in part-time employment5.85.85.05.45.35.6Gender pay gap2 (in undadjusted form)15.013.314.917.8::Education and training indicators201220132014201520162017Adult participation in learning(% of people aged 25-64 participating in education and  training)10.59.79.69.79.6:Underachievement in education324.9::23.8::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)27.830.031.331.934.6:Variation in performance explained by students' socio-economic status419.6::14.9:: 
 
 
 
 
C. Standard tables 

Table C.4: 

Social inclusion and health indicators 

*  Non-scoreboard indicator 
(1) At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income.  
(2) 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. 
(3) Percentage of total population living in overcrowded dwellings and exhibiting housing deprivation. 
(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) Ratio of the median individual gross pensions of people aged 65-74 relative to the median individual gross earnings of 
people aged 50-59. 
(6) Fixed broadband take up (33%), mobile broadband take up (22%), speed (33%) and affordability (11%), from the Digital 
Scoreboard.Source: Eurostat, OECD 

69 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare6.26.26.16.0::Disability1.82.01.91.8::Old age and survivors13.714.614.714.4::Family/children1.21.21.21.2::Unemployment1.71.81.51.1::Housing0.00.00.00.0::Social exclusion n.e.c.0.30.20.20.2::Total24.926.125.524.7::of which: means-tested benefits2.22.22.12.0::General government expenditure by function (% of GDP, COFOG)Social protection18.219.218.818.3::Health6.56.46.26.2::Education6.26.26.16.0::Out-of-pocket expenditure on healthcare (% of total health expenditure)28.227.027.727.7::Children at risk of poverty or social exclusion (% of people aged 0-17)*27.831.731.429.627.0:At-risk-of-poverty  rate1 (% of total population)17.918.719.519.519.0:In-work at-risk-of-poverty rate (% of persons employed)9.910.510.710.910.9:Severe material deprivation rate2  (% of total population)8.610.910.69.68.4:Severe housing deprivation rate3, by tenure statusOwner, with mortgage or loan2.53.54.03.23.4:Tenant, rent at market price10.610.510.18.09.0:Proportion of people living in low work intensity households4 (% of people aged 0-59)10.112.212.210.99.1:Poverty thresholds, expressed in national currency at constant prices*45654364437244894650:Healthy life years (at the age of 65)Females9.09.35.65.4::Males9.99.66.97.0::Aggregate replacement ratio for pensions5 (at the age of 65)0.60.60.60.60.6:Connectivity dimension of the Digital Economy and Society Inedex (DESI)6::54.457.363.067.4GINI coefficient before taxes and transfers*54.454.856.355.554.7:GINI coefficient after taxes and transfers*34.134.234.534.033.9: 
 
 
 
 
 
 
 
C. Standard tables 

Table C.5: 

Product market performance and policy indicators 

1) The methodologies, including the assumptions, for this indicator are shown in detail here: 
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 don't know.       
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 here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       
6) Aggregate OECD indicators of regulation in energy, transport and communications (ETCR). 
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). 

70 

Performance Indicators2010201120122013201420152016Labour productivity (real, per person employed, year-on-year % change)Labour productivity in Industry7.292.101.020.680.630.45-0.67Labour productivity in Construction-2.743.617.033.26-4.06-1.31-2.15Labour productivity in Market Services2.001.961.951.89-2.54-2.18-1.28Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in Industry-3.28-0.99-1.310.250.100.673.25ULC in Construction4.97-1.51-4.06-2.002.772.443.92ULC in Market Services0.34-1.49-2.37-0.410.023.863.31Business Environment2010201120122013201420152016Time needed to enforce contracts(1) (days)547.0547.0547.0547.0547.0547.0547.0Time needed to start a business(1) (days)5.55.55.54.54.54.54.5Outcome of applications by SMEs for bank loans(2)0.831.131.240.710.680.550.60Research and innovation2010201120122013201420152016R&D intensity1.531.461.381.331.291.241.27General government expenditure on education as % of GDP7.607.306.206.206.106.00naPersons with tertiary education and/or employed in science and technology as % of total employment24272930333435Population having completed tertiary education(3)14161718202122Young people with upper secondary level education(4)59656870727778Trade balance of high technology products as % of GDP-2.00-1.72-1.60-1.56-1.61-1.52naProduct and service markets and competition200320082013OECD product market regulation (PMR)(5), overall2.121.691.29OECD PMR5, retail3.293.971.83OECD PMR5, professional servicesna3.082.92OECD PMR5, network industries(6)3.092.552.18 
 
 
 
C. Standard tables 

Table C.6:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 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 % of total value added for the economy 
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 EUR)  
Real unit energy costs for manufacturing industry excluding refining : real costs as % 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 GHG 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 2010 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 covering natural gas, total petrol products, nuclear heat, renewable 
energies and solid fuels 
* European Commission and European Environment AgencySource: European Commission and European Environment 
Agency (Share of GHG emissions covered by ETS); European Commission (Environmental taxes over labour taxes and GDP); 
Eurostat (all other indicators) 

71 

Green growth performance201120122013201420152016MacroeconomicEnergy intensity kgoe / €0.130.130.130.130.130.13Carbon intensity kg / €0.390.390.380.380.40-Resource intensity (reciprocal of resource productivity)kg / €1.030.990.870.960.950.92Waste intensity kg / €-0.08-0.09--Energy balance of trade % GDP-4.2-4.7-3.7-3.6-2.3-1.6Weighting of energy in HICP%12.7413.798.597.868.258.11Difference between energy price change and inflation %6.610.92.61.7-1.9-2.1Real unit of energy cost% of value added17.819.118.618.9--Ratio of environmental taxes to labour taxesratio0.170.170.150.150.17-Environmental taxes% GDP2.32.22.22.32.42.6Sectoral Industry energy intensity kgoe / € 0.200.180.180.170.160.16Real unit energy cost for manufacturing industry excl. refining% of value added16.016.215.215.5--Share of energy-intensive industries in the economy% GDP8.138.067.928.098.20-Electricity prices for medium-sized industrial users€ / kWh0.100.110.110.120.110.11Gas prices for medium-sized industrial users€ / kWh0.040.040.040.040.040.03Public R&D for energy % GDP0.020.020.020.020.030.03Public R&D for environmental protection% GDP0.030.030.030.040.050.04Municipal waste recycling rate%20.126.125.830.4--Share of GHG emissions covered by ETS*%37.538.938.237.741.839.3Transport energy intensitykgoe / €0.940.890.900.940.950.95Transport carbon intensitykg / €2.372.212.202.342.34-Security of energy supplyEnergy import dependency%77.779.272.471.277.373.5Aggregated supplier concentration indexHHI26.626.728.128.232.1-Diversification of energy mixHHI0.320.300.310.310.300.32 
 
 
 
REFERENCES 

Amador J., and Stehrer R., Portuguese Exports in the Global Value Chains, Banco de Portugal, 2014 

Austrian Institute of Economic Research (WIFO), the Vienna Institute for International Economic Studies 
(wiiw), the Economic and Social Research Institute (ESRI), Drivers and Obstacles to Competitiveness in 
the EU: The Role of Value Chains and the Single Market, Vienna, 21 July 2017 

Autoridade da Concorrencia, Report on competition and regulation of public passenger transport services 
by car hire, December 2016  

Braguinsky  S.,  Branstetter  L.,  and  Regaterio  A.  (2011),  “The  incredible  shrinking  Portuguese  firm”, 
NBER Working Paper No. 17265, 2011 

Bank of Portugal (2017), December Statistical Bulletin, Lisbon 

Banco  de  Portugal  (2017a),  «Autonomia  financeira  das  empresas  portuguesas»,  Paulo  Soares  Esteves, 
Banco de Portugal, March 2017. 

Curnis C. and Manjón Antolín M (forthcoming 2018), Impact of the Economic Governance 

Eurobarometer (2017), Report "Business' attitudes towards corruption in the EU" 457, December 2017 

EUROMOD (2017) “Effects of tax-benefit policy changes across the income distributions of the EU-28 
countries: 2015-2016”, EUROMOD Working Paper 10/17, Institute for Social and Economic Research, 
University of Essex. 

European Commission (a), 2017 SBA Fact Sheet Portugal, 2017 

European  Commission  (b),  Quarterly  Report  16  No.1|21  A  macroeconomic  perspective  on  non-
performing loans (NPLs), 2017 

European Commission (c), Labour market and wage developments in Europe 2017, Directorate-General 
for Employment, Social Affairs and Inclusion, 2017 

European  Commission  (d),  Indicator  Framework  for  Monitoring  the  Council  Recommendation  on  the 
integration of the long-term unemployed into the labour market, forthcoming. 

European Commission (e), Country Report 2017 

European Commission 2017 (f), Alert Mechanism Report 2018. 

European Commission - DG Research & Innovation, "Science, Research and Innovation Performance of 
the  EU  2018"  (forthcoming);  data  from  SPINTAN  (Smart  Public  Intangibles)  and  INTAN  (on  market 
sector data on intangible assets) project 

European Centre of Expertise in the field of labour law, employment and labour market policy (2017), An 
in-depth analysis of the emigration of skilled labour, forthcoming. 

ESPN 2017, Thematic Report on access to social protection for people working as self-employed or on 
non-standard contracts — Portugal, 2017. 

Ferrando A., and Ruggieri A., Financial constraints and productivity: evidence from euro area companies, 
Working Paper Series no. 1823, European Central Bank, 2015 

72 

 
 
References 

Frazzani  S.,  Grea  G.,  and  Zamboni  A.,  Study  on  passenger  transport  by  taxi,  hire  car  with  driver  and 
ridesharing in the EU, Grimaldi, CERTeT Università Luigi Bocconi, Wavestone, 2016 

Fontoura  Gouveia,  A.,  Santos,  S.  and  Gonçalves,  I  (2017),  “The  impact  of  structural  reforms  on 
productivity: the role of the distance to the technological frontier”, OECD Productivity Working Papers, 
2017-08, OECD Publishing, Paris. 

Government  of  Portugal  (2017):  "Retribuição  Mínima  Mensal  Garantida:  Acompanhamento  do  Acordo 
sobre RMMG, 6.º Relatório", Ministério do Trabalho, Solidariedade e Segurança Social, October 2017. 

Governo de Portugal (2015), Programa do XXI Governo 

Governo  de  Portugal  (2016),  Relatório  Sobre  A  Avaliação  do  Acesso  ao  Ensino  Superior.   
http://www.portugal.gov.pt/media/22022458/relatorio-avaliacao-acesso-ensino-superior.pdf 

Hasanefendic et al. (2016) "Training students for new jobs: The role of technical and vocational higher 
education and implications for science policy in Portugal",Technological Forecasting and Social Change, 
Vol. 113, Part B. 

IMF, "Fiscal Monitor - Tackling Inequality", October 2017 

Kanjou  Augé  I.,  Kastrissianakis  S.,  and  Manjón  Antolín  M.,  (forthcoming  2018),  The  microeconomic 
dimension of non-performing loans 

Moral-Benito E., Growing by learning: firm-level evidence on eth size-productivity nexus, Bank of Spain, 
2016 

OECD (2017a), Economic surveys Portugal 2017, February 2017 

OECD (2017b), Entrepreneurship at glance 2017, OECD Publishing, Paris, 2017 

OECD  (2017c),  Labour  market  reforms  in  Portugal  2011-2015.  A  preliminary  assessment,  OECD 
publishing, Paris, 2017 

OECD/European  Observatory  on Health  Systems  and  Policies  (2017), Portugal: Country Health Profile 
2017, State of Health in the EU, OECD Publishing, Paris/European Observatory on Health Systems and 
Policies, Brussels. http://dx.doi.org/10.1787/9789264283527-en 

Pereira,  M.  et  Al  (2017)  Produtividade  na  justiça  cível  em  Portugal:  Uma  questão  incontornável  num 
sistrema congestionado  

Storz, M. et Al (2017) Do we want these two to tango? On zombie firms and stressed banks in Europe, 
European Central Bank  Working Paper Series No. 2104  

World Bank (2017a), Doing Business report 2018, October 2017 

World Bank (2017b), Paying taxes report 2017, World Bank and Pwc LLP, 2017 

73