international business context
Heriot-Watt University
C10IB1 International Business
Coursework 1: Country Based Analysis – Portugal
Wordcount: 2,685 words
Introduction
Portugal is an EU and Schengen area member state located on the West coast of the Iberian Peninsula (European Union, 2020). Although Portugal is a developed country, its economy heavily depends on EU funds, and its GDP and income per capita are among the lowest in Europe (Pinto da Costa, 2020). The International Monetary Fund (2019) defines Portugal as a small, open economy without an independent currency, as the country became a member of the Euro-area in January 1999 (European Commission, n.d.).
The purpose of this briefing report is to highlight the conditions of business in Portugal and the opportunities and threats presented by operating in this market. The report will firstly outline the political scenario in Portugal; secondly, the country’s operational structure and business regulations will be discussed. Thirdly, the essay will provide an overview of the Portuguese economy, comparing the economic situation pre- and post-COVID-19 and analysing Brexit’s potential consequences. Finally, Portugal’s current social issues will be examined, and the risk involved with operating in Portugal will be assessed.
Country analysis
1. Political scenario
Portugal is an independent, semi-presidential parliamentary democracy, whose legislative power lies within the Parliament (DFK International, 2018). Its Head of State is the President Marcelo Rebelo de Sousa, a Social Democrat elected in January 2016 (GOV.UK, 2018). In October 2015, the current Prime Minister, António Costa, was asked to form a left-wing coalition government between socialists, communists and left-wing MPs (GOV.UK, 2018). Despite the core differences between these parties, the coalition has been successful in leading the country through a period of slow but steady economic recovery after the austerity imposed by the €78 billion bail-out fund negotiated with the European Commission, the European Central Bank and the International Monetary Fund after the European debt crisis of 2009-2013 (ibid.). The resilience shown by this coalition highlights the ability of the Portuguese government to lead the country out of financial hardship, which will be helpful in recovering from the current COVID-19 crisis.
A presidential election will be held in January 2021 (ibid.). In May 2020, the President declared that the Portuguese people are too worried about the economic recovery to be concerned about the 2021 presidential election (Cabrita-Mendes, 2020). However, the socialist candidate Ana Gomes openly argued that democracy should not be put on hold (Plataforma Media, 2020). This suggests that a socialist victory would see the government’s focus shift towards addressing social issues, while the current President would focus his action towards economic recovery. Polls show that 55% of Portuguese would be inclined to vote for Rebelo de Sousa should he run again (Público, 2020). Although the presidential elections of January 2021 could cause some political unrest within the country, this information demonstrates that the population seems to have favourable opinions towards the current government. A likely re-election of the current President could entail a faster recovery, therefore entailing low political risk for businesses.
Regarding the tackling of the COVID-19 crisis, in April 2020 the European Commission approved two €13 billion Portuguese aid schemes to help businesses face the financial loss caused by COVID-19 (European Commission, 2020a). Furthermore, in March and April 2020 nine Euro-area governments, including Portugal, called for the issuance of joint European debt in the form of social bonds (also called ‘corona bonds’) to help member states fight the financial hardship caused by the pandemic (Financial Times, 2020). The Portuguese government has also authorised bank loan repayments to be postponed until September 2021 for individuals and businesses affected by the crisis (IMF, 2020), allowing consumers to have a larger disposable income for the short-term, which could increase consumer demand in the short-term.
2. Economic overview
According to DFK International (2017), Portugal’s connections and free trade with the EU, as well as its strategic location, make it an excellent country for the expansion of foreign businesses. Portugal also offers low labour costs compared to other European countries (ibid.), which may be an appealing element for MNCs expanding their operations. On the other hand, this presents social issues such as strong income inequality and low worker productivity.
Portugal’s economic and social environment was badly hit by the 2009-2013 European debt crisis, when the government was forced to negotiate a €78 billion bail-out fund with the European Commission, the ECB and the IMF (GOV.UK, 2018). However, in February 2019 it was observed that Portugal’s economic conditions had steadily improved, with the unemployment rate declining 10% since 2013 and the GDP growing by 2% a year (OECD, 2019). In fact, the Portuguese economy had largely recovered from the 2009-2013 crisis (ILO, 2020). However, although the debt-to-GDP ratio reached its lowest point of 117.7% at the end of 2019 (CEIC Data, 2020), this was still a very high figure, which highlighted the government’s inability to respond to potential economic shocks (OECD, 2019); this was further proved by the heavy repercussions COVID-19 is having on Portugal’s economy (ILO, 2020).
Even before the pandemic, Portugal was still facing social, financial and structural issues as a result of the previous crisis (ILO, 2020); although these issues were slowly being addressed, the country was characterised by relatively low wages and strong income inequality, as well as job insecurity and high public and private debt (ibid.). As a result of the pandemic, the Portuguese economy is expected to enter a recession and its GDP is expected to fall by up to 8% in 2020 alone (ILO, 2020). This will not only have negative consequences for the economy but also for the people, which were already facing several social issues before the pandemic. On one hand, the nation's economic history indicates that the Portuguese government has already been able to recover from an economic crisis in the past and is on track to address its many weaknesses. However, Portugal has already been severely affected by the coronavirus crisis and is likely to take relatively more time to recover than other countries due to the legacy of the previous crisis.
Regarding Portugal’s international trade activity, the country’s top exports are cars, vehicle parts, petroleum, leather footwear and uncoated paper, while its main imports are crude petroleum, cars, vehicle parts, packaged medicaments and petroleum gas (OEC, 2020). In May 2020, Portugal’s trade balance presented a year-on-year deficit of €908 million compared to 2019, as well as a decrease of 39% in exports and 40.2% in imports (ibid.). This is another important indicator of the financial loss caused by the COVID-19 pandemic, as well as the job insecurity caused by reduced trade and economic activity. The debt-to-GDP ratio was also severely impacted by the current coronavirus crisis. A pre-pandemic report by the European Commission (2019) forecasted the debt-to-GDP ratio to decrease and reach 116.8% by 2020; however, in June 2020 the ratio accounted for 127.2% of Portugal’s nominal GDP, as shown by Figure 1 (CEIC Data, 2020). Portugal’s high debt-to-GDP ratio could cause the domestic and international market to face severe uncertainty and increases the country’s risk of default if unable to pay back its debt. This poses a problem for Portugal-based companies, because high levels of government debt creates long-term uncertainty and high risk.
Figure 1:
Government debt-to-GDP ratio (September 1st, 2017 – June 1st, 2020)
(CEIC Data, 2020)
Brexit also poses a severe threat for Portugal and although it is difficult to evaluate its economic consequences on EU countries, including Portugal, Brexit will entail an increased level of uncertainty on both ends. Firstly, Britain will stop its contribution of 15% to the European Fund, which will result in Portugal’s share of the fund decreasing by 7% for the 2021-2027 budget (Pinto da Costa, 2020). This will negatively impact on Portugal’s economy, which largely relies on EU funding. Although economic activities are four times more at risk in the UK than they are in the EU (Confederation of Portuguese Business, 2018), Portugal will be the second most hit country by the uncertainty caused by Brexit, as the UK is Portugal’s fourth biggest foreign market accounting for $4.79 billion of its product exports in 2018 (OEC, 2020). Depending on the future trade relationships established following January 2021, the Portuguese export of consumer goods and services may decline by up to 26% (ibid.). Furthermore, consumer goods companies are the most high-risk with regards to Brexit (Confederation of Portuguese Business, 2018). The post-Brexit political and economic environment will certainly impact imports and exports, notably for consumer goods, which will face stronger regulations and stricter customs controls. Hence, this may represent an obstacle for multinational consumer goods companies, as their trade to and from the UK will face severe issues, such as increased costs and time-consuming paperwork – the extent of which depends on the nature of the nature of the trade relationship established between the UK and the EU after Brexit.
3. Operational structure
A World Bank (2018) report which investigated the cities of Braga, Coimbra, Évora, Faro, Funchal, Lisbon, Ponta Delgada, and Porto, assessed the business regulatory environment in Portugal and its impact on Portuguese entrepreneurs. The study’s areas of interest were starting a business, dealing with construction permits, getting electricity, registering property and enforcing contracts. The report assesses that entrepreneurs can register their companies and complete the tax, social security and labour registrations at a single contact point taking up to 3 hours, making Portugal one of four countries in the world allowing the creation of a business with only one interaction (World Bank, 2018). This highlights the ease of founding a business in Portugal. However, this information mainly refers to small and medium enterprises; hence, it might not be entirely relevant for big, multinational companies.
According to Lavinder (2018), several multinational companies are opening technological hubs in Portugal thanks to the policies which have been implemented by the Portuguese government to make business easier and attract foreign capital. This could suggest that the conditions of doing business for foreign companies are favourable, for example due to low corporate tax rates and reduced labour costs. Another factor which has brought these companies to operate in Portugal is the vicinity of leading universities and other institutions (Lavinder, 2018). The cost of living and renting premises in Portugal is also cheaper than in other European countries (ibid.), making Portugal appealing for foreign companies, as the cost of moving both operations and staff there would be reduced compared to other EU countries. The fact that other multinational giant companies have expanded their business to Portugal in the past is also proof that business regulations are advantageous for foreign investors.
Portugal’s ability to attract foreign investments is shown by the corporate tax rate being 21%, much lower than in other European countries, such as Italy (24%), Spain (25%), France (28%) and Germany (30%), as highlighted in Table 1 (KPMG, 2020).
Table 1:
(KPMG, 2020)
Operating in Portugal would allow foreign MNCs to benefit from lower corporate tax than in other Western European countries, making the country attractive for expansion. However, Portugal’s tax rate is slightly higher than the European average of 19.12% in 2020, demonstrating that other European countries, such as Easter European, could have more favourable tax rates than Portugal.
4. Social issues
The OECD (2020) states that the labour force participation rate in Portugal fell from 58.60% in the first quarter of 2020 to 56.30% in the second quarter (Trading Economics, 2020). This indicates that the Portuguese labour force has decreased as a result of the current pandemic; this suggests that the financial hardship has led Portuguese companies to furlough or lay-off staff. In fact, the unemployment rate is estimated to reach between 9.7 and 13.9 percent by the end of 2020 (ILO, 2020). The European Commission has established a temporary instrument called SURE (Support to mitigate Unemployment Risks in an Emergency) to provide financial support in the form of loans to EU member states facing severe economic and social issues as a result of the COVID crisis Portugal will receive a loan of €5.9 billion (European Commission, 2020b). This programme will be financed by the issuance of social bonds under the Social Bond Framework (ibid.).
Despite the mixture of uncertainty, job losses and decrease of income causing consumption to drop, especially in March and April 2020, the registered number of job losses in the wholesale and retail sectors was far less severe than the average for the country as a whole (ibid.). Portuguese consumers are generally concerned about the economic effects of COVID-19 and are cutting their spending on all categories, even though the pandemic’s damaging impact on the population’s disposable income, spending and savings is decreasing overall (McKinsey & Company, 2020). This suggests that, even though job loss in the retail sector was minimal, Portuguese consumers are willing to spend less and less on consumer goods as a result of the COVID crisis; this may pose a problem for consumer goods businesses, as low demand may negatively impact sales and cause unemployment in the retail industry to rise.
Another social issue which is currently representing a key challenge for Portugal’s business performance and growth is low productivity due to poor investment on human capital, heavy regulatory inflexibilities and difficulty in accessing capital especially for small businesses (European Commission, 2019). Moreover, the Portuguese workforce is lacking education and expertise; in fact, 50% of the country’s population lacks basic digital skills and school drop-out rate is higher than the EU average (European Commission, 2019); however, some progress regarding these issues has been made, following policies which have encouraged enrolment into higher education and the enhancement of digital skills (ibid.). The Human Capital Project (World Bank, 2020) has determined that students in Portugal score 509/625 on a scale of attainment. This shows that the Portuguese government needs to make further investment on human capital in order to improve productivity and generate a better-skilled labour force; although progress is being made to face this issue, the current Portuguese workforce is poorly skilled and does not meet the required productivity standards. This may represent an issue for MNCs expanding to the Portuguese market, as cultural differences, as well as a poor level of expertise and productivity, may lead to lower efficiency for the business and increased costs, as more time will have to be invested to address the cultural barriers.
Risk assessment
After analysing the current economic climate in Portugal, it can be inferred that Portugal has great potential to become a flourishing developed economy. However, although the country’s economic situation had steadily recovered from the 2009-2013 European debt crisis, it is now experiencing strong setbacks due to the COVID-19 crisis which has entailed a strong decrease in GDP and income per capita, as well as an increase of the debt-to-GDP ratio, increasing the chances of Portugal entering a recession and defaulting. Moreover, Portugal heavily relies on the European Union for funding; however, the UK’s withdrawal from the European Union will cause Portugal to receive less funding, hence increasing economic risk for the country.
Portugal’s political scenario is also facing some challenges, with the next presidential elections taking place in early 2021; although the political scene is generally stable, government changes could potentially lead to political unrest, especially as Brexit could have a significant impact on the Portuguese economy, depending on the nature of the trade relationships which will be established in early 2021. Moreover, consumer sentiment is low, resulting in decreased demand for consumer goods and therefore creating issues for companies, increasing unemployment rates and income inequality. Social risks also include low productivity and lack of digitally skilled labour, due to low investment on human capital and relatively low levels of education.
Conclusion
After taking into consideration the threats and opportunities and all political, social, economic and social issues currently faced by Portugal, it can be inferred that the risks involved with operating in Portugal do not create the ideal conditions for foreign investment. Therefore, it can be concluded that investing in Portugal at this given moment is not suggestable, but, as the country presents great potential for growth, it is recommended to further investigate the country’s economic, political, social and operational climate in the future, once the COVID-19 crisis is resolved and after the relationship between the UK and the EU has been established.
References
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Corporate tax rate (2020)
European average
2020 19.12 Portugal
2020 21 Italy
2020 24 Spain
2020 25 France
2020 28 Germany
2020 30
2