Portugal’s economic recovery and pro-business policies increased market attractiveness in 2019, a positive year before the country was hard-hit by the COVID-19 pandemic in 2020. The country’s notable recovery since concluding an EU/IMF bailout adjustment program in 2014 culminated in a first-ever budget surplus in 2019. Portugal recovered its investment-grade sovereign bond ratings and now enjoys record-low financing costs. While the country continues to hold strong potential for U.S. investors, the Covid-19 pandemic has had a serious impact on the economy.
The Portuguese economy contracted by 7.6% in 2020, the most severe yearly drop since 1928. The pandemic also increased the already problematic public debt by over €20 billion to 133.7% of GDP in 2020, from 117.7% in 2019. As of early 2021, the government predicted a budget deficit of 7.3% in 2020 and 4.3% in 2021. However, the government was able to contain a significant rise in unemployment, which at 6.8% in 2020, was higher than the 2019 figure of 6.5%, but was well below the government’s October forecast of 8.7%, as the labor market showed resilience during the first year of the pandemic. However, in January 2021, the government imposed a second lockdown to counter spiking COVID-19 numbers that continued to impact the tourism, hospitality, and retail sectors. The depth of the pandemic’s impact on the banking and tourism sectors will depend largely on the length of global travel restrictions and retail closures.
Portugal will have a once-in-a-generation chance to boost its economic recovery, using around €14 billion in European Union (EU) grants expected to flow to state coffers between 2021 and 2026, to support its Recovery and Resilience Plan. The government is expected to allocate the funds in support of energy and digital transitions.
Before the pandemic, the services sector, particularly Portugal’s tourism industry, served as an engine of economic recovery, while textiles, footwear, and agriculture moved up the value chain and became more export-oriented over the last decade. The auto sector, together with heavy industry, technology, agriculture, construction, and energy remain influential clusters.
The banking sector faced considerable challenges in recent years, including the costly central bank-led bailing out of Banco Espírito Santo in 2014 and Banif in 2015 from the global financial crisis. Even so, banks regained momentum since, restructuring and strengthening capital structures to address the lingering stock of non-performing loans. They are now in the frontline of the Covid-19 economic shock, supporting pandemic-related credit lines and debt moratoria programs initiated by the government. While banks entered the pandemic in a relatively strong position, investors are particularly attentive to the potential aftershocks related to the end of the extraordinary bank credit moratorium introduced to temporarily shield borrowers. Portugal’s economy is fully integrated in the European Union. Portugal’s primary trading partners are Spain, France, Germany, the United Kingdom, and the United States.
Beyond Europe, Portugal maintains significant links with former colonies including Brazil, Angola, Mozambique, Cape Verde, and Guinea-Bissau.
|TI Corruption Perceptions Index||2020||33 of 175||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2020||39 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2020||31 of 131||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, historical stock positions)||2019||USD 2.4 bln||https://apps.bea.gov/international/factsheet/|
|World Bank GNI per capita||2019||USD 23,200||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
The government of Portugal recognizes the importance of foreign investment and sees it as a driver of economic growth, with an overall positive attitude towards foreign direct investment (FDI). Portuguese law is based on a principle of non-discrimination, meaning foreign and domestic investors are subject to the same rules. Foreign investment is not subject to any special registration or notification to any authority, with exceptions for a few specific activities.
The Portuguese Agency for Foreign Investment and Commerce (AICEP) is the lead for promotion of trade and investment. AICEP is responsible for attracting FDI, global promotion of Portuguese brands, and export of goods and services. It is the primary point of contact for investors with projects over € 25 million or companies with a consolidated turnover of more than € 75 million. For foreign investments not meeting these thresholds, AICEP will make a preliminary analysis and direct the investor to assistance agencies such as the Institute of Support to Small- and Medium- Sized Enterprises and Innovation (IAPMEI), a public agency within the Ministry of Economy that provides technical support, or to AICEP Capital Global, which offers technology transfer, incubator programs, and venture capital support. AICEP does not favor specific sectors for investment promotion. It does, however, provide a “Prominent Clusters” guide on its website, where it advocates investment in Portuguese companies by sector. Additionally, Portugal has introduced the website Simplex, designed to help navigate starting a business.
The Portuguese government maintains regular contact with investors through the Confederation of Portuguese Business (CIP), the Portuguese Commerce and Services Confederation (CCP), the Portuguese Chamber of Commerce and Industry (CCIP), among other industry associations.
Limits on Foreign Control and Right to Private Ownership and Establishment
There are no legal restrictions in Portugal on foreign investment. To establish a new business, foreign investors must follow the same rules as domestic investors, including mandatory registration and compliance with regulatory obligations for specific activities. There are no nationality requirements and no limitations on the repatriation of profits or dividends.
Non-resident shareholders must obtain a Portuguese taxpayer number for tax purposes. EU residents may obtain this number directly with the tax administration (in person or by means of an appointed proxy); non-EU residents must appoint a Portuguese resident representative to handle matters with tax authorities.
Portugal enacted a national security investment review framework in 2014, which gave the Council of Ministers authority to block specific foreign investment transactions that would compromise national security. Reviews can be triggered on national security grounds in strategic industries like energy, transportation, and communication. Investment reviews can be conducted in cases where the purchaser acquiring control is an individual or entity not registered in an EU member state. In such instances, the review process is overseen by the applicable Portuguese ministry according to the assets in question. Portugal has yet to activate its investment screening mechanism.
Portuguese government approval is required in the following sensitive sectors: defense, water management, public telecommunications, railways, maritime transportation, and air transport. Any economic activity that involves the exercise of public authority also requires government approval; private sector companies can operate in these areas only through a concession contract.
Portugal additionally limits foreign investment with respect to the production, transmission, and distribution of electricity, the production of gas, the pipeline transportation of fuels, wholesale services of electricity, retailing services of electricity and non-bottled gas, and services incidental to electricity and natural gas distribution. Concessions in the electricity and gas sectors are assigned only to companies with headquarters and effective management in Portugal.
Investors wishing to establish new credit institutions or finance companies, acquire a controlling interest in such financial firms, and/or establish a subsidiary must have authorization from the Bank of Portugal (for EU firms) or the Ministry of Finance (for non-EU firms). Non-EU insurance companies seeking to establish an agency in Portugal must post a special deposit and financial guarantee and must have been authorized for such activity by the Ministry of Finance for at least five years.
Other Investment Policy Reviews
To combat the perception of a cumbersome regulatory environment, the government has created a ‘cutting red tape’ the website Simplex (simplex.gov.pt) that details measures taken since 2005 to reduce bureaucracy, and the Empresa na Hora (“Business in an Hour”) program that facilitates company incorporation by citizens and non-citizens in less than 60 minutes. More information is available at Empresa na Hora.
In 2007, the government established AICEP, a promotion agency for investment and foreign trade that also manages industrial parks and provides business location solutions for investors through its subsidiary AICEP Global Parques.
Established in 2012, Portugal’s “Golden Visa” program gives fast-track residence permits to foreign investors meeting certain conditions, including making capital transfers, job creation or real estate acquisitions. As of 2021, the government is planning to introduce changes to the “Golden Visa” program that includes restricting the purchase of real estate to regions in the interior, in the Azores and Madeira, a package of measures expected to kick-in in 2022. Between 2012 and 2020, Portugal issued 9,444 ‘Golden Visas’, representing €5.67 billion of investment, of which €5.1 billion went into real estate. Chinese nationals dominate the ‘Golden Visa’ issuance, with 5,672, followed by Brazilian nationals, with 994. Other measures implemented to help attract foreign investment include the easing of some labor regulations to increase workplace flexibility and EU-funded programs.
Portuguese citizens can alternatively register a business online through the “Citizen’s Portal” available at Portal do Cidadão. Companies must also register with the Directorate General for Economic Activity (DGAE), the Tax Authority (AT), and with the Social Security administration. The government’s standard for online business registration is a two to three day turnaround but the online registration process can take as little as one day.
Portugal defines an enterprise as micro-, small-, and medium-sized based on its headcount, annual turnover, or the size of its balance sheet. To qualify as a micro-enterprise, a company must have fewer than 10 employees and no more than €2 million in revenues or €2 million in assets. Small enterprises must have fewer than 50 employees and no more than €10 million in revenues or €10 million in assets. Medium-sized enterprises must have fewer than 250 employees and no more than €50 million in revenues or €43 million in assets. The Small- and Medium-Sized Enterprise (SME) Support Institute (IAPMEI) offers financing, training, and other services for SMEs based in Portugal.
More information on laws, procedures, registration requirements, and investment incentives for foreign investors in Portugal is available at AICEP’s website.
The Portuguese government does not restrict domestic investors from investing abroad. On the contrary, it promotes outward investment through AICEP’s customer managers, export stores and its external commercial network that, in cooperation with the diplomatic and consular network, are operating in about 80 markets. AICEP provides support and advisory services on the best way of approaching foreign markets, identifying international business opportunities for Portuguese companies, particularly SMEs.
6. Financial Sector
Capital Markets and Portfolio Investment
The Portuguese stock exchange is managed by Euronext Lisbon, part of the NYSE Euronext Group, which allows a listed company access to a global and diversified pool of investors. The Portuguese Stock Index-20 (PSI20) is Portugal’s benchmark index representing the largest (only 18, not 20, since 2018) and most liquid companies listed on the exchange. The Portuguese stock exchange offers a diverse product portfolio: shares, funds, exchange traded funds, bonds, and structured products, including warrants and futures.
The Portuguese Securities Market Commission (CMVM) supervises and regulates securities markets, and is a member of the Committee of European Securities Regulators and the International Organization of Securities Commissions. Additional information on CMVM can be found here: http://www.cmvm.pt/en/Pages/homepage.aspx.
Portugal respects IMF Article VIII by refraining from placing restrictions on payments and transfers for current international transactions. Credit is allocated on market terms, and foreign investors are eligible for local market financing. Private sector companies have access to a variety of credit instruments, including bonds.
Money and Banking System
Portugal has 148 credit institutions, of which 60 are banks. Online banking penetration stood at 60 percent in 2019. Portugal’s banking assets totaled EUR 410.4 billion at the end of June 2020. Portuguese banks’ non-performing loan portfolios remain among the largest in Europe despite improving since the global financial crisis. Total loans stood at around €200 billion, 5.5% of which constitute non-performing loans, above the Eurozone average of around 2.8% percent.
Banks’ return on equity and on assets remained was 0.9% in the first half of 2020 versus 4.9% for full-year 2019. In terms of capital buffers, the Common Equity Tier 1 ratio stabilized at 14.6% as of June 2020.
Foreign banks are allowed to establish operations in Portugal. In terms of decision-making policy, a general ‘four-eyes policy,’ with two individuals approving actions, must be in place at all banks and branches operating in the country, irrespective of whether they qualify as international subsidiaries of foreign banks or local banks. Foreign branches operating in Portugal are required to have such decision-making powers that enable them to operate in the country, but this requirement generally does not prevent them from having internal control and rules governing risk exposure and decision-making processes, as customary in international financial groups.
No restrictions exist on a foreigners’ ability to establish a bank account and both residents and non-residents may hold bank accounts in any currency. However, any transfers of EUR 10,000 or more must be declared to Portuguese customs authorities. See more at: https://www.bportugal.pt/.
Foreign Exchange and Remittances
Portugal has no exchange controls and there are no restrictions on the import or export of capital. Funds associated with any form of investment can be freely converted into any world currency.
Portugal is a member of the European Monetary Union (Eurozone) and uses the euro, a floating exchange rate currency controlled by the European Central Bank (ECB). The Bank of Portugal is the country’s central bank; the Governor of the Bank of Portugal participates on the board of the ECB.
There are no limitations on the repatriation of profits or dividends. There are no time limitations on remittances.
Sovereign Wealth Funds
The Ministry of Labor, Solidarity, and Social Security manages Portugal’s Social Security Financial Stabilization Fund (FEFSS), with total assets of around EUR 22 billion. It is not a Sovereign Wealth Fund (SWF) and does not subscribe to the voluntary code of good practices (Santiago Principles), or participate in the IMF-hosted International Working Group on SWFs. Among other restrictions, Portuguese law requires that at least 25 percent of the fund’s assets be invested in Portuguese public debt, and limits FEFSS investment in equity instruments to that of EU or OECD members. FEFSS acts as a passive investor and does not take an active role in the management of portfolio companies.