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Overseas business risk for Portugal

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Overseas business risk for Portugal

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Information on key security and political risks which UK businesses may face when operating in Portugal.

1.Political and economic

1.1 Political overview

The political system in Portugal is a semi-presidential parliamentary democracy, where the President is the Head of State with limited powers and the government holds the key executive role. The Prime Minister is appointed by the President and the government is accountable to the President and to Parliament.

The President serves a 5-year term, while a parliamentary term and a government mandate last for 4 years. The next general election is due in September/October 2026 and the next presidential election in January 2026. The President, Marcelo Rebelo de Sousa, was re-elected in January 2021 for a second term and he comes from the right-of-centre Social Democratic Party (PSD). Prior to his election, he was a respected law professor and highly popular TV commentator.

Since October 2015, Portugal has been governed by the Socialist Party (PS), led by Prime Minister António Costa. He has been leader of the PS since 2014 and was previously in government as Minister for Internal Affairs and Minister for Justice. In January 2022, Costa and the PS won a snap election with an overall majority.

Eight parties are represented in Parliament: the Socialist Party (PS), the Social Democrats (PSD), Chega (Enough - CH), the Liberal Initiative (IL), the Communists (PCP), the Left Block (BE), the Animal and Nature Party (PAN), and Livre (Free - L).

Since democratic elections were introduced in Portugal in 1976, the leader of the party winning most votes at the election has always become Prime Minister. However, this practice ended in October 2015 when the PSD were unable to form a majority government and the centre-right minority government was voted down by the left-wing majority in Parliament. António Costa, leader of the second-placed PS, formed a minority government – supported in Parliament by Socialist, Communist and Left Block MPs.

This was an unprecedented alliance in which the parties chose to put aside major differences, notably on the Euro and NATO, in order to achieve a shared objective of putting an end to the austerity imposed during the bail-out. Despite the marked differences between the parties, this left-wing alliance proved successful in leading the country through a period of political and social stability, as well as slow but steady economic recovery.

After the 2019 election, the minority PS government continued to rely on the left to pass its economic policies and on the right to comply with Portugal’s international and multilateral commitments. There was no formal arrangement or alliance in place however and support was negotiated issue by issue.

In October 2021, the minority Socialist government failed to secure parliamentary approval for the state budget and the President dissolved parliament and announced new elections. In January 2022, Prime Minister Antonio Costa’s Socialist Party defied the polls to win a parliamentary majority at the expense of its former allies.

1.2 Economic overview

With a population of 10.3 million and a GDP of around €239.4 billion (2022), Portugal saw its economy expand rapidly from its accession to the EU in 1986 until the late 1990s. Two decades of economic near-stagnation then followed.

Portugal weathered the 2008 global financial crisis relatively well but was dragged into the Eurozone sovereign debt crisis in 2010 to 2011. With the sovereign and banks effectively shut out of international capital markets, the then socialist government was forced to negotiate a €78 billion financial assistance package (‘bail-out’) with the European Commission, ECB and IMF in May 2011.

Following the successful completion of the bailout programme, the Portuguese economy was recovering steadily prior to COVID-19, with GDP growing for 22 consecutive quarters. GDP per head however remains at just 79.2% of the EU average. In 2020, GDP contracted by an unprecedented 8.4%, due to the pandemic, which curbed domestic demand and tourism (the latter, directly and indirectly, accounts for almost 15% of the economy).

Post-pandemic, the economy saw a strong recovery. GDP grew 4.9% and 6.7% in 2021 and 2022 respectively. For 2023, despite some slowdown in economic activity, the outlook remains positive: following a stronger-than-expected start of the year (quarterly growth of 1.6% in Q1, second highest in the EU), GDP is forecast to grow around 2.5%, according to the latest projections from IMF and the Commission, driven mainly by exports (and in particular tourism).

Portugal’s ambitious post-COVID-19 recovery plan, to be funded mainly by EU money (structural and cohesion funds under the 2021 to 2027 MFF and grants under the Next Generation EU package), will trigger sizeable investments on climate action, digital transition, infrastructure (mainly rail and ports) and human capital. Portugal’s long-term economic prospects, and ability to address some of the structural bottlenecks that hinder productivity, are intrinsically linked to the ability to properly execute this large financial envelope. So far, execution rates remain worryingly low (24%).

On the fiscal side, the budget balance reached +0.2% of GDP in 2019 (the first surplus in almost 50 years), down from a 10% record deficit pre-bailout. Portugal’s budgetary situation has started to improve: the budget deficit-to-GDP ended 2022 substantially below the Government’s forecast (-0.4% vs -1.9%, respectively). In 2022, public debt-to-GDP decreased to levels below the pre-pandemic period: 113.9% , -11 p.p. in comparison to 2021 and -3 p.p. in comparison to 2019, reaching the lowest level since 2011.

Although Portugal continues to enjoy full, and affordable, market access, persistent inflationary pressures and the ECB’s monetary tightening represent a significant risk, given the fact that the central bank holds some 50% of Portuguese outstanding government bonds. The labour market proved very resilient throughout the pandemic, mainly due to a comprehensive job retention package. However, the unemployment rate has been steadily rising in recent months, to 7.2% in Q1 2023, due to a slowdown in economic activity.

Financial stability is safeguarded, and banks’ asset quality has improved: since 2016 banks have been securing their position( by reducing non-performing loans ratio to 3.2% in Q3, which fell further to 3% in Q4 2022, approaching the European average (2.29% in Q3 2022).High interest rates, real estate prices, and high stocks of (public and private) debt will remain important risks.

In 2022, on the back of a sustained internationalisation effort over the last decade, total exports, as a share of GDP, broke the 50% threshold for the first time ever (up from around 30% 10-15 years ago). Further to a strong performance of tourism, Portuguese exports have steadily gained market share in key export markets in Europe, including the UK (Portugal’s 5th largest market) and the government is also proactively seeking new export market opportunities in non-EU emerging economies, mainly within the Portuguese-speaking world, eg Angola, Brazil, but also in China and Latin America.

2.Business and human rights

Portugal reiterates its firm commitment to the respect for human rights, which are embodied in the Portuguese Constitution. The country has ratified most of the universal human rights treaties, as well as the main ILO and UNESCO conventions and protocols relating to fundamental rights and it is part of all the core UN HR instruments.

Rules from international conventions which have been duly ratified or approved, automatically apply in domestic law following their official publication.

The right of assembly, membership of trade union organisations and the right to strike are legally guaranteed to employees. There are 2 union federations (CGTP-IN - General Confederation of Portuguese Workers and UGT - General Union of Workers), and a number of other union organisations in different sectors.

There is also a legal framework to safeguard the rights of children and adults who may be especially vulnerable because of race, sexual preference, gender, age or illness, although there are still challenges faced by Portuguese society in these areas.

In particular, there have been concerns relating to poor living conditions and discrimination experienced by migrants, as well as instances of labour exploitation and trafficking, particularly in the agriculture and construction sectors. The trafficking in persons report for 2022 states that “Portugal does not fully meet the minimum standards for the elimination of trafficking, but is making significant efforts to do so”, particularly in the area of prevention. In October 2022, the Portuguese Government launched a public consultation on a new national anti-trafficking action plan for 2022 to 2025.

3.Bribery and corruption

Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world.

In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere.

Reports of suspicious transactions are investigated by the financial intelligence unit, a department of the Portuguese Judicial Police (PJ).

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