This document provides an overview and summary of key economic indicators for Portugal. The main points are: 1) The Portuguese economy contracted sharply in 2012 as domestic demand decreased and exports growth slowed. Unemployment rose to over 15% while inflation remained above the EU average. 2) Fiscal consolidation efforts have been impressive but revenue targets were missed due to weak growth. Additional austerity measures were implemented to reduce the budget deficit. 3) Structural reforms have addressed some labor market issues but more progress is needed in product markets. Banks have bolstered capital ratios with ECB funding but credit remains tight.

1. Country Report
Lisbon
Portugal – December 2012

2. Overview
General information Most important sectors (% of GDP, 2011)
Capital: Lisbon Services: 75 %
Government type: Parliamentary democracy Industry/mining: 23 %
Currency: Euro (EUR) Agriculture: 2 %
Population: 10.7 million
Main import sources (2011, % of total) Main export markets (2011, % of total)
Spain: 31.1 % Spain: 25.2 %
Germany: 12.4 % Germany: 13.8 %
France: 6.9 % France: 12.2 %
Italy: 5.3 % United Kingdom: 5.0 %
The Netherlands: 4.8 % Angola: 5.0 %
Key indicators
2009 2010 2011 2012* 2013*
Real GDP growth (y-on-y, % change) -2.9 1.4 -1.7 -2.9 -1.9
Consumer price inflation (y-on-y, % change) -0.8 1.4 3.7 2.9 1.3
Real private consumption (y-on-y, % change) -2.3 2.1 -4.0 -5.4 -1.2
Retail sales (y-on-y, % change) -4.8 -1.2 -8.9 -7.4 -2.6
Industrial production (y-on-y, % change) -8.1 1.5 -1.9 -4.0 -1.6
Unemployment rate (%) 9.5 10.8 12.7 15.5 17.3
Gross fixed capital investments (y-on-y, % change) -8.6 -4.1 -11.3 -14.1 -6.5
Real net exports (EUR billion) -14.0 -13.2 -6.1 0.1 1.8
Fiscal balance (% of GDP) -10.2 -9.8 -4.4 -5.1 -4.7
Government debt (% of GDP) 83.2 93.5 108.1 119.5 127.3
*forecast Source: IHS Global Insight
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3. Political situation: Centre-right administration with an absolute majority
Head of state: President Anibal Cavaco Silva (since March 2006)
Head of government: Prime Minister Pedro Passos Coelho (since June 2011)
Form of government: Coalition of the two centre-right parties PSD and CDS-PP
In the June 2011 early parliamentary elections, the centre-right parties PSD (liberals) and CDS-PP (conservatives)
achieved an absolute parliamentary majority (132 of the 230 seats). The elections were precipitated as former Prime
Minister José Socrates (Socialist party) had resigned in March 2011, after proposed further austerity measures were
voted down in parliament. As the coalition holds a solid majority it is expected to remain in power for most of the
legislative period until 2015. Violent mass protests against austerity measures, of the kind seen in Greece, are not
expected in Portugal and so far any demonstrations have been peaceful. However, social stability may come under
Economic situation: The contraction accelerates
pressure as additional austerity measures continue to cut into living standards.
Economic Export growth, The contraction accelerates the economy
situation: but lack of domestic demand drags down
Lack of domestic demand and weaker exports drag down the economy
Real GDP growth
(Annual percentage change in real GDP)
Source: IHS Global insightinsight
Source: IHS Global
In Q2 of 2012 the economic downturn that had been relatively mild so far started to accelerate as domestic demand
In Q2 of 2012 the economic downturn that had been relatively mild so far started to accelerate as
decreased sharply and global headwinds had a negative effect on export growth: GDP contracted 3.2 % year-on-
domestic demand decreased sharply and global headwinds had a negative effect on export growth:
year after a 2.3 % decrease in Q1. According to Statistics Portugal domestic demand decreased 7.6 % year-on-year
GDP contracted 3.3% year-on-year after a 2.3% decrease in Q1. According to the Economist
in Q2 of 2012 (6.1 % decrease in Q1), with all demand components reflecting this picture. Private consumption
Intelligence Unit (EIU) domestic demand decreased 7.6% year-on-year in Q2 of 2012 (6.1% decrease
declined 5.9 %, with a major negative contribution from spending on cars (down 26.3 % year-on-year). The decline
in Q1), with all demand components reflecting this picture. Private consumption declined 5.9%, with a
in public consumption accelerated as well in Q2, to -3.9 % (-1.8 % in Q1). Fixed investment has steadily declined
major negative contribution from spending on cars (down 26.3% year-on-year). The decline in public
since 2011, and decreased 18.7 %, dragged down by the decline in investment in transport and equipment. Only
consumption accelerated as well in Q2, to -3.9% (-1.8% in Q1). Fixed investment has steadily declined
exports contributed positively in Q2 of 2012, growing 4.3 %, but to a significantly lower extent than in Q1 (+7.9 %)
since 2011, and decreased 16.3%, dragged down by the decline in investment in transport and
as demand from the EU, and particularly Spain, decreased.
equipment.
In Q3 of 2012 the economy contracted 3.4 % year-on-year and 0.8 % compared with the previous quarter, as the
positive contribution of net external demand decreased 2012, growing 4.3%, but to a significantly lower extent
Only exports contributed positively in Q2 of significantly.
than in Q1 (+7.9%) as demand from the EU, and particularly Spain, decreased.
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4. Contribution to GDP Growth: Portugal
(Chain-weighted basis; forecast data edge 2010)
Source: IHS GlobalIHS Global insight
Source:
insight
Source: IHS Global insight
AccordingUnemployment continued to increase, to 15.9% in Augustto 15.8from Q3 of 2012 (+3.4 % year-on-
to Statistics Portugal unemployment continued to increase, 2012 % in 15.7% in July. Inflation in 2011
year). Inflation3.7% and is currently still above theto above the EU averagefrom 15.7%below), Inflation in 2011 to to
was in 2011 was 3.7continued currently stillEU average (see 2012 (see chart inis expected expected
Unemployment % and is to increase, 15.9% in August chart below), but July. but is to decrease
decrease to 2.9 % in3.7% The is relatively highabove thedue to higher oil chartcommodity prices. Inflation is expected
2.9% in 2012. and relatively still level is due average (see and below), but is expected to decrease expected
was 2012. The currently high level is EU to higher oil and commodity prices. Inflation is to
to decrease to 1.3 % in 2013 asin 2013 aseconomic performance curbs pricingcurbs pricing power. is expected
to decreasein 2012. The relativelythe weak economic performance power. prices. Inflation
2.9% to 1.3% the weak high level is due to higher oil and commodity
to decrease to 1.3% in 2013 as the weak economic performance curbs pricing power.
Consumer price inflation
(Annual percentage change)
Source: IHS Global insight
Source: IHS Global insight
Structural reforms are underway
Source: IHS Global insight
In early 2011 Portugal received a bailout package worth EUR 78 billion from the so-called ‘Troika’ (IMF/EU/ECB),
guaranteeing the country’s financing needs - provided that Portugal abides by the conditions of an attached IMF
program, i.e. strict fiscal consolidation and far-reaching structural reforms). Overall, the Portuguese government is
demonstrating strong commitment to the program, which ends mid-2014.
Structural reforms are underway
According to the IMF many labourare underway
Structural reforms market distortions have been addressed (costs of workers’ dismissal, degree of
In early 2011 Portugal received a bailout package worth EUR 78 billion from the of wage ag-
protection, reservation wage, unemployment benefits). But there is still the automatic extension so-called ‘Troika’
reements (IMF/EU/ECB), which negatively affects the package worth EUR 78of manythat the so-called ‘Troika’the
to entire early 2011 Portugal received country’s competitive position billion from Portugal abides by
In sectors, guaranteeing the a bailout financing needs - provided businesses. However, the
government promisedof an attachedissue in order to i.e. strict moreneeds - provided that Portugal abidesstructural
conditions to tackle this IMF program, generate fiscalexport (and thus GDP) growth. by the
(IMF/EU/ECB), guaranteeing the country’s financing consolidation and far-reaching
reforms). Overall, an attached IMF program, i.e. strict fiscal consolidation and far-reaching structural 4
conditions of the Portuguese government is demonstrating strong commitment to the program,
whichreforms). Overall, the Portuguese government is demonstrating strong commitment to the program,
ends mid-2014.
which ends mid-2014.

5. Less progress has been made regarding the competitive framework, as the impact of current measures on network
industries such as electricity, telecom and ports are unclear. The IMF has urged the government to address this
issue, which hampers dynamismthe IMF many labour market distortions have been addressed (costs of workers’
According to in the economy.
dismissal, degree of protection, reservation wage, unemployment benefits). But there is still the
automatic extension of wage agreements to entire sectors, which negatively affects the competitive
Fiscal policies: progress made, but deficit However, the remain promised to tackle this issue in order to
position of many businesses. pressures government
generate more export (and thus GDP) growth.
Real progress has been made with fiscalmade regarding the competitive framework, as the impact ofpublic finance manage-
Less progress has been structural reforms of revenue administration and current measures
ment, and the IMF qualifies the extentsuchfiscal adjustment asand ports are unclear. The IMF has urged the Portuguese
on network industries of as electricity, telecom impressive. On the expenses side the
government to address this issue, which hampers dynamism in the economy.
government has in general complied with the terms of the bailout program (in some issues even surpassing them).
Spending however is firmly under control, especially when taking into account interest costs (up 17.3 %) as well as
the heavy burden of Fiscal policies: progress made, but deficit pressures remain
increased social security costs (up 23 %).
However, on the revenues side the expected with fiscal structural reformsbeen reached, as the impact of the weak
Real progress has been made target figures have not of revenue administration and public
finance management, and the IMF qualifies the extent of fiscal adjustment as impressive. On the
economic performance hits tax revenues. January-July 2012 general complied with the terms of the bailout in current re-
expenses side the Portuguese government has in figures show a 2 % year-on-year decline
ceipts, despite a number of (in some issues even surpassing them). Spending however is(-15.6 under control, especially
program tax rate increases (VAT). Especially corporate tax firmly %) and vehicle tax receipts sho-
when taking into account interest costs (up 17.3%) as well as the heavy burden of increased social
wed considerable decreases, whereas the slide in employment has consequences for social security contributions. As
security costs (up 23%).
a consequence, the original targeted fiscal deficit of 4.5 % of GDP in 2012 has been relaxed to 5 % of GDP.
However, on the revenues side the expected target figures have not been reached, as the impact of the
weak economic performance hits tax revenues. January-July 2012 figures show a 2% year-on-year
End of November 2012 theinPortuguese parliamentnumber of tax ratethe 2013 budget, which corporate tax (- tax in-
decline current receipts, despite a finally passed increases (VAT). Especially includes large
creases (e.g. an increase in and vehicle tax receipts showed considerable decreases,% and an additional 3.5 % surcharge on
15.6%) the standard income tax from 24.5 % to 28.5 whereas the slide in employment has
consequences for social security contributions. As a consequence, the original targeted fiscal deficit of
all incomes in 2013).4.5%theGDP in time has been relaxed to 5% of GDP.
At of same 2012 further spending cuts of EUR 2.7 billion to pensions and public healthcare
will be made. With those measures the government aims to decrease the budget deficit to 4.5 % next year. But the
additional tax increases and spending adjusted the 2013question whether the so far limited effects of the budget deficit
The government has cuts raise the budget through additional austerity measures worth EUR 5.3
reduction on economic performance (a multiplier of 0.5 % on economicthis the IMF)(a multiplier of 0.5%The 2013 budget
billion, with 81% of the amount on the spending side. But
limited effects of the budget deficit reduction
according to raises the question whether the so far
performance
are sustainable.
is critical because the achievement of aare sustainable. The 2013 budget is critical because theto GDP ratio, peaking at 127 %
according to the IMF) positive structural balance will put the debt achievement of a
in 2013, on a sustainable downwardbalance will put the debt to GDP ratio, peaking at 117% in 2013, on a sustainable
positive structural trajectory.
downward trajectory.
Source: IHS Global insight
Source: IHS Global insight
Banking system has been bolstered
Portuguese banks have drawn EUR 60 billion under the European Central Bank’s (ECB) supplementary longer-term
refinancing operation (LTRO), a three year bank funding at low rates, which has enabled them to finance a large
part of their 2012 requirements. Funds have partly been used to purchase government bonds, but exposure to
sovereign debt remains limited compared to other EU-peers in financial trouble.
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6. Meanwhile capital support from the government (as part of the ‘Troika’ rescue package) has enabled
large banks to bolster their capital ratios. Non-performing loans stood at 8% by the end of September
2012, but the overall asset quality is relatively good compared to banks in other peripheral EU
countries. Nevertheless, credit constraints are increasing and hamper the economic activity, with
smaller firms operating in the domestic market being mainly affected by the very tight credit
conditions.
Meanwhile capital support from the government (as part of the ‘Troika’ rescue package) has enabled large banks
to bolster their capital ratios. Non-performing loans stood at 8% by the end of September 2012, but the overall
asset quality is relatively good compared to banks in other peripheral EU countries. Nevertheless, credit constraints
Cautious financial market access
are increasing and hamper the economic activity, with smaller firms operating in the domestic market being mainly
affected by the very tight credit conditions.
According to the IMF program Portugal is due to return to the financial markets mid-2013. There are
Cautious financial market access
two positive developments in this respect: Firstly, Portugal has seen a significant reduction in the yield
divergence of its 10-year benchmark bond, from a peak of 15% early this year to approximately 7%
According to recently (see chart Portugal is due to returndeclinesfinancial markets mid-2013. Secondly, Portugal
the IMF program below). There are similar to the in yields for other maturities. There are two positive
developments in maderespect: Firstly, Portugal has seen awith a successful EUR 3.76 billion debt swap, extending
has this a cautious comeback to the markets significant reduction in the yield divergence of its 10-year
benchmark bond, from a peak lowering early this Whetherapproximatelybe ready for a (see chart below).to the are
the maturities and of 15 % the yield. year to Portugal will 7% recently full-fledged return There
similar declines in yields for other maturities. of the IMF Portugal is still an open question. However,to the is
financial markets after the expiry Secondly, program has made a cautious comeback there markets with
a successful EUR 3.76 billion debt swap,will extend its support beyond the expiry of the program if needed.
confidence that the ‘Troika’ extending the maturities and lowering the yield. Whether Portugal will be
ready for a full-fledged return to the financial markets after the expiry of the IMF program is still an open question.
However, there is confidence that the ‘Troika’ will extend its support beyond the expiry of the program if needed.
Long bond yield divergence within the Eurozone
(10-year government bond yield spreads over the German Bund)
Source: Atradius Economic Research
Source: Atradius Economic Research
Prospects: still a long and rocky road ahead
No recovery in 2013
As said above, the relative success in the implementation of IMF program hasn’t stopped the Portuguese econo-
my from sinking deeper into recession in the short-term. GDP is expected to contract 2.9 % this year, followed by
another 1.9 % decrease in 2013. The worrying growth of unemployment to more than 17 % and the prospect of
more austerity measures to be implemented in 2013 in order to tackle the budget deficit put a lot of pressure on
domestic demand, risking the prospects of an early return to growth. Private consumption and industrial production
will continue to contract in 2013.
After the steep decrease in investments in 2011, tighter constraints on investment credit remain one of the major
concerns of the Portuguese government and the troika, since the bailout program’s success will be determined
largely by the economy’s capacity to achieve sustainable growth and competitiveness. But persistent uncertainty
about the economic outlook, reflected in deteriorating business confidence, will continue to affect investment deci-
sions in 2013. Therefore, real fixed investments will decrease further, by 6.5 % year-on-year.
6

7. will be determined largely by the economy’s capacity to achieve sustainable growth and
competitiveness. But persistent uncertainty about the economic outlook, reflected in deteriorating
business confidence, will continue to affect investment decisions in 2013. Therefore, real fixed
investments will decrease further, by 6.4% year-on-year.
Exports are expected to keep growing, however decelerating growth and the negative economic
outlook of many of Portugal’s main trade partners is bound to take its toll on Portuguese exports,
leading to an expected lower growth rate in this GDP component in 2013.
Exports are expected to keep growing, however decelerating growth and the negative economic outlook of many of
Portugal’s main trade partners is bound to take its toll on Portuguese exports, leading to an expected lower growth
The competitive position has hardly improved
rate in this GDP component in 2013.
Despite the notable decline in Real Effective Exchange Rates, Portugal’s competitive position has
The competitive position has hardly improved
hardly improved compared to other EU countries in troubles, and in comparison to the Eurozone there
is even deterioration (see chart below). This underscores the need for further structural reforms in
Despite the notable decline be Realto increase foreign market share.
order to in able Effective Exchange Rates, Portugal’s competitive position has hardly improved
compared to other EU countries in troubles, and in comparison to the Eurozone there is even deterioration (see
chart below). This underscores the need for further structural reforms in order to be able to increase foreign market
share.
The decreasing current account deficit is positive news
Meanwhile the current account deficit has narrowed, to 3.3 % of GDP in 2012 from 6.4 % of GDP in 2011. But this
is mainly attributable to weak domestic demand cutting imports, as well as the fact that external funding is much
harder to obtain. However, it is anticipated that expected improvements in the country’s competitive position,
continued weak demand and foreign financing constraints will further narrow the current account to 2.7 % of GPP
in 2013, and may even produce a surplus by 2015-2016.

8. Insolvencies to increase further in 2012
As a result of the continuing decrease in consumption, investment, and employment business conditions for many
companies will remain very difficult and access to bank loans will remain problematic. Those sectors particularly
exposed to the downturn are construction, timber and furniture, fixtures and fittings, iron and steel, retail and elec-
tronics, and domestic appliances.
After a 17.1 % year-on-year increase in 2011, we expect business insolvencies to rise again this year: by 5 %, to
about 6,300 cases (see chart below).
Portuguese business insolvencies
(year-on-year change)
10,000 10,000 *forecast
Sources: Statistics Portugal; Atradius Economic
8,000 8,000
Research.
6,000 6,325 6,325 6,000 Note: Forecasts are based on the outcome of
6,025 statistical models and expert opinion. The hi-
5,144 story of growth rates in the table represent esti-
4,000 4,450 4,000 mates based on official insolvency statistics and
model-based calculations. As such they should
3,267
2,000 2,000 be treated as indicative. All views expressed
here are those of Atradius Economic Research
(date of final forecast: 10 October 2012)
0 0
2008 2009 2010 2011 2012* 2013*
% change 53.9 % 36.2 % 15.6 % 17.1 % 5.0 % 0%
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9. Copyright Atradius NV 2012
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