Portugal

major macro economic indicators

(e): Estimate (f): Forecast

RISK ASSESSMENT

Economic growth slows as ECB tightens monetary policy

The post-pandemic economic recovery strengthened by 2022, enabling GDP to exceed its pre-crisis level from the start of the year. Confirmation of the rebound in the tourism sector and private consumption in 2023 will enable the country to post economic growth well above that of its European peers (around 1% on average in the eurozone). While growth should remain solid in 2024, it will nonetheless slow as the main drivers of the rebound run out of steam. Private consumption, which was hitherto buoyed by the strength of the labour market and pent-up demand during the pandemic, will suffer from persistently high inflation and its negative impact on consumer purchasing power. Moreover, Portuguese households are particularly affected by the rise in interest rates, since almost 90% of the stock of mortgages, which account for more than three-quarters of their debt, is in floating-rate loans. Private investment will also be dented by harsher financing conditions given that the European Central Bank (ECB) is unlikely to start lowering rates again before the second half of 2024. Although inflation traced a downward path in the first half of 2023 in Portugal as in the rest of the eurozone, the easing trend was mainly attributable to energy prices, while underlying inflation (i.e., excluding energy and food) continued to rise. What's more, after slowing in 2023, Portuguese exports are expected to only rebound slightly in 2024 as the regional economy remains sluggish. Despite these multiple headwinds, activity will continue to be driven by the tourism sector, on which the country is heavily dependent (17% of GDP and 50% of service exports in 2019). However, after a dazzling recovery (12% more international tourists in the first four months of 2023 than in 2019), activity should grow more moderately in 2024. In addition, public investment in energy transition, infrastructure and digital transformation will continue to support growth as the country is one of the main beneficiaries of European funds, with €13.9 billion in grants under the Recovery and Resilience Plan (RRP), in addition to €2.7 billion in loans, for the 2021-2026 period. While funds are expected to be lower than in 2023, which was the peak year for disbursements, they should exceed €3 billion in 2024 (1.3% of 2022 GDP).

Improved public and external accounts

Despite substantial budgetary support to address the cost of living, public finances improved considerably in 2022 thanks to strong growth in nominal GDP and an outperformance in revenues. Public finances will continue to improve in 2023, thanks to the gradual withdrawal of considerable household support measures (0.8% of GDP in 2023, compared with 2% in 2022). In 2024, the government should continue its strategy of fiscal prudence, and withdraw the support measures in their entirety. Public investment, which will remain robust under the RRP, will essentially be financed in the short term by subsidies, so that it will have a neutral impact on the budget balance. The public debt ratio, which will have fallen back below its pre-pandemic level by 2022, will remain on a markedly downward trajectory by 2024 thanks to improvement in the primary balance and nominal GDP growth.

 
After deteriorating in 2022 as a result of the surge in world commodity prices, the current account should return to surplus in 2023 before stabilising in 2024. This will be made possible by the reduction in the structural deficit in the goods balance (-11% of GDP in 2022) which, despite sluggish external demand, will benefit from much cheaper imports than in 2022. The surplus on the balance of services (9% of GDP in 2022) will remain solid by 2024 and be fuelled mainly by income from tourism. Similarly, the surplus on the balance of income will be maintained (0.7%), with remittances from the Portuguese diaspora making up for dividends repatriated by foreign investors. Last, the capital account surplus (2.4% of GDP projected for 2023) will be driven by the substantial financing that Portugal is due to receive from the European Union over the next few years.

Stable governance by Prime Minister António Costa's majority party

Since the last snap legislative elections in January 2022, Prime Minister António Costa has enjoyed unprecedented political stability to push ahead with reforms without having to rely on the votes of his former coalition partners: the Left Bloc (BE, extreme left) and the Democratic Unitary Coalition (CDU, union of communists and ecologists). The Socialist Party (PS, centre-left) holds an absolute majority in Parliament with 117 seats out of 230 (9 more than in 2019), while the BE (5 seats, -14 compared with 2019) and the CDU (6 seats, -6) were the big losers in those elections. On the other side of the political spectrum, while the main opposition party remains the PSD (centre-right, 76 seats), the far-right Chega party became the country's third political force, winning 12 seats, up from just one in 2019. Against this backdrop, and despite the resignations of several ministers and secretaries of state in December 2022 following a scandal over large allowances received by the Secretary of State for the Treasury, the risk of political instability remains moderate and António Costa should be able to govern until the next general election in 2026.

Last updated: September 2023

Payment

Cheques are frequently used in Portugal and it is common practice to establish payment plans with post-dated cheques which are payable on presentation. If the bank account is not sufficiently provisioned, they are borne by the bank up to a maximum amount of €150. In the case of bounced cheques, an individual person or a company is prohibited from receiving or issuing further cheques for a maximum term of two years (or eventually six years, if there is a court decision).

Bills of exchange are commonly used for commercial transactions in Portugal. In order to be valid, they are subject to stamp duty, the rate of which is set each year in the national budget. A bill of exchange is generally deemed independent of the contract to which it relates.

Cheques, bills of exchange, and promissory notes offer effective guarantees to creditors against defaults, as they are legally enforceable instruments which entitle debt holders to initiate “executory proceedings”. Under this process, creditors can petition the court to issue a writ of execution and notify the debtor that this has been done. When debtors still fail to settle their debts, the creditors may request that the court officer issues an attachment order against the debtors’ property.

Electronic transfers via the SWIFT network are widely used by Portuguese companies and are a quick, reliable and economic means of payment. If the buyer fails to make a transfer, the legal recourse is to institute ordinary or summary proceedings, based simply on an unpaid invoice.

In the event of a payment default, creditors are not required to issue a protest notice before bringing an action to court, but such a notice can be used to publicise the matter and thus put pressure on debtors to honour their obligations, albeit belatedly.

Debt collection

Amicable phase

Amicable collection begins with the debtor being sent four demands for the payment of the principal amount. Interest on the principal can be requested, but is normally difficult to collect in Portugal. Payment agreements subsequently made between creditors and debtors can include guarantees to ensure payments will take place as agreed.

Interest rates are set by the Treasury Department. The rates are published in the Diário da República during the first fortnight of January and July each year, and are applicable for the following six months. These interest rates are applied by default, unless the parties involved in a commercial agreement have contracted otherwise.

Legal proceedings

Fast-track procedure

The order to pay procedure (Injunção), which is applicable to uncontested commercial claims, was established in March 2003. These proceedings, whatever the amount involved, are heard by the court in whose jurisdiction the obligation is enforceable, or the court where the debtor is domiciled. Since September 2005, these injunctions can also be served electronically.

The National Injunctions Office (Balcão Nacional de Injunções, BNI) has exclusive jurisdiction throughout the country for the electronic processing of order to pay procedures.

Ordinary proceedings

In cases of disputed claims, creditors can initiate formal, but more costly, declarative proceedings (acção declarativa), to obtain a ruling which establishes their right to payment. Once the claim is filed with the court and the debtor notified, a defence can be filed within 30 days. Failure to reply entitles the court to deliver a default judgment. If the judge rules in favour of the creditor, the court may order damages, if requested by the demanding party. They then need to initiate “executive proceedings” (acção executiva) to enforce the court’s ruling.

Under the revised Code of Civil Procedure, any original deed established by private seal (i.e. any written document issued to a supplier) in which the buyer unequivocally acknowledges his deb, is deemed to be an agreement that is enforceable by law. Since 2013, when the most recent revision of the Code of Civil Process was made, written signed payment plans can only be used to initiate executory proceedings when they have been recognised by a notary.

In the scope of the recent restructuring of Portuguese courts which has been ongoing since 2014, more courts specialising in commercial issues have been created. The number of Courts of First Instance has been reduced to 23 (in each district capital), while there are now 21 specialised courts (Secções de Competência Especializada) for commerical issues (secção de Comercio), commercial issues. These latter sections deal specifically with insolvencies and commercial company matters. During this same period, 16 sections specialising in Enforcement Procedures (Secções Especializadas) have also been created.

Legal actions in Portugal can take several years, depending on the complexity of the case. Enforcement proceedings can be faster, depending on the existence of assets.

Enforcement of a Legal Decision

Once all avenues of appeal have been exhausted, a judgment normally becomes final and can be enforced. If the debtor fails to comply with the decision, the creditor can request compulsory enforcement mechanisms before the court – either through an Attachment Order, or by allowing payment of the debt to be obtained from a third party which owes money to the debtor (Garnishee Order).

Foreign awards rendered in other EU countries benefit from specific enforcement mechanisms, such as the European Enforcement Order (which can be used if the claim is undisputed), or the European Small Claims Procedure. Awards rendered in non-EU countries must be party to a bilateral or multilateral agreement with Portugal on the recognition and enforcement of court decisions.

Insolvency Proceedings

Out-of court

A special extrajudicial administrative procedure (Regime Extra Juditial de Recuperação de Empresas, RERE) came into effect on July 1, 2017. This procedure for restructuring company debts is carried out by specialised mediators. It has been designed to enable creditors and debtors to reach a compromise, in a confidential and consensual manner.

Restructuring proceedings

The reforms implemented in 2012 included the introduction of a special rescue procedure (Processo Especial de Revitalizaçao, PER). The aim of this new procedure is to ensure the recovery of debts from debtors that are in a ‘difficult economic situation’ without starting an insolvency procedure. The management is obliged to request permission from the provisional judicial administrator in order to perform “particularly relevant acts”. During this process, the administrator prepares a recovery plan which must be approved by the creditors and a judge.

Bankruptcy

Insolvency law in Portugal also provides for insolvency proceedings (Processo de Insolvência). The main goal of these proceedings is to obtain payment for the company’s creditors through the implementation of an insolvency plan. Insolvency plans can be established under which the company is restructured and can continue to operate. Should this prove unfeasible, the insolvent’s estate is liquidated, and the subsequent proceeds are distributed among the creditors.