OECD Economic Surveys Portugal

1 OECD Economic Surveys Portugal February 2017 OVERVIEW This Overview is extracted from the 2017 Economic survey of Portugal . The survey is published on the responsibility of the Economic and Development review Committee (EDRC) of the OECD, which is charged with the examination of the Economic situation of member countries. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area OECD Economic Surveys .

2 Portugal OECD 2017 You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgment of OECD as source and copyright owner is given. All requests for public or commercial use and translation rights should be submitted to Requests for permission to photocopy portions of this material for public or commercial use shall be addressed directly to the Copyright Clearance Center (CCC) at or the Centre fran ais d exploitation du droit de copie (CFC) at OECD Economic Surveys : Portugal OECD 20179 Executive summary The economy is recovering Investment is still very low Improving skills is crucial for raising prosperityEXECUTIVE SUMMARYOECD Economic Surveys .

3 Portugal OECD 201710 The economy is recoveringThe economy s growth potentialhas declinedSource:Calculations based onOECD Economic Outlook: Statisticsand Projections(database).1 2 s economy has gone through agradual recovery from a deep recession. Awide-ranging structural reform agenda hassupported this recovery and the ongoing reductionof imbalances built up in the past. Strongerinvestment, skills, and productivity willincreasingly be the basis for sustainable is still very lowTotal gross fixed capital formation1. Euro area countries that are also OECD members (includingLatvia).Source:OECD (2016),OECD Economic Outlook: Statistics andProjections(database).

4 1 2 the rebalancing of the economywill require more investment. Removing distressedlegacy loans from bank balance sheets, addressingbottlenecks in insolvency procedures and openingup new sources of financing play a key role in thiscontext. Incentives for new capital investmentscould be strengthened by improvements in judicialefficiency, administrative reform, product marketregulation reforms or lower labour costs. Asystematic evaluation of past reforms could helpto identify areas for a new wave of skills is crucial for raising prosperityPopulation with upper secondary educationSource:OECD (2016a),Education at a Glance 2 a legacy of a low skilled , the education system could do more toraise skill levels and reduce the link betweenlearning outcomes and socio-economicbackgrounds.

5 The high share of early schooldrop-outs and frequent grade repetition would bereduced by improving teacher training andexposure to best practices and shifting resourcestowards primary education and students at the current fragmented VocationalEducation and Training (VET) system into onedual VET system, and more monitoring andevaluation, could enhance its need to continue to raise the skills levels ofthe low-qualified adult 2002 2004 2006 2008 2010 2012 2014 2016 2018 EUR billionActual GDPP otential GDP406080100120140160 2000 2002 2004 2006 2008 2010 2012 2014 20162000 Q1 = 100 PortugalSpainItalyEuro area 020406080100 MEXTURPRTESPITACHLGRCBELNLDOECDFRAGBRIRL SWEHUNKORDEUCHEUSAPOLSVKCZEAge 25-64, %EXECUTIVE SUMMARYOECD Economic Surveys .

6 Portugal OECD 201711 MAIN FINDINGSKEY RECOMMENDATIONSM acroeconomic policiesStructural reforms have improved productivity momentum for structural reforms, inconjunction with a continuous ex-ante and ex-postevaluation of debt is high and poses risks in the weak gradual fiscal consolidation to ensure thedecline of public debt without jeopardising efficiency of consumption taxes is undermined bythe still frequent use of exemptions and special tax exemptions, special rates and stocks of non-performing legacy loans posevulnerabilities for the banking sector and are limitinginvestment current regulatory incentives for reducingnon-performing loans (NPLs), including through write-offs and the development of a market for distresseddebt, notably through the creation of asset business investmentLengthy insolvency procedures make corporate loansmore risky.

7 The tax system encourages debt the workings of insolvency rules by: reconsidering the privileged treatment of publiccreditors enlarging the scope for simple-majority decisionsamong creditors shortening out-of-court settlement raise costs and curb competition, whichholds back firm performance and reduces incentives land use regulations and limit discretionarypowers of municipalities in licensing entry requirements for professional reduce trial length and the backlog of pendingcourt cases by expanding court capacity and assigningspecialised judges to specialised skillsUntil recently, Portugal has favoured general educationover vocational a thorough evaluation of all vocationaltraining the different systems of vocational education byestablishing a single dual VET system, includingwork-based learning in grade repetition harms learning outcomes inPortugal and exacerbates more and earlier individualised support tostudents at risk of falling behind to reduce teachers training and shift more resourcestowards primary and pre-primary Economic Surveys .

8 Portugal OECD 201713 Assessment and recommendations The economy is progressively recovering and rebalancing The outlook is becoming more challenging and vulnerabilities are rising Managing limited fiscal space Safeguarding financial stability Strengthening investment financing Improving the business climate to boost investment Raising skills Making growth more sustainableThe statistical data for Israel are supplied by and under the responsibility of the relevant Israeliauthorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights,East Jerusalem and Israeli settlements in the West Bank under the terms of international AND RECOMMENDATIONSOECD Economic Surveys : Portugal OECD 201714 The economy is progressively recovering and rebalancingPortugal has undertaken an ambitious structural reform programme since have spanned across a wide range of policy areas, product markets, labourmarkets, taxes, regulations and the public sector.

9 These reforms have supported a gradualrecovery of the Portuguese economy, with additional tailwinds resulting from highlyaccommodative monetary policy and low oil structural reforms have also led to a successful rebalancing of the economy towardsexports, which appears to be gaining ground. In light of the economy s weak historical exportperformance, this is a remarkable achievement. When Portugal joined the European Unionin 1986, its exports were intensive in relatively inexpensive labour, but this comparativeadvantage eroded with China s accession to the World Trade Organisation in 2001, the end ofthe multi-fibre agreement in 2005 and the Eastern enlargements of the EU in 2004 and responses at that time included strengthening private and public consumption and anexpansion of non-tradable sectors, financed by better access to external credit inconjunction with joining the Euro.

10 Banks were the principal channel for these credit inflows,and current challenges in the banking sector are partly a legacy of this global financial crisis implied abrupt changes in access to external finance, withendemic high fiscal deficits and rising public debt leading to an external assistanceprogramme in 2011. Since then, exports have increased significantly, both in volumes andrelative to GDP (Figure 1, Panel A). Portugal now exports over 40% of GDP, up from 27%Figure have improvedSource:OECD (2016),OECD Economic Outlook: Statistics and Projections(database).How to read this chart (Panel B):Export performance measures the expansion of a country s exports relative to the expansion of importdemand from its trading partners.