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Address by Governor Carlos da Silva Costa, at the working session with APCER: "How we got here and what lessons there are for the future"

Address 1

I would like to thank the Portuguese Association for Certification (Associação Portuguesa de Certificação – APCER) for its invitation to participate in this working session. Reflecting on current and future challenges is crucial so that we can act on the former and anticipate the latter with greater effectiveness. I congratulate APCER on the sessions it has promoted in recent years and am proud to be associated with this year’s event.

In this session I have decided to reflect upon 

  • First, the evolution of the Portuguese economy over the last 25 years, 
  • Second, the valuable lessons this path has taught us, and 
  • Third, and most importantly, the strategic priorities for the future development of our country. 


1. Financial integration, adoption of the euro and the accumulation of imbalances (1995-2007)

I would like to begin by going back to the mid-1990s. At that time, the Portuguese economy presented no significant macroeconomic imbalances.

Meanwhile, financial liberalisation and the perspective of joining the euro made the cost of financing cheaper and more accessible, bringing about a strong expansion of credit and, to a lesser extent, a fall in households’ savings rates. Between March 1995 and May 1999, the three-month interbank interest rate fell 8.5 percentage points – from a maximum of 11.1 to 2.6% (Chart 1). Between 1995 and 2007 the credit stock to the private sector increased by more than three-quarters of gross domestic product, from 52 to 131% of GDP. During the same period, the household savings rate fell to almost half, reaching 7% in 2007.


Chart 1. Interest rates

Sources: Banco de Portugal and European Banking Federation


The largest slice of this credit was channelled to financing consumption and low return investments, largely in non-tradable sectors (Chart 2). Imports grew and growing current account deficits appeared, which were not accompanied by a desirable increase in the growth potential of the economy (Chart 3). Between the mid-1990s and the eve of the global financial crisis in 2007, the Portuguese current and capital account went from a balance of almost nil to a deficit of 8.6% of GDP.


Chart 2. Gross fixed capital formation, Percentage of GDP

Source: Eurostat.


Chart 3. Debt and potential output

Source: Banco de Portugal. For a detailed description of the potential output measures see the special issue “Potential output: challenges and uncertainties”, Economic Bulletin, December 2017.


A countercyclical fiscal policy would have been useful to contain the risks associated with expansion. To the contrary, the fiscal policy followed aggravated the macroeconomic imbalances. Between 1995 and 2007, the budget deficit was on average 4.3% of GDP, always above the threshold of 3% of GDP (Chart 4). 


Chart 4. General government budget balance and debt, Percentage of GDP

Sources: European Commission and Banco de Portugal calculations


Such a sequence of public deficits reflects the application of savings in public debt interest expenses resulting from the fall in interest rates, and gains in tax revenue associated with the high levels of private consumption that characterised the second half of the 1990s. These temporary benefits were used to finance higher current government expenditure. 

At the beginning of the 21st century, the introduction of the euro led to the irrevocable fixing of the exchange rate versus our European partners, the downward trajectory of interest rates was interrupted, economic activity decelerated and tax revenue fell, creating a rapid deterioration in public finances.

The international investment position also deteriorated significantly from the mid-1990s, as the result of high and persistent current and capital account deficits. Between the mid-1990s and 2007, the international investment position went from close to balance to a negative position equivalent to almost 90% of GDP. Developments in gross external debt in the same period were even more expressive: it rose from approximately 60 to 195% of GDP.

High external indebtedness was intermediated for the most part by the Portuguese banking system. Banks raised (mostly short-term) funds and converted them into (long-term) loans to the private sector. The loan-to-deposit ratio for the whole banking system rose from 89% in 1998 to 156% in 2007.

In hindsight, it is clear that the procyclical fiscal policy and less demanding regulatory context, coupled with the complacency of international financial markets, contributed decisively to the accumulation of important macroeconomic imbalances from the mid-1990s.


2. Global crisis, fiscal expansion and interruption of financing of the Portuguese economy (2008-11)

The imbalances accumulated since the mid-1990s made the Portuguese economy particularly vulnerable to the international financial crisis and its contagion effects. When the crisis broke, followed by a global recession, an expansionary fiscal policy was once again adopted, and this time it was particularly intense, despite the imbalances hitherto accumulated and the absence of fiscal space. In 2010, the public budget deficit exceeded 11% of GDP and gross government debt reached 96% of GDP – over half of which was external debt.

Considering the weak growth of potential output, the level of external indebtedness reached contributed to investors doubting Portugal’s capacity to pay its debts. As a result, the difficulties felt by domestic banks and general government to raise external financing grew. Banks were obliged to seek recourse to ECB financing, whilst Portuguese sovereign debt volumes placed with domestic banks increased. Between 2009 and 2011, as a reflection of the increasing difficulty in accessing the international financial market, external financing to banks fell by 30 percentage points of GDP, which was compensated for by the Eurosystem’s liquidity-providing operations; in turn, between January 2010 and December 2011, private financial flows into the Portuguese economy registered a similar fall.

In the first half of 2011, following a period of one year in which interest rates on ten-year government debt almost doubled, investors’ doubts resulted in an interruption in the country’s ability to obtain financing on the international markets (Chart 5). Recourse to institutional financing therefore became inevitable, under an assistance programme negotiated with the European Union and the International Monetary Fund.


Chart 5. Interruption of financing

Sources: Banco de Portugal and Reuters


3. Adjustment programme provides route to rebalancing the Portuguese economy (2011-18)

The execution of the economic and financial assistance programme and the period following it brought about noteworthy progress:

  • The budget deficit contracted significantly and sovereign debt began a downward trajectory (Chart 4);
  • The private sector began a deleveraging process;
  • The banking sector became more robust, with greater liquidity, better solvency and, in the most recent period, has presented an increase in asset quality (Chart 6).


Chart 6. Loan-to-deposit ratio

Source: Banco de Portugal


The deleveraging of different economic sectors and the very positive response of the export sector, which grew by over 60% between 2009 and 2017 (Chart 7), enabled an inversion of the current account deficit and put external debt on a downward trajectory (Chart 8).


Chart 7. Developments in real GDP and demand components, Index 2008=100

Sources: Statistics Portugal and Banco de Portugal

(p) projections of Banco de Portugal used in the December 2018 issue of the Economic Bulletin.


Chart 8. Current and capital accounts, Percentage of GDP

Sources: Statistics Portugal and Banco de Portugal


Despite the undisputed progress, it is important that the corrections continue.

The level of indebtedness in the economy and asset quality in credit institutions' balance sheets have evolved favourably, but it is necessary for this progress to carry on. In the third quarter of 2018, private sector debt was still 167% of GDP, sovereign debt was 125% of GDP and non-performing loans corresponded to 11% of total loans (Chart 9).


Chart 9. Ratio of non-performing loans, Percentage of total loans

Source: Banco de Portugal


This whole context generates vulnerability and uncertainty, having a negative impact on investment. It is therefore imperative to maintain budgetary discipline and follow the deleveraging process of the private sector and the strengthening of banks’ balance sheets.

The history of the past 25 years teaches us that imbalances were caused by the combination of excessive indebtedness and weak potential growth. It is therefore insufficient to persist in reducing levels of indebtedness: it is necessary to generate sustained economic growth.


4. How to evolve to a model of sustainable economic growth in the euro area?

Over the last decade, Portuguese per capita GDP has remained 30-40% below the European Union average, without converging with the richest economies. 

A lasting trajectory of growth and convergence with our European partners depends on our capacity to generate and maintain high levels of employment, that is levels of employment that do not depend on unsustainable demand, namely public. At the same time it depends on our capacity to reach higher levels of productivity, meaning greater added value per asset (Chart 10). 


Chart 10. Productivity and potential growth

Sources: INE and Banco de Portugal calculations.

(p) – based on projections

Notes: Banco de Portugal’s estimates are based on a Cobb-Douglas production function. Total factor productivity corresponds to the (HP) filtered version of the Solow residual. Annual rates of change calculated using the differences in the logarithmic series.


Only then will we be able to, on the one hand, bring our workers’ wage levels closer to European standards and, on the other, ensure the financing of the welfare state in a context of unfavourable demographic developments. In effect, our population is ageing considerably: the number of citizens over 64 years of age for each 100 people aged between 15 and 64 years increased from 22 in 1995 to 33 in 2017. This ageing creates important challenges to the financing of the pension system (Chart 11). 


Chart 11. Old age dependency ratio, Projections

Note: Ratio between the number of persons aged over 64 years and the number of persons aged 15 to 64.

Source: Eurostat.


The challenge we are confronted with is therefore that of activating the “levers” of employment and productivity. From among these “levers”, I would highlight, for our reflection, four that are particularly related with the productive capacity of firms:

  • Capital levels per worker, or capital intensity;
  • Employee skills;
  • The suitability, quality and robustness of the management models;
  • And finally, the innovation ecosystem. 


4.1. Capital intensity

Portugal has historically low levels of capital per worker (Chart 12). Adverse developments in business investment during the crisis, with a reduction of 34% between 2008 and 2013, contributed to aggravating capital shortages. 


Chart 12. Capital and GDP per worker, 2007-16 average, thousand euro

Source: Special Issue “Reallocation of resources and total factor productivity in Portugal”, Economic Bulletin, October 2018, Banco de Portugal.


It is therefore crucial to increase investment and take advantage of that recovery to learn from past mistakes, scrutinising investment projects in a far more demanding way. The infrastructures and support services are available, the investment in the non-tradable sector has been made, now that must be capitalised upon, creating capacity in the economy's tradable sector.

The recovery in investment is, however, constrained by the (still) high indebtedness level and low savings rate of the Portuguese economy. In the second quarter of 2018, Portugal remained one of the European Union economies with the most leveraged non-financial corporations whilst the households’ savings rate was, in the year ending that quarter, 4.5%, far below the 9.9% European Union average.

This means that the increase in investment will have to occur by way of an increase in equity by firms, be it from existing shareholders, be it through the entry of new domestic or foreign shareholders. 


4.2. Employee skills

In Portugal, employees’ skills have improved considerably in recent years. As an example, the percentage of persons aged 25 to 34 who have finished their secondary education increased in Portugal from 33 to 70% between 1995 and 2017, converging significantly with the European Union average that was about 84% in 2017. 

Nevertheless, there are still gaps in relation to European averages, meaning it is necessary to continue to improve the formal education of our workers. In particular, the employees with the longest years’ service, holding fewer qualifications, have a lot to benefit from life-long learning, which would enable them to transform their skills and, by those means, better take advantage of the jobs of the present and future.


4.3. Suitability, quality and robustness of the management models

For the combination of capital and labour to equal production that is desired and valued by the market, we need an entrepreneur, an organisation and a management model. 

The management model reflects the way in which the manager coordinates the environment, organisation and strategy. That is, the management model defines an organisation, which designs a strategy in such a way as to take advantage and even influence the environment that surrounds it. 

Widely known academic studies, written namely by Professor John Van Reenen, who was recently in Portugal by invitation of Banco de Portugal, estimate that approximately 30% of the productivity differences between countries are explained by differences in management quality (Chart 13).


Chart 13. Correlation between management scores and per capita GDP

Source: Management, Productivity and the Wealth of Nations, Keynote lecture at the 9th Banco de Portugal Conference "Portuguese economic development in the European area”


In this domain, our country has a considerable progress margin, as evidenced in the latest edition of the Global Competitiveness Index published by the World Economic Forum. In this index there are 15 European Union economies ahead of Portugal. In the list of indicators where our country is worst classified, some are intimately connected to management models, namely 

  • attitude to risk, where we are 80th in 140 economies,
  • willingness to delegate authority – position 70 out of 140 –
  • integration of disruptive ideas – position 46 out of 140.

We therefore need management models that encourage openness to risk and favour decentralised decision-making. Firms with a more decentralised management are surely more open to disruptions and thus more innovative.


4.4. Innovation ecosystem

The promotion of innovation is precisely the fourth and final productivity “lever” I would like to highlight.

Economies’ capacity for innovation depends on a whole ecosystem of factors, of which I want to emphasise three. 

In first place, it depends on the existence of a culture of merit and entrepreneurship and the capacity of society to deal with and learn from failure. Innovation is a continuous process, whose fruits may take many years to appear, with a great likelihood of failure at the end of the process. Erring is an integral part of innovation – its role is to select the best ideas. 

In second place, the capacity for innovation of an economy depends on the spread of knowledge amongst the corporate sector and the capacity of firms to absorb that knowledge, be it into the generation of new products or new production processes – so-called “radical innovation” – be it in the improvement of existing products or processes – so-called “incremental innovation”. 

Finally, and in third place, the capacity for innovation also depends on the suitability of the financial system, particularly the capital market, to finance innovative projects. Financing radical innovation or start-ups is far from being part of the primary mission of the banking system because innovative processes have long maturities and high levels of risk and rates of failure. Financing innovation requires specialised operators and an institutional framework suited to participating in such risks. In Portugal, these specialised operators are still underdeveloped and have limited possibilities of becoming associated with foreign operators of larger scale.



Having identified some of the main constraints to the potential growth of the Portuguese economy, I want to conclude with some brief notes on the contribution that public policy can have to increase productivity. 

From the outset, the adoption of a legal and institutional framework to foment an attractive business environment is crucial to stimulating productive investment. The business environment should facilitate an efficient and flexible allocation of available resources and provide a reduction of the levels of uncertainty that economic agents operate with. 

Having established a context to promote efficiency, more specific public policies can include

  • the continuous evolution of the education system, without forgetting a permanent adaptation of skills to the labour market and the broadening of some curricula to soft skills such as leadership, interpersonal skills or problem-solving;
  • the promotion of networks between centres of knowledge production and propagation, technological development centres and retraining centres, that promote the identification of threats and opportunities, as well as accompanying the key determinants of competitiveness;
  • the promotion of favourable conditions for investment in innovation through, for example, the creation of hubs or clusters of firms that benefit from such investments;
  • the promotion of effective corporate insolvency and recovery processes;
  • or even the promotion of the aforementioned suitability, quality and robustness of the management models; in a production base like ours, largely made up of family-run businesses transitioning to the 3rd generation (Chart 14), we need to think about how we can conciliate the professionalisation of the management with family ownership; this can be achieved, for example,
    - by re-analysing the tax treatment of profit distribution to encourage a suitable trade-off between profit distribution and reinvestment;
    - generalising the requirement for firms to present audited accounts in order to provide the manager with the necessary transparency and immunity to balance the interests of the various stakeholders to the benefit of the firm;
    - and developing and making available the standardised figure of the “family holding”, through the legal classification of a centralised management model of the holdings of the members of one family, adjusted to the specificities of family-run firms and easy to access by smaller firms.


Chart 14. Distribution of private limited companies by age, Portugal, 2017, Percentage

Source: Banco de Portugal.


But private agents also have a role to play in promoting productivity. The first step is precisely to encourage spaces for reflection like this one. I believe that some of these productivity ‘levers’ will be particularly dear to an association like APCER, which is dedicated to empowering organisations with management tools that enable them to demonstrate the compliance of products, services and processes with national and international standards. 

It is now our role to reflect on the teachings of past experience and understand what each of us can do, in the field, to build a more efficient and equitable Portugal.

Once again, my congratulations to APCER for the initiative and I am naturally available to address any questions or observations that you might have.


Thank you very much.


1 As prepared for delivery.

Banco de Portugal (2018), Economic Bulletin, May 2018

Bloom, N., R. Sadun, J. Van Reenen (2016), Management as a Technology?, NBER Working Paper No. 22327, Revised in October 2017

Bloom, N., R. Sadun, and J. Van Reenen (2015), Do Private Equity Owned Firms Have Better Management Practices?, American Economic Review, 105 (5): 442-46

Statistics Portugal (2018), Práticas de Gestão 2016 (In Portuguese only)

OECD (2018), Economic Policy Reforms 2018: Going for Growth Interim Report, OECD Publishing, Paris,

Office for National Statistics, United Kingdom (2018) Management practices and productivity in British production and services industries - initial results from the Management and Expectations Survey: 2016