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May 26, 2013 7:31 pm
The café was the last to close. By March, Marina Oliveira, the owner, was selling only a few cups of coffee a day and had fallen three months behind with the rent. Before her small restaurant finally closed, a mini-market, a builder’s office and other neighbouring businesses had shut down. Now every store window in the row of a dozen shops on a north Lisbon housing estate is covered with cardboard and old newspapers.
Across Portugal, in high streets and shopping centres, forlorn signs mark the country’s malaise: vende-se (for sale) and aluga-se (to let). The two “terrible years” that Pedro Passos Coelho, the prime minister, predicted as the price of an international bailout will end in June, but there is little hope that the Portuguese can escape at least another desperate year.
Few, if any, crisis-hit European countries have followed the austerity programme more assiduously than Portugal, and the public has largely backed the government’s deep cuts. But recent polls show they have reached their limit and want the programme to be altered, if not scrapped.
In the wake of the country’s worst recession for almost 40 years, tens of thousands of small businesses like Ms Oliveira’s Café Sol da Colina have gone to the wall, victims of a collapse in demand as record unemployment climbs towards 19 per cent and tough austerity measures, including a 77 per cent increase in value added tax for restaurants, leave families struggling to get by or afraid to spend.
“Business used to be good – breakfasts, lunches, dinners,” says Ms Oliveira, 56. “We had a charcoal grill outside and the young people would stay till midnight playing pool and table football.” The street is almost deserted now. A man in overalls comes up, hoping to buy fire extinguishers from the closed businesses.
A few miles away, in a shopping centre on Lisbon’s Avenida de Roma, a well-heeled commercial district, empty jewellery showcases and shoe racks gather dust in more than 20 closed outlets, leaving only about a dozen open. Across the street, one of the estate agents that proliferated in the pre-crisis years has been converted into a cash-for-gold bureau – a trend across the country as hard-pressed families sell off lockets, rings and bracelets. “The impact of the recession on small firms has been devastating,” says Jaime de Lacerda of the Forum for Competitiveness.
João Vieira Lopes, head of the CCP, the national commerce and services confederation, estimates the mortality rate for shops at 75 a day in 2011 and 2012. A report by PwC, the professional services firm, estimates that more than 39,000 cafés and restaurants – 48 per cent of the total – could close between 2012 and 2013, costing almost 100,000 jobs.
So-called micro companies with fewer than 10 employees account for 94 per cent of all enterprises and 40 per cent of private sector jobs, a share of the workforce that is 10 percentage points higher than the EU average. Since 2008, says the OECD, these mainly family-run businesses – from hairdressers and laundries to tradespeople and shopkeepers – have suffered a “massive decline”.
Unlike Spain and Ireland, Portugal had no property bubble to burst. The increase in public debt has not been as dramatic as in Greece, nor has it experienced political instability on a par with Italy. Rather, Portugal finds itself in a similar crisis to these countries as result of a sharp decline in export competitiveness and weak productivity growth that has seen the economy virtually stagnate for more than a decade.
In a recent paper, Ricardo Reis, a Portuguese professor of economics at Columbia University, says Portuguese citizens grew poorer in terms of gross domestic product per capita between 2000 and 2012 than Americans after the Great Depression (1929-41) or the Japanese during their “lost decade” from 1992 to 2004. “Growth [in Portugal] has been as bad as it gets for an advanced economy,” he writes.
After GDP growth averaging 4.1 per cent a year between 1986, when Portugal joined what is now the EU, and the launch of the euro in 1999, the country’s low-tech, lost-cost manufacturing exports, including textiles, garments, shoes and furniture, were hit hard by globalisation, when the EU opened up to the east and China joined the World Trade Organisation.
“Instead of adapting, we turned inward,” says Pedro Santa-Clara, professor of finance at Lisbon’s Universidade Nova. “Funded first by EU funds and then cheap overseas credit, we invested in non-tradable, non-competitive sectors like public infrastructure, construction, telecoms, energy, banks and retail distribution. Restructuring the economy was delayed by as much as 15 years.”
Small companies flourished as the Portuguese, once the world’s biggest savers after the Japanese, made free with their credit cards. Domestic demand surged amid a boom in home buying and car sales. By 2005, says Mr Vieira Lopes, developers had built 7.5m square metres of hypermarkets and shopping centres. These “cathedrals of consumption”, as Mr de Lacerda describes them, served a “domestic market doped with foreign credit”.
Government became the “ultimate non-tradable, non-competitive” sector, Prof Santa-Clara says, using public-private partnerships to finance motorway and hospital construction and railway modernisation. These contracts, used to shift the payment burden off-balance sheet and on to future taxpayers, are now being renegotiated as one of the conditions for Portugal’s €78bn bailout from the EU and IMF.
The financial crisis in 2008 sounded the death knell for this spending spree. Debt was reaching new peaks at every level: foreign debt to 110 per cent of GDP, corporate and household debt to 200 per cent. Public debt, still climbing, passed 123 per cent of GDP last year. By the spring of 2011, the government could no longer finance itself in the market at sustainable rates and was forced to follow Greece and Ireland in asking for a rescue.
“It’s easy to blame government, but we’re all to blame,” says Carlos Loureiro, a tax partner with Deloitte.
. . .
Yet Portugal was never short of foreign lenders to finance its spending. “Recklessness goes both ways,” says José Ferreira Machado, dean of the Nova School of Business and Economics. “There was very little perception of specific country risks. Markets lent to Portugal at they same rates as they did to Germany. For every family firm that went into debt, there was a lender.”
Those days of cheap credit are long past – and for most small companies, the prospect of any credit at all. Banks, struggling with the high cost of shoring up their capital and provisioning against a sharp increase in bad loans, have all but closed their doors to family concerns. “Some companies are going out of business with healthy order books because they can’t get the credit to buy materials,” says Mr Loureiro. Last week the government announced a tax credit plan aimed at encouraging investment by small and medium-sized companies, one of its first pro-growth incentives since taking office two years ago.
In 2009, Marta Gregório, 33, sold her home to finance an expansion of the small car repair business she runs with her husband in the Algarve. “Our sales were increasing every year by 10 to 15 per cent,” she says. “But 2011 was catastrophic.” Sales fell by 20 per cent that year and have continued to drop. The couple has since had to dismiss two of their four employees and move into Marta’s parents’ home with their two small children. “We’re trying to hang on,” she says. “Whether we make it or not depends on how soon the economy recovers.”
If official forecasts made when Lisbon signed its 2011 bailout agreement had proved accurate, the economy would be growing. But, partly disrupted by a deeper downturn than expected in Europe, every projection has proved over-optimistic, including forecasts of the fiscal consolidation austerity was meant to deliver.
Nevertheless, some economists believe the pain is producing results. “Over the past two to three years, this country has reinvented itself in an incredible way,” says Prof Santa-Clara. “For the first time in decades we have a current account surplus. Export industries like shoes and olive oil are setting a fantastic example. What we desperately need is investment. But I’m convinced growth won’t be long in coming.”
Few share his optimism. A steep rise in unemployment, currently 17.7 per cent, has caused most concern. The jobless rate among under-25s has reached 40 per cent and, over the past year, the number of couples in which both people are out of work has risen by more than 80 per cent.
The welfare safety net is being stretched to breaking point, warn Catholic charities, trade unions and others, threatening the social stability and resilience in the face of hardships that have characterised Portugal’s response to the crisis, with protests remaining peaceful and no extremist movements emerging. “Four or five years ago, shoplifters were taking perfume, bottles of whisky and expensive razor blades from supermarkets,” says Mr Vieira Lopes of the CCP. “Now they’re stealing rice and tins of tuna.”
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Like most owners of family companies that have gone under, Ms Oliveira, who ran the Café Sola da Colina with her late husband for 27 years, is not entitled to any unemployment benefit, which only an estimated 44 per cent of the jobless receive. Nor does she see much prospect of a job: “I’ve worked since I was 16 and I’m looking again now, but who’s going to take me on at my age?” She is currently struggling on a widow’s pension of €150 a month and hoping her daughter can sell the coffee machine and refrigerators from the café.
Prof Reis says the misallocation of capital in non-competitive sectors such as wholesale and retail trade is one of the main reasons for a loss of competitiveness that saw the country fall from 22nd position on the World Economic Forum’s Global Competitive Index in 2005 to 49th last year.
“Economic growth is a tough business,” says Prof Santa-Clara. “It means shutting down uncompetitive businesses and redeploying people to more productive industries. You don’t turn a café waiter into a factory worker or a shop assistant into a healthcare specialist overnight. It’s a painful yet inescapable part of the transition to higher growth.”
Others question the feasibility of training an older generation of shopkeepers, café owners and tradespeople who have lost their livelihoods for new roles in the export-driven economy that economists see as the only viable future for Portugal. Mr Vieira Lopes says: “Many of the people over 40 who have lost their businesses are poorly qualified and will find it to difficult to find new employment, even when the economy recovers.”
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Ageing population adds to economic strains
Guilherme Montoia, delivered last week at Lisbon’s Alfredo da Costa maternity hospital, is a source of joy to his proud parents, Solange and Filipe. In a country where the number of births has fallen to its lowest level in more than half a century, his arrival, like that of every baby, should also be a cause of celebration for Portugal.
According to a recent Save the Children report, Portugal is one of the best places in the world to be a mother. But since the early 1980s, the fertility rate has dropped below 2.1, the number of children each woman would need to have to maintain current population levels.
Last year only 90,000 babies were born in a population of 10m, accelerating the country’s already rapid rate of ageing. From 24 per cent today, the percentage of the population aged 60 and over is forecast to reach 40 per cent by 2050, higher than in any other EU country.
Fuelling Portugal’s heated debate over austerity, Pedro Passos Coelho, the prime minister, has raised the possibility of imposing a special “sustainability tax” on pensions, cutting public sector pensions to bring them in line with the private sector and raising the minimum retirement age.
Amid the country’s deep recession, such measures could seriously aggravate social tensions, warns the UGT trade union federation. “In many families, pensioners provide vital support for their unemployed children and small grandchildren,” says Paula Bernardo, the UGT’s deputy leader.
The retired have already been hit hard. State pensions above about €250 a month have been frozen since 2011. Those above €660 a month have been cut by up to 10 per cent and subject to a “solidarity tax” ranging from 3.5 to 40 per cent.
“This is about tough choices and fairness,” says Pedro Santa-Clara, a Lisbon professor of finance. “If we can’t agree to cut current pensions a little, the pensions our young people receive in the future will be much lower than they are now.”
One such tough – and highly unpopular – decision that the government has already made is to close the maternity hospital where Guilherme was born.
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