“Money is the barometer of a society’s virtue” Ayn Rand

I am no Economist – so please don’t expect this to be an in-depth serious economical or political debate! There has been so much written and spoken about the current global economic downfall – and every day on the news there is more to digest and follow.

But the current crisis affecting a large portion of the world has certainly had an impact in Portugal – so I couldn’t pass over the Economy in this A to Z of Portugal.

Alongside a bit of economic context I’ll have a go at explaining what the current climate actually feels like out here – in terms of lifestyle, shopping and business opportunities – and apologies for those of you reading who know far more about this than I ever will! (And please do add your comments at the bottom – this is a ‘starter for ten’ post!)

The Eurozone

Portugal has been part of the Eurozone since its inception, moving over in virtual terms to the Euro currency on the 1^st January 1999; having previously used the Escudo since its introduction on 22 May 1911, after the 1910 Republican revolution. In 2002 new Euro notes and coins began to circulate – and it was shortly after this that we first visited both Spain and the Algarve on holiday. I can remember being surprised that things instantly seemed to be more expensive – even with a strong ‘exchange rate’ – and that was ten years ago. 

The last few years have seen the pound steadily dip against the Euro – long gone are the days of a 1.50 exchange rate – I can even remember the heady heights of 1.70 – two winters ago we even dropped to a 1:1 rate – a bit of a shock that one! For anyone who is relying on investments or pensions for their income in the sun, the low interest rates we now have across Europe have also had a detrimental effect upon people’s wallets and purses.

Being in the EU was obviously a good thing for Portugal and they initially benefitted from a glut of EU funds for improving their infrastructure – resulting in a large number of new motorways and public buildings – but I am not sure how much planning or organisation went into some of the construction programmes – for example we have an amazing new Conference Centre at the bottom of the hill – but until the Germans discovered it as the venue for launching the new Series 3 BMW in the New Year – it had been used at best half a dozen times a year.

Tourism

The service sector is now Portugal’s largest employer, having overtaken the traditional manufacturing and agriculture industries. Here in the Algarve, service and tourism has always been king.

But the signs are here too that all is not well. We have seen many restaurants close down; and a large percentage closed in October/November with ‘closed for holidays – re-open February’ signs – some shops have closed for the winter until April.

We have changed our habits a lot – we are on a tight budget now – and unlike the holidays we used to take when we would often eat out – now we eat out perhaps once or twice a month – and we are always looking for a ‘prato do dia’ all-in menu for 6.50€ or 7.50€ per head.

too expensive – and in English 😦

Cost of Living

The IVA tax increase in January has also had an effect, with the tax on many food products increasing from 13% to 23%; and the VAT on restaurants also increasing to 23%. Household electric bills rose in October 2011, and are due to increase again in the first quarter of this year. That may feel like small increments if you look at each item individually – but the overall effect is definitely increased bills and food costs. You do feel it!

This article in the Algarve Resident Cost of living Goes Up gives an excellent summary of all the increases and price rises.

Portugal’s GDP per capita is the third lowest in the Euro area, after Malta, Slovakia, and Estonia and Portugal’s GDP contracted by 2.7% in 2008–2009 – the impact on employment and on public finances was especially severe and the budget deficit increased rapidly from 2.8% of GDP in 2008 to 9.4% in 2009. This translated into rapidly increasing government debt, which was already 76.8% in 2009. The European Commission projected that the debt would increase to 107.4% in 2011.

Unemployment rose to 11% in 2010 and the country came under pressure in 2010-11 to regain control of its ballooning budget deficits. In May 2011, Portugal agreed to strict fiscal measures as part of a €78 bn EU/IMF financial support program (that’s a ‘bail out’ to you and I)

The aim is to cut Portugal’s current deficit of 9.1% – which is three times the Eurozone’s limit – to 3% by 2013.

I’m a simple girl at heart – and especially when it comes to finances – and I have no idea how so many countries have got in such a mess – the Victorian principles of budgeting that I grew up with – ‘have you got the money? – can you afford it? – if not – you can’t have it!’ seem simple – but are effective ways of managing your money – however much you have or haven’t got!

Junk Rating

On the 24^th November 2011 Portugal has had its debt rating cut by Fitch to so-called “junk” status, and warned it could be cut again.

Fitch made the downgrade because of its “large fiscal imbalances, high indebtedness across all sectors and adverse macroeconomic outlook”.

This means that it would make it more expensive for Portugal to borrow – if it were not already being bailed out.

The Minister for the Economy Álvaro Santos Pereira has recently said that “Portugal was doing everything it needed to do in order to get out of the current situation” and was “doing its homework”. He said it was remarkable that the country was managing to carry out reforms “within a climate of overall agreement and consensus between the unions, company bosses, and the Government.” Algarve Resident article

However Reuters are less optimistic than Sr Pereira – predicting that “Portugal’s economy will shrink as much as Greece’s this year, according to IMF projections. The two will have identical current account deficits and the red ink in Portugal’s budget will be almost as deep as in Greece’s”

Economists do seem united in the belief that Portugal could be given a second bail-out if required though – it seems that the Eurozone is determined that Greece will be a one-off.

“To rise to the challenge, Portugal will need political and social cohesion. Here, economists are guardedly optimistic.

In contrast to the political squabbling and backsliding in Athens that is frustrating the EU, Portugal is governed by a coalition that was elected by voters fully aware that they would face years of austerity and structural reforms to improve Portugal’s dismal competitiveness and productivity…

On the ground they recognize that reforms are necessary and they clearly want to stay in the system,” Owen said. “Portugal perceives that, inside the system, with financing, they’ll eventually come through.” Reuters article

The New York Times agrees: “Lisbon’s center-right coalition government, which came into power last June, insists that it needs more time rather than more money. Prime Minister Pedro Passos Coelho said on Tuesday that Portugal would comply with the agreement reached last May, “whatever the cost.”

The most important advantage that Portugal has is probably its internal political and social consensus.” New York Times article

What is clear on the news and on the street is the different mentality of the Portuguese people compared with the Greeks – there have been several ‘protests’ in Lisbon – but all have passed off peacefully – with stalls, music, flowers, dancing and peaceful demonstrations – a sharp contrast to the riots we have seen in Athens on the news. There is a stoicism – and a seeming overall acceptance of the need for cuts and taxes, and austerity measures, within the local people. I’m not saying they like it any more than we do – but they are not rioting and setting fire to buildings because of it.

However the fact is still there that in September 2013, Lisbon must repay 9 billion Euros of debt.

Banks

And the banks are not doing very well either – The Algarve Resident recently reported that Portugal’s three main private national banks ended 2011 with an historic €1 billion loss.

“Banco Espírito Santo, a financial bedrock that has been around since the 19th century and is a byword for prudent and thrifty financial management, clocked up a loss of €108.8 million.

Despite the losses, the bank’s president, Ricardo Salgado, said that the bank would not go cap in hand to the government for liquidity but would, instead, seek a whip-round from shareholders” – A refreshing response in the current banking world! Algarve Resident article

But how has this recession affected Tourism in the region – the cornerstone of the Algarve industry? – again bad news from the Algarve Resident article:

Worst occupancy levels in 17 years

“Algarve’s overall occupancy level during January was down by 7.6% in comparison to the same month in 2010, making it the worst recorded in the last 17 years, according to data accumulated by AHETA, the region’s hotels and tourist resorts association.

The most significant decreases were from the national and British markets, with -41% and -13% respectively. However, Dutch tourists were up by 44%”

Tax Evasion and eating out

Tax evasion is a key target for the Portuguese government – with some interesting ideas from the government – I am intrigued by a recent ruling by the Portuguese government, which has ordered all banks to send all credit and Multibanco card transactions to the Portuguese tax authorities – who will now receive details of all card payments from restaurants, shops, hotels and other commercial outlets.

This will not identify the consumers making those purchases but will spotlight all the commercial establishments and will allow the tax authority to check against any false claims which may be made by a business – including restaurants.

This is interesting – last year the cost of ‘hiring’ and ‘using’ a credit card machine in many restaurants became so prohibitive for many restaurant and café owners – that most of the restaurants we know locally are now ‘cash only’ – so I am not sure how well this initiative from the government will actually work in practice.

Sales and Shopping

What is clear as we travel around are the fantastically large number of sales that are currently in place in most shops – and not just a paltry 30% off – many shops are advertising 70% or even 80% off their stock. It doesn’t have the feel of an ‘end of season’ sale – many shops seem to be ‘liquidating’ stock. The future does not feel very bright.

We are very thankful for some offers that are currently around – notably with food shopping – we love Continente and its frequent 75% off items and discounts on its loyalty card offers. Their card scheme is a good one – money off that you can actually see increase – and that you can redeem usually only 2-3 weeks after you have collected it. Petrol often has a 5c per litre off voucher – and with their ‘vice-versa’ deal you then get the amount saved on petrol back again as a voucher to use back in store.

But small savings and innovative tax measures may not be enough for the tourism industry which the Algarve relies on so heavily. One example of this heavy reliance on tourism is illustrated in our local square – a pretty little place -but certainly in recent months a quiet place – we currently have a total of six cafés/snack bars and three restaurants (if you add a post office (which may be closing soon) and a very quaint but old fashioned little clothes shop) – that’s the sum total of things in the square. So there’s a renovation of an old building about to be finished – and the rumour is that the ground floor is going to be – yes – you’ve guessed it – another coffee shop/snack bar. I am pretty sure – even for the Portuguese – that there are only so many coffees you can drink in a day! All that will happen is that current trade (already slow) will be further diluted by another establishment.

A22 Tolls

And please don’t get me started on the A22 tolls – which it is believed will have a detrimental effect on tourism – well it will if a recent story reaches the tabloids abroad – couple have a hire car – with a transponder – and do the decent thing at the end of their holiday and go to a post office to pay their toll fees – post office tries to make them pay for ALL the toll fees (weeks of them were outstanding from before they hired the car!) – and when they refused to pay all the other fees – they were refused permission to only pay for their week! Oh dear! I do hope they sort this out before the peak tourist season starts.

So that’s just a snapshot of how things are really – please do add your own thoughts and comments to the post – and I leave you with a fantastic old shot of a building in Portimão that has a very deep and thought-provoking quote painted on the side: