Portugal has changed significantly since it joined the European Union (EU) in 1986 and offers a much more stable economic environment as a result. To qualify for the membership of the European Monetary Union (EMU) the government undertook a rigorous programme to reduce both the budget deficit and public debt. The efforts to curb public debt have been substantially assisted by receipts from privatisation, which has been carried out mostly through the stock exchange, thereby playing a key role in the growth of market capitalisation. EMU membership has eliminated any control over monetary policy and has constrained the room for manoeuvring on the fiscal policy front. Risks are limited given its membership of the EU and EMU although from time to time domestic political uncertainty will impact upon financial markets.
Portugal is an economy with high growth potential and a favourable environment for foreign investment. The economy emerged from recession in 1994, when a modest 0.8 per cent growth rate initiated an upward trend that has since been maintained. Over the period 1996 to 2000 the economy grew by 3.4 per cent establishing a trend significantly above the EU and Eurozone averages. During the first years of the recovery when domestic demand was quite sluggish, the main contributor to growth was the external sector. But this situation has since been reversed and now the internal sector is fuelling the economy, albeit at a slower pace than in previous years. The unemployment rate at four per cent is below the EU 7.6 per cent average.
Despite having substantially progressed in the right direction, there is still alot to do to correct the economy’s intrinsic unbalances. The government’s goal over the next couple of years is to complete the structural transformation of the economy, in particular the liberalisation and deregulation of some key sectors, with the aim of encouraging foreign investments into the country.