Kuwait Times

Portugal’s economy: An express train at risk of derailing

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LISBON: The passengers on a night train chugging along Portugal’s northern coast last month got the fright of their lives when the 40-year-old locomotive’s diesel engine literally fell off. Luckily, the train didn’t derail and Portugal Railways ordered taxis to take the 15 passengers home. But the incident was a shocking reminder of Portugal’s chronic underinves­tment in public services and the hidden frailty of its economic rebound.

The Portuguese economy, bailed out by the European Union eight years ago, is booming.

It is enjoying its highest economic growth in nearly two decades, fuelled by record tourism, an upswing in the housing market, a growing tech sector and strong exports. Private investment has returned to 2009 levels, helped by foreign investors including Chinese companies.

But for every glitzy new hotel and fancy restaurant in Lisbon there is a creaking bit of infrastruc­ture or aging locomotive, including the one that fell apart in late February. It had been rented from neighborin­g Spain as a stopgap measure. Some economists fear a lack of public investment is starting to undermine the economy, or worse, could be storing up trouble should another recession come.

And with total debt close to 120 percent of gross domestic product, one of Europe’s highest, the ruling Socialists have limited room to finance a big investment drive without putting almost a decade of budget repair at risk. The budget deficit, once 11 percent of GDP during Portugal’s 2010-14 debt crisis, has been almost eliminated under the Socialists. But that has come largely at the expense of public investment, according to Ricardo Arroja, visiting economics professor at the University of Minho.

Arroja said the government was not taking a longterm view. “Since the start of the legislatur­e, this has been navigation by sight,” he added. In 2018 public investment reached 4.14 billion euros ($4.7 billion), but in a sign of how this item of spending has been used to balance the books in recent years, it was cut from an initial budgeted amount of 4.53 billion euros.

Public investment represente­d 2.1 percent of GDP in 2018, up from 1.5 percent in 2016 but still less than half of the 5.4 percent registered in 1960, according to Pedro Brinca, professor of economics at Nova School of Business & Economics. However the government says it has had little choice but to prioritise cutting the deficit, to gain credibilit­y among investors and help the economy recover.

‘Burden for future’

A recent report by the Internatio­nal Monetary Fund found Portugal actually had net public investment of about negative 1.2 percent of GDP in 2016, putting it at the bottom of a list of 26 rich countries, including Greece, Italy and Spain. That means it is not spending enough to offset the depreciati­on of state assets.

“We are consuming capital, that is we don’t have sufficient investment to replace capital (stock),” Luis Moraes Sarmento, deputy director of the statistics department at the central bank, said at a recent conference. “These two things mean that we are leaving behind a burden to future generation­s that is extremely high. We are confusing the good times with having no problems on the horizon.” Brinca said Portugal’s declining capital stock “could have especially serious effects for economic growth”. — Reuters

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