Reports

ECONOMIC & COMMERCIAL REPORT
OCTOBER 2007



1.Developments directly affecting India’s foreign trade and Investment :
NIL


2. Economic & Commercial Developments:

Gross Domestic product up by 1.8% in real terms in the 3rd Quarter 2007.
Portuguese Gross Domestic product (GDP) grew 1.8% in volume in the third quarter 2007, comparing to the same quarter of the previous year, slightly decelerating from the previous quarter (1.9%). The first estimate for the quarter-on-quarter change rate points to a stabilisation of the Portuguese GDP also in real terms.The European Commission last week reiterated its growth forecast for Portugal for 2007 and 2008, leaving the GDP figures at levels more pessimistic than the government’s offering. The Commission said GDP would rise 1.8% this year and 2% next year. The figure for 2007 is in line with the government view, though the Finance Ministry estimates GDP will rise 2.2% in 2008. The Commission also sees Portuguese unemployment at 8% in each of the two years, while the government thinks the rate will be 7.8% this year and 7.6% next. As for the budget deficit, the Commission has pencilled in a 2.6% gap for 2008, while the government is aiming for 2.6%.

Consumer Prices up 2.6% in October on a year earlier.
The Portuguese Consumer Price Index (CPI) increased 2.6% in October 2007 when compared with October of the previous year, percentage points (p.p.) higher than in the previous month. The core inflation index which excludes energy components and fresh unprocessed food products and intends to reflect price growth trends rose at a lower rate than the CPI (2.2%).The main upward contribution to the CPI monthly rate came from changes in the prices of clothing and footwear.
These products cost, on average 5.4% more than in September 2007, as a result of the introduction of new clothing and footwear collections that traditionally occur at this time of the year. The main downward contributions came from changes in the prices of electricity (1,7%), fish (-0.8%) package holiday (-4.5%) and cars (-0.3%). The HICP increased 0.5% between September and October 2007. The HICP 12-month with average rate remained at 2.4%. The gap between the Portuguese and the Euro Zone 12-month average rate of change is estimated to have remained constant from September to October 2007 at 0.5 percentage points. Inflation is forecast to average 2.4% in 2007 and 2% in 2008, before edging up marginally to 2.1% in 2009.

Future of new people carrier at risk.
The Volkswagen company Autoeuropa is struggling to win a lucrative contract to produce the new MPV (Multi Purpose Vehicle) in Portugal. At the heart of the matter are apparent quality control failures in the overall production process of existing models. Now that the company, which only three years ago was considering closing the plant at Palmela to relocate it in Eastern Europe where labour and production costs are cheaper, is thinking of awarding the contract to produce the VW Eos, Scirocco and MPV, successor to the Sharan, in Slovakia. The factory, that only five years ago was considered the best plant in terms of quality and production out of all VW factories, has of late been forced to report failures. Problems over production quality levels began following an internal VW audit which is allegedly using stricter quality criteria and controls in production as well as management. The plant was therefore forced to increase its production and reduce production time to overcome the failures reported, namely in the people carrier and family multi-purpose vehicles produced by the company. The production of these vehicles had fallen from 215 to 175 vehicles a day which in turn has impact on suppliers.

Sonae Distribution is to open five new retail stores per week over the next three months.
The company Sonae forms part of the empire of Belmiro Azevedo and pertains to non-food outlets including cut-price electrical goods store Worten and sports clothing outlet Sport Zone.
Sonae Distribution’s retail arm represents around 28 per cent of the company’s business, which brought in a 2,400 million euro (2.4 billion) turnover in the first nine months of 2007. During this period, Sonae, which also owns supermarkets Continente and Modelo and newspaper Publico, invested 171 million euros modernising its shops. From a total of 60 new outlets to be opened, 95 per cent will be non-food retail outlets, although there will be three new Modelo and Continente openings. Sonae has decided on a programme of expansion and modernisation largely because it has seen overall sales skyrocket by 15 per cent in the non-food sector of its retail business in the past 12 months.


3. POLICY ISSUES AND ANNOUNCEMENTS

The Portuguese government assumed the rotating presidency of the EU in the second half of 2007. Although much of the agenda will be inherited from previous presidencies, including the task of agreeing a new treaty for the EU, the government has nonetheless identified a number of priorities reflecting its own interests. Portugal hopes to focus on EU relations with North Africa and Middle-East, hold a second EU-Africa Summit, revitalize the Lisbon agenda, and develop a common EU approach towards migration flows. Mr. Socrates wants to capitalise one of Portugal’s comparative strengths, namely the country’s strong links with Africa ( mainly Portuguese-speaking African countries and the Maghreb countries) and with Brazil. The Portuguese government also argues that there is a need to make EU policy towards the fast-growing “BRIC” countries (Brazil, Russia, India and China) more comprehensive, as Brazil is the only country in this group without a formal mechanism for high-level dialogues with the EU. In December 2007, Portugal is also set to host the first EU-Africa summit for seven years, where it hopes to agree a joint partnership strategy. Finally, Portugal’s presidency will also seek to give a new impetus to the Lisbon agenda, a range of initiatives designed to boost productivity and foster a knowledge-driven economy. The government is working to change Portugal’s economic development model from one based on public consumption and public investment to one focused on exports, public investment and development of the high-tech sector.

Portugal Union Stages Protest During EU Summit
A new revision of the labour code, which previously had ranked low in the list of priorities of the current government, has been announced for 2008. Portugal's main trade union, General Confederation of Portuguese Workers (CGTP), staged in October, what it said was the country's biggest demonstration for 20 years to oppose so-called "flexicurity" labour reforms being considered at a European Union summit. Around 200,000 people gathered outside the venue of the EU summit in Lisbon to protest against flexicurity and Portuguese Prime Minister Jose Socrates' economic policies. In a speech, Jose Carvalho da Silva of the CGTP union, said that flexicurity is above all, for this government, a slogan to impose liberalization and a lack of job protection for many years. Socrates' government has introduced tough spending cuts and reduced civil servants' benefits since coming to power in 2005 with an aim to ensuring that Portugal meets EU budget deficit goals. Flexicurity aims to combine flexible work laws with higher social protection for the unemployed. The European Trade Union Confederation and Business Europe, representing employers in the EU, agreed on the guiding principles for 'flexicurity' labour market reforms. General Confederation of Portuguese Workers.
The government presented its 2008 budget on 12th October, 2007. The budget contains no new tax cuts and targets a general government deficit of 2.4% of GDP, based on an assumption of real GDP growth of 2.2%. Portugal is still subject to an excessive-deficit procedure implemented by the EU and has until 2008 to reduce its budget deficit to 3% of GDP. The Minister of Finance, Fernando Teixeira dos Santos, has hinted that the direct tax burden could be reduced. However, in order to remain on target if tax cuts were to be implemented, the government would have to reduce public expenditure, and this is likely to prove difficult, especially in light of the delays in rolling out its public-sector reform programme.

State-owned railway companies post large losses
Refer, the national railways network operator, posted the largest loss of all state-owned firms in 2006, with Euro 201.7mn, a deterioration of 25.8% compared with 2005. Caminhos de Ferro Portugueses, the national rail firm, lost Euro 192.8mn, and Metropolitano de Lisboa, the Lisbon underground service lost Euro 147.1mn. In the context of budget consolidation, the performance of state-owned firms is a major concern for the government. The government has stated that it intends to carry on with privatisations, partly in order to reduce further public-sector debt. However, in order to find potential buyers, many of the companies in the state sector will need to have their balance sheets redressed. The government has a target of Euro 950 mn in privatisation receipts for 2007.

Lisbon’s new airport construction delayed until early 2008
The new Lisbon airport (NLA) which is expected to cost around Euro 4.8 billion is included in the current Government Priority Infrastructure Investment Programme for 2007 and together with the high-speed rail project will be the largest investment in Portugal, both combined reaching 3% of the state budget. The new airport is scheduled to be ready by 2017. The tender to construct and operate a new airport in Lisbon is expected to be delayed for after a new study contested its proposed location north of the Portuguese capital. The tender will be closely related to the privatisation of Portugal's airport authority ANA, with the winner of the tender expected to walk away with control of ANA as well. The international public tender for the privatisation, initially expected in October, may be delayed by about three months. Amid continuing controversy over the initial choice of Lisbon's planned new international airport, another alternative location considered by the Portuguese government has again stalled the project. A new study carried out by the Confederation of Portuguese Industry (CIP) has proposed a different location in the area of Alcochete, nine miles south of the capital. Portuguese Public Works Minister Mario Lino told a parliamentary committee that a panel of experts would examine the possibility of building the airport, expected to cost around 4.8 billion Euro.
After years of postponements, the government said in 2005 the airport would be built at Ota, a town about 30 miles north of Lisbon. Projects for a new airport have been discussed by successive governments for about 10 years, but rows over its location have held up the plan. Lisbon's current airport, which is on the edge of the city, is forecast to reach its limit of 16 million passengers a year in 2015. The future Portuguese airport will be served by the TGV-line regardless of the location – Ota or Alcochete. The TGV-line will create close to 36.000 new jobs and is set to have an enormous GDP impact in the long term. Prime Minister José Sócrates assured that the decision about where to locate the new Lisbon International Airport will be made solely on the study that is being carried out by the National Civil Engineering Laboratory (LNEC). LNEC is to carry out a comparative study into the two sites and then report back to the government by December 12.

Portuguese energy company will take part in projects of liquified gas
Portuguese oil and gas Galp Energia is signing an agreement today with Petroleos de Venezuela to take part in projects of liquefied gas. The national energy company may buy up to 2 billion cubic metres of liquefied natural gas annually from state oil company Petroleos de Venezuela gas to sell to the Iberian market. The two companies are also considering a joint venture at the Gran Mariscal Ayacucho industrial complex in Venezuela's Sucre state where they may jointly build and operate a liquefied natural gas terminal. The agreement is being signed at the ministry of Economy between Galp Energia's CEO, Ferreira de Oliveira, and the minister of Energy and president of Petroleos de Venezuela, Rafael Carreño. The formal signing of the agreement was due to coincide with a brief visit to Lisbon by Venezuelan President Hugo Chavez. In October, the two companies signed a memorandum of understanding to examine deals that Galp said could eventually supply up to 30% of Portugal’s hydrocarbon consumption.
Shares of Portuguese oil company have risen by 38 per cent in two days.
Galp Energia has once again been at the centre of transaction in the Lisbon Stockmarket. Shares in the oil company rose by 24.7 per cent to 15.40euros. The announcement of a huge oil reserve off the coast of Brazil has prompted a rush for shares in Galp Energia in the Lisbon stockmarket. Galp owns about ten per cent of Petrobrás which owns the reserve. At the same time financial institutions have made positive forecasts for the company which has helped to boost the company stock even more. Caixa Banco de Investimento for example has increased the target price of Galp Energia shares by 30 per cent - and has recommended its investors buy shares in the oil company. The Prime Minister said the news of the massive oil discovery in Brazil is good for the national economy.

Portugal relinquishes Mozambique’s Cahora Bassa dam
Portugal will later this month celebrate the take over the strategically-important Cahora Bassa hydroelectric dam in the central province of Tete from Portugal. A ceremony will take place in the town of Songo where the dam is located on the 27th of November. Cahora Bassa currently generates electricity for domestic consumption and export to neighbouring states. The Mozambican government will pay Portugal US$700 million dollars for the purchase of a majority shareholding in the Cahora Bassa. Under the deal signed in Maputo in October 2006 by President Armando Guebuza and Portuguese Prime Minister Jose Socrates, Mozambique will increase its stake in the dam operating company, Hidroelectrica de Cahora Bassa (HCB), from 18 to 85 per cent, while the Portuguese holding shrinks from 82 to 15 per cent.



4. INFORMATION ON TRADE AND INVESTMENTS:
Foreign Direct Investment (FDI) amounted to Euro 2.5bn, but with Portuguese investment abroad (FDIO) amounting to Euro 3bn, there was a net outflow of direct investment, compared with an inflow in the equivalent period of 2006. Portuguese investments to Spain and Angola have been particularly strong and have targeted sectors such as real estate, services and manufacturing. On the FDI side, roughly 50% of the main foreign direct investments in Portugal were in the real-estate and tourism sectors. in the months up to April, according to data from the Ministry of Economy and Innovation.

Cimpor to open cement factory in China
Portuguese cement company Cimpor – Cimentos de Portugal plans to invest 100 million Euro on building a clinker and cement factory in China’s Shandong province, where the plant will be built and have signed a 50-year cooperation agreement. The agreement signed would be carried out by Chinese subsidiary, Shandong Liuyuan New-Type Cement Development (NLG). The investment will be carried out in two stages. In the first stage, a 5,000 tonne per day clinker production line will be built which is expected to be concluded at the beginning of 2009, and then a second identical production line will be built. The company said that this project will boost its production capacity in China namely in Shandong province and in the areas surrounding Shanghai to over five million tonnes a year from 1.8 million tonnes a year.

Boom ahead in private health sector:
The Portuguese health sector today is as hot as the banking sector was 20 years ago.   Private sector opportunities have opened up and private health care networks are expanding across the country.  Portuguese companies are ensuring part of this investment is also cross-border. The private health outlook is changing rapidly. Current provision of private health care is now on the same level as that of the Portuguese national health service.  Investors are also contemplating investment in areas where health care provision costs are astronomical – cancer treatment and cardiovascular disabilities.  The boom in health insurance policies, now worth €1.8 million, has funded the development of the private sector.  The ageing of the population is making healthcare the place to be in the 21st century. The cost of healthcare to the NHS is rising year-on-year at a pace unsustainable in the short term.  Private healthcare operators are demanding larger market share – at the moment 10% of hospital beds are in private supplier hands and 50% of out-patient care is currently dominated by private operators says the Portuguese Association of Private Hospitalisation – Associação Portuguesa de Hospitalização Privada (APHP).   The five most active companies in the market are: José de Mello Saúde (JMS),  Grupo Português de Saúde (GPS),  Espírito Santo Saúde (ESS),  Hospitais Privados de Portugal (HPP) and CESPU - Serviços de Saúde. Total sector turnover on latest available figures was €600 million.

Bio Consumption for export
Over the next 3 years €330 million will be invested in Portugal's bio combustion market on seven bio diesel, two bio ethanol and two refining plants. A further 7 smaller units supplying private transport fleets are also due to be built.   Maria Fernanda Rosa director of the biomass department at the National Institute of Engineering Technology and Innovation (INETI) says: "if all the units are in fact built, Portugal will produce 50% more bio diesel and bio ethanol than the targets set for the country under EU environmental commitments.”  To meet Government's 5.75% target for 2010, Portugal must produce 325 million litres of bio diesel and 30 million litres of bio ethanol.

Major Sines investments get underway
National and foreign petrochemical companies (Galpenergia, Repsol YPF and Artensa) have announced more than €2.1 billion of new investment at Sines harbour (south-east) through to 2010.  The investments will create 1000 new jobs and help boost Portuguese exports. Government is keen to attract more FDI to establish an “advanced petrochemical cluster” at Sines. The port, with future TGV network links to Spain,  good motorway connections and  plentiful  industrial land, is well placed to attract  further industrial development. Among planned Sines investments are a new Galpenergia hydro cracker worth €717 million and an additional €73 million for a co-generation power plant. By 2010 Repsol YPF , which acquired the former Borealis plant from it Finnish owners in 2004) plans to conclude a €750 million Sines expansion. Two new polyethylene and polypropylene plants are to be built as well as a new electrical power plant as well as an additional 40% expansion of capacity at the existing cracker.
Europac (Spain) which has completed a successful takeover of Gescartao SGPS S.A. (pulp & paper products)  is to invest €81 million in the Viana do Castelo Gescartao plant, of a total €141 million the company has set aside for investment and further acquisitions in Portugal.  Between 2000 and 2006 the company invested €271 million in Portugal of which €170  million in industrial acquisitions and investments and  €164 million in financial investment.


5. Portugal’s External Trade
a) International Trade – Exports and Imports increase.
From January to August, exports increased by 9.6% and imports 4.5%. During this period, Fuels and Lubricants had a decrease on both flows: 24.7% on exports and 13.4% on imports.
For exports, one can underline the invoice by 17.1% for Capital goods, by 14.7% for Food and beverages and by 12.8% for industrial supplies. On the other hand, for imports one can highlight the increase of 14.3% for food and beverages and 9.4% for industrial supplies and 7% for Capital goods.

Source : National Statistics Institute (INE)


b) Foreign Trade by major categories
Portugal’s merchandise trade deficit narrowed slightly to Euro 8.8bn in the first half of 2007, down from Euro 9.5bn a year earlier, according to data released by the Bank of Portugal. Export earnings rose by 9.2% to Euro 18.7bn in the first half of the year, driven by stronger demand in emerging markets. There was solid growth in earnings from exports of machinery goods, which rose by 20.3%, but also in raw materials and intermediate goods, transport goods and food and beverages.
The merchandise import bill increased by 3.3% year on year to Euro 27.4bn in the first half of 2007. The cost of imports of food and beverages showed the fastest growth rate, rising by 13.3%. The value of imported raw-materials and intermediate goods, the largest import category in value terms increased significantly, by 7.6% to Euro 8.1bn, accelerating from 4.9% growth in the first quarter. Expenditure on imports of machinery goods rose to Euro 5bn, reflecting a mild increase in industrial confidence and output compared with a year earlier. Imports of transport goods registered only a sluggish growth rate, at 2% year on year, and imports of fuel and lubricants declined by 15.2%.



Foreign Trade by major categories ( Euro mn )

Source : National Statistics Institute (INE)



c) Foreign Trade by Major Partners
The value of exports to the EU rose by 7.4% year on year in January-June 2007 to Euro 14.5bn, while the imports grew by 3.5% to Euro 20.7bn. Overall, the EU absorbed 77.4% of Portuguese exports in the first quarter of 2007, down from 78.7% in the previous quarter. This decrease is due to the increasing share of exports to Asia and to Portuguese speaking countries in Africa (PALOPs), mainly Angola, Spain, France and Germany together absorbed 69.9% of total Portuguese exports into the EU in the first half of 2007 compared with 68.4% in the first half of 2006. The larger EU states remained the principal suppliers of imports into Portugal in the first half of 2007, with Spain, Germany and France accounting for 69.2% of the total of EU imported goods. Overall, Spain remains Portugal’s largest single trading partner in the EU, accounting for 40.1% of imports and 36% of exports. According to the National Statistics Institute, for non-EU trade , exports to the US and Asia are the other two main destinations, representing 22% and 23% respectively. Imports from non-EU countries came mainly from OPEC countries (24.6% of the total, or euro 1.9bn), the Americas (23.3%) and Asia (23.5%).



Foreign Trade by Major Partners (Euro mn)

Portugal’s Trade with Non-EU Countries:
According to National Statistics Institute, for non-EU trade up to July show that Portuguese exports to Portuguese –speaking countries in Africa continued to rise on a year—on-year basis, representing 22.3% of the total or Euro 1.12bn. Exports to the US and Asia are the other two main destinations, representing 22% and 23% respectively. Imports from non-EU countries in January-July came mainly from OPEC countries (24.6% of the total, or Euro 1.9bn), the Americas (23.3%) and Asia (23.5%). Portugal maintains a trade deficit with most of the main regions, with the exception of the Portuguese speaking countries in Africa and with the US.




d) KEY ECONOMIC INDICATORS:

Portugal : Economic Indicators

(b) estimates

India-Portugal Bilateral Trade
India-Portugal Trade Statistics 
(Calendar Years)

Source : National Statistics Institute (INE)





b) Total trade in Euros and its growth with India by top 10
commodities. ( Jan-August 2007)

India’s Main Exports to Portugal
(Export of Top 10 Items)

Main Imports from Portugal to India:
(Imports of 10 major items)

c) Portuguese Sectors Attracting Investments:
The Portuguese Government is investing in logistic platforms embracing different transport infrastructures, such as the new Lisbon airport, the high-speed rail network, ports, and motorway networks. The new Lisbon airport and high-speed rail are major mass transport projects. Priority Sectors identified are :
Airports
Communications
Environment
Food & Drink
Financial Services
Healthcare
Ports
Railways
Renewable Energy
Security
Tourism