The president of Associação Portuguesa de Bancos (APB - Portuguese Banking Association), Fernando Faria de Oliveira, participated in the TSF/OTOC conference on  "Private Enterprise - the economy, companies and taxation system” in Lisbon on 26 May. Read his opening speech here.


"It is an honour to participate in this conference on PRIVATE ENTERPRISE – the economy, companies and taxation system organised by TSF and the Association of Chartered Accountants.


Private enterprise is the basis and driving force of market economies, which have been adopted by the vast majority of countries.

Francis Fukuyama wrote in an article in the Wall Street Journal published in May’s Courier that the world’s prevalent economic order has led to significant increases in prosperity in all continents. Global production quadrupled between the early 1970’s and 2008. The middle classes, on which liberal democracy is based, have spread all over the world and they are much more knowledgeable and demanding.

Civil society is of great importance and plays a crucial role in the functioning and quality of democracy and also in the performance of the market economy associated with it.

It is only natural for civil society to worry about, defend and contribute to the framework in which private enterprise, i.e. companies, operate. It must be as favourable as possible for the creation of wealth, employment and prosperity, which are any country’s permanent goals.

And the larger a country's shortages are, the more necessary their cultural, political and economic elites are. They have special responsibilities: their contribution and their clear, strategic vision are even more important in fostering economic progress and social wellbeing.

After anaemic growth between 2000 and 2008 (an average of 0.6% a year), with very high levels of public and private borrowing, Portugal went into a recession from which it only emerged a year ago.

Now, we know that:

there are deep-seated causes, most of which have been diagnosed, that led us into this situation, but we often confuse the consequences of crises with their causes and we fail to consistently attack our profound weaknesses and vulnerable spots.

  • In the last four years, in order to avoid bankruptcy, we had to follow an adjustment programme with solutions that in practice were imposed on us by our creditors (which included sometimes excessive and even inappropriate measures and others that were insufficient). We managed to achieve the main target - returning to the markets - by achieving external equilibrium, but the other four goals (internal equilibrium, aggregated supply, reduction in excessive private borrowing and fiscal sustainability) were only partially pursued and a lot of work was left to be done in order to achieve them.
  • We need a large, more ambitious economic growth period to absorb accumulated excess debt, reduce the high levels of unemployment that are affecting our socio-economic development to generate more prosperity and meet our commitments as a state, at a domestic level (those that lead to an sustainable social state ) and external level.

We must recognise the response capability of the production sector during the crisis. A large number of companies were more than able to adjust to the circumstances, reducing costs, diversifying markets and becoming more flexible. The performance of exporting companies in particular shows our ability to face challenges and is an inspiring example. The weight of exports in GDP increased significantly to over 40% (albeit with an imported component of 15%).

As economic growth is our main goal, we must never forget that there are four main factors that particularly influence it:

  • a healthy macroeconomic framework, with emphasis on the sustainability of public finances
  • a favourable institutional framework, involving structural reforms, policies that improve human capital (education, qualifications, research, innovation, intellectual property), flexible labour markets and a sound financial system
  • competitiveness, based on knowledge, efficiency, high productivity and innovation, which puts us on the map in the global economy
  • initiative and entrepreneurial skills, which include vision, investment and a need for funding

I have to point out, however, that. of the constraints on economic growth that we have to face, there are three that are decisive.

1st constraint 

Where public finances are concerned, I must highlight the need to reduce public spending, in order to lighten the tax burden and thereby increase the country’s attractiveness for investment and foster virtuous growth in consumption. The adjustment programme provided for fiscal consolidation based on a reduction in public expenditure with a 2/3 contribution, and an increase in revenue (tax burden), responsible for 1/3. We did exactly the opposite. The basic reason is that the reduction in spending entails reforming the state - the public administration, local authorities. What reforms have been made in the state apparatus and local authorities and Social Security? This requires options involving public services and their sustainability and quality (education, health, security, defence, etc). It is necessary to answer the following question. What state can we have on the basis of bearable tax revenue? What we all want is the most and best... And we all know that state reform is only possible - over several years – with consensuses and political and social commitments that create the right conditions for reform in a sustainable social climate, though there will always be objections on a number of fronts. What dynamics do we need to move? What culture of commitments can we develop?

2nd constraint 

Under-capitalisation and, in particular, excessive borrowing by companies, some of the largest in Europe, while the deleveraging process has been insufficient.

3rd constraint

The degree of investment - we are experiencing under-investment in relation to needs for pursuing reasonable economic growth. For one thing, this is because the circumstances have not been good for attracting Portuguese or foreign investors. The Portuguese private capital base has been seriously eroded by the international financial crisis and the sovereign debt crisis and attraction of DFI must be stimulated and encouraged. And here the tax question is very important.

Getting over these three constraints without remaining vulnerable means that we must mobilise wills for a realistic, ambitious national strategy.

The stability of the political, economic and institutional framework is decisive in restoring confidence and investment intentions. We need to preserve the good things that have been done.

We need an environment that reduces uncertainty and feelings of distrust and changes the climate of aversion to risk and stimulates investment.

We need to be obsessed with investment; otherwise there is no ambitious economic or employment growth.

We have entered a virtuous circle for growth, competitiveness and greater confidence in the economy, companies and households. This is an exceptional conjunction of circumstances – low energy prices, very low interest rates, a weaker Euribor, a new community framework, new EU initiatives for fostering investment and higher expectations and better perception of Portugal by the markets. The export sector, which has been the great bulwark of growth, is benefiting from the recovery of the euro area and depreciation of the euro. And Portugal today has a group of other factors for attracting investment, incomparably better than 25 years ago: a much more qualified generation, an inclination for scientific, management and innovation, a better qualified workforce and excellent infrastructure, which must further enhanced.  We must take greater advantage of this positive setting and act even more vigorously against the constraints, while encouraging investment. And of course this means access to finance. And I’m now going to focus on that.

The international crisis in 2008-2010, which was exacerbated in Portugal by the sovereign debt crisis, deeply affected companies, shareholders and workers and, of course, the banks. It obliged everyone to make adjustments and operate in new circumstances.

It is essential for a country to have a strong, modern, reliable banking system, because banking is the heart of the economy, responsible for more than 70% of companies’ funding.

Everyone is saying, and not only in Portugal, but throughout the EU, that “finance is not reaching the economy”

It is worth trying to decipher this feeling. This perception is due as much to businesses as it is to the difficulties of the banking sector, which had particular influence in the initial phase of the sovereign debt crisis resulting in a fall in loans, then and now. Let us see, starting with banking part:

  • Growth in loans to companies was highly significant until the international financial crisis broke out. On the one hand, at the end of 2007, Euribor was over 5% (so the price of borrowing was quite high) and on the other hand, company defaults were under 2%.
  • Even during the 2008-2010 financial crisis, loans continued to grow in Portugal (12.8% between 1 January 2008 and 31 December 2010).
  • As a result of the sovereign debt crisis and its effects on banks and companies and of the impacts of the new regulatory and supervisory framework, loans fell 21.2% between the end of 2010 and 2014.

The sovereign debt crisis affected the banks very seriously. They were among its victims. It contaminated ratings and prevented access to funding in the international markets, thereby creating liquidity problems and leading to much greater capital requirements and demanding deleveraging plans. At the same time, the inherent economic crisis led to substantial growth in default rates (which, for companies, went from less than 2% in December 2007 to 13.8% in 2014), impairments (which totalled 31 billion euros between 2007 and 2014) and high pressure on net interest income (Euribor fell from 5.2% in 2008 to 0.3% in June 2014). All this meant banks’ profitability and share prices fell sharply – ROE went from 17.7% in 2007 to -11.5% in 2013 and -19.2% in 2014 (including Novo Banco and BES). This naturally affected private investors’ appetite for investing in the banking sector.

Moreover, the banks had to undertake a very demanding deleveraging process [whose goal in the FAP was to reduce the loan to deposit ratio from around 160% in June 2010 to 120% in late 2014] and strengthen their balance sheets and capital.

There was also the impact of new regulatory and supervisory frameworks for the banks, which were obviously necessary and have been implemented and European and global level. They also had substantial effects on the banking system and the banks’ business models.

The new capital, liquidity and leverage requirements, the new bank supervision culture entailing stricter methods and criteria in risk analysis and higher demands in terms of quality of collateral also had considerable effects on the banks’ business models and also on the economy as a whole. It is naturally necessary for them to continue in the grant of loans, and criteria of meticulousness and common sense.

The banks are facing a complex, highly demanding regulatory and supervisory framework that is unclear in many technical aspects and sometimes redundant. They had to prepare themselves and their human and technological resources to absorb it and this meant additional costs.

The European Banking Federation and Associação Portuguesa de Bancos have always upheld that it is vital to calibrate each regulatory measure individually during their joint appreciation. They need to carefully assess their impact on the economy and the system. Transition periods must be established to tie in with the banking sector’s absorption and execution capacity in order to avoid negative effects on the economy.

Banking Union has also introduced an extremely demanding framework in terms of supervision and resolution.

The banks’ loan portfolios are scrutinised on the basis of the same criteria for all European banks. And if loans are not properly justified and collateralised, the banks have to record impairments or set up provisions.

In spite of having had to operate in this highly unfavourable context, the banks are now more solvent and comfortable in terms of liquidity. But there are still great challenges to be faced, such as the recovery of return and of their reputations.

There can be no doubt. If they are to recover their return, the banks need to do more business – which means granting more loans to increase their earnings. They have a real interest in and capacity for handling demand for solvent loans.

Access to loans has practically been re-established, and progress has been made in terms of amounts. And interest rates for this demand are clearly at very favourable levels for companies. So we have a banking system that is in a position to finance the sustained recovery of the economy.

However, the funding of the economy does not depend only on the solvency and liquidity of the banks; it depends first and foremost on demand for loans. And this demand is currently scarce (and insufficient compared to the banks’ appetite, which is for granting loans, particularly to SMEs, which dominate the Portuguese economy. Of the 380,000 SMEs, 340,000 are micro-enterprises).

The prospects for improvement in the demand for loans to companies are always highly dependent on the economic climate.

Smaller companies tend to be more vulnerable to economic shocks, mostly because they have greater difficulty in obtaining funding than their larger counterparts. On the other hand, shortage of equity was diagnosed long ago as a structural weakness.

The capitalisation of companies is a decisive step in access to funding at sustainable prices over the medium and long term, either for mid-caps and others with a degree of development that also allows them access to other sources of funding or for the large number of companies for which the intermediation of a bank is even more essential, in order to reduce asymmetry of information and increase efficiency of evaluation and monitoring of loans. A number of solutions for the recapitalisation of companies can be used, including share capital increases, conversion of loans or recourse to the capital market, venture capital or equity funds. There are also innovative products such as an investment fund convertible into debt being planned by Instituição Financeira de Desenvolvimento.

But there are other important pitfalls in granting loans, such as the submission of applications.

In short, and without prejudice to considering the specificities of many micro-enterprises, I would suggest that, to improve access to loans, companies must:

  • have a sufficient solvency ratio
  • demonstrate their management ability
  • optimise their accounting and management information
  • offer sustainable business models, credible business plans and consistent growth strategies
  • focus on the creation of value over time without ignoring the need to generate short-term income that will enable them to meet their liabilities to third parties

Those that are still highly over-indebted but have a market and are still viable should seek their bank’s advice and study debt restructuring solutions and ways to reinforce their balance sheets. It is also very important for banks to reduce loans at risk and non-performing loans.

Mechanisms that reduce this precariousness are particularly useful. They improve risk assessment and help provide a capacity for future diversification of sources of funding.

The banks and other institutions in the Portuguese financial system are strongly committed to collaborating closely to help find ways of overcoming difficulties in access to funding, such as alternative forms to complement bank loans.

While we are on the subject, I must stress that the problem of funding SMEs, which, though greater in the southern EU Member States, is a problem throughout the European Union and so its institutions are developing new projects.

Indeed, it is important to create a favourable, Europe-wide framework for attracting resources and allocating them efficiently, while also involving the grant of bank loans and an increase in use of the capital markets. If properly designed, Banking Union and Capital Market Union will successfully create a union of efficient, integrated financial markets. For this to happen, the focus must be on increasing overall funding of the economy and not on the effects of replacing sources of finance.

Liquid, efficient capital markets will, over time, result in an increase in the amount of bank loans (even if the percentage of bank loans in relation to total funding goes down), in particular if use of the capital markets is aimed at filling in funding gaps (e.g. insufficient equity and funding in the initial stages of a company’s life cycle).  The development of additional sources of funding to complement bank loans, which is indissociable from the creation of a capital market union, must be subject to the principle of “same risks, same rules”. Non-bank funding carries risk for the financial system and for investors and must be properly regulated and supervised, both at prudential and behavioural level. It is therefore essential for the rules to be strengthened to make them as strict as those for the banking sector.


Ladies and gentlemen

The Portuguese banks are still operating in a difficult setting  and there are still substantial challenges, such as:

  • the banking system as a path and partner in economic growth
  • the recovery of the sector’s reputation
  • the recovery of profitability, which is very important in attracting private shareholders again and facilitating loans
  • preparation and absorption of the new regulatory and supervisory framework
  • development of digital banking

But the work done to adjust to the sector’s new circumstances means that I can say that our banks are ready to meet companies’ funding needs. They are committed to supporting businesses’ restructuring and recapitalisation processes and cementing partnerships with each company and to Portugal’s economic and social development.

Thank you very much"

Fernando Faria de Oliveira