Newsletter of last week
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Here starts today’s NEWSLETTER from TextileFuture:
An exclusive report on Portugal’s textiles and clothing success
By Virginia F. Bodmer-Altura
Portuguese textile and clothing has not only survived successfully the backlash of the financial crisis, but it superseded also the recovery of its economy. Along this development, the two sectors underwent drastic changes. Many companies had to close down, and the ones remaining had to transform dramatically. The best survivors are medium family owned firms. The metamorphose included a change from order takers to collaborative working with the customer, and in the case of textile and clothing manufacturers to develop their own lines. Many textile companies are vertically organised and this organisational form allows to control the value chain, and the added values with one distinct objective to mainly create and keep it in Portugal.
Since only direct contact can give a true picture, TextileFuture visited the textile sectors of Portugal, and was impressed of the dynamic of the two sectors. As we already know, ITMF will hold its Annual Conference on October 20 – 22, 2019 in Porto, Portugal.
Finally, let us give you an insight on the actual economic performance of Portugal, based upon a report of IMF, the International Monetary Fund of September 2018.
The effect of promotion
By Paulo Vaz, ATP’s General Director and Fashion from Portugal’s Project Coordinator:
ATP’s Editorial of the 2017 edition of P Fashion from Portugal Directory: The promotion of the Portuguese Textile and Clothing Industry, now based on more qualified drives such as fashion, design, technological innovation or advanced logistics, carried out through multiple actions covered by the “Fashion From Portugal” project, have found in this Directory an effective piece of communication to support the global customers of textile, clothing and fashion “made in Portugal” in the process of suppliers selection.
The 2017 Directory, as it has already happened in the previous year’s edition, will continue to be massively distributed in international fairs where the sector has biggest presence, as well as in national events related to textile, clothing and fashion industry, such as the “Modtissimo” or “Portugal Fashion” shows, which also welcome many professionals of this activity, in Portugal and abroad, further expanding its base of dissemination, becoming a reference manual for anyone who is looking for Portugal to do business.
In addition, AICEP delegations recognize in this tool the essential quality and informative content so that they also are able to reinforce the promotional effort of our sector, which has been attracting more and more interest across borders, both in traditional markets and in emerging markets, where the Textile and Clothing Industry has a solid reputation of excellence production, including in design and product engineering, plus flexibility and quick response, with the world’s shortest lead time: between 2 to 6 weeks, depending on the product.
As a reminder, the Portuguese Textile and Clothing Industry exports more than EUR 5 billion annually to over 180 countries around the globe and is responsible for around 10% of all Portuguese exports. Thus, it is why the Balance of Trade is over EUR 1 billion – making of this activity an undisputable and more strategic activities for the country ́s economy. The promotion campaign “Fashion From Portugal” running 2016 and 2017, has segmented its intervention in 4 markets: Spain, Germany, Nordic Countries and the USA. Three sub-sectors were in focus: fashion and brands, private label and home textiles. They may intercross between themselves locally wherever it may made sense and always coordinated with exhibitions in the markets in question. This way synergies could be profited and took leverage effects from the communication intensification. One way or the other, all outputs benefited the Sector’s promotion, independently of the countries or markets defined as priority in this program. They accompanied the multiple actions carried out international wise in over 85 exhibitions in 35 countries across the globe, including Portugal as well. “Fashion From Portugal” included fashion editorials, advertorials and publicity in the specialized media, outdoors, brochures, stylebooks and annual magazines, dedicated to the subsectors to be promoted. There were viral videos for the social networks, besides this directory, now in the second edition, in paper and digital version– for which there is an app for smartphones and tablets, among other actions and events. All with one purpose, a bigger promotion of both image and visibility outside the country and turning the reputation of excellency of “made in Portugal” even greater in fashion, home textiles, technical know-how and technological innovation, in some of the main markets.
Portugal made already part of the international fashion business itinerary, but now it has certainly become a mandatory route for all of those who take part of the global textile, clothing and fashion business. “Fashion From Portugal” means, without a doubt, that it is designed in Portugal, is produced in Portugal and ends up being dressed worldwide!
Here are some prominent voices of the Portugal’s Textiles and Clothing sector
These were compiled at TextileFuture’s visit. It is noteworthy, that we expressively asked for the measures taken to escape the downturn during the financial crisis.
Paulo Vaz, General Director of ATP, the Textile and Clothing Association of Portugal
When we asked Paulo Vaz, General Director of ATP, the Textile and Clothing Association of Portugal, to have a look back on the Portuguese textile development, his answer was distinct: “In former times, we operated on price only, now we operate on value. We have the base of cost, competition, service and performance. We are no longer only order takers, we are active sellers of solutions, packages, services, individual production and we are in control of the entire product and the added value remains in Portugal.”
His Association forms nowadays a sort of think tank, cooperates on technology, works with universities and is involved in politics. His decided answer: “We know where we want to go, and we have met the challenges successfully.”
Reflections on the past
In 2001 the sectors recorded record exports and turnovers. In 2009 the figures were lower EUR 1.5 billion exports, however it was an open market. The introduction of the EURO and the founding of WTO created a difficult situation, as well as the forming of the European Union and the European Market. Strong industries and comparable costs and nearness to important markets created an outstanding position for Portugal.
In 2009 started the financial crises and lasted until 2011
During that time, big firms and many firms had to downsize their activities or to close down. Then followed the era of technical textiles and the remaining large companies invested into automation. Technical textiles interacted with construction and textile became an important factor.
In turn, textiles started to form a cluster based upon textile companies and collaboration among the firms of the cluster, interface with knowhow and sciences and an exchange among these groups.
CITEUVE and Nano Technology brought new materials and state-of-the-art.
Competition and technological innovation were bringing new opportunities. The top companies entered into Technical Textiles.
Paolo Vaz stated: “2017 was a record for the clothing industry with very important increases in export and turnover (50 % plus) and 50’000 people being employed in the productive industry revealed a case study. This created a certain kind of confidence.
Portugal becomes a sort of model status planning with same goals design and business.
There are 11000 registered companies and 8000 are active e and 85 % are domiciled in one region forming the Northern Portugal cluster, the epicentre of the two sectors industry. Everything is available design, service, distributors, etc. and in addition sciences university, technologies and training.
During the past two years we note a return of young people (textile engineers at university level) and a high demand of fashion, marketing and difficulties to find specialist in the construction, controlling and education. (40-50 and children do want a degree = productivity). We have to keep the knowhow and control of the booming engine. Intelligence is demanded, but some specific activities to create added value, control of business and engineering.
For the time being, there is a shortage of qualified young people.
The tenor of the companies is family enterprise and high independence through own financial investments (mostly without banks).
Textile and Clothing Association of Portugal / Associação Têxtil e Vestuário de Portugal (ATP)
Textile and Clothing Association of Portugal is an employers’ association that groups around 600 companies from the entire Portuguese textile and clothing sector. Altogether, these companies are responsible for more than 45000 jobs, with a turnover of EUR 3000 million; two thirds of this value represents exports. “ATP” was the result of a merger between APIM (the Portuguese Knitting and Clothes Manufacturing Industries Association) and APT (the Portuguese Textile and Clothing Association), which took place in July 2003. ATP has become not only the biggest organization representing the Portuguese Textile and Clothing Sector, but also one of the most important in Europe. Recently, ATP has merged again, this time with ANET (the National Textile Companies Association, formerly the Textile Wholesalers Association), pursuing therefore its strategy of concentration and strengthening of the textile sector. The Association now represents all commercial and industrial activities of the textile and clothing business.
Somelos – Tecidos, S.A.
Somelos – Tecidos, S.A., a weaving company, produces and sells yarn dyed fabrics for shirtings. The company is based in Guimaraes, Portugal. It has operations in Europe, America, Asia, and Oceania. The company operates as a subsidiary of Grupo Somelos.
It is one of the largest weaving company in Portugal.
At our visit to Somelos Mix-Fios Tèxteis S.A. in Guimrães, we were visiting with Paulo Teixera de Melo, CEO.
One item on the wishing list of Paulo Teixeira de Melo is more efficiency in view to power and water.
On the other hand, he disposes of the state-of-the-art textile machinery, but due to specific applications, automation is somewhat limited.
He gives us an overview of the group:
Since 1990 spinning and finishing is no longer vertically but horizontally organised, and according to the principle spinning and weaving in small but more efficient units and in cooperation with brands. We are keeping the holding company on top. We have 12 firms in textiles, services, administration, machines and IT serving all of our companies but also for third parties offering price, quality, service and experience.
The main business is the collective spinning mill, where we cover the needs for knitting, flat knits, weaving, yarn, underwear, socks, etc.
60-65 % of our proceeds are exported, mainly to Spain, Italy, France, Germany and Switzerland.
Weaving segments are destined to shirtings for men, women and children in the high-end market, with two collections serving also as reference for brands and their needs. Brands do not source directly, but they are looking for colours, quality. We have eight customers and they serve in turn 2000 customers in Italy, USA, Germany, France, U.K., and in Asia Japan, Korea, China. To Switzerland we export yarns and fabrics. We have to sales offices in New York City (USA) and in Hongkong. We deliver to safe countries and the total of our added value remains in Portugal.
We offer fashion and special articles, knowhow in textiles and in all subsectors.
Sales of yarns and fabrics cover also Europe, U.S., Asia and to around 1000 customers in Portugal.
Actually we work in three shifts per week.
The finishing unit enjoys a special relationship within our group, but is also serving other customers in Portugal and in Spain. The unit produces 10 million running metres annually (in tubes and cones). Dyeing amounts to 1.5 to 1.6 million kg per annum. The weaving capacity shows an average of 5 Mio metres of fabric and spinning one million metres.
Our turnover is EUR 60-62 million annually.
The focus and special level of attention of our company are lots of services that additionally drive our business. We do not sell to certain brands only, as many competitors do. We believe in our future and the link with brands and designers and a multitude of projects and materials, eco products and comfortable fabrics for trousers and coats. Our technicians have to be in a position to produce such products. In other words, we do want to keep the play in Europe, so to speak.
We are a family enterprise in the 4th generation and the new generation will bring and realise new ideas. We operate very near to the market, and can find out easily, how we become successful.
The efficient development of a new product generation takes four to five days; three to four weeks for the production of the fabrics. Within 20 to 30 days everything is available.
It produces different ranges of high quality products.
Ranges of products specifically developed to fit to the production of circular knitting, flat knitting, seamless, underwear, sportswear, shirting and home textiles.
Using raw materials defined as:
Noble: like Linen, Merino Wool, Wool, Angora, Cashmere, Silk, Alpaca, Camel Hair
Comfortable: like Cotton, Cupro Micro, Viscose Micro, Modal, Modal Micro, Tencel, Tencel Micro, Polyamide, Polyamida Micro
Eco Friendly: like Viscose Bamboo, Seacell, Cupro, Ecovera Viscose
All these materials, “by themselves” or “also combined in blends” to create real collections, and show their numerous possibilities for different market segments.
Can be supplied single, twisted, corespun, coretwist, dyed, melange even turned into fancy yarns.
Find our collection in three main groups:
Smooth World: Blending the correct fibres the result are smooth articles with specific and technical features, always having in mind the environment and eco friendliness.
Imperial World: The exclusive and lixiry products ae the result of perfect combination of noble fibers and different raw materials.
Fantasy World: The look is given either by production know-How, colour or/and the blend of different fibres creating the Fantasy World for the final products.
SOMELOS COLLECTIONS – the “reference” in quality, fashion and service of multipurpose yarn production which any top yarn buyer and designer must always consider.
De Melo: 70 % of our collections are followed by the direct and indirect customers, because of the exclusivity. Our design team develops the lines in close cooperation with customers.
Impetus Tèxteis S.A.
At this firm we talked to Manuel Torres, Director of Sales and Business Development
Impetus was founded in 1973 in a garage and it is family owned. Manuel Torres underlines, “we almost do everything ourselves”
During the carnation revolution in Portugal we started with six machines. The salaries were very high at that time, also compared to Germany, but if you do something different, the price is no longer the leading factor. At the beginning of the 80s we had special machinery and skills. With Lotus underwear at the beginning of the 90’s and with 25 machines. With this idea, we created our own collection for Europe. So, the company was built up successfully.
We had only a small collection that created a tremendous success. Toward the end of the 90’s, we had our design team in Spain delivering own designs, including an international brand quickly . Now we are a group of 12 companies, thereof four in production – we buy yarns), we colour, we ennoble fabrics and we produce the fabric. We have our own sales force and we export to Spain, Germany, USA and slected overseas country. Most recently and in partnership with Universities and with applied innovation we developed projects on an intercontinental basis and markets. This is our second pilar.
The annual turnover is around EUR 65 million and a large market share and add value. We collaborate with small private enterprises. Our staff amounts to 800 people. Renumeration is excellent, our staff receives 15 salaries per annum. We have very highly motivated people, one of the reasons why our company is successful. We offer to customers innovation, quality and fashion. The focus is on men. We produce also special articles for female customers. We export to more than 40 countries, including Mexico and Japan, all countries with excellent prospects.
In the past, many companies of the textile industry had to give up, unfortunately, because our government seems not understand our business.
Impetus is one of the most innovative Portuguese vertical industrial textile companies, delivering outstanding sustainable products and services with impressive figures:
- Circular Knitting 1800000 kg per annum
- Seemless Knitting 3700000 products per year
- Elastic Weaving 125000 kg yearly
- Continuous Dyeing 4900000 kg annually
- Garment Dyeing 270000 kg per year
- Conventional printing 6100000 metres per annum
- Digital Printing 1500000 metres annually
- Sizing and bonding 9000000 pieces yearly
- Four automatic cutting stations
- 50 Quality Experts
All in combination with the state-of-the-art equipment, systems and technology, also guaranteeing sustainability and efficiency. In addition there are electrical vehicles and solar panels in use and social events are created for the personnel. All in all the company has certainly the qualities to be a model case for others!
Tintex Textiles Knits Fabrics
At Tintex Textiles, we discussed with Màrio Jorge Silva, owner of the company.
Knitted fashion- own lines – raw material. Grège, colour and feeling. Nonwoven is the basic material, and we produce afterwards the raw materials.
TINTEX was born in 1998 out of the creative Porto region in Europe.
TINTEX began its journey, making high quality, natural based, responsible jersey fabrics combined with their core expertise using the latest and best sustainable hi-tech dyeing and finishing processes reinforcing the firm’s advanced vision to better supply the contemporary fashion, sport and lingerie markets. TINTEX has a workforce family of more than 120 skilled staff, who are up-trained ongoing to deliver high quality jersey innovations through a dedication to design creating natural innovation hybrids with technical smarts and responsible values.
Creating smart and premium quality, responsible knitted fabric innovations for the contemporary consumer’s life.
TINTEX presents two collections per year in three focussed concepts: Timeless – Fashionable – Innovative.
1988 commissioner of dyeing and finishing. After 56 years commercial activity Tencel was the first development. Cotton linen and Tencel, and it was design, feel and 80% are our own articles, whereas in commissioning, we have been dominated.
Capsule and sustainable fibres and processes to comfort and perform for over 10 years and we know how to do it, but no storytelling and this develops the business. Image, logo, website with a clean look, and the response is fantastic, states Mario Jorges Silva.
The TINTEX vision is to build a new generation textile business that truly delivers an eco-sustainable strategy for all its production and fabric innovations through dedicated investments in technology, assets and skilled teams of specialist staff. TINTEX nurtures a strong relationship between creativity and commercial realities and its DNA helps define how new business can be done better. The vertical integration of the TINTEX supply chain and processes confirms total creative control, with technical expertise, skills and strategies deployed across its international operation to supply responsible premium fabrics that match contemporary consumer needs.
A continuous investment development program is in place to create and maintain our leading market ready business strategy that matches international customer expectations. The TINTEX journey to be a ‘best in class’ manufacturer of quality jersey fabrics comes from this investment, year on year, of over EUR 26 million for its R&D schedule in cutting edge machinery, finishing technologies, design research and a modern marketing and communication strategy for TINTEX added values and how our customers benefit.
TINTEX has already for 5 years created an internal strategy and real department to focus on minimizing its environmental impacts through better sourcing of renewable and natural materials, added to energy savings, and more sustainable processes at all levels of the supply chain with hybrid, nature-based textiles, that do not compromise on innovation.
The development and sourcing of the latest and best smart and naturally available materials updated season on season, combined with research latest dying & finishing technologies, part of the company’s DNA, securing its naturally advanced position and achievements.
TINTEX is committed to improving water usage, with the latest dyeing equipment and efficient finishing techniques, garnering a CITEVE environmental impact assessment with improved metrics for: reduced water consumption, improved electricity energy use and natural gas consumption, minimizing chemical products use, reduction of waste water and organic load in effluents.
Effluent management successfully recycles or reuses 98 % of all production materials.
All new textile and design innovations boast at least a 60% use of more sustainable materials including Tencel, Organic and BCICotton, and recycled materials, all supported with original or brand supplier supported certifications.
A complete TINTEX analysis is already in process for mercerizing and coating processes. The traceable origin of all yarns and production materials will be fully transparent by 2018.
For business ISO 9001, ISO 14001 and Step.
For products GOTS, OCS, GRS by Sept 17, Oeko-Tex and BCI
Bluesign certification will be in place by 2018
TINTEX TEXTILES, SA, an entrepreneurial company at its core and in line with its context has defined, with the company’s positioning, recognition and sustainability strategies in the global market, the following Quality & Innovation, Environment and Social Responsibility Policies’ cornerstones:
- To satisfy its customers, their needs and expectations, adding value to their products/services by means of Quality, Innovation and Differentiation;
- To systematically develop new technical and technological solutions that foster the company’s international positioning and recognition based on its innovation capability and commitment to Sustainability;
- To create sustainable development using resources rationally, aiming to reduce energy, water and other natural resources’ consumption by adopting technologies that enable such reductions, where technically possible and economically viable;
- To prevent polluting the environment by contributing to a greater environmental sustainability and minimizing the environmental impact caused by the company’s activities;
- To establish and promote partnerships with all stakeholders that foster Innovation and sustainable development in its economic, social and environmental dimensions;
- To comply with all legal and regulatory regulations arising from the company’s business; including environmental, quality and social responsibility issues;
- To comply with the principles of the International Labour Organization (ILO), including with the Universal Declaration of Human Rights and applicable national laws;
- To commit to sanctioning child labour, forced or compulsory labour, non-compliance with safety rules, discrimination, undisciplined practices and employees’ overtime;
- To provide the freedom to form unions and the right to collective bargaining;
- To observe the legal minimum wage, ensuring that the basic needs of all employees are met;
- To encourage an organizational culture that ensures the organization’s values and commitments based on the development of Human Assets, seeking to stimulate their creativity and individual initiative, in pursuit of Tintex’s goals;
- To encourage the continuous improvement of the Management System, within an integrated perspective of satisfaction of the different stakeholders;
- This Policy is duly divulged to all employees by way of display, and by announcing it in the Management Platform.
Technical Textiles are of importance
The Textile and Clothing sector has a long tradition in Portugal. The recent evolution of trhe global market presented several challenges. The choices Portuguese T&C sector have done to be competitive by the four must’s:
- Only high quality is acceptable
- Quickest response available in the market
- Endogenous design and technological innovation
- Less commodities and more specialties
With the support of a strong and active scientific and technological system, the sector developed vigorously their activities in the field of non-commodity Tech Textiles.
Now the technology intensive and design intensive products are responsible for the main part of the growth of Portuguese exports, and, specially, the growth of GVA per employee.
Nowadays, in some fields, Portuguese TechTextiles are worldwide reference, because of a very particular ecosystem, consisting of
- A complete and integrated cluster
- Tradition and manufacture knowhow
- Cutting-edge research capacities
- Good cross link between T&C sector and the high value added chains
- Professionals’ sense of customer service
More than 10 % of the total companies are producing TechTextiles and these are contributing around 25 % of total textile exports.
The application areas entail:
- 15 % Sporttech,
- 14 % Clothtech,
- 11 % Protech,
- 11 % Medtech,
- 10 % Mobiltech,
- 10 % Hometech,
- 7 % Agrotech,
- 7 % Indutech,
- 7 % Buildtch,
- 5 % Geotech
- 3 % Packtech
Portugal’s specialisation entails the sectors Sport, Protection, Healsh and Wellbeing, Mobility, Habitat, and Sea.
Citeve Textile Technology
The scientific arm of ATP Citeve Textile Technology with branches in Brazil, Tunesia, Argentina, Pakistan, Chile and India, covers a variety of scientific activities and services such as Innovation Management services and project building, testing thermal comfort, product Engineering, Testing and Certification (including Oeko-Tex 100) for automotive purposes, as well as Testing heat and flame protection.
Portugal’s Science and Technology System
Portugal’s Science and Technology Systems entails besides CITEVE the UBI the University of Beira Interior (areas: textiles, aeronautics, informatics, electromechanics, health, mathematics, optics and telecommunications). Also the UMinho, University of Minho, one of the largest universities of Portugal, with a department of Textile Engineering ewhose objectives are the creation and transmission of knowledge to the industry in the field of Textile and Clothing Science and Technology. In addition, there is CeNTI Centre of Nanotechnology and Smart Materials, a research institute focused in nanotechnology and smart materials with expressive activities oriented to the textile sector, mainly in the Technical Textiles fields. Its main competences are related to nanostructured material development, surface functionalisation, tri-component fibres, printed electronics, printed light emission materials and smart systems. CeNTI is a partnership between CITEVE, the University of Minho, the University of Porto, the University of Aveiro, CTIC-Technological Cente for the Leather industry and Ceiia – Centre of Excellence and Innovation for the Automotive and Aeronautic Industries.
We have been visiting Modtissimo that celebrated the 50th edition 2017 in Alfândego do Porto (Porto’sCustoms Port) and was a milestone in the history of the evolution of the entire Portuguese ITV, reflecting the excellent health status of the whole sector. 2017 was also the 25th anniversary of Selkective Fashion Association and the 10th Porto Fashion Week. The next edition of MODtissmo during the Fashion Week in Porto is taking place September 26 -28, 2018. MODtissimo is the only Hall of Textiles and Accessories, Confectionery, Adult Fashion Deseiners and Crainaça, with its own brand as private label, and Portuguese Textile innovators, and it is the oldest in the Iberian Peninsula. Porto Fashion week is a hit in trend and associates with MODtissimo a series of parallel actions, such as the Porto Fashion Week’s Night Out, Photography contest Fashion, People, iTechStyle, Mini-Mi, Festival Film and Port Wine Fashion.
MODtissimo is a unique meeting of the textile industry in Southern Europe, are AICEP and QREN. Fashion conscious attendees from all over the world will attend this event and will get a scope to get familiar with all kinds of innovative products and services related to fashion accessories and apparel industries. At the same time, these attendees can get meet, network and communicate with the designers as well as the owners of many stores by attending this show.
More than 6500 buyers, among 500 international ones were assisting. According Manuel Serrão, CEO of the Associação Selectiva Moda that edition reunited news and trends of the textile industry iin the national and international panorama, adding in the space around 400 collections of European fabric and accessory manufacturers for the textile industry, garment makers (adult and child) with private label and related services.
Reinventing the sector
A mirror of the reputation the textile sector enjoys across borders in a hard work that the Selectiva Moda Association , ATP, the Textile and Clothing Association of Portugal and ANIL, the National Association of the Wool industry, have carried out in the last 16 years, in partnership with several entities, namely the CITEVE Technological Centre that helped to transform the artisanal into modern, and reinvent an entire sector denominated traditional, and to which many predicted its passing away. From Portugal to the world, Portuguese businessmen are winning several innovation awards. The Associations were able to take advantage of the tools of the community frameworks and encourage Portuguese companies to show the world what Portugal has to offer.
In 2016 – a record year, exports exceeded EUR 5 billion, the target originally set for 2020. To remember, the last record goes back to 2001!
The exhibition also serves as the stage for iTechSTyle Showcase® – Textile Innovation and Business Platform, carried out in partnership with CITEVE Technological Centre, with the aim to foster entrepreneurship in the textile area, where innovations for industry, applicable to the product or the production methods are presented. For exhibitors there is an application process, which has to meet innovation criteria before being admitted to the completion for iTechstyle Awards annually b CITEVE. Various award winning innovations gained international reputation.
A special SEWWAND marketplace – a platform of the world’s leading N2B leaders, gives fabric manufacturers an opportunity to present their best products, in coordination with the annual motto of the Fabric Forum.
The Rebirth of Portuguese Textiles: An example of Best Practices
The presentation was under the motto of European Textile 2020 in Brussels, Belgium.
In May 2017 there was a presentation of Portuguese textile development at the European Parliament. ATP, the Textile and Clothing Association of Portugal was the host. Also during TextileFuture’s fact finding tour in Portugal, we were received by the Association’s very knowledgeable General Director Paulo Vaz.
The members of the EU Conference:
Paulo Vaz, General Director, ATP – Textile and Clothing Association of Portugal Photo
Degree in Law at Oporto’s Catholic University and post-graduation in Administration and Business (PDE) by AESE / IESE.
Is the General Director of ATP (Textile and Clothing Association of Portugal) since 2003 and before that was the Secretary-General and General Director of APIM (Portuguese Knitwear Association), since 1988.
Formerly was reporter, lawyer and companies´ manager. At present, besides being the General-Director of ATP, he is Vice-President of Selectiva Moda Association (organization of international fairs, Board Member of Fundação AEP. and Board Member of AGAVI – Promotion of National Gastronomy, Wines, Regional Products and Biodiversity.
He is also auditor of the National Defence. PhD Student at Universidade do Minho. He is Knight of the Spanish Military Order of “Camino de Santiago”.
Speaker in several seminars, across the globe and is the author of the books “Dressing the Future” (Macro tendencies in the Textile and Clothing Industry), “One Contribution for a Strategic Plan for the Portuguese Textile and Clothing Industry” (2002, 2007 and 2014 editions) and “Does Tradition have a Future? – The Portuguese Textile and Clothing Sector on a Development Change Paradigm”.
Recently published “20 Years of Textile Associativism – Building a Strategic Speech for Textile and Clothing Industry” (2009) and “Dressing the Future” (2010, an edition dedicated this time to micro trends in fashion business). Last book “The Crisis after the Crisis”, dated September 2013, is about the Financial Crisis that affected Portugal 2011-2013.
Was the founder and is the coordinator of the “Textile Industry’s Forum”, national conference on the Textile Sector’s prospective, which is one of the most important in Europe.
In organising this Conference, ATP expects to raise the profile and political attention to the Textile & Clothing Industry at European level, discussing the sector’s place in the EU economy and the broader global perspectives on its trade. To that end, the Conference gathers high ranking players that bring valuable contributions to the topics at hand. Those topics being, on the one hand, the tale of the reindustrialization of the Portuguese Textile & Clothing Industry and its place in Europe, and on the other hand, the potential for replicating the process in other Member States to make way for a new European movement in the T&C Industry that can impact the European economy.
The Portuguese Textile and Clothing Industry has gone through a reindustrialization that has turned around the low performances that occurred after the economic crisis, and which was shaping up long before that. Through technological differentiation and a shift from price competition to added value, the sector has undergone a rebirth to the extent that its goals for 2020 were reached already last year. The Portuguese case is one of the success stories that have happened largely thanks to the support of the European Union funding strategy. As collaboration is one of the key words in today’s European economy, it is worthwhile exploring the possibilities to recreate the same achievements in other Member States, who share similar characteristics to Portugal.
José Manuel Fernandes, MEP Group of the European People’s Party Photo
José Manuel Ferreira Fernandes is a Portuguese professor and politician. He has been a Member of the European Parliament since 2009. He holds a degree in Systems and Information Engineering from the Faculty of Engineering of the University of Minho and attended the 3rd Year of Law Course at the University of Minho Law School. He served as mayor of Vila Verde between 1997 and 2009. He was a member of the Portuguese parliament in the VIII Legislature (1999-2002), part of the Social Democrat PSD parliamentary group.
He was elected Member of the European Parliament in 2009 and re-elected in 2014. In that capacity, he integrates the Group of the European People’s Party. He is the president of the PSD Braga District Political Committee and honorary president of ACES – Federation of European Cities and Sports Capitals.
In 2015 he acted as rapporteur and negotiator of the European Parliament in the European Union budget for 2016 and was appointed rapporteur by the Committee on Budgets of the European Parliament for the European Fund for Strategic Investments, also known as the “Juncker Plan”.
Slawomir Tokarski, Director of Innovation and Advanced Manufacturing, Directorate General Internal Market, Industry, Entrepreneurship and SMEs (DG GROW) Photo
Slawomir Tokarski graduated from Warsaw University (social sciences and political sciences faculties) and obtained PhD at the European University Institute in Fiesole in 1995. Between 1996 and 2004 he occupied a number of managerial positions in the Polish administration involved in the EU accession negotiations and process.
In 2004 he joined the European Commission in the cabinet of Commissioner responsible for regional policy. In 2009 he was nominated a head of economic policy unit in DG MARE, in 2012 he moved to the position of head of Unit responsible for defence, aeronautic and maritime industries in DG GROW.
In February 2016, he became Director responsible for Innovation and Advanced Manufacturing in DG GROW.
DG Internal Market, Industry, Entrepreneurship and SMEs is based in Brussels and has approximately 1400 staff working under the political leadership of Commissioner Elżbieta Bieńkowska. The Commissioner is also the EU’s SME Envoy tasked with ensuring that all EU policies respect the ‘think small first’ principle. The DG is managed by Director-General Lowri Evans. Her work and the work of the DG as a whole is supported by the Chief Economist Team.
Under President Juncker, DGs work together to achieve cross-cutting objectives, led by the Commission Vice-Presidents. DG Internal Market, Industry, Entrepreneurship and SMEs contributes to the following project teams:
- Jobs, Growth, Investment and Competitiveness
- Digital Single Market
- Energy Union
- Euro and Social Dialogue
- Better Regulation and Interinstitutional Affairs
- Budget and Human Resources
Paulo Melo, President, ATP – Textile and Clothing Association of Portugal, Photo
Paulo Melo is 53 years old and was born and raised in Brito, Guimarães, the grandson of António Teixeira Melo, the founder of Somelos. Graduated in Economy.
He always liked the industry, “the great creator of wealth”. He kicks off his career working in 1989 in his grandfather’s factory. He started, as a freshman, in the cost section, and his postgraduate studies in Textile Industry lead him through several departments: spinning, weaving, finishing.
He is now the administrator of the holding Somelos SGPS and responsible for the spinning sector and Somelos Mix. He likes hunting, golf and exercise.
TextileFuture had the pleasure to meet with Paolo Melo at Somelos.
Portuguese T&C Industry
The Textile and Clothing Industry is one of the most important industries for the Portuguese economy.
- 9 % of the Portuguese Total Exports;
- 19 % of the manufacturing Industry’s Employment;
- 8 % of the Manufacturing Industry’s Turnover;
- 8 % of the Manufacturing Industry’s Production.
Portugal has around five thousand companies working in all sub sectors of textile and clothing industry; some of them are vertical units, but the majority are small and medium companies, all well-known for their flexibility and quick response, expertise and innovation.
The textile and clothing companies are mainly placed in the north of Portugal (Porto, Braga, Guimarães, Famalicão), but there are also some companies located in Covilhã (East of Portugal) working with wool products (from yarns to clothes).
Francesco Marchi, (ex) Director General, EURATEX
Francesco MARCHI is of Italian nationality. He has a Master’s degree in Economics from the Catholic University of Louvain (Belgium). He is married with four children. He began his professional career as Marketing Researcher and Assistant Product Manager in 1983 in, one of the three largest Belgian textile groups (NV UCO as).
From 1989 he was Senior Economist for Comitextil (Coordination Committee for the EC textile industries) and joined EURATEX (the European Apparel and Textile Confederation) in 1996 where he was designated Director of the Economic Affairs Since 1996 he was also appointed as the representative of the Clothing industry and the Knitting industry interests within the EURATEX body.
He took over the position of Director General of EURATEX in May 2009. He is also Board member of the: International Apparel Federation (IAF); European Technology Platform for the Future of Textiles and Clothing; Textile-Clothing-Leather-Footwear European Skills Council; Centre d’Information Textile-Habillement (CITH); Advisory Board of Texprocess Fair (Messe Frankfurt). He is member of the Alliance for a Competitive European Industry.
The European Apparel and Textile Confederation is representing interests of the European textile and clothing industry at the level of the EU institutions. As the voice of the European textile and clothing industry, EURATEX aims to create a favourable environment within the European Union for the manufacture of textile and clothing products. Its headquarter in Brussels is in close distance from the major EU decision-making institutions.
The EU textile and clothing industry, including manmade fibres, remains an essential pillar of the local economy across the EU regions, at the same time it is intensively competing within the international market striving for a level playing field with the rest of the world. According to the latest EURATEX data, 174500 EU textile and clothing companies reached in 2016 a turnover of more than EUR 170 billion and generated a value added of EUR 46 billion, employing 1.7 million workers. In 2015, the Extra-EU exports reached EUR44.5 billion or 26.3 % of the global sales, a growing share of the EU-28 turnover.
Constantin Livas, Senior Expert – International Trade and Industrial Policy, Directorate General Internal Market, Industry, Entrepreneurship and SMEs (DG GROW)
He started his professional career on 1982 by working in the Greek Ministry of Foreign Affairs (section of European Affairs) having the responsibility of trade policy and the negotiations of the Uruguay round. From 1988 until 1990 he worked as economic analyst in Commercial Bank of Greece (one of the leading banks of the country in this period).
He joined the Directorate General of European Commission in charge of industrial policy in December 1990 and has worked with different projects related to the restructuring of the textile sector (programs RETEX, programme of restructuring of the Portuguese textile industry, PEDIP)
In 1999 he joined the Directorate General Information Society where he has worked with the team in charge of the EU strategy elated to the dissemination of information technologies and broadband.
In May 2004 he went again the Directorate General Enterprise at present he is team leader of the textile section of the Unit in charge of Tourism, emerging and creative industries. He is also one of the responsible negotiators for the textile/clothing, footwear and leather sectors in different Free Trade Agreements
He published many articles in Green newspaper and Greek scientific magazines.
António Braz Costa, Director General, CITEVE – Portuguese Technological Centre for Textile and Clothing Industries and CENTI – Nanotechnologies and New Materials
Born in Portugal, Braz Costa is 54 years old. He graduated in Mechanical Engineering from the University of Minho in 1989.
Since January 2000, he works as General Manager at CITEVE – Portuguese Technological Centre for Textile and Clothing Industries. CITEVE is a European reference institute that provides technological support and services to companies acting in the textile and clothing business.
Product design and development, prototyping, testing and applied R&D oriented to innovative applications are included in its service portfolio that also includes consultancy, training and fashion intelligence.
Since April 2012, is the CEO at CeNTI – Centre of Nanotechnology and Smart Materials. CeNTI is a research institute specialized in nanotechnology, functional materials, smart materials, printed electronics and additive technologies applied to several sectors, mainly developing solutions for Automotive & Aeronautics, Architecture & Construction and Health, Security & Wellbeing.
At international level, he is President of Textranet, the European Network of Textile Research Organizations, Vice President of Textile ETP, European Technological Platform for the future of Textiles and Clothing.
CITEVE is a Technological Institute, which provides technological support and services to companies acting in the textile & clothing business. The Institute facilities are located in Portugal (Vila Nova de Famalicão) with complementary fields of expertise, and also international branches, namely in Brazil (São Paulo) and Tunisia (Monastir).
Product design & development, prototyping, testing and applied R&D oriented to innovative applications in other sectors as well are included in a service portfolio that also includes consultancy, training and fashion intelligence.
For two decades, CITEVE has been an active member of several international networks, and also takes part in different technical working groups in the fields of research, product testing and certification. As a private non-profit organization, the Centre ensures an effective link to the public sector, both at national and European level, namely with an important contribution in the definition and implementation of public policies, relevant for the textile & clothing industry.
Matthijs Crietee, Secretary General, IAF – International Apparel Federation
Matthijs Crietee’s career is fully focused on the fashion industry. He started with the Dutch fashion industry association FENECON to support its members with trade policy affairs. At that time, the trade in fashion was governed by quota still. After a brief stint at the Dutch Ministry of Economic Affairs, Matthijs Crietee returned to fashion to work with the successor of FENECON, MODINT, as its deputy director. In the ten-year period from 2000 to 2010 he built up an important part of MODINT’s consultancy department, heavily focused on compliance support, trade policy and sourcing, market information and labour law.
From 2010, he helped the Dutch fashion industry to get full recognition as part of creative industry and one of the ‘top sectors’ in the Netherlands and he helped MODINT to secure government support for its innovation promotion work. He built up MODINT Logistics, a successful division of MODINT organizing buying power in logistics for its members.
Starting 2012, Matthijs Crietee was named deputy secretary general of the IAF and in January 1st 2015, he became IAF’s Secretary General. Matthijs Crietee has served on the Board of the Dutch Federation of Creative Industries. He is adviser to the Dutch innovation institute for the creative industries ClickNL and he frequently lectures at several Dutch fashion management institutes as well as the academy for industry association management in the Netherlands.
The International Apparel Federation was founded by Joachim Hoffman (Europe), Komataro Kondo (Japan) and Thomas Roboz (USA) in 1972 in Williamsburg (USA), with the objective of building bridges between continents by promoting common business interests, encouraging best practice and supporting apparel manufacturers and marketers worldwide.
IAF has become the world’s leading federation for apparel manufacturers, their associations, and the supporting industry. IAF’s membership now includes apparel associations from more than 40 countries representing over 150000 companies who provide products and services to the apparel industry – a membership that represents over 20 million employees. The associate members of IAF are prominent companies or institutes in technology, business services, retailing, logistics, culture and education.
To help the apparel sector in benefiting from these challenges the IAF has redrafted its mission statement in 2006 broadening its scope and embracing the entire apparel chain. The IAF aims to be the premier worldwide knowledge network on a great variety of apparel industry issues including design, manufacturing, distribution, sourcing, trade, technology and education. The development of business contacts worldwide remains a main target of IAF.
Moderator of the conference was Gregor Küpper
German by birth, Italian at heart and European by conviction. 30 years of managing international projects – trade fairs, exhibitions and events – as well as international business development.
Promoting understanding of the Biotic Principles of Growth to allow people, organisations and brands to increase in value and prosper. By increasing their degree of in-exchangeability.
Founding member of the Federation of African, Caribbean and Pacific press clubs.
IMF Executive Board on Portugal
On September 7, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Portugal.
Following robust growth in 2017, driven by investment and exports, activity is expected to moderate in 2018. Nevertheless, unemployment continues to fall on the back of sustained employment growth; and the output gap is estimated to turn positive this year. While rising energy prices have pushed up consumer prices, core inflation remains subdued. Strong import growth (linked to investment) has largely been offset by robust exports, particularly tourism, leaving the current account largely unchanged in 2017.
While the headline fiscal deficit deteriorated in 2017 owing to one-off’ bank recapitalization costs, the primary structural balance is estimated to have improved by 0.4 % of GDP reflecting strict budget execution. The headline deficit will continue to fall in 2018, although part of the structural improvement will be reversed. On constant policies, the ratio of public debt to GDP should steadily decline in the coming years. Sovereign funding costs have declined significantly since early 2017, but saw volatility in May and June owing to spillovers from political uncertainty in Italy.
Credit growth continues to lag the recovery in economic activity, as banks repair their balance sheets. However, rising capital ratios, falling rates of non-performing loans and lower impairments meant that the resilience of banks improved significantly in 2017. Further improvement is expected in 2018. Nevertheless, no significant acceleration in credit growth is expected, and the economy should continue deleveraging its external balance sheet.
1 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
Executive Board Assessment 2
Executive Directors agreed with the thrust of the staff appraisal. They welcomed Portugal’s strong economic performance, driven by investment and exports. This job-rich recovery has led to falling unemployment and broad-based employment creation. Directors noted that while, in the short term, growth prospects remain positive, external risks from a slowdown in trading partners’ growth and financial-market spillovers have increased. They encouraged the authorities to sustain the policy and reform momentum to ensure resilience to shocks, reduce vulnerabilities, and facilitate convergence towards the average income level of the European Union.
Directors noted that the current favourable economic conditions provide an opportunity to frontload planned fiscal consolidation. This will not only avoid pro-cyclical adjustment but will also help build policy space to deal with contingent spending needs. They emphasized that to achieve lasting consolidation, policies should focus on restraining current expenditure, including via reforms to public employment and pensions. Efforts should also be made in improving budget monitoring and control, especially in the health-care sector. Directors welcomed the authorities’ commitment to reducing public debt and bringing it back to more sustainable levels.
Directors welcomed that banking sector resilience has further improved, with higher capital and increased profitability. They noted that while progress has been made in reducing the stock of non-performing loans (NPLs), further steps are needed to strengthen the banking sector, including a concerted effort to bring down the level of NPLs. To prevent the emergence of new vulnerabilities, Directors encouraged the authorities to continue to focus on preserving credit standards, monitoring mortgage markets, and employing macro- prudential measures where necessary.
Directors emphasized the need to boost potential growth to both reduce balance sheet risks and converge to average EU levels of productivity and income. While acknowledging that the trend of improving educational attainment has the potential to offset the impact on growth of an ageing population, they recommended further structural reforms to foster investment and allow high-skilled workers to meet their potential. In this context, Directors highlighted additional gains that could be obtained by removing unnecessary regulatory barriers, lowering energy prices, better coupling wages to productivity, and further improving the debt enforcement and insolvency regime
2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm
IMF Staff report
The Portuguese economy performed strongly in 2017. Investment and exports were the key drivers of growth. Labour market conditions continued to improve, with falling unemployment and broad-based employment creation. The underlying fiscal balance posted a strong improvement, which can be attributed to buoyant economic growth, controlled budget execution, and falling interest costs, and has contributed to more favourable financing terms throughout the economy. Stability and confidence in the banking system strengthened following successful efforts by banks to raise capital and reduce NPLs, and the sale of Novo Banco in 2017.
Prospects remain positive, but downside risks have increased lately. Growth is expected to ease in 2018 from its recent cyclical peak and gradually moderate over the medium term. The overall fiscal deficit is likely to fall in 2018, helping reduce public debt ratios. However, renewed market instability related to policy uncertainty in key euro area countries, or additional tightening of global financial conditions, could increase Portuguese bond yields, raise borrowing costs, and negatively affect firms, households, and banks. A significant weakening of growth in the euro area or a turn in the global economy toward protectionism could impact Portugal because of its linkages to other European countries. Policies need to remain strong in the face of heightened external risks, and of pressures to erode past reforms.
Strong macroeconomic policies have worked and should be sustained. Frontloading the fiscal consolidation envisaged in the Stability Program 2018–2022 would avoid pro-cyclicality by taking advantage of current favourable cyclical conditions to adjust. It would also be prudent given future uncertainties. Similarly, addressing lingering vulnerabilities will also require perseverance in implementing the NPL- resolution strategy. To avoid future build-up of NPLs and the erosion of capital buffers, supervisors should continue to press banks to strengthen their risk management and corporate governance.
Faster sustainable growth is needed to continue to reduce vulnerabilities and converge towards the average levels of productivity and income of the EU. Strengthening growth will require fostering soundly financed investment and continuing improvements in productivity and skills. Investment can be spurred by enhancing business conditions, streamlining regulations, and increasing the flexibility and responsiveness of institutions and markets, building on past reforms.
- After growing strongly in 2017, the economy slowed somewhat in 2018:Q1. Real GDP growth reached 2.7 % in 2017 reflecting re- energized investment, robust exports, and stable consumption. In addition to construction, investment in equipment and machinery grew vigorously in 2017 and 2018:Q1; tourism growth remained strong, but is beginning to face capacity constraints (for example, in Lisbon Airport). In 2018:Q1 growth decelerated to 2.1 y-o-y (0.4 % q-o-q), owing to weaker exports reflecting slower activity in Europe and some temporary factors.1 Unemployment fell from 10.1 % in December 2016 to 7. 1 % in April 2018, even as labor force participation was rising, thanks to broad-based employment growth. The output gap is estimated to have narrowed in 2017 and to turn positive this year.
- Consumer prices have been rising, though price competitiveness has stabilized recently. Headline inflation rose to 2 % y-o-y in June 2018 driven in part by increases in energy prices, while core inflation was 1.5 %. Unit labor costs (ULCs) continued to increase, both in nominal and real terms, reflecting wage growth outpacing gains in labor productivity (compensation per worker grew on average, while labor productivity declined in the past two years).2 Price competitiveness, as measured both by the CPI- and ULC-based real effective exchange rate (REER), had been deteriorating since mid-2015, although it appears to have stabilized in the last year. Imports of goods have increased strongly, resulting in a reduction of more than one- %age point of GDP in the goods trade balance in 2017. Growth in exports of services has, however, been strong too since late 2016, led by booming tourism. As a result, the decline in the goods and services balance is a much smaller 0.3 percentage points. The current account balance was essentially unchanged in 2017.
1 AutoEuropa and Galp had unscheduled production stoppages, and an unusually rainy March affected construction.
2 These trends appear to be broad based, being visible both in goods and services sectors.
- The underlying fiscal balance improved in 2017. The fiscal performance in 2017 was robust, reflecting strong economic growth, prudent budget execution, and falling interest costs. Nevertheless, the headline fiscal deficit widened to 3.0 % of GDP owing to one-off payments (2.0 % of GDP), mainly associated with bank recapitalization costs. In primary structural terms, the fiscal stance tightened by 0.4 % of GDP.
- The sovereign’s improved access to market financing has contributed to more favorable borrowing terms throughout the economy. 10-year sovereign spreads in late July were around 130 basis points vis-à-vis the German bund, having exceeded 300 bps in early 2017. S&P and FITCH both upgraded Portugal to investment grade in 2017. ECB purchases have also supported the bond markets (and thus aggregate demand), but their importance has waned. Rates on new corporate and household loans are at multi-year lows.
However, the sovereign spread experienced increased volatility in May and June owing to spillovers from political uncertainty in Italy (3)
- Credit continues to lag the recovery, although new lending is increasing. The contraction in bank credit has essentially halted, with rising new loans, especially to households, driven by both demand (responding to lower interest rates and improved confidence) and supply (improved bank capitalization) factors. In the nonfinancial corporate (NFC) sector, new loans to firms in dynamic tradable sectors with better risk profiles have accelerated.
- Banks’ balance sheets strengthened in 2017 with capital augmentations and improved macroeconomic conditions. The average CET1 ratio rose 2.5 percentage points since end-2016 to 13.9 % at end-2017. During the same period, non-performing loans (NPLs) fell by EUR 9.4 billion from EUR 46.4 billion at end-2016, largely driven by write-offs and sales of business loans, and debt recovery (cures) for household loans, bringing the NPL ratio to 13.3 % of gross loans from 17.2 %. Most banks posted profits.4 Meanwhile, the impairment coverage ratio increased to 49.4 % in end-2017 from 45.3 % at end-2016. The liquidity coverage ratio reached 173.4 % at end-2017 (a minimum of 100 % is required since January 2018).5
The authorities noted in their Stability Program 2018–2022 that output growth has been generally strong, and that the deceleration in 2018:Q1 was temporary. Growth has been accompanied by strong employment creation, boosting social security contributions and reducing unemployment claims. The deceleration registered in the first quarter was in their view largely due to temporary factors, and did not warrant a revision of growth forecasts for the year. Data for April and May 2018, they stressed, already indicated an acceleration of exports.
4 In 2017, Novo Banco recorded a loss of nearly EUR1.4 billion, driven by impairments of EUR2 billion, most of which are related to the assets covered by the contingent capital agreement (see Box A2).
5 Some contingent risks receded recently, as the authorities prevailed in litigation in the U.K involving a claim of about $835 million against Novo Banco pursuant to a facility agreement with Banco Espirito Santo under English law. The UK Supreme Court confirmed that the English courts had no jurisdiction as the legal dispute in connection with a bank reorganization action by Banco de Portugal is to be decided by the Portuguese courts.
- The authorities noted in their Stability Program 2018–2022 that output growth has been generally strong, and that the deceleration in 2018:Q1 was temporary. Growth has been accompanied by strong employment creation, boosting social security contributions and reducing unemployment claims. The deceleration registered in the first quarter was in their view largely due to temporary factors, and did not warrant a revision of growth forecasts for the year. Data for April and May 2018, they stressed, already indicated an acceleration of exports.
Outlook and risks
- Growth is expected to ease in 2018 from its recent cyclical peak and gradually moderate over the medium term. Real GDP growth is projected to decelerate to 2.3 % in 2018, 1.8 % in 2019, and to moderate over the medium term under a baseline with no new significant reforms. Investment and exports should remain important drivers of growth, albeit at a slower pace, while private consumption eases somewhat. Employment growth is expected to decelerate, and the labor market should continue tightening in 2018, with average unemployment declining below 7.5 %, supporting moderate real wage growth. Staff is projecting consumer inflation of 1.7 % for 2018 and 2.1 % over the medium term. In 2018 the external current account balance is expected to deteriorate somewhat owing to strong import demand.
- The fiscal deficit should fall in 2018, helping reduce public debt ratios, although the trajectory of public debt remains subject to significant risks. Staff is projecting a headline fiscal deficit of 0.7 % of GDP in 2018, and public debt of 121 % of GDP at end-2018, down from 126 % in 2017. It should decline further to 103 % by 2023 assuming a largely unchanged structural primary balance after 2018 and no major one-off expenditures. The trajectory of Portugal’s public debt remains subject to risks which could delay debt reduction (Annex I).
- Risks to the outlook, especially external, appear to be tilting downward (Annex II). Portugal would be negatively affected by a significant weakening of growth in the euro zone. Renewed market instability related to policy uncertainty in key euro area countries could increase Portuguese bond yields and raise borrowing costs for most agents. Similarly, additional tightening of global financial conditions would affect highly leveraged firms and households as short-term and variable-rate loans are repriced, and could weaken banks’ balance sheets through higher NPLs and a reduction in the value of government bonds. A turn in the global economy toward protectionism would impact Portugal because of its increasingly strong linkages to European export-oriented value chains. Additional increases in real labor costs might hurt corporate sector profits (see Selected Issues paper) and competitiveness. As the expansion continues, there is a risk that excess confidence will build among policy makers and other stakeholders, leading to policy slippages or the erosion of past reforms. On the upside, exports could continue to surprise, including tourism if bottlenecks can be eased soon, and reforms might yet provide additional strength to the economy.
- The authorities in their Stability Program 2018–2022 saw the economy maintaining growth above two % in coming years, and pointed to downside developments in the EU as the main source of risk, while emphasizing their commitment to further reduce domestic vulnerabilities. They agreed that a slowdown in the EU would be a significant challenge, as would renewed uncertainty in European markets, but Portugal’s ability to manage shocks has improved. They stressed that spreads are lower owing to strong policies, government cash buffers amount to at least 40 % of prospective 12- month needs, and the public debt ratio, while still high, is on a declining trend. Similarly, they argued that the level of NPLs is high, but has been on a consistently declining trend, and continued policies to strengthen balance sheets would further mitigate risks. They also explained that recent non-price competitiveness gains, reflected in rising export market shares, make Portugal less vulnerable to fluctuations in price competitiveness. A global economic slowdown and tighter global financial conditions, especially in Europe, could affect Portugal, for example through their impact on foreign demand for Portuguese exports. Nevertheless, the authorities see market conditions remaining supportive through the ongoing monetary policy normalization, given muted wage and inflation pressures in the euro area. They also reiterated that Portuguese policies would continue to be strong and robust to risks, and that past reforms were not at stake.
Policy Macro-Financial Issues and Policies
- Macro-Financial Issues and Policies
- The pace of deleveraging is slowing amid benign financial conditions. In 2017, the net flow of loans to households turned positive for the first time since 2011, driven by consumer loans and mortgages. In the case of NFCs, the positive net flow of financial debt was due to intra-group lending by non-residents, while NFCs continued to reduce their borrowing from the domestic banking system. Household saving rates were low at 5.4 % of disposable income in 2017.
These developments translated into a slowdown in the deleveraging process. Private indebtedness, however, remains high: at end-2017, total household and NFC debts were 73.4 and 139.1 % of GDP, respectively,6 while the euro area medians of the household and NFC debt-to-GDP ratios were 56.2 and 124.9 %. High leverage makes Portuguese households and firms vulnerable to negative shocks to income and spikes in interest rates. This is compounded, in the case of households, by the preponderance of floating rate loans, and long maturities for mortgages (33 years on average), which extend into the retirement years.
- The Banco de Portugal deployed macro-prudential measures to prevent the financial sector from taking excessive risk in a context of low interest rates and heightened competition. Against the background of gradually rising loan maturities, loan-to-value (LTV) and loan-to-income ratios in mortgage and consumer credit, the measures aim at preventing overexposures to residential mortgage and consumer loans by financial institutions and minimizing the risk of default by households. The measures (Box 1) include limits on maturities and LTV and debt-service-to-income (DSTI) ratios, and their design considers the risk that debt service burdens may rise as interest rates normalize. Early in July, banks started to implement the limits under this measure. Staff welcomes the activation of these macro-prudential tools at this juncture, when credit standards were starting to ease. The introduction of tighter LTV, DSTI, and loan maturities will contain such easing, bolstering the resilience of financial institutions and households to variations in real estate prices, interest rates, and incomes. While supporting the measured approach taken, staff calls on the authorities to closely monitor the effectiveness of these measures and to supplement them if warranted.
- Although declining, the stock of NPLs remains a concern. At end-2017, the stock of NPLs stood at EUR 37 billion (13.3 % of total loans), with about half of the NPLs covered by provisions. The majority of NPLs correspond to loans to NFCs (SMEs), with the bulk concentrated in three banks. The elevated stock of NPLs is tying up resources in the economy, and holding back bank profitability. The authorities have been pursuing an NPL resolution strategy based on three pillars: (i) supervisory actions (under the SSM), which includes requesting regular updates of banks’ NPL reduction strategies, setting targets for NPL reduction, and monitoring and enforcing implementation; (ii) legal, judicial and fiscal reforms to remove impediments to NPL resolution; and
(iii) measures to improve management of NPLs and develop secondary markets for troubled loans. Staff welcomes the progress made so far in the implementation of the NPL resolution strategy, reflected in the significant reduction of the NPL stock, and encourages the authorities to maintain this momentum, and to press banks to strengthen their risk management and corporate governance.
The Banco de Portugal announced in February 2018 macro-prudential measures focused on new mortgage and consumer loans, which went into effect on July 1, 2018, under the principle of ‘comply or explain’. The main provisions are:
- LTV ratio for new mortgages for primary residence cannot exceed 90 % (80 % for purposes other than primary residence).
- The DSTI ratio should not exceed 50 %, with some limited exceptions. In the case of variable or mixed rate loans, banks are required to calculate DSTI ratios assuming interest rate increases of 100 basis points for loans with maturity below five years, 200 basis points for maturities between five and 10 years, and 300 basis points for maturities over 10 years. For these calculations, income is net of taxes and social security contributions.
- The maturity of mortgage and related loans is capped at 40 years, and the average maturity of new credit agreements should gradually converge to 30 years by 2022. For consumer credit agreements, the maturity of new loans should not exceed 10 years.
- New loans should be granted with regular payments of interest and capital.
- Despite the improved economic outlook, generating strong and sustained bank profitability will be challenging. Net interest income, the main source of Portuguese banks’ profits, remains moderate, and may come
under renewed pressure as deposit rates bottom out, funding costs increase due to MREL issuances, and competition from Fintech and nonbank financial institutions intensifies. High nonperforming assets are still a drag on profitability, and the updating of business models can involve upfront costs, as when closing brick-and-mortar branches.
- Housing prices continue to increase, but there is no significant overvaluation yet.
Following a decline of 18 % in real terms over 2010–13, housing prices have since increased by about 20 % in real terms (7.9 % in 2017), especially in Lisbon, Porto and the Algarve region.7 While the increases have been driven largely by transactions on existing dwellings by non-residents, the share of housing transactions financed by Portuguese mortgages has been growing since 2015 (reaching 41 % in the last quarter of 2017).
Estimates in the ECB’s May 2018 Financial Stability Review suggest that there are incipient signs of overvaluation in the residential real estate market. The authorities should continue to improve the quality of real estate data and related analytical tools, and to monitor mortgage markets and the evolution of risks to banks from developments in real estate markets.
- While acknowledging remaining challenges in the financial sector, the European and Portuguese authorities pointed to progress achieved so far and reforms underway to address them:
- Deleveraging in the non-financial private sector. The Portuguese authorities noted that the nonfinancial private sector’s debt-to-GDP had fallen by 47 %age points since 2012, but recognized that continuing the deleveraging process is key to making the economy more resilient to future shocks. They observed that the positive net flow of loans to households in 2017 was driven by consumer loans, with newcomers to the credit market accounting for the largest contribution. The non-resident sector was the main contributor to the positive net flow of total credit (loans plus securities) to corporations with access to international securities markets. This financing was partially channeled to their domestic affiliates via intra-group loans.
- Addressing NPLs. The European and Portuguese authorities highlighted the NPL reduction over the last two years as an indication that all stakeholders, including at the EU level, are determined to address this issue. They pointed to several measures that have been recently finalized or are underway. At the EU level, the implementation of the Action Plan to Tackle Non-Performing Loans in Europe is underway.8 At the national level, the measures include: (i) the continuous improvement of the legal, judicial and tax framework, including the recent establishment of a common decision body between the tax authority and the social security administration to participate in restructuring negotiations; (ii) the enhancement of in-court restructuring and insolvency frameworks (including through digitalization of processes); (iii) the introduction of several measures to speed up out-of-court settlement procedures; and (iv) ongoing actions to put in place an early warning mechanism and the development of a simplified regime to facilitate the transfer of NPL portfolios. In addition, at the bank level, they noted the strong execution of the NPL reduction plans submitted by banks to the supervisor and the operationalization of the platform for integrated management of NPL cross-exposures. The authorities also indicated that strong economic growth would contribute to the reduction of NPLs.
- Ensuring strong and sustained bank profitability. Acknowledging the challenges ahead, the European and Portuguese authorities indicated that banks’ determined implementation of their strategies to cut costs and diversify income sources, alongside the improved economic outlook, would help ease pressure on profitability from low interest rates and increased competition. They highlighted progress achieved over the last years in improving the cost-efficiency of the Portuguese banking system as evidence of such resolve.
- Mispricing of risk and excessive-risk taking. While noting that there are no signs of a systematic mispricing of risk and excessive risk-taking by banks at this juncture, the Portuguese authorities pointed to the macroprudential measures taken in February 2018 on new mortgage and consumer loans as an indication of their determination to prevent them from happening.
7 For example, in 2017:Q4, the median value of residential real estate transactions per square meter increased by 18 % y-o-y in Lisbon and Porto, compared to a national median value increase of eight %.
8 This Action Plan includes, inter alia, the following initiatives: guidelines on management of nonperforming exposures and forborne exposures (building up on existing SSM guidelines); a blueprint for asset management companies; measures to strengthen NPL data infrastructure; measures to develop secondary markets for NPLs and enhance the protection of secured creditors; guidelines for the monitoring of loan tapes; measures to enhance disclosure requirements on asset quality; and measures to address potential under-provision of newly originated loans.