Portugal’s economic and financial results “extraordinary” but “we can’t rest on our laurels” says Finances minister

Finances Minister Joaquim Miranda Sarmento at AmCham Portugal

Portugal has performed remarkably well in balancing its books, slashing the national debt, reducing taxes, and attracting big ticket, job-creation investments over the past 2 years.

And despite the costs of devastating winter storms that wreaked havoc on homes and companies this year, the government will still manage a budget surplus of just over 1% of GDP for 2025.

Speaking to business leaders at a lunch organised by the American Chamber of Commerce in Portugal (AmCham Portugal) on Wednesday (March 04), Portugal’s Minister of Finances, Joaquim Miranda Sarmento delivered an optimistic snapshot of Portugal’s economic and financial performance without photoshopping out the perennial bugbears that have continued to blight the economy for decades.

Text: Chris Graeme; Photos: Renata Schiavon

 

Portugal went through a difficult period 15 years ago during the Great Recession and Sovereign Debt Crisis, but from 2015 had begun a gradual recovery after making a series of difficult structural changes and improvements under the supervision of the European Central Bank (ECB), International Monetary Fund (IMF) and European Council (EC) ‘Troika’.

That recovery had been interrupted during the Covid-19 pandemic, although European mechanisms to control inflation through high interest rates and NextGenerationEU funds proved to be groundbreaking temporary recovery instruments to support the country’s economic recovery from the coronavirus pandemic from which Portugal received €22.2Bn allocated to Portugal’s Recovery and Resilience Plan (RRP) to further restructure and modernise its economy.

The recovery continued post-Covid-19 and “today the Portuguese economy enjoys a superior performance than the majority of its EU Member State partners – not a mean feat at all.

Middle East conflict crosswinds

However, Portugal is a small and necessarily open economy and, as such, is inevitably prone to the ‘slings and arrows of outrageous fortune’ overseas, to quote Shakespeare, and as the minister said, “today, we live in turbulent times” with the recent events in the Middle East, the War between Israel, the US and Iran, and the subsequent attacks on the oil-rich Gulf States all threatening to destabilize trade and gas and oil flows with the probable knock-on effect of higher energy costs for Portuguese businesses and consumers if the war becomes prolonged.

The attack on a UK military base on Cyprus threatened to bring the war to the European Union. “This leads us to look at the times with some concern on what’s happening internationally”, he admitted.

Outpacing Euro Zone partners on growth

On the numbers front, Portugal’s economy grew 1.9% above the Euro Zone average (1.5%) with the prospects of the economy growing above 2% and even as far as 3% since “our direct competitors – those with whom we must compare ourselves – are the cohesion countries at our level of development and, like us, receive European funds from net contributors,” said the minister.

The bad news is that Portugal doesn’t really grow to 3% because it has a productivity problem, and this means that the country has a relatively low GDP potential (hence the low salaries).

Nevertheless, there have been, and may continue to be, upward revisions to Portugal’s GDP which has also happened in other EU economies but is happening more frequently in the case of Portugal.

Looking back to 2023, there was a slight growth in the Portuguese economy above 2% (2.3%) but Portugal’s National Statistics Institute (INE) reviewed that upwards to 3.1%.

“This was a very significant revision and I would not be surprised if we see GDP numbers of at least 2.4% and 2.5%”, said the Finances minister. (These numbers are based on company performance).

In any case, the official numbers are currently 1.9% for 2025 after 2.3% posted in 2024.

Low unemployment and budget surpluses but qualified labour shortages

The unemployment rate continues to be the traditional average of around 6% but virtually all sectors of the Portuguese economy continue to complain about a lack of qualified manpower across the Portuguese economy.

Turning to Portugal’s annual budget, by the third quarter of 2025, Portugal enjoyed a surplus of 2.1% which compared to a budget deficit in the Euro Zone of 3.1% and the balance is expected to be almost +€900 million in the black.

However, the final balance for the year might not be so good since the last quarter of any year is usually worse than the penultimate quarter, and because the summer months usually bring in more revenues for companies in a cyclical context when companies have to pay their IRC income tax.

The projection, therefore, is that the government will end 2025 with a surplus of 0.3% as anticipated with the actual figure slated for release on March 26 which will place Portugal below the Euro Zone average.

As for inflation, this is forecast to be close to 2% while Portugal’s accumulated State debt is projected to be below 90% at a forecasted 89.6%, which would place the national debt at below the Euro Zone average.

Notwithstanding, “our main concern will continue to be keeping our public accounts balanced”. This is no picnic in the park given that the challenges (both overseas and at home) faced this year are very significant.

Good progress on public debt

The minister said that the government’s target was to continue to reduce the public debt so that by the end of the decade it should at least be below 80% and even get it as low as 75%.

And the British magazine ‘Economist’ had highlighted Portugal’s economy as the best among the OECD countries while the ‘Financial Times’ placed Portugal in a group of economies that had enjoyed significant performances.

Portugal’s attempts to tackle its public debt had been “extraordinary”. “When Portugal completed the ‘troika’ programme, or the year after closing the troika programme, in 2015, it reached a public debt peak of 132% of GDP. That dropped to 119% by 2019. Of course, with the pandemic it rose again and reached 134%, which is our highest record, at least since there have been long series records”, said the minister.

And added that from 134% to below 90% in the space of four years, which meant an average reduction of 7% or 8% per annum, was “absolutely extraordinary”.

This performance has been backed up by the Bank of Portugal in its latest December forecasts, which already places public debt at the end of the decade very close to 75%.

“This is in fact the target that we must have. Portugal was the only country that went from being a high-debt country to a moderate-debt country. The closer we get to the 60-65% threshold we will be in a very comfortable position, especially compared to Germany which is going through a period of budget expansion with increased spending on infrastructure, technology and defence.”

In fact, Germany is expected to have a debt to GDP ratio of 70% by the end of the decade.

And this growth and good economic housekeeping reflects on the ratings awarded to Portugal by the ratings agencies.

Strong ratings from the agencies

Today, in all rating agencies, Portugal now has an A rating. At S&P Portugal has A+ with S&P last week changing its outlook from stable to positive.

“In reality, if we use the S&P assessment tables, we should already be double A minus. I realise there’s still some backlog from what happened fifteen years ago, but if we’re purely using the S&P tables, we should already be double A minus, and so this climb to an outlook from stable to positive indicates that, if nothing gets worse, we could be double A minus”, he said.

This means that the spreads on Portugal’s sovereign debt is currently lower than countries such as Spain, Italy and Belgium.

And for now, the Middle East conflicts has not had a detrimental affect on Portugal’s debt in terms of yields paid to investors — but we are only six days into the war.

Prospects for 2026

As for this year so far, “We already have the January numbers, we have some February numbers – and the items that showed the biggest jumps in expenditure in 2025 and 2025 were due to political choices made by the PS government and some made by this government – are clearly stabilising and growing at or below the level of nominal GDP growth. The Portuguese economy has grown a lot through private consumption, also through sectors such as tourism and technological sectors and investment”, he said.

Public and private Investment

Portugal, the minister added, was seeing a strong recovery in public investment, much of this from the effect of the Recovery and Resilience Plan, which represents the bulk of the investment value ​​between 2024 to 2026.

But there has also been growth in private investment in recent years (although Foreign Direct Investment (FDI) transactions in Portugal totalled €8.51Bn, marking a 34.9% decrease compared to the €13.07Bn recorded in 2024, according to data released by the Bank of Portugal.).

And the growth of public consumption in Portugal, despite that very significant increase in expenditure in 2024 and some increase in expenditure in 2025, which will now be more moderate in 2026, is still growing less in Portugal than the Euro Zone both in 2024 and 2025 and the forecasts continue to grow, but the minister pointed out that “I admit that forecasts can be wrong”.

Export growth down on the Euro Zone

Portugal’s exports, on the other hand, grew less in 2025 than in the Euro Zone, but the forecast was that they could recover in 2026 and in the years that follow with a recovery in exports after the summer, after the great uncertainty on tariffs had passed.

“Exports, as we know, represented almost 50% of GDP. Today they are a little lower, but this is one of the most important transformations of the Portuguese economy that we must continue to promote.

A small economy without an exchange rate policy, without a monetary policy, can only grow sustainably in the medium and long term through investment, especially Foreign Direct Investment and transfers and exports” stated the minister.

“In exports, tourism is very important, but where we are growing the most is technology, research and consultancy services.

Obviously, the base is smaller with these, so tourism continues to be number one export, but we increasingly see the importance of other sectors, some with greater added value, although tourism over the past fifteen years has enjoyed a very significant increase in terms of added value”, said Joaquim Miranda Sarmento.

Success of the labour market

The job market is another area of success for the Portuguese economy. In the last decade, Portugal has an extra 1.2 million people working and contributing to Social Security system with very significant employment growth rates, and an unemployment rate that is already very close to the natural rate of unemployment at 6% which is below the Euro Zone average.

Last year, employment grew by 2.3%; this year it is expected to grow by 0.9%, and with the continued increase in wages per worker (wages last year grew by around 7% against inflation of slightly above 2%), this will give real growth in worker wages close to 5%.

In terms of disposable income, which reflects the real growth in worker wages and the reduction in IRS the government has made, in 2024 Portugal was the second OCDE country with the highest growth in disposable income.

“We will see this year’s data, but I would continue to bet, looking at the data already known for the OECD economies, that we will continue to be in the top places in terms of growth in disposable income”, said Joaquim Miranda Sarmento.

Savings

Portuguese families are saving more of their disposable income despite the relatively low salaries.

The historical trend was a savings rate of around 7-8% of disposable income. At the moment, the savings rate is at 12-13%.

It is still low for the potential of Portugal’s economy, but it is a significant recovery, especially if the pandemic and its aftermath are taken into consideration.

“We had a significant increase in interest rates, which obviously encouraged savings, just as the pandemic also encouraged savings because people were forced to spend less by staying at home”, recalled the minister.

However, the last two years had seen a reduction in interest rates and, therefore, the incentive was reduced, but overall savings levels have not decreased.

“Of course, savings are very asymmetrical. We are talking about 20-30% of the Portuguese population that actually manages to save because salary levels are still very low”, the minister pointed out.

The banking sector – another success story

Portugal’s banks are among the most resilient and most profitable in the Euro Zone. In fact, of the banks supervised by the European Central Bank, State-owned Caixa Geral de Depósitos enjoys the largest Tier One with a €1.9Bn profit – the highest ever.

And the purchase of Novobanco by France’s BPCE group ( For €6.4Bn) was another example of a success story in the Portuguese banking sector today.

“In any case, either because of international uncertainty or because we should not be complacent, we must continue to strive to do better and better”, said the minister.

Portugal’s companies – indebted and under internationalized

Joaquim Miranda Sarmento said that Portugal continued to have difficulties with public entities in projects that are critical for the country, the job market and social support.

Tax justice continued to be a problem in terms of innovation, expertise and quality.

Portuguese companies continued to remain small, heavily indebted and poorly internationalised.

Public expenditure continued to be high, the public administration suffered from relatively low levels of efficiency, and there was low public and private investment even through it was recovering.

“Over the past 25 years public investment has, for the overwhelming majority of years, not even covered capital depreciation. Therefore, the stock of public capital has been reduced and many of the problems we have in terms of infrastructure result from that”, said the minister.

This was not an exclusively Portuguese problem. In fact, this had happened in the overwhelming majority of advanced economies in recent decades.

… but it was still another constraint.

“We have continued to reduce our public debt and modernise our tax system while reducing taxes. But when we look at our worker productivity, it is one of the lowest in the European Union, and in fact, worker productivity did not grow in 2024 and 2025”, the minister lamented.

The biggest problem for the Portuguese economy, despite it having grown, is that it has basically levelled out.

“We see more significant growth in other countries and, therefore, we have to continue to work at this. When we look at capital productivity, we are no longer so badly placed. We are already placed more or less in the middle of the league tables”, added Joaquim Miranda Sarmento on a more positive note.

Reducing taxes

Portugal continues to suffer from low levels of national private investment, but has significantly reduced IRS income tax, slashing it by €2Bn and a further €1.5Bn by 2029.

Portugal is cutting its general Corporate Income Tax (CIT) rate from 20% in 2025 to 19% in 2026, with planned annual 1- percentage-point reductions to reach 17% by 2028. Additionally, for SMEs, the tax rate on the first €50,000 of taxable income is being reduced to 15%.

Attracting big ticket investments

Portugal has succeeded in attracting some large investments recently which will have a leveraging effect on the economy and a knock-on effect on other companies.

These include the CALB lithium batteries factory, the Sky Technik aircraft maintenance factory, a new order for an electric car for VW Autoeuropa secured for at least 15 years, and a pipeline of data centres and AI gigafactory projects.

“We’ve even got to be more selective in terms of the investments available because we have more investment demand than the country is capable of fulfilling or aligns with our interests”, admitted the Finances minister.

Portugal did not want to become a repository of data centers which tend not to generate jobs or bring added value.

The modernisation of Portuguese oil and gas company Galp’s refinery meant that in the last quarter of 2025 and the first of this year there was less activity which would be felt in exports and GDP despite very high efficiency gains in the longer term.

Then there is the new competence center for Natixis, which is BPCE’s investment bank. Prior to this investment BPCE had no banking activity in Portugal before buying Novobanco.

Natixis already has an operations centre in Porto employing around 3,000, another opened in Lisbon that will provide up to 1,500 jobs this year or at the beginning of next year.

BNP Paribas has continued to expand its operations. Although this bank that does not have banking activities in Portugal, it employs over 9,000 people in Portugal with plans to expand to up to 16,000

The expansion of the Airbus factory, other factories related to lithium exploration and processing, and various projects in the defense industry also represent important investments.

The consequences of the winter storms damage

Finally, the Minister of Finances, Joaquim Miranda Sarmento, could not leave out the cost to families and businesses resulting from a string of severe winter storms, the worst of which was Storm Kristin, which assailed parts of the country in January and February.

The costs of this were still being calculated, but they are significant and stand at around €7Bn in damages.

These damages were not only structural, but also represented losses in taxes and company activity, the cost of social support, and the cost of rebuilding factories, farms and homes.

Given all these factors, and those of Recovery and Resilience Funds, support for Ukraine, anticipated losses from the wars in the Middle East, court decisions that could result in the State paying compensation or reimbursing taxes, the extraordinary supplements paid to pensioners, and increases in defence expenditure, Portugal’s budget will still manage to be slightly above 1% of GDP providing there is no world recession on the cards.

And even the cost to Portugal’s insurance sector will be a manageable 10% of the results of 2025.

“This should not distract us from the main point, which is that we can’t create moral hazard, meaning giving the impression that whenever there is a storm the State will cover the losses. If we did that no one would take out insurance”, he said.

One of the most interesting things that this storm showed us was the resilience of the insurance industry and how insurance works.

On average, these storms will cost some insurance companies significantly, 10% of last year’s results, which is a deductible that insurance does not cover.

“A 10% drop in results is nothing that would in the least jeopardize the financial capacity of our insurance companies”, the minister of Finances, Joaquim Miranda Sarmento concluded.