China Bolsters Portugal’s FDI

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Attracting foreign investment is key to recovery and economic expansion for Portugal, and the country is increasingly determined to show it is open for business. From a fiscal bonus of 10 years of income-tax exemptions for all the foreigners who move to Portugal to a new takeover law to a friendly attitude toward Chinese investors, the government has done a lot. It remains to be seen how well this strategy works.

Foreign direct investment (FDI) inflows rebounded last year, but only modestly. According to the UNCTAD World Investment Report, Portugal welcomed $6.95 billion of new investment in 2017, up from $6.07 billion the year before and on par with the $6.93 billion in 2015. While the European Union is the main supplier of FDI to Portugal, with the biggest chunks coming from the Netherlands (25.5% in 2016), Spain (22.9%) and Luxembourg (18%), a noticeable portion of the new inflow came with the privatization of state-rescued Banco Novo and its purchase by the US equity fund Lone Star.

“The quality of the labor force—and its relative low cost and the relationship between companies and universities—have been key factors in attracting the latest wave of investment, especially in digital services like Google,” says Antonio Monteiro, CEO of Banco Santander Totta.

At a time when other European countries are turning inward, as is the case with the UK’s decision to leave the EU, Portugal is rediscovering its international, multicultural roots. For the country that once had an empire stretching to Macau in the South China Sea, the link with investment-hungry Chinese institutions seems a logical step.

“We see Chinese interest also in other European countries, due to the Belt and Road Initiative,” says Steven Trypsteen, economist at ING. “In some European countries, this is viewed with skepticism, but in Portugal, this is less so.”

In mid-May, Portuguese utility Energias de Portugal (EDP) rejected a $10.6 billion takeover bid by China Three Gorges, its largest shareholder, saying that the price offered was too low. However, the Chinese bid is still favored over other European suitors—such as Spain’s Gas Natural, which could break up EDP, cutting staff and ultimately reducing the utility’s importance to the Portuguese economy.

China already has some large holdings in Portugal. According to Reuters, Chinese firms own 25% of the Portuguese grid; 27% of Millennium bcp, which is the country’s largest listed bank; and Portugal’s largest insurer, Fidelidade.

Economists highlight the advantages: “Portugal has a strong geographic location, which can work as a link between European, American and African—and even Asian—markets; improved logistic capacity; strong ports; and a stable society and politics,” says Carlos Andrade of Novo Banco.

Several large Chinese companies have made direct investments in Portugal, from manufacturers to high-tech companies. According to Angel Talavera, lead eurozone economist at Oxford Economics, “Stronger economic prospects, a stable government and relatively cheap assets should help attract foreign investment. I expect this is a trend that should continue.”