Portugal’s slow progress towards throwing off the unwanted title of being one of the weakest eurozone economies following the global financial crisis is helping the country’s lease industry recover at least some of the precious ground that was lost during the first half of this decade, writes Paul Golden
When Portugal became one of the recipients – alongside Italy, Ireland, Greece and Spain – of a €750bn stabilisation package in May 2010, its economic travails were seen as a potential existential threat to the single currency, with critics pointing out that continued economic disparities could lead to the breakup of the eurozone. Portugal’s GDP had fallen 6.5% below its pre-crisis peak, and its public-debt-to-GDP ratio was roughly 5:4.
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GDP grew by 1.4% in 2016, and short-term indicators for investment in 2017 have been positive, confirming the ongoing rebalancing towards exports, which remain an important driver of economic growth.
Fast-forward seven years and the outlook is rather more promising. After a sluggish first half the Portuguese economy experienced a welcome upturn in growth in the second half of 2016, boosted by stronger exports and a further drop in unemployment.
The current account also improved last year, reaching 0.8% of GDP; inflation remained subdued at 0.6% and the unemployment rate decreased further to 11.1%, reinforcing the positive trend in the labour market since 2013.
Growth in 2017 is projected to reach 1.8%, largely on the back of strong export performance, and inflation is forecast to increase to around 1.6%. Portugal has continued to successfully access bond markets, and its capacity to repay the IMF is expected to be adequate.
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By GlobalDataThese developments point to an improved near-term outlook, but the IMF observes that medium-term growth could be put on a more sustainable footing by reducing structural bottlenecks and high levels of corporate debt. The revised 2016 fiscal target appears likely to have been met, but prospective outlays for banking sector recapitalisation continue to weigh on public debt trends.
Public debt remains high and the large annual financing needs – combined with banking system challenges – leave Portugal vulnerable to a range of shocks and a tightening of financing conditions. In April, Abdelhak Senhadji, deputy director of the fiscal affairs department of the IMF, observed that the country’s debt ratio stood at 130% of GDP in 2016.
This emphasises the need for stronger momentum to improve financial sector resilience, ensure durable fiscal consolidation and raise potential growth.
Portuguese authorities have recognised that continued efforts to improve banking sector soundness are required to break the vicious cycle between weak banks, high non-performing loans and low growth. This should include a predictable, time-bound and credible plan for banks to write off or restructure non-performing legacy assets, strengthen internal governance and improve profitability, including by further cutting costs.
It is expected that such moves would help attract new private capital to support the clean-up of bank balance sheets. In this context, proposals to address non-performing loans – including supervisory, legal and judicial measures to incentivise banks to dispose of non-performing loans and reduce corporate debt – have been well received.
Reinvigorating critical structural reforms remains essential to boost the Portuguese economy’s competitiveness, growth potential and resilience to shocks, and the authorities have been encouraged to proceed with reforms in labour and product markets, with a particular focus on tackling labour market segmentation, improving education and skills and enhancing public sector efficiency.
It is also perceived as important that increases in the minimum wage do not impair labour competitiveness and undermine prospects for new entrants to the labour force. Removing regulatory barriers, strengthening institutional capacity and addressing other supply bottlenecks are also considered critical reforms.
So how has this affected the lease industry? Data from the Portuguese Association of Leasing, Factoring and Renting (ALF) reveals that leasing volumes increased by 5.1% in 2016 to reach €1.72bn, with vehicles accounting for almost €1.13bn and equipment lease activity worth €591m.
Real estate leasing was valued at €742m last year, an increase of 10.3% from 2016; last year’s increase was on a more modest scale than the 20% increase experienced in 2015.
However, Eduardo Moradas, director ALF with responsibility for leasing, says recent gains are indicative of mobility gaining weight in the business budget and companies becoming more rigorous when considering the best options for updating the fleets used by their employees.
“Leasing demand has increased in the last three years,” he explains. “This positive development confirms that Portuguese companies – even under economically unsettled conditions – are opting for specialised financing solutions for the acquisition of vehicles as a way to reduce operational costs, control and predict fees and increase service support. However, investment is progressing at a different pace in the financial and real estate lease areas.”
Asked whether business conditions have changed significantly over the last 12 months, Moradas observes that growth rates during 2016 show companies recognise the advantages of leasing products for the management of fleets. In 2016, leasing grew by 16.6% in the automotive sector with the acquisition of approximately 45,000 new cars with a total investment of €1.13bn.
“In general, financial and operational leasing have both progressed very well during 2016,” he adds. “Vehicle leasing was the sector with best performance, especially for small to medium-sized businesses.
“The lease market has been stable in recent years with no relevant changes introduced by the Portuguese government in the sector, although we should highlight that leasing was considered in EU legislation regarding support to companies, which can be seen as an acknowledgment of the importance of this product.”
On the issue of recruitment, Moradas states that – particularly with the processes of bank restructuring and consolidation leading to a reduction in the number of finance professionals employed in the banking sector – lease companies are not facing any major problems recruiting professionals with adequate knowledge of the industry. However, he also acknowledges that training is still a challenge for companies in the sector.
“ALF has been defending the sector’s interests in the public and the private spheres, contributing to its technical, economic and social development,” he says. “In this context, we would like to highlight the education and training role the association has assumed, developing several sessions and workshops directed to technicians and others for the general public.”
Moradas says managers of professional fleets – especially the largest fleets – have reached a very high level of professionalism and specialisation.
“Besides, professional and efficient fleet management businesses – and a growing number of small and medium-sized businesses – know it is almost impossible not to use leasing,” he continues.
“For those reasons – and because leasing tends to reflect the evolution of the national economy and particularly the car sector – we believe the market will continue to gradually grow in 2017.”
According to LeasePlan Portugal, the growth in the operational leasing market experienced over the last 12 months will be carried forward into 2017. Asset-based finance supported businesses representing 12% of Portugal’s economy in the 12 months to the end of June 2015, ahead of an average of 10.3% across Europe according to data from the EU Federation for the Factoring and Commercial Finance Industry.
As stated by a spokesperson for LeasePlan Portugal, changes in the concept of mobility and the customer profile are the key factors impacting the Portuguese lease market, with the decline in typical fleet size the only major negative development.
“The new generation are turning to a set of services that provide access to flexible products without the burdens of ownership,” he says. “This represents a great opportunity for operational leasing companies.
“Additionally, the idea that operational leasing is only for large companies is disappearing, and there has been a remarkable growth of small and medium-sized businesses and individual clients for this product – enterprises that are already recognising the benefits of operational leasing.”
The LeasePlan Portugal spokesperson says the market has changed relatively little over the last 12 months, although he accepts that there have been significant changes in fleet management.
“Fleets are typically half the size they were a decade ago, which is why we turned our attention to small and medium-sized businesses and individual clients, which are the customer segments with more potential to grow in the short to medium term. Also, we have experienced increasing demand for more flexible mobility solutions.”
Since large companies are already familiar with the concept of operational leasing, it is inevitable that SMEs have been identified as the customer segment with the most promising scope for expansion in the short to medium term, he continues. “We also believe that individual clients have great potential for growth in the medium to long term, which is why we are following this customer segment with great attention.”
While accepting that the Portuguese government has remained neutral regarding direct action to support the lease finance industry, he says increased use of leasing for the state vehicle fleet is seen as setting an encouraging example.
Asked what LeasePlan Portugal is doing to encourage growth in leasing activity in Portugal, its spokesperson observes that it has focused on offering structured operational leasing solutions to meet the mobility needs of corporate and individual clients.
“In addition to the special campaigns we have developed to promote the traditional operational leasing product – which typically ranges between 12 and 72 months – we have developed a solution for shorter-term leases, ranging in length from as little as one day to 24 months,” he says.
“FlexiPlan offers all the flexibility that companies need to respond to specific projects, employee displacements or temporary team reinforcements.”
Rui Lourenco, managing director of BNP Paribas Leasing Solutions Portugal, suggests that business conditions have changed significantly over the last 12 months, with stronger competition both at the level of presence in the market and in relation to margins.
His view on which sectors of the lease market are performing particularly well – or badly – is that transport (heavy vehicles and trailers) is the star performer. He adds that there is still considerable pressure on the construction sector, where only a modest recovery has been experienced.
“We are encouraging growth in leasing activity in Portugal by continuing to support the product as a driver for industrial development with tailored solutions,” explains Lourenco. “Over the remainder of 2017 we expect the market to continue its trend of the last few years, which is one of sustainable growth.”
A spokesperson for the Portuguese leasing business of Spanish banking group BBVA says the financial weakness of many small businesses continues to impact the Portuguese lease market. Looking ahead, he refers to the impact of IFRS 16, which will come into effect for most companies from 2019.
He agrees that the segment of the market with the most positive recent growth profile is car leasing – by both individuals and SMEs – supported by an increase in automotive leasing supply. “The sector that is performing most poorly is that of leasing of equipment to small and medium-sized businesses, which has been negatively impacted by limited demand for investment and reduced supply of credit.”
The BBVA spokesperson says recruitment is a challenge for Portuguese lease companies given low levels of mobility in the labour market. However, he has an upbeat assessment of the activities BBVA is undertaking to encourage growth in leasing activity in Portugal, and the prospects for the market during 2017.
“Our focus will continue to be the self-directed market for individuals and we will aim to increase the level of supply to small and medium sized businesses,” he concludes.
“In the automotive space, the leasing market can grow between 5% and 10%, although the equipment market is more unpredictable and will depend on investment demand.”
