Last April 17th there was a online session organized by Algarve Tech Hub which included the three members of the Order of Economists who signed this text: Pedro Plácido da Silva, Cláudio Lima and Luís Serra Coelho. The session reflected on the prospects that open up for the economy of our region in the short and medium term.
The generic scenario is, unfortunately, unexciting. As we know, the Algarve's economy is based on the tourist phenomenon, responsible for more than 50% of its Gross Added Value (GVA) and 40% of employment.
There is high seasonality (in 2019, 55% of tourist demand that spent the night in tourist accommodation establishments materialized between June and September, a period that concentrates 64% of the turnover of these units) and a strong dependence on the foreign market (in 2019, 75 % of total overnight stays recorded in tourist accommodation establishments were by non-residents).
On the other hand, the pandemic knocked on our door at the worst possible time. In fact, many companies (and people) were now preparing for the peak season, as it happens every year, which is essential to ensure sufficient income to survive the rest of the year.
It is mid-April, with airports and borders closed, and the situation is not expected to change in the near future. So, even if there is summer, it is feared that it will be weak, as it is doubtful that anyone who comes to visit us will have the conditions (financial and soul) to do differently.
On the other hand, it is important to say that tourism is also a driving force in our national economy. In particular, according to the National Institute of Statistics (INE), with closed accounts for 2018, this sector represented 11,3% of our Gross Domestic Product (GDP). On the other hand, the same source reveals that, for each quarter that we go without tourism, we risk losing around 2.9% of our GDP. The situation is therefore serious since all international studies released so far are unanimous on one point: the sector that has the most to lose from the current pandemic is tourism (and travel).
Our Government has responded to the present emergency in any way it has been able to. In fact, among a public debt that represents 120% of our GDP, a surplus marginal budget achieved in 2019 at the expense of record tax revenue in the history of democracy and a European Union that is anything but a union, António Costa tries to act with the caution required at this time.
In particular, the Government launched a set of measures aimed at preserving the national economic fabric, maintaining as many jobs as possible and maintaining some confidence in the system. The main ones focused on the presentation of treasury financing lines, mortgages and rent moratoria, tax deferral and the definition of a period of lay off short-term simplified.
Unfortunately, these measures do not seem to be having the desired effect because of their slowness. There are several testimonies that show that treasury support remains blocked due to the bureaucratic banking process that underlies it. There have also been significant constraints on the submission and approval of applications for the lay off simplified, as noted by several entrepreneurs in the Algarve and other regions of the country.
We hope that these problems can be resolved by the end of the month, in order to reduce, as much as possible, the demise of countless companies and jobs with the consequent disastrous impacts for the affected families.
What to do?
The answer to this question is anything but easy given the known constraints and vicissitudes. We would, however, like to point out some ideas. In the short term, it seems essential to maintain confidence in the Algarve's economy. Thus, the support to be granted to families and companies should allow these economic agents to look to the next 12 months with the confidence of those who will be able to honor the payment of their expenses even if their incomes drop substantially (as everything indicates that it will happen ).
One way to achieve this desire at the business level is to substantially extend the period of moratorium on financing to be granted (for example, up to 2 years), making this measure depend on the sector, on the economic strength of the company to be supported and on the seasonality of the activity.
Interest (and other charges, necessarily with values close to zero) could be subject to partial direct subsidization by the State, with the non-subsidized part deferring for an extended period after the end of the moratorium.
On the other hand, the payment of municipal taxes that apply to many of these businesses could be reconsidered, as well as other taxes, which would be temporarily suspended.
Additionally, a regime of lay off simplified extended, with a total contribution from the State for a maximum period of one year and exemption from social charges.
In return, companies could not fire and the workers covered would have to attend training programs that effectively qualify and prepare them to be more productive when they return to activity, something that would happen as soon as possible.
These measures would, in our opinion, have a very positive effect on companies and households, while allowing for the safeguarding of the State's budgetary position. In fact, the non-adoption of this type of measures will very possibly result in a substantial increase in the costs of social benefits owed to unemployed workers (as noted by information recently released by the Employment and Vocational Training Institute) and the execution of state guarantees for loans attributed, within the scope of Covid, arising from the bankruptcy of many companies initially supported.
Finally, to say that Town Halls and Parish Councils can also play an important role at this stage if they choose to strengthen their relationship with local suppliers (and pay quickly) and think of social support strategies that help to boost the proximity economy, namely the traditional trade.
In the long term, the battle is different and involves the diversification of the Algarve's economic base. In this context, three sectors look particularly promising: Energy production clean through the solar option, information technologies and the sea.
These lines of action capitalize on the Algarve's natural advantages (hours of sun exposure, the region's quality of life and our wide coastline, respectively) and allow us to dream of an Algarve capable of competing at other levels of the international value chain.
However, it should be noted that this would be a Herculean task. The region's competitive advantage is clear, and the resulting tourism sector is interesting from a business point of view, offering average shareholder remuneration rates of around 10%/year between 2016 and 2018.
Thus, for such a change to take place, it is essential to count on the commitment of all actors in the Algarve society, starting with the business class and its representative associations, the public authorities and, in particular, the Association of Municipalities of the Algarve and the Algarve Regional Coordination and Development Commission, as well as all deputies to the Assembly of the Republic who were elected by the constituency of Faro.
Will be easy? Certainly not. Let us hope that it is possible to take advantage of this moment to rebalance the scales with regard to investment priorities in the Algarve, so that new activities, new jobs, more qualified and better paid can emerge.
About the authors:
Pedro Placido da Silva – Partner at DFK & Associados, SROC, Statutory Auditor and Consultant, Professor at the Faculty of Economics, University of Algarve.
Claudio Lima – Director at BECORPORATE – Consulting in investment management and projects. Member of the Order of Economists. Certified Accountant.
Luís Serra Coelho – Professor at the Faculty of Economics of the University of Algarve. Member of the Order of Economists. Certified Accountant.
Note: article published under the protocol between the Sul Informação and the Algarve Delegation of the Order of Economists and following the online seminar “Economy of the Algarve Post-Covid19: looking ahead”, which was moderated by a journalist from the Sul Informação.
(Re)view the full seminar:
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