PORTUGAL: An Introduction to Capital Markets

Macroeconomic and Political Outlook and Challenges

As we look ahead to 2024, we can feel a cautious sense of hope. Some challenges still lie ahead, such as geopolitical tensions that could adversely impact investments and the overall economy. The situation in Ukraine and the Middle East, as well as uncertainty surrounding the outcome of the US elections and the potential separation of western countries from the large Chinese economy, are all factors to consider. Additionally, the slowing down of the German economy, which is a driving force in Europe, should be considered seriously and carefully.

Despite these concerns, there are some positive developments. Inflation is slowing down, interest rates are expected to drop, and the US economy is performing well. The European Commission’s Winter Report also indicates that conditions are favourable for Europe’s economy to gradually pick up pace.

In Portugal, there is reason for optimism based on the country’s strong economic performance in 2023. Although the 2024 forecast may not be as rosy, there are still reasons to be optimistic about investment opportunities. The Resilience and Recovery Plan, which encompasses elements of resilience, climate transition, and digital transition, has already been fully contracted and its execution could have a significant positive impact.

Capital Markets in 2024  

The outlook for equities remains somewhat split. Projections suggest that the exodus of companies from stock exchanges will be counterbalanced by new entrants via IPOs, particularly given the flurry of upcoming operations that have already been announced.

Companies have taken note of their peers who have experienced explosive growth in the past three years. Many of these companies secured different forms of financing offered through the stock market – Greenvolt Energias Renováveis stands out in this respect – and have frequently leveraged the market to capitalise on opportunities.

A positive development is the Portuguese Securities Market Authority (CMVM) initiative to introduce a regulatory sandbox designed to help companies adapt to the market environment and overcome any obstacles or apprehensions they may still harbour. Looking towards the debt market, we can anticipate continued issuing and refinancing of corporate bonds. The prospect of the ECB lowering interest rates could lead to increased demand for such bonds. Additionally, the popularity of green and social bonds looks set to continue, as sustainability and ESG factors remain a top priority, despite geopolitical tensions potentially impacting the drive towards climate transitional initiatives in selected sectors.

Banking and Financial Intermediation 

The leading banks operating in Portugal boast robust balance sheets and substantial equity capital, positioning them to continue providing a viable avenue for corporate financing.

Irrespective of these circumstances, we are witnessing credit institutions steadily implementing their strategy of issuing own funds instruments and eligible liabilities in order to meet the Minimum Requirement for Own Funds and Eligible Liabilities (MREL) provisions in 2024.

Despite these circumstances, opportunities exist for the offering of companies’ non-performing loan (NPL) portfolios to the market. Additionally, since households are not in as strong a financial position, there may be a rise in non-performing consumer loan origination. There are also opportunities for originating loans based on unlikely-to-pay (UTP) loans, which are different from NPLs as they are not yet in default and can be repaid if the borrower’s financial health improves.

It is also anticipated that credit funds that aim to provide efficient funding options for specific projects and companies may gain momentum, providing that the resolution of tax-related issues surrounding stamp duty and income taxation generated by such funds is achieved.

Portugal’s real estate finance industry will face ongoing challenges in 2024, including heightened capital costs a trend from the previous year, as well as investment uncertainties. Despite this, there is reason for optimism as evidenced by an uptick in transactions, indicating a resilient market. This landscape offers opportunities to capitalise on new funding sources, despite recent legal and regulatory shifts, and foregrounds the need to adopt sustainable practices.

Legal and Regulatory Framework: Challenges for Clients

As we look ahead to 2024, the implementation of sustainability-related legislation and regulations will remain a pressing need across various industries. The banking sector has until the end of 2024 to introduce quantitative instruments, including the Green Asset Ratio and the Banking Book Taxonomy Alignment Ratio. These measures will allow regulators and investors to better understand and assess the amount of green loans and financing provided by credit institutions.

In the asset management sector, firms not only need to continue adapting to changes driven by the new Decree-Law and CMVM regulation on asset management from 2023, but must also prepare themselves in 2024 for the upcoming supervisory programme. This programme is expected to focus on ESG criteria, digital resilience, and money laundering prevention measures.

As for publicly traded companies, the International Sustainability Standards Board (ISSB) released its standards in 2023, which are expected to apply to reporting periods beginning on or after 1 January 2024. Under IFRS S1, companies are required to disclose information about sustainability-related risks and opportunities, governance processes, controls, and procedures to manage such risks and opportunities, strategies for addressing sustainability-related risks and opportunities, and progress towards targets established by law or regulation. The IFRS S2 applies specifically to reporting of climate-related risks, which includes climate-related physical risks and climate-related transition risks faced by issuers. Further, 2023 saw the publication of the European Sustainability Reporting Standards (ESRS). There is a high degree of interoperability between IFRS and ESRS. Companies previously subject to the non-financial regime should be preparing in 2024 the reporting in ESRS that will be disclosed in 2025.

The Corporate Governance Code of the Portuguese Institute of Corporate Governance was revised in 2023. As a result, we expect that issuers will continue to implement necessary changes made to the new code throughout 2024. Once again, sustainability is at the forefront of these adaptations, with issuers advised to develop strategies that support sustainable development goals and mitigate adverse impacts on the environment and society resulting from their operations. Additionally, issuers are recommended to establish internal controls to gather and analyse data on environmental and social sustainability, which can help alert directors of potential risks and provide suggestions for their alleviation.

As for other financial instruments, the new framework for covered bonds was finalised in 2023 and new regulations were published by the CMVM. This framework involved transferring supervision of these financial instruments to the CMVM and introducing fresh rules for overcollateralisation. Additionally, bondholders were granted expanded information rights pertaining to collateral and bond guarantees. Our expectation is that issuers will consistently continue to implement and adjust to this framework throughout 2024.