Transcript of the video message by Angel Gurría
2 October 2020 - Paris, France
It is my pleasure to launch the OECD Capital Market Review of Portugal 2020: Mobilising Portuguese Capital Markets for Investment and Growth. I would like thank Minister Leão for the excellent support of the Ministry of Finance and the Portugal Securities Commission (CMVM) during the preparation of this review. This is also a very good example of our increasing collaboration with the European Commission’s DG Reform, which currently encompasses joint implementation of 85 projects in 22 EU countries. I would like to thank Commissioner Ferreira for this, and Director General Mario Nava and his team.
We are in the midst of an unprecedented health, economic and social crisis. Before COVID-19, we expected world GDP growth to be 2.9% in 2020, now we project it to fall by 4.5%. The decline would have been much larger without the strong and effective policy support introduced by many economies.
This shock has come at a time when there were already widespread concerns about the high levels of debt in the corporate sector. At the beginning of the year, OECD analysis showed that by the end of 2019 the volume of outstanding corporate bond debt reached an all-time high in real terms, at 13.5 trillion USD. On top of that, another one trillion USD has been added in the first six months of this year. However, the increase in debt issuance has been accompanied by a significant decline in the quality of outstanding stock. In 2008, only 39% of investment grade issues were rated BBB, which is the lowest investment-grade rating. In 2019, just over half (51%) of all new investment grade bonds were rated BBB. As the crisis hit, there were 387 downgrades of non-financial corporate bonds only in March 2020 and 373 in April. This can be compared with a total of 735 downgrades during the entire year 2019.
We need to maintain the fiscal and monetary policy support to preserve confidence and limit uncertainty. Once the crisis is over, many economies will have an even larger portion of companies that are under-capitalised and highly leveraged. We must therefore focus on structural reforms to ensure that equity markets play their much-needed role in strengthening corporate balance sheets and long-term investments.
This is particularly important for Europe, where companies rely heavily on bank loans. While loan financing is only 35% of corporate debt financing in the US, it is 88% in the euro area. Importantly, since 2008 the number of companies that have left the stock market each year has surpassed the number of new listings in Europe.
I was glad to see that last week the European Commission announced an ambitious Action Plan to boost the Capital Markets Union over the coming years.
A strong European capital market will not only help strengthen corporate balance sheets, but it will also support the transition to a low-carbon economy and provide adequate financing to enable the shift towards a digital economy.
Turning to Portugal, I ask you to set your minds on pre-COVID times, as this study was carried out with an eye on 2019. By the end of 2019, and even at the beginning of the year, economic activity was dynamic. GDP exceeded pre-global financial crisis levels and the drop in unemployment was one of the highest among OECD countries, with a 10-percentage point decline compared to its peak. Moreover, important structural reforms included a deleveraging of the banking system, labour market reforms and a significant reduction in compliance costs for businesses.
Despite these favourable conditions, there was no noticeable improvement in Portuguese companies’ use of capital markets.
At the end of 2019, there were only 47 companies listed on Euronext Lisbon, which is only one-third of the number of companies that were listed back in 1997. The use of corporate bonds has also been quite limited, with less than ten non-financial companies issuing long-term bonds over the past three years. The picture is not different for private capital markets. In 2019, the Portuguese share of European private equity investments was less than half of its share in EU GDP.
The Review we are launching today puts forward a number concrete policy recommendations to mobilise Portugal’s domestic capital markets for investment, resilience and growth. Let me underline three key messages:
First, years of low activity have severely weakened Portugal’s capital market ecosystem. Minor adjustments to the legal, regulatory and institutional frameworks are not sufficient.
A broad range of policy tools spanning different policy domains are needed to support capital markets. This could include modernising the regulatory framework for listing and public disclosure to attract companies to the market and introducing a savings account system for capital market investments to attract household participation.
Second, the government should focus on supporting the business sector during the COVID-19 crisis without incentivising a higher leverage. Through equity capital, the authorities can provide long-term financing that is suitable for forward-looking investments. It can also support efforts to progress towards a competitive, innovative and resilient business sector.
And third, well-designed fiscal incentives should be used to promote capital markets.
These should be targeted to encourage retail investors’ participation in the market and higher institutional investor allocation to equity. They should also support capital market institutions to achieve sufficient economies of scale.
Ladies and Gentlemen:
Capital markets are central in helping us to address the challenges of COVID-19, boost confidence and achieve a resilient recovery. The OECD stands ready to support Portugal’s capital markets to ‘build back better’ and ensure a transition towards a greener, more inclusive, more sustainable and more digital economy. Thank you.