Via IMF (Den Internationale Valutafond)

IMF Executive Board Concludes 2019 Article IV Consultation with Portugal







July 11, 2019















On July 8, 2019, the Executive Board of the International Monetary Fund
(IMF) concluded the Article IV consultation

[1]

with Portugal.

Growth in 2018 eased compared to 2017 in part due to weaker economic
activity in Europe. Unemployment is at a 14-year low, driven by strong
employment growth, especially among the long-term unemployed. Growth in
2019 is expected to moderate to 1.7 percent and converge in the following
years to its medium-term potential. Consumer price inflation remains
subdued but is expected to gradually increase in coming years as wages
picks up. The current account is expected to post moderate deficits in
coming years.

The headline fiscal deficit improved in 2018, reflecting smaller one-off
expenses, cyclical tailwinds, and a tight budgetary execution. It is
expected that the government will meet it’s 2019 budget deficit target,
despite higher than expected transfers to Novo Banco, as a result of
lower-than-budgeted capital spending and strong revenues. The Medium-Term
Objective under the Stability and Growth Pact is expected to be met in
2020. Public debt is on a firm downward trajectory and is projected to
reach close to 100 percent of GDP by 2024.

Banks have made significant progress in strengthening their balance sheets,
with non-performing loans falling significantly in recent years.
Nevertheless, troubled legacy assets remain high by European standards and
profits moderate. No significant acceleration in credit growth is expected.

READ ALSO  Lad os få et seriøst klimaudspil frem for en forkølet boligjobordning

Executive Board Assessment

[2]

Executive Directors welcomed Portugal’s improved fundamentals, noting that
the current real GDP level has now surpassed its pre-crisis levels, the
unemployment rate declined to its lowest level in more than a decade, and
that structural reforms have paid off. Directors, however, agreed that
downside risks have increased amidst a less favorable global environment.
They, therefore, stressed the need for continued efforts to strengthen the
resilience of the economy and the financial system, including addressing
the still elevated public debt level and non-performing bank loans.
Implementation of further structural reforms to support potential growth,
raise domestic savings and improve the business climate remains a priority.

Directors commended the authorities’ commitment to sound public finances
and fiscal consolidation, which resulted in reductions in the fiscal
deficit and debt ratio in recent years, the repayment of the IMF loan ahead
of schedule, credit rating upgrades, and substantially lower borrowing
costs. Notwithstanding these achievements, Directors generally stressed the
need for accelerated debt reduction to rebuild fiscal buffers to protect
against unanticipated shocks as well as to address the fiscal impact of
Portugal’s aging population. In that context, Directors particularly
welcomed the authorities’ commitment to use revenue windfalls to accelerate
public debt reduction. While acknowledging numerous efforts already taken
to improve the efficiency of public spending, Directors called for further
examination of the quality and composition of spending, with a view to
shift spending toward greater public investment. Expenditures on pensions,
wages, and health also deserve closer examination.

Directors agreed that banks’ balance sheets had improved significantly in
recent years, and especially commended the marked decline in non-performing
loans. They noted, however, that modest profitability remains a concern,
and encouraged further efforts to improve asset quality, efficiency, and
governance. Directors also called for continued vigilance of mortgage
market developments and for the authorities to stand ready to adjust
macroprudential policies if needed. With respect to the financial
supervision reform bill, Directors encouraged the careful consideration in
Parliament of the concerns raised by the ECB, Banco de Portugal, and other
domestic supervisors, and a continuing search for consensus, to ensure that
the bill guaranteed the independence of supervisors, it was consistent with
the European institutional framework, it would ensure timely and
well-informed decision making, and it was cost-effective.

READ ALSO  Nye coronaanbefalinger: Stor forskel i potentialet for hjemmearbejde i københavnske kommuner

Directors emphasized the need to boost potential growth and productivity,
to both reduce balance sheet risks and accelerate the pace of convergence
to euro area living standards. They noted that to meet this goal,
investment spending needs to increase, supported by an improved business
environment, greater competitiveness and innovation, and a more efficient
use of labor. To avoid the re-emergence of external imbalances, domestic
savings will need to increase as well. In this regard, Directors suggested
that the authorities explore ways to encourage complementary second- and
third-pillar pension schemes.


Portugal: Selected Economic Indicators

(Year-on-year percent change, unless otherwise indicated)

Projections

2018

2019

2020

Real GDP

2.1

1.7

1.5

Private consumption

2.6

2.1

1.6

Public consumption

0.8

2.4

1.2

Gross fixed capital formation

4.5

7.0

4.1

Exports

3.7

4.1

4.1

Imports

4.9

6.0

4.6

Contribution to growth (Percentage points)

Total domestic demand

2.8

2.7

2.0

Foreign balance

-0.7

-1.1

-0.4

Resource utilization

Employment

2.3

1.4

1.0

Unemployment rate (Percent)

7.0

6.2

5.7

Prices

GDP deflator

1.4

1.5

1.7

Consumer prices (Harmonized index)

1.2

1.1

1.5

Money and credit (End of period, percent change)

Private sector credit

-1.0

0.1

0.8

Broad money

8.5

2.8

2.7

Fiscal indicators (Percent of GDP)

General government balance

-0.5

-0.2

0.1

Primary government balance

3.0

3.1

3.4

Structural primary balance (Percent of potential GDP)

3.4

3.6

3.6

General government debt

121.5

118.8

116.0

Current account balance (Percent of GDP)

-0.6

-0.6

-0.5

Nominal GDP (Billions of euros)

201.6

208.2

215.0

Sources: Bank of Portugal; Ministry of Finance; National
Statistics Office (INE); Eurostat; and IMF staff
projections.



[1]

Under Article IV of the IMF’s Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country’s economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
Executive Board.


[2]

At the conclusion of the discussion, the Managing Director, as
Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country’s authorities. An
explanation of any qualifiers used in summings up can be found
here:

http://www.imf.org/external/np/sec/misc/qualifiers.htm

.


IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Andreas Adriano

Phone: +1 202 623-7100Email: MEDIA@IMF.org

@IMFSpokesperson