Portugal—Concluding Statement of the Second Post-Program Monitoring Discussions

Lisbon, June 12, 2015

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

An International Monetary Fund (IMF) mission visited Lisbon from June 4-12, 2015, for the second Post-Program Monitoring discussion—part of the IMF’s regular surveillance of countries with IMF credit outstanding above 200 percent of quota. The IMF mission was coordinated with the European Commission and the European Central Bank (ECB). At the end of the visit, the mission issued the following statement:

Portugal’s economic recovery is expected to strengthen this year, boosted by a favorable external environment and a continued rebound in confidence. However, long-standing vulnerabilities and legacies of the crisis – including elevated public debt, corporate debt overhang and high unemployment – continue to weigh on medium-term growth prospects and will require further fiscal adjustment, intensified efforts to advance private debt resolution, and sustained structural reforms.

1. The pace of the ongoing economic recovery was broadly sustained in the first quarter of this year, but growth is expected to moderate over the medium-term. Real GDP growth is projected to rise to 1.6 percent in 2015, supported by a pickup in exports and investment, with possible upside to the near-term outlook mainly from domestic demand. The IMF staff’s medium-term outlook remains unchanged, however, with the pace of activity expected to moderate as cyclical tailwinds fade. The recent upturn in exports and investment is encouraging and may suggest an emerging structural transformation of the economy has begun that could foster higher growth over the medium term. But these developments would have to accelerate further over the next several quarters to suggest a definitive improvement in medium term growth prospects above the current baseline, given the countervailing effects of large public and private debt and the structural impediments to resource reallocation.

2. There is a tangible risk that the 2015 fiscal deficit target of 2.7 percent of GDP will not be met without additional spending restraint. Cash-based fiscal data show improved revenue performance during January-April, but there remains significant uncertainty over the extent to which this reflects technical factors that may reverse in the coming months. In addition, more clarity on corporate and personal income tax receipts, anticipated by mid-year, will be important in assessing progress in meeting the budget target. In the absence of steps to reduce primary spending, the overall fiscal deficit this year is currently projected at 3.2 percent of GDP.

3. Putting public debt on a firmly downward trajectory will require the articulation of concrete measures to underpin the fiscal goals in the Stability Program. While recent debt operations - including early repayment to the IMF - have improved the structure of public debt, medium-term refinancing needs remain sizable. The Stability Program sets appropriately ambitious targets for debt reduction, but includes little specificity on the underlying measures to achieve them. Moreover, it is predicated on optimistic medium-term growth assumptions, as also highlighted by the Public Finance Council in its assessment of the macroeconomic projections. Concrete fiscal measures for 2016-19 will need to be spelled out to underpin the authorities’ targets. The proposed reversal of several revenue measures introduced during the adjustment program is unlikely to be feasible without very determined efforts to contain the public wage bill and pension spending. Under IMF staff’s baseline, an annual structural primary adjustment of about 0.5percent o f GDP over the next three years will be needed. A national expenditure rule that sets targets for each level of government could help to anchor fiscal consolidation and avoid the need for less-growth friendly revenue measures.

4. Financial stability has been maintained in a gradually improving operating environment for banks, but weak profitability remains a concern. Most of the large banks reported profits in the first quarter, but this reflected mostly gains from trading as they continue to struggle with high operating costs and additional impairment charges for non-performing loans. Capital adequacy remains broadly unchanged, with the average Common Equity Tier 1 ratio declining slightly to 11.1 percent during the first quarter of this year. More concerted efforts are needed to rein in operating costs and shed non-performing legacy assets in order to accelerate the process of balance sheet repair and improve financial performance. With banks still facing overcapacity and weakening asset quality, they should not rely on economic growth alone to mend their balance sheets.

5. A more forceful approach to corporate debt resolution is needed to accelerate the reallocation of resources to more productive firms. Corporate debt overhang remains a constraint on the structural transformation of the economy. In the absence of more concerted efforts to tackle bad debts, economic resources will remain tied up in unviable firms, limiting new investment and weakening medium-term growth prospects. A coordinated approach is required to bring together firm owners, creditors, and potential new investors to restructure the debts of viable firms, and move forward with liquidation of those that are no longer viable.

6. Faster medium-term growth will also require continued implementation of structural reforms. The adjustment program introduced a large number of structural reforms to product markets, but it is essential to ensure that statutory changes are accompanied by results on the ground to reduce structural bottlenecks to growth. Recent efforts to move forward with privatization, transport concessions and lowering natural gas prices for end-users have been encouraging, but reforms to increase the effectiveness of the public sector have continued to lag. Labor market reforms to spur job creation remains a particular challenge, especially for lower-skilled workers, and fresh reform initiatives in this area would be desirable.

The mission would like to express its gratitude to the Portuguese authorities and our counterparts at the European Commission and the European Central Bank for a close and constructive dialogue.

Portugal: Selected Economic Indicators
(Year-on-year percent change, unless otherwise indicated)
      Projections 1/  
    2014 2015 2016 2017  

Real GDP

  0.9 1.6 1.5 1.4  

Private consumption

  2.2 1.7 1.6 1.5  

Public consumption

  -0.3 -0.5 0.9 1.1  

Gross fixed capital formation

  2.5 4.2 2.5 2.4  


  3.3 5.5 4.8 4.7  


  6.4 4.5 4.8 5.0  

Contribution to growth (percentage points)


Total domestic demand

  2.1 1.2 1.6 1.5  

Foreign balance

  -1.2 0.3 0.0 -0.1  

Resource utilization



  1.6 -0.2 0.6 0.5  

Unemployment rate (percent)

  13.9 13.4 12.9 12.5  



GDP deflator

  1.3 1.0 1.3 1.3  

Consumer prices (harmonized index)

  -0.2 0.6 1.3 1.5  

Money and credit (end of period, percent change)


Private sector credit

  -7.5 -2.8 0.3 0.8  

Broad money

  0.0 2.1 2.4 2.2  

General government balance 2/


-4.5 -3.2 -2.7 -2.5  

Primary government balance


0.5 1.6 2.0 2.0  

Structural primary balance (percent of potential GDP)


3.6 2.9 2.7 2.4  

General government debt

  130.2 126.5 124.3 122.5                            

Current account balance (percent of GDP)

  0.6 1.0 0.8 0.6                            

Nominal GDP (billions of euros)

  173.0 177.5 182.6 187.7                            

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

1/ Projections for 2016 and 2017 reflect current policies.

2/ In 2014, includes one-off measures from SOE and banking sector support operations, CIT credit, and the upfront costs of mutual agreements for 1.1 percent of GDP.


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