IMF Executive Board Concludes 2008 Article IV Consultation with Portugal

Public Information Notice (PIN) No. 08/128
October 3, 2008

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2008 Article IV Consultation with Portugal is also available.

On October 1, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Portugal.1


A modest recovery was underway until 2007. Growth rose to 1.9 percent in 2007, led by strong external demand, which had been driving a notable rebound in export growth in the last two years. In response, corporate investment gathered steam, which, along with robust private consumption, led to a pick up in domestic demand. Modest employment growth failed to keep up with continuing labor force growth, leading to unemployment rising to 8.0 percent in 2007. Inflation, while below that of the euro area since late 2007, has picked up due to higher food and energy prices. The current account deficit (including capital transfers) narrowed to about 8½ percent of GDP in 2007.

Real GDP growth is projected to slow to about 0.7 percent in 2008 and to about 0.6 percent in 2009, owing to deterioration in the global outlook, higher commodity prices, the stronger euro, and the fallout from the international financial turbulence. Relatively robust external demand is forecast to lead to a positive contribution from the external sector, while domestic demand is expected to become more subdued. Private consumption is forecast to remain constrained by weak employment growth and high indebtedness. While some corporate balance sheet restructuring has occurred, still-high enterprise debt levels and tighter credit conditions may restrain the rebound in investment. Some continued fiscal consolidation and structural reforms are projected to prompt a gradual recovery in competitiveness and productivity.

Decisive government action has reduced fiscal imbalances and enhanced credibility—since 2005, the deficit has fallen by 3½ percentage points of GDP to 2.6 percent of GDP in 2007. The consolidation has been driven by containing primary current spending. Revenue overperformance has also contributed, due in significant part to enhanced revenue administration. Fiscal consolidation is set to continue in 2008, though at a slower pace. Following substantial overperformance in 2007, the government lowered the deficit target to 2.2 percent of GDP. The restructuring of the central administration will play a central role in achieving fiscal consolidation goals and improving productivity. Recent reforms to the social security system have significantly improved long-term fiscal sustainability. Important steps to move to performance-based budgeting are underway.

Portugal's financial system remains sound and well supervised. The financial system has come under pressure but has so far weathered the recent global financial turmoil, though vulnerabilities have risen. Portuguese banks' reliance on wholesale funding, the sensitivity of bank employees' pension funds and banks' own investment portfolios to stock market returns, high household and corporate debt, and significant loan concentration in some banks to certain sectors and large exposures remain sources of risk. The authorities have been pro-active in addressing these vulnerabilities; for example, banks with weaker capital ratios have been encouraged to raise capital, and the Bank of Portugal has enhanced monitoring of banks' liquidity positions and banks' plans to address potential liquidity shortfalls.

Executive Board Assessment

Executive Directors welcomed the progress made in addressing Portugal's long-standing macroeconomic imbalances, while recognizing that the economic situation remains challenging. Growth has slowed and near-term risks continue to be tilted to the downside, reflecting international financial tensions and weaker global macroeconomic conditions. Directors underscored that these challenges argue for strengthening the reform momentum, building on gains already made, so as to create the conditions to reignite the income convergence process with the EU and boost employment growth.

Directors commended the decisive action taken by the government to reduce fiscal imbalances and enhance credibility. Revenue overperformance and current expenditures that were set on a downward path have permitted an exit from the EU Excessive Deficit Procedure one year before the deadline. Directors welcomed the continued fiscal consolidation in 2008, and considered the measures to support more vulnerable groups appropriately targeted. Directors encouraged the authorities to continue with fiscal consolidation to ensure that the Medium-Term Objective can be achieved. They considered that a structural consolidation of ½ percent of GDP in 2009 should be achievable on current policies. Directors stressed that there was no scope for further discretionary loosening. Efforts to enhance the quality, transparency, and durability of fiscal consolidation should also continue.

Directors observed that the financial system remains sound and well supervised. Global financial tensions and weaker macroeconomic conditions have, however, heightened some existing vulnerabilities, including high household, corporate, and government debt levels and the relatively heavy reliance of Portuguese banks on wholesale funding. Directors welcomed the Bank of Portugal's pro-active efforts in addressing the vulnerabilities. They recommended that some further enhancements to the financial stability framework could be considered, including further strengthening liquidity supervision and the deposit insurance system, greater use of stress tests to ensure the adequacy of capital buffers, and speeding the implementation of the Basle II framework.

Directors agreed that improving productivity growth and closing the external competitiveness gap are critical to address Portugal's economic problems, and noted the important steps being taken to address these challenges. The ambitious and broad-ranging SIMPLEX program continues to improve the business climate, and the authorities should build on the recent public administration reforms and the implementation of the EU Services Directive. Directors welcomed the recent agreement on reforming labor relations, though the envisaged higher rate of social security contributions on fixed-term contracts should be reconsidered. Directors also stressed the need for greater competition in domestic markets, including by strengthening the efficiency of the judicial system to help improve the Competition Authority's effectiveness and developing a roadmap for the end of regulated electricity prices.

Portugal: Selected Economic Indicators, 2003-09

  2003 2004 2005 2006 2007 1/ 2008 1/ 2009 1/

Real economy (change in percent)


Real GDP

-0.8 1.5 0.9 1.4 1.9 0.7 0.6

Domestic demand

-2.1 2.7 1.6 0.7 1.6 0.9 0.9

CPI (year average, harmonized index)

3.3 2.5 2.1 3.0 2.4 3.2 2.1

Unemployment rate (percent)

6.3 6.7 7.6 7.7 8.0 7.6 7.8

Gross national saving (percent of GDP)

16.8 15.5 13.1 15.0 12.3 10.3 10.0

Gross domestic investment (percent of GDP)

22.9 23.1 22.6 25.1 22.1 22.4 22.7

Public Finance (percent of GDP)


General government balance

-2.9 -3.4 -6.1 -3.9 -2.6 -2.2 -2.2

General government balance 2/

-5.3 -5.5 -6.1 -3.9 -2.7 -2.4 -2.2

Primary balance 2/

-2.5 -2.8 -3.5 -1.1 0.1 0.5 0.9

Public debt

56.9 58.3 63.6 64.7 63.7 63.5 63.6

Money and credit (end-of-period, percent change)


Total domestic credit

1.7 4.5 6.9 12.5 13.5 ... ...

National contribution to euro area M3 3/

4.3 5.7 5.8 3.4 9.0 ... ...

Interest rates (end-period)


Deposit rate, up to two years 4/

2.0 2.0 2.1 2.7 3.6 ... ...

10-year government bond yield

4.4 3.6 3.5 4.0 4.5 ... ...

Balance of payment (percent of GDP)


Trade balance

-9.1 -10.3 -11.0 -10.7 -10.7 -11.7 -11.9

Current account (including capital transfers)

-4.2 -6.1 -8.3 -9.3 -8.6 -10.7 -11.4

Net official reserves (billions of U.S. dollars, end of period)

11.5 10.7 10.9 9.4 10.8 ... ...

Exchange rate


Exchange rate regime -- euro-area member


Present rate (July 24, 2008) U.S.$1.57 per euro


Nominal effective rate (2000=100)

104.6 105.4 105.6 105.8 107.1 ... ...

Real effective rate (2000=100)

109.6 110.6 110.8 111.5 113.5 ... ...

Sources: Bank of Portugal; Ministry of Finance; and IMF staff estimates and projections.
1/Figures for 2008 and 2009 are projections.
2/Excludes one-off measures.
3/Excludes currency in circulation held by nonbank private sector.
4/Data refer the stock of outstanding deposits.

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. 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.


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