Press Release: IMF Executive Board Concludes Article IV Consultation with Portugal
May 8, 2015Press Release No. 15/199
May 8, 2015
On May 6, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Portugal.
Portugal’s significant flow imbalances have largely been corrected in the wake of the sovereign debt crisis, with employment increasing, output expanding, and the current account balance posting surpluses for the first time in decades. Nevertheless, the stock vulnerabilities that had accumulated over time—most notably public and nonfinancial corporate debt, and a large negative international investment position—remain pronounced.
The economy has expanded at close to 1 percent per year on average since early 2013, with growth driven largely by consumption. The 2014 fiscal deficit objective of 4.0 percent of GDP (excluding one-off operations) has been achieved, implying a structural primary adjustment of 1 percent. The trend of downward inflation pressures, exacerbated more recently by falling energy prices, appears to have been arrested. The banking system is reducing its reliance on Eurosystem financing, although it remains unprofitable and saddled with a rising stock of non-performing loans.
The near-term outlook is benefiting from the trifecta of record-low interest rates, a weakening euro, and low oil prices. Output is expected to increase by 1.6 percent in 2015 and by 1.5 percent in 2016, with outlook for inflation improving as well. As the boost from short-term factors fades, however, growth is projected to moderate over the medium term, as Portugal continues to lag behind its peers in key structural indicators. The risks to the outlook are mostly on the upside, as the impact of ECB’s expanded asset purchase program may turn out to be stronger than anticipated. At the same time, there are low-probability but potentially disruptive downside possibilities, most notably any volatility associated with turmoil at the euro-area level.
Executive Board Assessment2
Executive Directors commended the Portuguese authorities for their achievements over the past few years in improving the fiscal and current account balances, safeguarding financial stability, and regaining market access. Directors also welcomed the authorities’ decision to begin early repayment of outstanding Fund credit. Directors observed, however, that the ongoing recovery is still too modest to bring output and employment back to pre crisis levels in the period ahead. Restoring internal balance without undermining Portugal’s external position thus remains the most important policy priority.
Directors agreed that, while the near term economic outlook has improved significantly, medium term prospects are still clouded by legacy problems—weak investment, large stocks of public and private debt, excessive leverage in the corporate sector, and labor market slack. Noting that Portugal is benefitting from low sovereign yields, a depreciated euro exchange rate, and low oil prices, Directors encouraged the authorities to tackle the remaining vulnerabilities, rebuild fiscal buffers, and accelerate key structural reforms to enhance potential growth.
Directors welcomed the progress on fiscal consolidation and the authorities’ commitment to exit the EU’s Excessive Deficit Procedure this year. They encouraged further efforts to reduce the debt to GDP ratio to more sustainable levels. Directors generally noted the benefits of setting multi year expenditure targets to anchor the fiscal structural adjustment, given Portugal’s elevated tax burden. In this regard, it will also be important to further rationalize public spending through a comprehensive reform of wages and pensions, and broader fiscal reforms to improve public administration and mitigate risks from state owned entities.
Directors considered that Portugal’s economic recovery depends crucially on progress in addressing nonperforming loans and the corporate debt overhang in a timely and systematic manner. Actions are needed to ensure that banks maintain adequate capital and provisioning, and speed up debt write offs. Directors recommended further efforts to improve the efficiency of the insolvency framework and promote equity based financing for corporations.
Directors stressed the need to continue structural reforms to enhance external competitiveness and labor market flexibility, building on recent achievements. They saw as priorities reforms to support job creation, enhance local competition, and upgrade public services. Directors also recommended measures to improve vocational training, upgrade managerial skills, reduce disincentives to work, and make the social dialogue more inclusive.
|Portugal: Selected Economic Indicators, 2014–17 1/|
(Year-on-year percent change, unless otherwise indicated)
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/ Includes one-off measures from SOE and banking sector support operations, CIT credit, and the upfront costs of mutual agreements for 1 percent of GDP.
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