## 1prtea2019001 ## Source details **Canonical URL:** [1prtea2019001](https://www.imf.org/-/media/files/publications/cr/2019/1prtea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1prtea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1prtea2019001.pdf.json) --- ### Executive summary — recent developments - Real GDP growth: 2.1 percent in 2018; 2.8 percent in 2017; 1.8 percent y-o-y in 2019:Q1. - Labor market: - Employment growth: 2.3 percent in 2018 (from 3.3 percent in 2017). - Unemployment rate: 6.5 percent (s.a.) in 2019:Q1. - Job vacancy rate: at historically high levels (Beveridge curve). - Inflation and labor costs: - Headline inflation: averaged 1.2 percent in 2018; slowed to 0.9 percent in April 2019. - Euro Area headline rates: 1.8 percent (2018); 1.7 percent (April 2019). - Core inflation: 0.7 percent in 2018; 0.8 percent in April 2019. - Real labor productivity: declined -0.2 percent y-o-y in 2018. - Fiscal accounts: - Nominal fiscal balance: -0.5 percent of GDP in 2018 (from -3.0 percent in 2017). - One-off costs: 2.0 percent of GDP in 2017; 0.4 percent of GDP in 2018. - Portugal paid off the balance of its IMF credit at end-2018, five years ahead of schedule. - External sector: - Current account: -0.6 percent of GDP in 2018 (declined by 1.1 percent of GDP). - Balance of trade in goods and services: declined by about 0.8 percentage points of GDP in 2018. - NIIP: -100 percent of GDP in 2018. - Credit and banking: - Total credit to the nonfinancial private sector: continued to decline in 2018 and early 2019. - Loans to nonfinancial corporates: declined 5.7 percent y-o-y in April 2019. - Household loans: declined y-o-y during December 2018–April 2019. - Banking system (2018:Q4): Common Equity Tier 1 capital ratio 13.2 percent; NPL ratio 9.4 percent; impairment coverage ratio 51.9 percent. ### Outlook and risks - Growth and inflation projections: - Real GDP growth: 1.7 percent in 2019; easing towards estimated medium-term potential of 1.4 percent. - Consumer price inflation: 1.1 percent for 2019; 1.5 percent in 2020. - Unemployment: projected to decline to 6.2 percent in 2019. - Output gap: slightly positive projected for 2019. - Fiscal outlook: - Government target: near-balanced budget in 2019 (-0.2 percent of GDP). - Novo Banco capital transfer: increases spending commitments by 0.4 percent of GDP over budgeted amount. - Public debt projected decline: from 122 percent of GDP in 2018 to around 100 percent of GDP by 2024 (Annex I). - Risks (shifted to the downside): - External demand shock could bring fiscal deficit close to 0.7 percent of GDP in 2019–2020 and delay debt reduction until 2021. - Disorderly Brexit: moderate direct trade impact but potentially significant tourism effects. - Rising protectionism, security risks, or sharp tightening of global financial conditions could raise bond yields and strain balance sheets. - Domestic policy slippages or reversal of past reforms could amplify external risks. - Downside scenario (Figure 1): - Weaker-than-expected growth for four quarters, including a technical recession with two quarters of about -0.2 percent qoq. - Fiscal and macroeconomic impacts derived from a semi-structural model. ### Policy recommendations (overview) - Sustain strong macroeconomic policies and multi-year fiscal consolidation to reduce vulnerabilities. - In a material downturn: adopt a neutral fiscal stance—allow nominal deficit to widen via automatic stabilizers provided public debt remains on a downward trajectory. - Maintain discipline to keep a structural fiscal surplus and support continued decline in public debt. - Support NPL reduction and strengthen bank corporate governance, internal controls, and risk management. - Strengthen domestic saving rates; consider measures to encourage second- and third-pillar pension schemes. - Implement structural reforms to address low investment, subdued productivity, and adverse demographics to raise potential growth above the baseline medium-term potential of 1.4 percent. ### Macro-financial specifics for sectors - Households: - Household debt-to-GDP: 70.6 percent in 2018 (declined 1.8 percentage points). - Household saving rate: low; household savings 3.2 percent of GDP in 2017. - Nonfinancial corporates (NFCs): - NFC debt-to-GDP: 131.1 percent in 2018 (declined by 8.1 percentage points). - NFC capital: increased; SME equity-to-capital asset ratio surpassed 2006 level. - NFCs exposed to negative shocks and interest rate increases at current debt levels. --- ### Banking sector: legacy assets, NPLs, and profitability - NPL reduction strategies: cures, write-offs, sales, and foreclosures consistent with authorities’ strategy. - NPLs: remain among the highest in the Euro Area though substantially reduced since June 2016. - Profitability headwinds: - Low interest rates, high operating costs, impairments. - Heightened competition from nonbank financial institutions. - Need to obtain costlier MREL resources. - Supervisory recommendations: - Ensure banks follow through on NPL reduction targets. - Strengthen corporate governance, internal controls, and risk management. - Improve operational efficiency and profitability. - Reported legacy/NPL metrics (as presented): - CGD NPL ratio targets (percent): 12.5, 10.0, 7.0, 5.0; NPL ratio (percent) reported: 15.8, 12.0, 8.5 (table-format values). - Novo Banco legacy assets (€ billion): 14.7, 10.7 (values as presented). - CCAs asset (€ billion): 7.9, 5.4, 4.0 (values as presented). - System-wide reduction: Non-performing loans declined by €25 billion (~50 percent in volume since peak in June 2016). - Net NPL ratio: 4.5 percent by end-2018. ### Capital resilience and exposures - Capital augmentations in 2017–2018 improved buffers alongside provisions. - Risks: - Weaker economy could worsen asset quality and profits. - Concentrated exposures to real estate and sovereign risk persist. - Holdings of domestic government securities: 8.8 percent of total assets in December 2018 (up 0.5 percentage points year-on-year). - Stress sensitivities: - IMF GFSR benchmark (June 2018): a 250 basis point increase in BBB bond yields would lower Tier 1 capital ratios by about 1.5 percentage points. - Banco de Portugal estimate: a 100-basis-point rise in domestic public debt yields reduces banks’ capital ratios by 58 basis points. - Supervisory recommendation: preserve capital buffers from 2017–2018 augmentations and ensure resilience to economic weakening and changes in risk premia. ### Housing market, mortgage lending, and macroprudential monitoring - House prices: - HPI growth: 9.3 percent y-o-y in 2018:Q4 (down from 12.2 percent y-o-y in 2018:Q1). - Existing dwellings: rose 9.5 percent y-o-y in 2018:Q4. - Median value per square meter: increased more than 23 percent y-o-y in 2018:Q4 in Lisbon and Porto (as reported). - Real estate exposures: - Banks’ exposures to real estate: 38 percent of total assets as of December 2018. - Mortgage financing: mortgage lending stable at 40 percent of real estate transactions (below pre-crisis levels). - Macroprudential actions: - Borrower-based measures implemented in February 2018 with reported broad compliance. - Supervisors should closely monitor mortgage markets and be ready to adjust measures. ### Supervisory and resolution framework reform (bill under discussion) - Proposed changes: improve coordination among supervisors; create permanent coordination mechanism with legal personality and new powers (including macroprudential policy); create a resolution authority separate from supervisors; modify governance of supervisory bodies. - Concerns: - Banco de Portugal, the Securities and Exchange Commission, and the Insurance and Pension Funds Regulator communicated substantive concerns regarding independence, interaction with sectoral supervisors, and funding costs. - ECB views some provisions as inconsistent with the European institutional framework. - Staff view: different architectures can meet objectives but must guarantee supervisory independence, cost efficiency, and sound, timely decision-making; recommend Banco de Portugal retain a central macroprudential role given expertise and bank-dominated system. - Recommendation: Parliament should fully examine the concerns before turning the bill into law. --- ### Authorities’ and Ministry views on banking developments - Authorities’ reported improvements: - Total capital ratio stabilized in 2018 (issuance of AT1 and Tier 2 instruments). - Banking profitability recovered in 2018 Q1–Q3; ROA slightly above EA average in that period. - NPLs declined by €25 billion (~50 percent since June 2016); impairment coverage ratios increased. - Net NPL ratio: 4.5 percent by end-2018. - Banking system total assets increased in 2018 for first time since 2010; liquidity comfortable. - High compliance with borrower-based macroprudential measures during July 2018–March 2019. - Firms and households continued deleveraging; household leverage near the Euro Area median. - Ministry of Finance position: - With fast recovery, reform of supervision and resolution framework is possible while preserving independence. - Banco de Portugal: not opposed in principle but raised major concerns about elements that could undermine independence. - European authorities: view several elements as incompatible with European institutional framework or Basel Core Principles and recommend reconsideration. --- ### Pensions, social protection, and public employment - Findings: - Pension system: expensive and generous by OECD standards; does little to correct old-age income inequality. - Generous PAYG first pillar supported with general revenue may discourage private saving. - Public employment grew by over 2 percent despite a commitment to reduce it in the 2018 budget. - Move to a 35-hour week and gradual unfreezing of career progressions add wage-bill pressure. - Policy recommendations: - Re-examine outcomes of past pension reforms; focus on highest pensions to enhance equity and control pension spending. - Consider reducing accrual rates for the largest earning brackets to gradually converge to EU average replacement rates. - Conduct comprehensive review of public employment level, composition, and rules to control wage-bill increases without affecting service delivery. - Rationalize spending and modernize practices (example: health sector reforms). - Enact regulations for complementary second-tier occupational pension schemes and explore options to encourage second- and third-pillar pension schemes. --- ### Structural issues, growth, investment, and saving - Key facts: - Real GDP returned to pre-crisis levels in 2018. - GDP per capita: remains 40 percent lower than the Euro Area average. - Investment ratio: 17.5 percent in 2018 vs EA average of 21 percent. - Corporate savings: around 13 percent of GDP in 2017. - Household savings: 3.2 percent of GDP in 2017; among the lowest in Europe. - Share of low-skilled workers: 46 percent in 2017 vs 17 percent in the EU. - Recommendations: - Improve regulatory environment and competitiveness; promote competition in network industries; address high energy prices. - Encourage complementary pension schemes to boost private saving. - Raise skill levels and strengthen education–industry links to support productivity. ### Labor market, skills, and gender - Observations: - OECD over-qualification indicator: among the highest in advanced economies. - Gender: Portugal ranked 37 among 149 countries in WEF 2018 Global Gender Gap Report. - Share of temporary employment: around 19 percent. - Minimum-to-median wage ratio high: H1 2018—40.2 percent of new employment contracts at minimum wage; 22.6 percent of total employment contracts at minimum wage. - Recommendations: - Raise education and vocational training quality; foster university–industry exchanges. - Make permanent contracts more flexible rather than increasing costs of temporary contracts. - Ensure wage growth consistent with productivity. --- ### Financial sector and insolvency - Findings and recommendations: - NPL ratios in single digits; supervisors should maintain focus on balance sheet repair. - Strengthen corporate governance, internal controls, risk management, operational efficiency, and profitability. - Debt enforcement and insolvency frameworks improved but processes remain slow. - Staff recommends enabling public creditors to participate more fully in debt restructuring (on clear, transparent terms) and addressing conditions that allow non-viable firms to delay liquidation. - Financial supervision reform bill contains positive elements but raises concerns from sectoral supervisors and ECB that merit careful parliamentary consideration. --- ### Key fiscal and macroeconomic projections and figures (selected) - Real GDP (year-on-year percent): 1.9 (2016); 2.8 (2017); 2.1 (2018); 1.7 (2019); 1.5 (2020); 1.4 (2021–2024). - General government balance (Percent of GDP): -2.0 (2016); -3.0 (2017); -0.5 (2018); -0.2 (2019); 0.1 (2020); 0.8 (2021); 0.5 (2022); 0.6 (2023); 0.8 (2024). - Revenues (Percent of GDP): 42.8 (2016); 42.7 (2017); 43.5 (2018); 43.6 (2019); 43.7 (2020); 44.2 (2021); 43.9 (2022); 43.9 (2023); 44.0 (2024). - Expenditures (Percent of GDP): 44.8 (2016); 45.7 (2017); 44.0 (2018); 43.9 (2019); 43.7 (2020); 43.5 (2021); 43.3 (2022); 43.3 (2023); 43.1 (2024). - Primary government balance (Percent of GDP): 2.2 (2016); 0.9 (2017); 3.0 (2018); 3.1 (2019); 3.4 (2020); 3.8 (2021); 3.3 (2022–2024). - General government debt (Percent of GDP): 129.2 (2016); 124.8 (2017); 121.5 (2018); 118.8 (2019); 116.0 (2020); 110.3 (2021); 106.0 (2022); 104.4 (2023); 100.6 (2024). - Nominal GDP (Billions of euros): 186.5 (2016); 194.6 (2017); 201.6 (2018); 208.2 (2019); 215.0 (2020); 221.7 (2021); 228.6 (2022); 235.7 (2023); 243.1 (2024). - Unemployment rate (Percent, average): 11.1 (2016); 8.9 (2017); 7.0 (2018); 6.2 (2019); 5.7 (2020); 5.5 (2021); 5.4 (2022); 5.3 (2023–2024). - Consumer prices (Harmonized index): 0.6 (2016); 1.6 (2017); 1.2 (2018); 1.1 (2019); 1.5 (2020); 1.6 (2021); 1.7 (2022); 1.8 (2023); 1.9 (2024). --- ### Public Debt Sustainability Analysis (Annex I) - Baseline trajectory: - Debt decline: expected to decline by an average of 3 percent of GDP a year over the next 5 years. - Primary balance: 3.1 percent of GDP in 2019; projected to persist over 2020–2024 under current policy. - Potential growth assumption: 1.4 percent. - Interest payments as share of GDP: decline from 3.4 percent in 2018 to 2.5 percent in 2024. - Gross nominal public debt (Percent of GDP): 124.8 (2018); 121.5 (2019); 118.8 (2020); 116.0 (2021); 110.3 (2022); 106.0 (2023); 100.6 (2024). - Cumulative change in gross public sector debt (projection window): -20.9 (percent of GDP). - IGCP cash buffer end-2018: €9.3 billion, 4.6 percent of GDP. - Risk assessment: - High debt level remains a vulnerability; debt will not fall below the MAC DSA ‘high-risk’ threshold of 85 percent of GDP until 2030 under current projections. - EMBIG (bp) as of May 22, 2019: 111. - 5Y CDS (bp): 63. - Public gross financing needs (2019 baseline): 12.2 percent of GDP. - Stress tests: - Growth shock (recession in 2020 and 2021 with real growth -0.9 and -1.0 percent): debt peaks at 122 percent of GDP; GFNs peak at 19 percent of GDP. - Combined macro-fiscal and contingent liability shock (10 percent of GDP contingent liability): debt peaks at 130 percent of GDP; GFNs peak at 24 percent of GDP. - Staff recommendation: pursue further durable fiscal consolidation and structural reforms to raise potential output to reduce debt more quickly. --- ### Early repayment to the IMF (Annex II) - Action and timing: - Final repurchase on December 10, 2018: cleared outstanding IMF credit five years ahead of schedule. - Early repayments began in 2015 and accelerated in 2017. - Financial rationale: - Savings: comparator analysis showed Portugal saved almost 400 basis points of interest (net) on repurchased amounts by late 2017–early 2018, plus hedging cost savings. - After February 2018, Portugal paid the IMF “basic rate” which remained more than 100 basis points higher than sovereign yield for equivalent maturity. - EA surcharges (=300 bps) applied while balances exceeded surcharge threshold; after February 2018 the marginal cost equaled the IMF’s basic rate. - Additional benefits: - Repayments smoothed public debt maturity profile. - Conclusion: repayment was financially sound. --- ### r* (natural rate) definition, measurement, and implications - Definition: - r* defined in terms of the short-run, risk-free interest rate (overnight or 3-month maturity); distinct from average return on capital. - Estimation frameworks and findings: - Laubach-Williams (L-W) framework (modified following Pescatori and Turunen, 2015) with Bayesian calibration and Kalman filter. - L-W original: r* falls from ~2.5 percent in 1999 to around -2 percent at crisis depth; rebounds to around 1 percent by 2018. - Modified L-W with WEO g*: similar but less deep crisis dip. - Extensions: model z_t as function of REER, trading partner growth, and CDS spread to capture drivers orthogonal to potential growth. - CDS spreads associated with large movements in estimated r*; high-frequency estimate fell to nearly -10 percent at crisis depths when CDS included. - Trading partner growth: main driver of dip in 2008/9. - REER overvaluation at euro entry acted as headwind. - Market-based common-factor approach (Del Negro et al., 2018 style): - Portugal-specific common-factor estimate: r* around 0.8 percent in 1999, falling to around -0.8 percent in 2018. - r* co-moves closely across countries; Portugal’s gap with Euro Area common factor small. - Market-based projections: - Two techniques (forward swap rates; Nelson-Siegel term-structure fit) imply r* likely between 0.1 and 1.6 percent over the medium-term. - Caveat: projections biased upwards if credit/liquidity premia exist. - Interest rate gap and monetary conditions: - Interest rate gap = actual real rate − r*; positive implies deflationary conditions, negative implies inflationary. - Using shadow rate estimates (Krippner, 2015) shows highly accommodative policy from 2014; interest rate gap around -8 percent in 2016 for all three r* measures. - Country-specific measures highlight restrictive conditions in Portugal 2011–2014 due to risk-driven credit crunch. - Link to public debt dynamics: - Lower r* does not mechanically improve debt dynamics because r* and g* can move together; effective interest rate on existing debt adjusts slowly; lower r* may increase ELB risk; credit risk premia critical. - For Portugal DSA (Annex I): natural/effective interest rate remains low over medium-term; r − g projected close to zero; primary balance drives debt reduction. --- *Italic: Source: IMF staff report (1prtea2019001) — EXECUTIVE SUMMARY, informational annexes, and excerpts (June 18, 2019; Statement July 1, 2019).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Recent developments - Economic activity moderated after a strong 2017: real GDP growth was 2.1 percent in 2018 (2.8 percent in 2017) and 1.8 percent y-o-y in 2019:Q1. - Deceleration in 2018H2 coincided with weaker economic activity in Europe; lower exports and investment contributed to slower growth. - Labor market: - Employment growth moderated to 2.3 percent in 2018 (from 3.3 percent in 2017). - Unemployment rate reached 6.5 percent (s.a.) in 2019:Q1. - Job vacancy rate is at historically high levels (Beveridge curve). - Inflation and labor costs: - Headline inflation averaged 1.2 percent in 2018 and slowed to 0.9 percent in April 2019. - Euro Area headline rates were 1.8 percent (2018) and 1.7 percent (April 2019). - Core inflation was 0.7 percent in 2018 and 0.8 percent in April 2019. - Unit labor costs (ULCs) increased in nominal terms in 2018 but were broadly stable in real terms; real labor productivity declined -0.2 percent y-o-y in 2018. - Fiscal accounts: - Nominal fiscal balance improved to -0.5 percent of GDP in 2018 (from -3.0 percent in 2017). - One-off costs: 2.0 percent of GDP in 2017 (largely CGD recapitalization) and 0.4 percent of GDP in 2018 (largely capital transfer to Novo Banco). - Portugal paid off the balance of its IMF credit at end-2018, five years ahead of schedule. - Spreads over German 10-year bonds reached 1 percent one year after May 2018 turbulence. - External sector: - Current account turned negative in 2018: declined by 1.1 percent of GDP to -0.6 percent of GDP. - Balance of trade in goods and services declined by about 0.8 percentage points of GDP in 2018. - NIIP rose modestly to -100 percent of GDP in 2018. - CPI and ULC-based REER stable and slightly below pre-crisis levels. - Credit and banking: - Total credit to the nonfinancial private sector continued to decline in 2018 and early 2019. - Loans to nonfinancial corporates declined 5.7 percent y-o-y in April 2019. - Loans to households declined y-o-y during December 2018–April 2019; consumer loan growth did not offset mortgage decline. - Banking system strengthening over 4 years: - Common Equity Tier 1 capital ratio: 13.2 percent in 2018:Q4 (11.3 percent at end-2014). - NPL ratio declined 8.4 percentage points from June 2016 peak to 9.4 percent in 2018:Q4. - Impairment coverage ratio increased to 51.9 percent (from 40.8 percent at end-2015). - Banks reported positive profits since beginning of 2017. ### Outlook and risks - Growth projections: - Real GDP growth projected at 1.7 percent in 2019, easing towards estimated medium-term potential of 1.4 percent. - Staff project consumer price inflation of 1.1 percent for 2019 and 1.5 percent in 2020. - Unemployment projected to decline to 6.2 percent in 2019. - A slightly positive output gap is projected for 2019. - Fiscal outlook: - Government target: near-balanced budget in 2019 (-0.2 percent of GDP). - Greater-than-budgeted Novo Banco capital transfer increases spending commitments by 0.4 percent of GDP over budgeted amount; staff still expect the -0.2 percent of GDP target to be achieved through lower capital investment and buoyant revenue. - Under constant policies and absent unforeseen shocks, public debt projected to decline from 122 percent of GDP in 2018 to around 100 percent of GDP by 2024 (Annex I). - Risks (shifted to the downside): - External demand shock: weaker-than-expected global growth, especially in the Euro Area, would reopen the output gap and could bring the fiscal deficit close to 0.7 percent of GDP in 2019–2020, delaying public debt reductions until 2021. - Disorderly Brexit could cause market disruptions and negative spillovers—moderate direct trade impact but potentially significant tourism effects. - Rising protectionism, intensification of security risks, and a sharp tightening of global financial conditions could raise bond yields and interest rates, straining public and private balance sheets. - Domestic policy slippages or reversal of past reforms could amplify external risks; conversely, strong macro-financial and structural policies would mitigate them. - Downside scenario (as used in Figure 1): - Weaker-than-expected growth for four quarters, including a technical recession in Portugal with negative real growth for two quarters of about -0.2 percent qoq. - Fiscal and macroeconomic impacts of this shock are derived from a semi-structural model. ### Policy discussions and recommendations - Overarching policy stance: - Strong macroeconomic policies should be sustained. - Continue the multi-year fiscal consolidation effort to reduce vulnerabilities. - In a material downturn, a neutral fiscal stance is appropriate: allow nominal deficit to widen as automatic stabilizers operate, provided public debt ratio remains on a downward trajectory. - Fiscal policy: - Maintain discipline to keep structural fiscal surplus and support continued decline in public debt. - Achieve 2019 near-balanced target (-0.2 percent of GDP) despite higher Novo Banco transfer by offsetting with lower capital investment and buoyant revenue. - Financial sector and banks: - Supervisors should ensure banks meet NPL reduction targets. - Strengthen corporate governance, internal controls, and risk management in banks. - Continue efforts that have raised Common Equity Tier 1 to 13.2 percent and reduced NPL ratio to 9.4 percent. - Deleveraging and savings: - Strengthening domestic saving rates is necessary to continue deleveraging and sustain higher investment rates without creating new external imbalances. - Authorities should consider measures to encourage complementary second- and third-pillar pension schemes to boost private saving. - Structural reforms to raise medium-term growth: - Address low investment, subdued productivity growth, and unfavorable demographic trends that constrain potential growth (estimated medium-term potential 1.4 percent under baseline with no new significant reforms). - Improve policies to boost productivity of available resources and increase resilience to external shocks. ### Macro-financial specifics (households and NFCs) - Household sector: - Household debt-to-GDP declined 1.8 percentage points to 70.6 percent in 2018 but remains above Euro Area average. - Household deleveraging moderated since 2017 due to increased consumer loans and, to a lesser extent, mortgages. - Low household saving rates imply continued vulnerability to income shocks and interest rate spikes; boosting household saving rates is recommended. - Nonfinancial corporate (NFC) sector: - NFC debt-to-GDP declined by 8.1 percentage points to 131.1 percent of GDP in 2018 (net loan repayments, write-offs, and nominal GDP growth). - NFC capital increased, with SME equity-to-capital asset ratio surpassing 2006 level. - At current debt levels, NFCs remain exposed to negative shocks and interest rate increases. *Source: EXECUTIVE SUMMARY, June 18, 2019.* ### 12. Supervisors should ensure banks continue to address their still large stock of legacy ### 1prtea2019001 - 12. Supervisors should ensure banks continue to address their still large stock of legacy ### Legacy assets, NPLs, and bank profitability - Portuguese banks have been reducing legacy assets with a mix of cures, write-offs, sales, and foreclosures, consistent with the NPL reduction strategy pursued by the authorities. - Non-performing loan (NPL) ratios remain among the highest in the Euro Area. - Low interest rates, high operating costs, and impairments continue to weigh on profitability. - Profitability is subject to headwinds from: - heightened competition in the provision of financial services by nonbank financial institutions (payment systems and financing), and - the need to obtain costlier “bail-in -able” MREL resources (Minimum Requirement for own funds and Eligible Liabilities). - Supervisory recommendations: - Ensure banks continue to follow through on their NPL reduction targets. - Strengthen corporate governance, internal controls, and risk management. - Encourage banks to step up efforts to improve operational efficiency and profitability. - Reported legacy/NPL developments and metrics: - Legacy asset reductions by major banks (source: Banks' quarterly reports): CGD NPL ratio target (in percent) 1/ 12.5 10.0 7.0 5.0; NPL ratio (in percent) 15.8 12.0 8.5 (table format preserved as in source). - Novo Banco: Legacy assets (in € billion) 14.7 10.7 (values presented as in source). - CCAs asset (in € billion) 3/ 7.9 5.4 4.0 (values presented as in source). - Reported system-wide reduction: Non-performing loans continued to decline significantly (€25 billion corresponding to a decrease of around 50 percent in volume since its peak in June 2016). - Net NPL ratio below 5 percent by the end of 2018 (4.5 percent). ### Capital resilience and sovereign/real estate exposures - 2017–2018 capital augmentations helped banks absorb losses from legacy asset reductions and improve buffers, in conjunction with provisions. - Risks to capital and asset quality: - A weaker-than-expected economy could worsen asset quality and pressure profits. - High concentrated exposures to the real estate market and to the sovereign remain a vulnerability. - In December 2018, holdings of domestic government securities by the banking system stood at 8.8 percent of total assets, up 0.5 percentage points from a year earlier. - Simulation (IMF Global Financial Stability Report, benchmarked June 2018): under a severe scenario in which yields on BBB rated bonds increase by 250 basis points, Tier 1 capital ratios would decline by about 1.5 percentage points to levels slightly lower than in 2010. - Banco de Portugal estimated the direct negative impact of a 100-basis-point rise in domestic public debt yields on banks’ capital ratios at 58 basis points. - Supervisory recommendation: - Ensure that capital buffers provided by the 2017–2018 augmentations are not eroded. - Ensure banks’ capital ratios are resilient to a potential weakening of the economy and changes in risk premia. ### Housing market, mortgage lending, and macroprudential monitoring - House price developments: - Growth of the Portuguese House Price Index (HPI) decelerated to 9.3 percent y-o-y in 2018:Q4 from its 12.2 percent y-o-y peak in 2018:Q1. - Existing dwellings rose 9.5 percent y-o-y in 2018:Q4. - Median value per square meter increased more than 23 percent y-o-y in 2018:Q4 in Lisbon and Porto (as reported). - Real estate exposure and mortgage activity: - Banks’ exposures to real estate: 38 percent of total assets as of December 2018. - Most real estate transactions have not been financed with mortgages. - Mortgage lending could increase if strong price rises persist, further raising banks’ real estate exposures and household leverage. - New credit granted to households stabilized amid tightening bank credit standards. - Mortgage lending has been stable at 40 percent of real estate transactions, significantly below pre-crisis levels (as noted by the authorities). - Macroprudential stance: - Authorities implemented borrower-based macroprudential measures in February 2018, with reported broad compliance (Banco de Portugal). - Supervisors should closely monitor mortgage markets and be ready to adjust macroprudential measures if needed. ### Proposed supervisory and resolution framework reform - The government submitted a bill to Parliament to reform the financial sector supervisory and resolution frameworks; further discussion is needed on several aspects. - Objectives and proposed changes in the bill: - Improve coordination among supervisors. - Limit the risk of conflicts of interest related to assigning supervision and resolution functions to the same entity. - Give a permanent structure and legal personality to the mechanism for coordination of supervisors, vesting it with new powers (including macroprudential policy) and create a new resolution authority separate from supervisors. - Modify aspects of governance of existing supervisory bodies. - Concerns and positions: - The three sectoral supervisors affected (Banco de Portugal, the Securities and Exchange Commission, and the Insurance and Pension Funds Regulator) communicated substantive concerns to Parliament about interaction with sectoral supervisors, potential implications for independence and effectiveness, and funding costs of new entities. - Banco de Portugal and the ECB see some provisions as inconsistent with the European institutional framework. - Staff view: different architectures can achieve core policy objectives but should guarantee supervisory independence, cost efficiency, and that sensitive decisions can be made soundly and quickly. Staff recommend that Banco de Portugal retain a central role in macroprudential policy given its expertise and the small, bank-dominated character of Portugal’s financial system. - The comments by the three national supervisors and the ECB raise legitimate concerns that deserve full parliamentary examination before the bill is turned into law. ### Authorities’ and Ministry views on banking sector developments - Authorities highlighted improvements during the last year: - Total capital ratio stabilized in 2018, benefitting from issuance of AT1 and Tier 2 instruments. - Banking system profitability recovered with lower credit impairment losses and higher operational efficiency, resulting in a ROA slightly above EA average during 2018 Q1–Q3. - NPLs declined significantly (€25 billion, ~50 percent reduction since June 2016) and impairment coverage ratios increased. - Net NPL ratio at 4.5 percent by end-2018. - Banking system total assets increased in 2018 for the first time since 2010; liquidity position remained comfortable. - High degree of compliance by banks with borrower-based macroprudential measures during July 2018–March 2019. - Portuguese firms (especially SMEs) and households continued to deleverage — household leverage now not far above the Euro Area median level. - Corporate credit growth was broad based across sectors and concentrated on low and medium-risk firms. - Ministry of Finance position: - With the banking system undergoing fast recovery, it considered it possible to finalize reform of the financial supervision and resolution institutional framework based on lessons learned, including stronger coordination among sectoral supervisors while preserving their independence. - Banco de Portugal stressed it was not opposed in principle to updating the framework but had major concerns about elements of the proposed legislation that could undermine independence or be inconsistent with the European institutional framework. - European authorities view several elements of the proposed law as either incompatible with the European institutional framework or inconsistent with the Basel Core Principles for Effective Banking Supervision and recommend reconsideration. *Italic: Source: 1prtea2019001 - 12. Supervisors should ensure banks continue to address their still large stock of legacy (excerpt).* ### 2007. However, the system remains expensive, generous by OECD standards and does little to ### 1prtea2019001 - 2007. However, the system remains expensive, generous by OECD standards and does little to correct old-age income inequality. Also, a generous PAYG first pillar supported with general revenue may be discouraging private saving. It is recommended that the outcomes of past reforms be re-examined, with the view to identify possible actions, focused on the highest pensions, to enhance equity in the system and keep a tight control on the trajectory of pension spending. For instance, the accrual rates for the largest earning brackets could be reduced in order to gradually converge to EU average replacement rates. ### Pensions, social protection, and public employment - Findings - The pension system remains expensive and generous by OECD standards and does little to correct old-age income inequality. - A generous PAYG first pillar supported with general revenue may be discouraging private saving. - Pressure on the wage bill is mounting: public employment grew by over 2 percent despite a commitment to reduce it in the 2018 budget. - The move to a 35-hour week and the gradual unfreezing of career progressions are putting additional pressure on the wage bill. - The stop-and-go cycle of career progressions since 2005 has been disruptive and raises sustainability questions. - Policy recommendations - Re-examine outcomes of past pension reforms to identify actions focused on the highest pensions to enhance equity and control pension spending trajectory. - Consider reducing accrual rates for the largest earning brackets to gradually converge to EU average replacement rates. - Conduct a comprehensive review of the level, composition and rules of public employment to identify ways to control wage-bill increases without affecting service delivery. - Continue to rationalize spending and modernize practices (example given: ongoing reforms in the health sector). - Enact regulations needed for complementary second-tier occupational pension schemes and explore options to encourage complementary second- and third-pillar pension schemes. ### Authorities’ fiscal stance and projections - Authorities’ views - The Stability Program 2019–2023 envisages that the structural balance will exceed the MTO in 2020, stabilizing at 0.3 percent of potential GDP. - Expected drivers: continuation of efficiency gains from the spending review, a declining interest bill, and moderation in the public sector wage bill. - Authorities expect this stance to provide a buffer against temporary shocks and keep debt on a firm downward trend. - In the near term, the government will further reduce the penalty on early retirement for very long careers; this measure is described as having a minimal fiscal impact. - In the event of a slowdown, authorities believe there is sufficient fiscal space to allow automatic stabilizers to fully operate. - Staff appraisal related fiscal guidance - Consider additional fiscal efforts in 2019 and 2020 to reduce still-high public debt more rapidly. - In a material downturn, a neutral fiscal stance allowing the nominal deficit temporarily to widen would be appropriate if public debt remains on a downward trajectory. - Prioritize public investment through rebalancing the composition of public spending. ### Structural issues, growth, investment, and saving - Findings on growth and structure - Following a five-year expansion, real GDP returned to pre-crisis levels in 2018. - GDP per capita remains 40 percent lower than the Euro Area average, with no significant convergence envisaged over the next five years. - Employment and labor force participation in 2018 are still below their pre-crisis peak levels despite declines in unemployment. - Investment remains relatively low as a ratio to GDP: 17.5 percent in 2018 vs the EA average of 21 percent. - Recent investment growth has been financed through a mix of retained corporate earnings and debt. - Saving dynamics - Corporate savings recovered to around 13 percent of GDP in 2017. - Household savings reached 3.2 percent of GDP in 2017 and have been on a protracted declining trend. - Portuguese household saving rates (to disposable income and GDP) are among the lowest in Europe. - Country-specific factors negatively associated with saving ratios include household debt, and government spending on social protection benefits and pensions. - Recommendations to support investment and saving - Improve regulatory environment, strengthen competitiveness, and make more efficient use of labor. - Promote competition in network industries; address relatively high energy prices. - Enact regulations for complementary second-tier occupational pension schemes and explore policies to encourage second- and third-pillar private pension coverage to boost household saving. - Raise skill levels to support productivity and household saving (education improvements have spillovers to saving). ### Labor market, skills, and gender - Skills and education - Share of low-skilled workers is 46 percent in 2017 vs. 17 percent in the EU. - The difference is much smaller for younger age groups, suggesting improvements through cohort replacement. - OECD over-qualification mismatch indicator for Portugal is one of the highest among advanced economies, though Banco de Portugal staff found lower levels of over-qualification in cross-country comparisons. - Policy focus: raise quality of education and training in vocational schools; foster exchanges between universities and industry (examples: Porto and Coimbra regions). - Gender and participation - The gender gap in labor force participation is smaller than the European average and has been narrowing. - Portugal ranked 37 among 149 countries in the WEF 2018 Global Gender Gap Report. - The gender pay gap is above the European averages; women are over-represented in low-paying clerical and service occupations and more likely to be part-time or on fixed-term contracts. - Portugal has high enrollment rates of children under age 3 in formal childcare and high participation intensity, but the share of public funding for early childhood services is relatively low. - The recently adopted law on equal pay provides assessment and correction mechanisms and measures to promote more balanced gender representation at managerial positions. - Labor market rigidities - Employment protection for permanent contracts remains one of the strongest in the Euro Area, contributing to labor market segmentation. - Share of temporary employment in Portugal has been stable at around 19 percent (the second largest in the Euro Area). - Minimum-to-median wage ratio is one of the highest in Europe; in H1 2018, 40.2 percent of new employment contracts were at the minimum wage and 22.6 percent of total employment contracts are at the minimum wage. - Recommendation: enhance flexibility by making permanent contracts more flexible rather than making temporary contracts costlier; ensure wage growth consistent with productivity. ### Financial sector and insolvency - Findings and recommendations - Banks’ NPL ratios are now in single digits; supervisors should maintain focus on furthering ongoing bank balance sheet repair. - Supervisors should ensure banks follow through on NPL reduction targets, strengthen corporate governance, internal controls, risk management, and improve operational efficiency and profitability. - Debt enforcement and insolvency frameworks have improved but restructuring and liquidation processes remain slow. - Staff recommends: (i) enable public creditors to participate more fully in debt restructuring, preferably on the same footing as other creditors, subject to clear and transparent guidelines; and (ii) identify and address conditions that allow non-viable insolvent businesses to delay liquidation. - Financial supervision reform bill contains positive elements, but Banco de Portugal, securities market and insurance supervisors, and the ECB raised concerns that merit careful consideration in Parliament before finalization. - External position - Portugal’s external position is moderately weaker than consistent with medium-term fundamentals and desirable policies. - Net international investment position has been improving in recent years. - Maintaining a positive current account balance in coming years would be helpful and calls for stronger domestic saving. ### Key statistics and exact figures cited - Public employment growth: over 2 percent (2018 budget period). - Structural balance target: stabilizing at 0.3 percent of potential GDP (from Stability Program 2019–2023). - Move to a 35-hour week referenced as a driver of wage-bill pressure. - Real GDP: returned to pre-crisis levels in 2018. - GDP per capita: remains 40 percent lower than the Euro Area average. - Investment ratio: 17.5 percent in 2018 vs the EA average of 21 percent. - Corporate savings: around 13 percent of GDP in 2017. - Household savings: 3.2 percent of GDP in 2017. - Share of low-skilled workers: 46 percent in 2017 vs. 17 percent in the EU. - Share of temporary employment: around 19 percent. - Share of new employment contracts at the minimum wage (H1 2018): 40.2 percent. - Share of total employment contracts at the minimum wage: 22.6 percent. - Portugal ranked 37 among 149 countries in the WEF 2018 Global Gender Gap Report. *Source: IMF staff report (excerpts provided in the content unit).* ### 40. It is proposed that the next article IV consultation take place on the standard 12- ### 1prtea2019001 - 40. It is proposed that the next article IV consultation take place on the standard 12- ### Article IV timing - It is proposed that the next article IV consultation take place on the standard 12-month cycle. ### Real sector: key indicators and recent observations - Real GDP (year-on-year percentage change, projections): 1.9 (2016); 2.8 (2017); 2.1 (2018); 1.7 (2019); 1.5 (2020); 1.4 (2021); 1.4 (2022); 1.4 (2023); 1.4 (2024). - Contributions to change in GFCF (year-on-year; percentage points) shown by components: Machinery and Equipment, Construction, Other (last observation 2019Q1). - Tourism developments (sum of last 4 quarters, last obs. 2019Q1): Hotel revenues (billion euros), Overnight stays (millions), Number of travellers (millions) depicted in figure (series up to 2019Q1). - High frequency indicators (year-on-year percent change, last obs. 2019Q1): Industrial production, Manufacturing industrial production, Retail sales volume. - Labor market underutilization (percent, last obs. 2018Q4): components include Persons not seeking/seeking work but available/not available immediately, Involuntary part-time, Long-term unemployment, Unemployment (excl. long-term). ### Fiscal sector: recent balance, composition, and projections - Fiscal balance (percent of GDP): series shown 2007–2018 for fiscal balance and structural primary balance (figure). - Current Primary Expenditure, 2018 (Percent of GDP) composition: - Wages, 10.8 - Intermediate consumption, 5.4 - Other transfers, 6.6 - Other, 2.5 - Subsidies, 0.4 - Pensions, 11.6 - Public Gross Fixed Capital Formation (Percent of GDP): historical Portugal vs EU series (1996–2018). - 10 Year Government Bond Yields (Percent; Last obs. May 27, 2019) shown for Portugal, Spain, Italy, Ireland. - Projected Public Debt at End-2019 (Percent of GDP) shown by country ranking (PRT included). - Table 1 — Selected fiscal projections (year-on-year percent change, unless otherwise indicated): - General government balance (Percent of GDP): -2.0 (2016); -3.0 (2017); -0.5 (2018); -0.2 (2019); 0.1 (2020); 0.8 (2021); 0.5 (2022); 0.6 (2023); 0.8 (2024). - Revenues (Percent of GDP): 42.8 (2016); 42.7 (2017); 43.5 (2018); 43.6 (2019); 43.7 (2020); 44.2 (2021); 43.9 (2022); 43.9 (2023); 44.0 (2024). - Expenditures (Percent of GDP): 44.8 (2016); 45.7 (2017); 44.0 (2018); 43.9 (2019); 43.7 (2020); 43.5 (2021); 43.3 (2022); 43.3 (2023); 43.1 (2024). - Primary government balance (Percent of GDP): 2.2 (2016); 0.9 (2017); 3.0 (2018); 3.1 (2019); 3.4 (2020); 3.8 (2021); 3.3 (2022); 3.3 (2023); 3.3 (2024). - General government debt (Percent of GDP): 129.2 (2016); 124.8 (2017); 121.5 (2018); 118.8 (2019); 116.0 (2020); 110.3 (2021); 106.0 (2022); 104.4 (2023); 100.6 (2024). ### General government accounts (Tables 2a and 2b): levels and percent-of-GDP detail - Revenues (Billions of euros): 79.9 (2016); 83.1 (2017); 87.7 (2018); 90.8 (2019); 94.0 (2020); 98.1 (2021); 100.3 (2022); 103.6 (2023); 106.9 (2024). - Taxes (Billions of euros): 46.4 (2016); 48.8 (2017); 51.9 (2018); 53.2 (2019); 54.9 (2020); 56.7 (2021); 58.5 (2022); 60.4 (2023); 62.3 (2024). - Expenditure (Billions of euros): 83.6 (2016); 88.9 (2017); 88.6 (2018); 91.3 (2019); 93.9 (2020); 96.4 (2021); 99.1 (2022); 102.1 (2023); 104.9 (2024). - Net lending (+)/borrowing (–) (Billions of euros): -3.7 (2016); -5.8 (2017); -0.9 (2018); -0.5 (2019); 0.2 (2020); 1.7 (2021); 1.3 (2022); 1.5 (2023); 2.0 (2024). - Memorandum: Primary balance (Billions of euros): 4.1 (2016); 1.7 (2017); 6.0 (2018); 6.5 (2019); 7.2 (2020); 8.5 (2021); 7.6 (2022); 7.8 (2023); 8.0 (2024). - Debt at face value (EDP notification, Billions of euros): 241.0 (2016); 242.8 (2017); 244.9 (2018); 247.4 (2019); 249.3 (2020); 244.6 (2021); 242.3 (2022); 246.1 (2023); 244.6 (2024). - Nominal GDP (Billions of euros): 186.5 (2016); 194.6 (2017); 201.6 (2018); 208.2 (2019); 215.0 (2020); 221.7 (2021); 228.6 (2022); 235.7 (2023); 243.1 (2024). ### External sector: trade, current account, and financial flows - Trade in goods and services (Percent of GDP; 12-month rolling sum, last obs. Mar. 2019): series show imports, exports, and balance (figure). - Contribution to growth in exports of goods, by destination (Percentage points; year-on-year, last obs. 2019Q1): destinations include EAEU ex-EA & UK, UK, US, Brazil, Angola, Other. - Income account (Percent of GDP; 12-month rolling sum, last obs. Mar. 2019): Direct investment, Portfolio investment, Other investment. - Financial account (Billions of euros; 12-month rolling sum, last obs. Mar. 2019): FDI (net), Portfolio (net), Other investment (net) series shown. - Real Effective Exchange Rate (Index: 2005Q1=100, last obs. 2019Q1): ULC-based and CPI-based indices with historical series. - Table 4 — Balance of Payments (Billions of euros; projections): - Current and Capital account: 3.0 (2016); 2.7 (2017); 0.9 (2018); 3.0 (2019); 3.6 (2020); 2.6 (2021); 1.3 (2022); 0.5 (2023); 0.7 (2024). - Current account (Billions of euros): 1.1 (2016); 0.9 (2017); -1.2 (2018); -1.2 (2019); -1.2 (2020); -1.2 (2021); -1.9 (2022); -2.2 (2023); -2.6 (2024). - Trade balance (Billions of euros): -9.6 (2016); -12.1 (2017); -14.7 (2018); -16.5 (2019); -17.6 (2020); -18.5 (2021); -19.6 (2022); -20.6 (2023); -21.8 (2024). - Services, net (Billions of euros): 13.5 (2016); 15.6 (2017); 16.7 (2018); 17.5 (2019); 19.1 (2020); 20.1 (2021); 21.2 (2022); 22.3 (2023); 23.4 (2024). - Tourism (component of services exports): Exports attributed to Tourism (Billions of euros): 12.7 (2016); 15.2 (2017); 16.6 (2018); 18.0 (2019); 19.6 (2020); 21.1 (2021); 22.2 (2022); 23.4 (2023); 24.6 (2024). - Net international investment position (Percent of GDP, memorandum): -105.5 (2016); -104.9 (2017); -100.8 (2018); -96.2 (2019); -91.5 (2020); -87.6 (2021); -84.3 (2022); -81.6 (2023); -78.8 (2024). ### Financial stability and banking sector indicators - Household debt (Percent of GDP, 2018:Q4) and Non-financial corporate debt (Percent of GDP, 2018:Q4): cross-country comparisons shown in figure (Portugal included). - Interest rates on new loans (Percent; last obs. Mar. 2019): series for Loans to NFCs (up to 1 million), Loans to NFCs (over 1 million), Loans for house purchase, Consumer loans. - Banks' profitability (Percent of total assets) quarterly series shown (net interest income, net commissions, financial operations results, other income, operational costs, impair and provision, RoA). - Real house prices (2010=100; last obs. 2018Q4) and Price-to-Income and Price-to-Rent Ratios (2010=100; last obs. 2018Q4). - Table 5 — Selected financial indicators of the banking system (Percent; quarterly series through 2018/2019 in panel): - Regulatory capital to risk-weighted assets: series around 12.0–15.3 depending on quarter and year. - Common Equity Tier 1 capital to risk-weighted assets: series around 11.1–15.3 depending on quarter and year. - Non-performing loans to total gross loans: 12.3 (2015Q1) decreasing over time to 9.4 (2017 series) and further to 3.9 (2018) and 4.7/4.0 etc. (quarterly detail provided). - Loans to deposits series: 101.7 (2015Q1) and varying quarterly (detailed series provided). - Return on assets and return on equity series shown quarterly (detailed series provided). ### Monetary and credit aggregates - Table 3 — Monetary survey (Millions of euros; end of period, projections): - Broad money (M3): 167,000 (2016); 179,666 (2017); 194,944 (2018); 200,352 (2019); 205,846 (2020); 211,247 (2021); 216,790 (2022); 222,479 (2023); 228,319 (2024). - Narrow money (M1): 76,981 (2016); 89,105 (2017); 101,393 (2018); 104,206 (2019); 107,063 (2020); 109,872 (2021); 112,756 (2022); 115,714 (2023); 118,752 (2024). - Private sector credit (Millions of euros): 207,317 (2016); 200,893 (2017); 198,846 (2018); 199,045 (2019); 200,637 (2020); 203,847 (2021); 207,109 (2022); 210,423 (2023); 213,789 (2024). - Broad money (percent change): 9.0 (2016); 7.6 (2017); 8.5 (2018); 2.8 (2019); 2.7 (2020); 2.6 (2021); 2.6 (2022); 2.6 (2023); 2.6 (2024). - Private sector credit (percent change): -3.7 (2016); -3.1 (2017); -1.0 (2018); 0.1 (2019); 0.8 (2020); 1.6 (2021); 1.6 (2022); 1.6 (2023); 1.6 (2024). ### Structural reform gaps (Figure 6) - Portugal’s position vis-à-vis OECD countries on structural indicators normalized 0 (min) to 1 (max); higher values indicate better outcomes. - Indicators where Portugal exceeds OECD average (blue bars) and where it falls below (red bars) are shown across categories including: - Credit market, Financial market development, Higher education and training, Health, Public expenditures on childcare and early education services, Skills shortage index, R&D expenditures, Innovation, Business dynamism, Technological readiness, ALMP expenditures, Employment protection, Labor market efficiency, Product market regulation, Sectoral regulation (electricity, professional services, retail), Administrative burdens on startups, Complexity of regulatory procedures, State control (involvement and public ownership), Starting a business, Business regulations, Product market efficiency. - The figure presents normalized comparisons (value axis 0.0–0.9) with OECD and PRT markers for each indicator. ### External debt sustainability (Table 6) - Baseline external debt (Percent of GDP): 214.1 (2016); 209.4 (2017); 204.7 (2018); 196.6 (2019); 191.8 (2020); 186.3 (2021); 182.0 (2022); 181.0 (2023); 177.5 (2024). - Change in external debt (Percent of GDP): -7.9 (2016); -4.8 (2017); -4.6 (2018); -8.1 (2019); -4.9 (2020); -5.5 (2021); -4.3 (2022); -1.0 (2023); -3.5 (2024). - Identified external debt-creating flows (4+8+9) (Percent of GDP): -8.2 (2016); -7.0 (2017); -2.3 (2018); -0.3 (2019); -0.1 (2020); 0.0 (2021); 0.1 (2022); 0.1 (2023); 0.3 (2024). - Current account deficit, excluding interest payments (Percent of GDP): -4.9 (2016); -4.3 (2017); -2.8 (2018); -2.8 (2019); -2.4 (2020); -3.0 (2021); -2.3 (2022); -2.3 (2023); -2.3 (2024). - Gross external financing need (Billions of euros): 163.4 (2016); 177.4 (2017); 198.6 (2018); 197.7 (2019); 203.1 (2020); 204.9 (2021); 209.0 (2022); 215.7 (2023); 227.0 (2024). - External debt-to-exports ratio (Percent): 526.6 (2016); 483.3 (2017); 462.6 (2018); 437.5 (2019); 421.0 (2020); 405.5 (2021); 393.8 (2022); 387.5 (2023); 374.8 (2024). - Key macroeconomic assumptions underlying baseline: - Real GDP growth: 1.9 (2016); 2.8 (2017); 2.1 (2018); 1.7 (2019); 1.5 (2020); 1.4 (2021); 1.4 (2022); 1.4 (2023); 1.4 (2024). - GDP deflator in Euros (Percent): 1.8 (2016); 1.5 (2017); 1.4 (2018); 1.5 (2019); 1.7 (2020); 1.7 (2021); 1.7 (2022); 1.7 (2023); 1.7 (2024). - Nominal external interest rate (Percent): 2.0 (2016); 1.9 (2017); 1.7 (2018); 1.7 (2019); 1.5 (2020); 1.9 (2021); 1.7 (2022); 1.8 (2023); 1.8 (2024). - Current account balance, excluding interest payments (Percent of GDP): 4.9 (2016); 4.3 (2017); 2.8 (2018); 2.8 (2019); 2.4 (2020); 3.0 (2021); 2.3 (2022); 2.3 (2023); 2.3 (2024). - Net non-debt creating capital inflows: -0.3 (2016); -2.4 (2017); -1.4 (2018); -2.6 (2019); -2.2 (2020); -2.0 (2021); -1.8 (2022); -1.6 (2023); -1.8 (2024). ### IMF credit and Fund-related indicators - Table 7 — Indicators of Fund Credit (Millions of SDR / percent of quota; projections): - Disbursements: total 4,065 (2016); 8,608 (2017); 4,661 (2018); 233 (2019); 333 (2020); 333 (2021); (projected) 3?? etc. (series provided; outstanding clarifications and projections included). - Interest and charges (Millions of SDR): 505 (2016); 376 (2017); 912 (2018); 333 (2019); 333 (2020); 333 (2021). - Repayments (Millions of SDR): 3,560 (2016); 8,232 (2017); 4,571 (2018); 0 (2019 onward in table). - Outstanding stock (Millions of SDR): 12,803 (2016); 4,571 (2017); 0 (2018 onward in table). - Percent of quota (Memorandum): 621.5 (2016); 221.9 (2017); 0.0 (2018 onward). - Total debt service to the Fund, in percent of Exports of goods and services: 6.7 (2016); 12.5 (2017); 6.3 (2018); 0.0 (2019 onward). ### Key cross-cutting projections and metrics - Nominal GDP (Billions of euros, Table 1 projections): 186.5 (2016); 194.6 (2017); 201.6 (2018); 208.2 (2019); 215.0 (2020); 221.7 (2021); 228.6 (2022); 235.7 (2023); 243.1 (2024). - Unemployment rate (Percent; average, Table 1 projections): 11.1 (2016); 8.9 (2017); 7.0 (2018); 6.2 (2019); 5.7 (2020); 5.5 (2021); 5.4 (2022); 5.3 (2023); 5.3 (2024). - Consumer prices (Harmonized index, Table 1): 0.6 (2016); 1.6 (2017); 1.2 (2018); 1.1 (2019); 1.5 (2020); 1.6 (2021); 1.7 (2022); 1.8 (2023); 1.9 (2024). *Source: IMF staff calculations and figures and tables presented in the 1prtea2019001 content unit.* ### Annex I. Public Debt Sustainability Analysis (DSA) ### Annex I. Public Debt Sustainability Analysis (DSA) ### Baseline scenario: trajectory and drivers - Debt is expected to decline by an average of 3 percent of GDP a year over the next 5 years. - Primary balance in 2019: 3.1 percent of GDP; projected to persist over 2020–2024 under current policy (assumes no new fiscal measures). - Potential growth assumption: 1.4 percent. - Interest-payment dynamics: - Interest payments as a share of GDP expected to decline from 3.4 percent of GDP in 2018 to 2.5 percent in 2024. - Effective interest rate on public debt falls as high-yield historical debt rolls over, despite a rise in marginal borrowing costs. - Projected gross nominal public debt: - 2018: 124.8 (percent of GDP) - 2019: 121.5 (percent of GDP) - 2020: 118.8 (percent of GDP) - 2021: 116.0 (percent of GDP) - 2022: 110.3 (percent of GDP) - 2023: 106.0 (percent of GDP) - 2024: 100.6 (percent of GDP) - Cumulative change in gross public sector debt (projection window noted in Figure 3): -20.9 (percent of GDP). - Market and liquidity context: - Gross financing needs (GFNs) remain below the DSA benchmark of 20 percent of GDP under baseline projections. - IGCP cash buffer at end-2018: €9.3 billion, 4.6 percent of GDP, reducing rollover/liquidity risks. ### Risk assessment and vulnerabilities - High debt level remains a vulnerability for fiscal sustainability and the wider economy despite downward momentum. - Under current projections, debt will not fall below the MAC DSA ‘high-risk’ debt threshold of 85 percent of GDP until 2030. - Sensitivity to interest-rate − GDP growth differential noted (snowball effect can reverse progress if shocks occur). - Large economy-wide external financing needs create vulnerabilities to foreign risk appetite and financial conditions. - Debt profile and market indicators (selected): - EMBIG (bp) as of May 22, 2019: 111 (basis points) - 5Y CDS (bp): 63 (basis points) - Public gross financing needs (2019 baseline): 12.2 (percent of GDP) - Staff recommendation summary: further durable fiscal consolidation and structural reforms to raise potential output are needed to reduce debt to safer levels more quickly. ### Realism of baseline assumptions and alternative scenarios - Baseline assumptions: - Constant primary structural balance after 2019. - Modest potential growth (1.4 percent). - Historical realism: - Historically, around one-third of countries have maintained a cyclically adjusted primary balance at Portugal’s current level or above for three years. - Portugal would need to maintain the current stance for considerably longer to reach safer debt levels. - Authorities’ Stability Program 2019–2023 scenario: - Shows debt reaching 100 percent of GDP in 2023 versus staff baseline 105 percent in 2023. - Assumes medium-term growth of 2 percent (substantially above staff estimate of 1.4 percent). ### Stress tests: scenarios and impacts - Growth shock (macro-fiscal stress test): - Involves a recession in 2020 and 2021 with real growth rates of -0.9 and -1.0 percent, respectively. - In this scenario: inflation falls, interest rates rise (via credit spread), and the primary balance deteriorates. - Outcome: debt would peak at 122 percent of GDP; GFNs would peak at 19 percent of GDP (just below the DSA debt-burden threshold). Market access would likely be maintained. - Combined macro-fiscal and contingent liability shock (Additional Stress Tests): - Macro-fiscal component driven mainly by the growth shock above. - Contingent liability component: 10 percent of GDP increase in debt (comparable to crisis-era banking support). - Outcome: debt would peak at 130 percent of GDP; GFNs would peak at 24 percent of GDP — significantly raising concerns over debt sustainability. - Probability: assessed as low. - Note: Single Resolution Mechanism provides an important buffer versus crisis-era sovereign exposure from banking-sector support. - Other stress tests summarized (from Figure 5): - Primary balance shock, real interest rate shock, real exchange rate shock, combined macro-fiscal shock, contingent liability shock — each tested with specified alternative paths for real GDP growth, inflation, primary balance, and effective interest rate as detailed in the stress-test panels. ### Interest-rate sensitivity and market co-movement - Historical pattern: - Pre-crisis: Euro Area sovereign yields moved largely in lock-step; Portugal’s yields closely tracked core (Germany). - Post-2008: markets differentiated; Portugal became more sensitive to non-core country yields and domestic events. - Recent episodes (e.g., May 2018) show Portugal’s yields reacting to events in other non-core countries (Italy). - Empirical approach: - Two-stage regression: daily change in Portuguese 10-year yields regressed on German yields, then residual regressed on average non-core yields to measure sensitivity to core and non-core movements. - Conclusion: despite improved fundamentals, Portugal remains highly sensitive to external market developments, particularly non-core sovereign yield movements. ### Key numerical indicators (selected, as reported) - Primary balance (2019 baseline): 3.1 percent of GDP. - Effective interest rate projections (selected): 2019: 2.9 (percent), 2024: 2.5 (percent). - Real GDP growth (baseline path): 2019: 2.1 (percent); 2020–2024: 1.7, 1.5, 1.4, 1.4, 1.4 (percent) respectively (see Figures). - Inflation (GDP deflator) baseline: 2019: 1.4 (percent); 2020–2024: 1.5, 1.7, 1.7, 1.7, 1.7 (percent) respectively. - Public gross financing needs (selected years, percent of GDP): 2018: 17.2; 2019: 12.2; 2024: 11.4 (percent of GDP) (Figure 3 projections). - IGCP cash buffer at end-2018: €9.3 billion, 4.6 percent of GDP. *Source: Annex I. Public Debt Sustainability Analysis (DSA).* ### Annex II. Early Repayment to the IMF ### Annex II. Early Repayment to the IMF ### Summary of action and timing - On December 10, 2018, Portugal made a final repurchase, clearing the outstanding balance of its IMF credit, five years ahead of schedule. - Portugal had been making early repayments since 2015, which accelerated in 2017. - The level of outstanding purchases remained above the surcharge threshold (187.5 percent of quota) until February 2018. ### Financial rationale and cost savings - Early repayments represented significant savings, especially on the debt subject to surcharges for large and prolonged use of IMF resources. - Using as a comparator the yield on sovereign bonds with a similar maturity in secondary markets, Portugal was saving almost 400 basis points of interest (net) on the amounts repurchased by late 2017-early 2018, as well as the cost of hedging foreign exchange risk. - After February 2018, Portugal was only paying the “basic rate” on the remainder of its IMF credit; this basic rate was still more than 100 basis points higher than the sovereign yield for an equivalent maturity. - EA surcharges (=300 bps) applied while outstanding balances exceeded the surcharge threshold; in February 2018 the outstanding balance fell to the threshold and the marginal cost of funds became equal to the IMF’s basic rate. - Definitions provided in source: - “Marginal” cost of funding is the interest cost on the next SDR that stands to be repurchased at each moment. - “Effective” cost is the average cost on all outstanding balances accruing at each point in time. ### Additional financial benefits - The December 2018 repayments helped smooth the overall profile of maturities of Portugal’s public debt. - Conclusion in source: the repayment was a financially sound decision. _Source: IMF staff calculations._ ### 2. r* is typically defined in terms of the short-run, risk-free interest rate. The ### 1prtea2019001 - 2. r* is typically defined in terms of the short-run, risk-free interest rate. The ### Definition and measurement of r* - r* is defined in terms of the short-run, risk-free interest rate (typically the overnight rate or 3-month maturity). - r* corresponds to a ‘risk-free’ interest rate: often government debt yields, the policy rate used by central banks, or the inter-bank overnight interest rate. - r* is distinct from the average return on capital, which includes credit and duration risk. - Empirical observation: return on capital has been stable or rising in the Euro Area while most measures of r* have been declining; this growing wedge has been attributed to rising risk aversion and higher profit margins. ### Laubach-Williams (L-W) framework and implementation - Benchmark: Laubach and Williams (2003) model; modified version used here follows Pescatori and Turunen (2015) with Bayesian calibration. - Model components: - Phillips curve and IS curve linking inflation, output gap, and interest rate gap: - Equation (1): inflation relation with lags and imported inflation term. - Equation (2): output gap dynamics including interest rate gap terms. - Real interest rate definition: r_p = i_p − E_p(π_{p+1}). - Trend growth (g*_p) follows a random walk with persistent shock. - r*_p is function of trend growth and an exogenous process z_p: r*_p = c g*_p + z_p, with c>0 and z_p assumed AR(2). - r* and g* simultaneously estimated via Kalman filter. - Model adjustment: incorporating IMF WEO estimate of g* as an observable yields more plausible output gap estimates; subsequent L-W estimates use WEO output gap. ### L-W model estimates and historical trajectory - L-W model (original): r* falls from around 2.5 percent in 1999 to around -2 percent at the depth of the crisis, then rebounds to around 1 percent by 2018. - Modified L-W using WEO g*: similar trajectory but a less deep crisis dip (g* falls by less). - Shortcoming noted: implied output gap from estimated g* can be too small, especially during crisis periods — motivates the WEO modification. ### Extensions: drivers orthogonal to potential growth - z_p can be modeled as function of other variables instead of pure AR(2) to capture drivers orthogonal to g*; possible drivers include: - monetary policy transmission shocks, - external demand, - fiscal policy, - other real factors affecting output and interest rate gaps. - For Portugal, candidate drivers used: - real effective exchange rate (REER), - trading partner growth, - CDS spread (proxy for deterioration in monetary policy transmission during the Euro Area crisis). ### Key empirical findings on drivers and volatility - CDS spreads associated with large movements in estimated r*; a high-frequency estimate of r* falls to nearly -10 percent at the depths of the crisis when CDS is included. - Prior to the crisis, near-zero credit spreads provided a positive boost to r*. - During the Euro Area crisis, widening CDS spreads pushed r* down sharply — interpreted as a summary indicator of strong domestic policy actions needed to restore the economy. - External factors: - Trading partner growth provided a steady drag on r*, and was the main driver of the dip in 2008/9. - REER was overvalued when Portugal joined the euro, acting as a headwind to growth and pushing down on r*. - Post-crisis recovery in r* driven by a combination of higher potential growth and normalization of credit spreads. - Cross-country comparison: decline in r* was much more severe in Portugal than in Germany, France, Spain, and Italy; at recent frequencies Portugal’s r* is at the upper end of the range and almost identical to Germany. ### Techniques using financial market data - Alternative approach: model r* as a deep trend in market rates, assuming real interest rates fluctuate around r* and converge as shocks dissipate. - Method (Del Negro et al, 2018): extract trends from inflation, real short-term rates, and real long rates using a Kalman filter with Bayesian estimation. - Cointegration relationships used: - π_p = π*_p + e_p - i_{p}^{3m} = π*_p + r*_p + u_p - i_{p}^{10yr} = π*_p + r*_p + ttp*_p + v_p - Trend components (π*_p, r*_p, ttp*_p) follow random walks; white-noise shocks. - Joint estimation for six largest Euro Area economies with common Euro Area factors and country-specific trends. ### Market-based and common-factor estimates for Portugal - Common-factor financial market model: r* co-moves closely across countries with some convergence since early 2000s; some recent divergence possibly due to market fragmentation or country-specific shocks. - Portugal-specific estimate (common-factor model): r* around 0.8 percent in 1999, falling to around -0.8 percent in 2018. - Compared to L-W models: smaller overall decline and no recent rebound. - Gap between Portugal and Euro Area common factor is very small (median estimates within each credibility band). - Interpretation: low-frequency/common-factor measures emphasize euro-area-wide influences on Portugal’s r* given close co-movement of business cycles. ### Market-based projections of future r* - Two techniques to project r* five years ahead: a. Forward interest rates: use forward swap market on Portuguese government debt — proxy is 3-month treasury bill, 5-years ahead — convert nominal to real using inflation expectations. b. Term structure: Nelson-Siegel version fits the yield curve of Portuguese government debt to derive implied future nominal short rates, then convert to real using inflation expectations. - Projection results: r* likely to be between 0.1 and 1.6 percent over the medium-term — around 2–3.5 percent higher than current observed real interest rates. - Caveat: these techniques are biased upwards if substantial credit or liquidity premium exists in the markets. ### The interest rate gap and monetary conditions - Interest rate gap defined as actual real rate minus r*: - If positive (real rate above r*): monetary conditions are deflationary. - If negative (real rate below r*): monetary conditions are inflationary. - Three measures of r* used to infer Portugal’s interest rate gap: - L-W model with z_t as random walk, - Common factor model, - L-W model with z_t explicitly modeled as function of other variables. - Narrative from measures: - Early euro years: monetary conditions somewhat loose. - Pre-GFC: gradual tightening. - During crisis: monetary conditions eased when viewed at Euro Area level, but country-specific measure (modeling z_t) indicates highly restrictive conditions in Portugal between 2011–2014 due to risk-driven credit crunch. - Unconventional monetary policies (UMPs) and shadow rates: - Using shadow rate estimates (Krippner, 2015) recalculates the interest gap. - From 2014, monetary policy became highly accommodative for Portugal; interest rate gap around -8 percent in 2016 for all three r* measures. - Nonetheless, L-W model (with modeled z_t) still indicates tight monetary conditions during the depths of the crisis due to country-specific factors. ### Link between r* and public debt dynamics - Standard debt dynamics equation used (variables as in source): - ∆d_p = r^e_t − g_t / (1+g_t) d_{p−1} − tb_p (equation notation as in source) - Key nuances why lower r* does not mechanically improve debt dynamics: - A low r* may imply a low g* — drivers like demographics and productivity affect both r* and potential growth; differential r − g matters. - Effective interest rate on public debt changes slowly because a large share of debt bears fixed rates; sustained lower r* needed to affect r^e_d. - Increased risk of hitting the ELB: falling r* linked to secular stagnation hypothesis and higher ELB incidence; limits or costs of UMPs can hamper stabilization of nominal GDP. - Credit risk premia are critical: long-term debt yields can be dominated by risk premia, which are endogenous to growth, debt, primary balance, and external conditions. Mitigants: boost potential growth, raise primary balance, reduce public debt. ### Projections and implications for Portugal’s debt trajectory - Both growth and interest rates projected to stay moderate in Portugal. - Debt Sustainability Analysis (DSA) assumptions (Annex I): natural/effective interest rate remains low over the medium-term, with relatively subdued growth. - Consequence: the differential between interest rate and growth (r − g) projected to be close to zero; primary balance is the main driver of projected debt reduction. *Source: IMF staff calculations, from content unit 1prtea2019001.* ### References ### References ### Bibliographic citations - Banco de Portugal (2019), “The Natural Interest Rate: From the Concept to the Challenges to Monetary Policy”, Economic Bulletin, March 2019. - Brand, C., Bielecki, M. and Penalver, A. (2018), “The Natural Rate of Interest: Estimates, Drivers, and Challenges to Monetary Policy”, ECB Occasional Paper No. 217. - Christensen, J., Diebold, F. and Rudebusch, G., (2010), “The Affine Arbitrage-Free Class of Nelson-Siegel Term Structure Models”, Federal Reserve Bank of San Francisco Working Paper 2007–20. - Del Negro, M., Giannone, D., Giannoni, M. and Tambalotti, A. (2018), “Global Trends in Interest Rates” (2018), Federal Reserve Bank of New York Staff Report No. 866. - Krippner, L. (2015), “Zero Lower Bound Term Structure Modeling: A Practitioner’s Guide”, Palgrave-Macmillan. - Laubach, T. and Williams, J., (2003), "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press. - Pescatori, A. and Turunen, J., (2015), "Lower for Longer; Neutral Rates in the United States," IMF Working Papers 15/135. - Pimenta and Pereira, 2019, 'Aggregate Educational Mismatches in the Portuguese Labour Market”, Banco de Portugal Working Paper. - Summers, L. (2014), “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound” Business Economics Vol 49, Issue 2. - Woodford, M., (2003), “Interest and Prices: Foundations of a Theory of Monetary Policy”, Princeton University Press. ### IMF staff and document context - PORTUGAL — STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX. Prepared By European Department (In Consultation with Other Departments). June 18, 2019. --- ### Fund relations and fiscal/financial figures ### Membership, quota, and SDR holdings - Membership Status: Joined: March 29, 1961; Article VIII. - Quota: 2,060.10 SDR Million (100.00 percent). - Fund holdings of currency: 1,594.17 SDR Million (77.38 percent). - Reserve position in Fund: 466.27 SDR Million (22.63 percent). - SDR Department net cumulative allocation: 806.48 SDR Million (100.00 percent). - SDR holdings: 537.98 SDR Million (66.71 percent). ### Outstanding arrangements and past financial arrangements - Outstanding Purchase and Loans: None. - Financial Arrangements (historical): - EFF: Approval Date May 20, 2011; Expiration Date June 30, 2014; Amount Approved 23,742.00 SDR Million; Amount Drawn 22,942.00 SDR Million. - Stand-By: Approval Date Oct 07, 1983; Expiration Date Feb 28, 1985; Amount Approved 445.00 SDR Million; Amount Drawn 259.30 SDR Million. - Stand-By: Approval Date Jun 05, 1978; Expiration Date Jun 04, 1979; Amount Approved 57.35 SDR Million; Amount Drawn 0.00 SDR Million. ### Projected payments to the Fund (SDR Million; based on existing use of resources and present holdings of SDRs) - Charges/Interest: 2019 — 2.29; 2020 — 3.07; 2021 — 3.07; 2022 — 3.07; 2023 — 3.07. - Total: 2019 — 2.29; 2020 — 3.07; 2021 — 3.07; 2022 — 3.07; 2023 — 3.07. ### Exchange rate and consultations - Exchange Rate Arrangement: Portugal’s currency is the euro, which floats freely and independently against other currencies. Portugal has accepted the obligations of Article VIII, Section 2, 3, and 4, and maintains an exchange system free of restrictions on payments and transfers for current international transactions, other than restrictions notified to the Fund under Decision No. 144 (52/51). - Article IV Consultations: Portugal is on the standard 12-month consultation cycle. Previous consultation discussions: May 16–29, 2018; staff report Country Report No. 18/273 discussed on September 7, 2018. - Post-Program Monitoring: Seventh Post-Program Monitoring Discussions held in Lisbon during November 27–30, 2018. Portugal’s final repurchase on December 14 cleared the outstanding balance of its IMF credit five years ahead of schedule. - Resident Representative: Resident representative office in Portugal closed in September 2015. - Safeguards Assessment: First-time safeguards assessment of the Bank of Portugal finalized in September 2011; recommended changes to BdP Law and extension of Audit Board responsibilities. BdP implemented all safeguards recommendations, including formally proposing amendments to the BdP law; these have not been enacted. --- ### Statistical issues and data adequacy (As of May 31, 2019) ### Overall assessment - General: Data provision to the Fund is adequate for surveillance purposes. ### Real sector statistics - Since September 2014, INE publishes a full set of national accounts based on the ESA 2010 methodology, including quarterly GDP estimates. Data available from first quarter of 1995; quarterly and annual data are consistent. - INE publishes the Consumer Price Index and the Harmonized Index of Consumer Prices (HICP) according to EU Member States methodology; control and quality assessment ensured through Eurostat supervision. ### Fiscal sector statistics - Government finance statistics (GFS) compiled on an accrual basis according to ESA 2010 and reported to Eurostat quarterly and annually. Data underwent revisions during transition to ESA 2010, sizably altering revenue and expenditure. Fiscal data in the GFSM 2014 framework are reported through the Eurostat convergence project with the IMF. IMF GFS datasets cover general government operations and financial balance sheet. ### External sector statistics - Bank of Portugal compiles and disseminates balance of payments and international investment position (IIP) statistics quarterly following BPM6. BP participates in IMF surveys on direct and portfolio investments, and reports data template on international reserves and foreign currency liquidity regularly. Portfolio investment data collection system encompasses transactions of resident banks, domestic securities transactions undertaken by nonresidents (through resident custodians), external securities transactions undertaken by residents (through resident investor or custodian), and residents’ issuance of securities in foreign markets. ### Monetary and financial sector statistics - Central bank balance sheet and consolidated balance sheet of other monetary financial institutions available from Bank of Portugal’s BPStat website. Portugal provides monthly monetary statistics to the IMF for the central bank and other depository corporations through the ECB. Data for other financial corporations is not reported. Portugal reports data on some key series and indicators of the Financial Access Survey (FAS) including the two indicators adopted by the UN to monitor Target 8.10 of the Sustainable Development Goals (SDGs). - Financial sector surveillance: Portugal reports eleven core FSIs (excluding the net open position in foreign exchange capital), twelve encouraged FSIs for the deposit takers, and ten encouraged FSIs for the other sectors on a quarterly basis. ### Data standards and quality - Portugal is subject to statistical requirements and timeliness and reporting standards of Eurostat and the ECB. Portugal adheres to the Special Data Dissemination Standard Plus (SDDS+); relevant metadata posted on the Dissemination Standards Bulletin Board. - No data ROSC is available. --- ### Table of Common Indicators Required for Surveillance (As of May 31, 2019) - Exchange Rates: Date of Latest Observation 06/30/18; Date Received 06/30/18; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities 1/: Date of Latest Observation 5/18; Date Received 6/18; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Reserve/Base Money: Date of Latest Observation 4/19; Date Received 5/19; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Broad Money: Date of Latest Observation 4/19; Date Received 5/19; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Central Bank Balance Sheet: Date of Latest Observation 4/19; Date Received 5/19; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Consolidated Balance Sheet of the Banking System: Date of Latest Observation 4/19; Date Received 5/19; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Interest Rates 2/: Date of Latest Observation 3/19; Date Received 5/19; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Consumer Price Index: Date of Latest Observation 4/19; Date Received 5/19; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Revenue, Expenditure, Balance and Composition of Financing 3/ – General Government 4/: Date of Latest Observation 4/18; Date Received 6/18; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Revenue, Expenditure, Balance and Composition of Financing 3/ – Central Government: Date of Latest Observation 2018:Q4; Date Received 4/19; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - Stocks of Central Government and Central Government-Guaranteed Debt 5/: Date of Latest Observation 4/18; Date Received 6/18; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - External Current Account Balance: Date of Latest Observation 2018:Q4; Date Received 3/19; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - Exports and Imports of Goods and Services: Date of Latest Observation 2018:Q4; Date Received 3/19; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - GDP/GNP: Date of Latest Observation 2018:Q4; Date Received 6/19; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - Gross External Debt: Date of Latest Observation 2018:Q1; Date Received 5/18; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - International Investment Position: Date of Latest Observation 2018:Q4; Date Received 3/19; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. Notes in table: - 1/ Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means. - 2/ Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds. - 3/ Foreign and domestic banks and domestic nonbank financing. - 4/ The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. - 5/ Including currency and maturity composition. - 6/ Daily (D), weekly (W), monthly (M), quarterly (Q), annually (A), irregular (I); and not available (NA). --- ### Statement by Mr. Fanizza and Ms. Lopes on Portugal (July 1, 2019; Executive Board Meeting July 8, 2019) ### Overview and authorities' stance - Authorities thank IMF staff for Article IV Consultation discussions and reiterate commitment to economic, fiscal and financial policies that promote competitiveness, economic growth, social cohesion, and sound public finances. - Authorities welcome acknowledgement of improvements in economic fundamentals and fiscal position stemming from progress in (a) fiscal consolidation; (b) deleveraging of both households and non-financial corporates; and (c) strengthening the banking system. ### Economic activity and inflation - GDP growth: After decelerating in the second half of 2018, GDP grew at 0.5 percent q-o-q, and 1.8 percent y-o-y in the first quarter of 2019 — broadly in line with annual growth forecasts. - Gross fixed capital formation (GFCF): 11.6 percent in 2019Q1 y-o-y. - Exports: Weight of exports in GDP reached 48 percent. - HICP annual average: 1.1 percent in May 2019, compared to 1.2 percent in 2018 and 1.8 percent in the Euro Area. - Current leading indicators suggest GDP growth stabilized in second quarter of 2019. - Net exports projected to slightly deteriorate because of weaker international demand. ### Labor market - Employment: grew at 1.5 percent y-o-y in 2019Q1, driven by higher permanent job creation; temporary employment decreased for the first time in the post-crisis period. - Unemployment rate: decreased to 6.8 percent, down from 7.9 percent the year before. Both youth and long-term unemployment contributed to this reduction. ### Fiscal policy and public debt - General government headline deficit: decreased to 0.5 percent of GDP in 2018 (record low). Government expects deficit to shrink to 0.2 percent of GDP in 2019 and to become a surplus 0.3 percent of GDP in 2020. - 2019Q1: general government headline surplus of 0.4 percent of GDP. Tax revenue grew 5.1 percent; Social Security contributions increased 6.5 percent. Expenditure growth 2.6 percent y-o-y; public investment increased 12 percent y-o-y. - Public debt-to-GDP ratio: expected to reach 118.6 percent of GDP in 2019, down from 121.5 percent in 2018. Authorities committed to using any revenue windfalls to reduce public debt. - Debt management: Active and dynamic strategies adopted to smooth amortization profile and optimize financing costs. Authorities repaid remaining € 5.51bn of total € 26bn IMF loan in December 2018. ### Structural reforms - National Reform Programme aims to increase productivity, improve domestic savings, and enhance business climate. Key areas and measures: - Labor market: measures to (i) foster longer working lives, increased fertility rates, and positive net migration flows, (ii) reduce segmentation, and (iii) promote Active Labor Market Policies. - Education and skills: policies to reduce school failure and dropout rates and reduce skills mismatches; align vocational education and training with labor market needs; strategy to improve population’s average digital skills for students, adults, and workers. - Judicial and insolvency reform: revision of Insolvency and Companies’ Recovery Code including changes to special revitalization proceedings; creation of a new regime for out-of-court restructuring of companies; development of an Early Warning Mechanism; new credit lines to stimulate SMEs and start-ups. - Energy sector: tariff debt on downward trend; expected decline by further 12 percent in 2019 (cumulatively 37 percent from a € 5.1bn peak in 2015). Under baseline, energy debt expected to be fully repaid by end of 2022. Policy focus on promoting renewable capacity and developing electricity transport network. ### Financial sector policies and banking system - Private sector deleveraging: debt ratios declined for NFC and households; NFC increased capitalization and liquidity. Reduction in indebtedness in 2018 mainly driven by denominator effect. Authorities stress need for continued adjustment even under economic slowdown. - Residential real estate: prices growing steadily; signs of mild overvaluation surfaced from mid-2017. Banco de Portugal’s Macroprudential Recommendation on new consumer and housing loans expected to mitigate risk. Implementation progress shows convergence towards limits with exceptions scrutinized by BdP. Recommendation helped reduce share of credit to higher risk borrowers. - NFC credit: annual rate of change of credit granted by resident banks to NFC turned positive in 2018; banks differentiating NFC by spreads and volumes according to risk profile. - Banking system developments in 2018: significant recovery of profitability; significant reduction of non-performing loans (NPL). By end-2018, NPL ratio below 10 percent and net NPL ratio below 5 percent — around 50 percent decrease since July 2016 peak, mainly driven by NFC-related NPL reduction. Banks’ liquidity at comfortable levels; own funds ratio stabilized. Portuguese banks issued some debt eligible as own funds. - Challenges: low interest rate environment compresses interest-related net revenues; need to continue NPL reduction plans and increase operational efficiency; competition from digital financial services providers (Bigtech). Regulatory demands increasing, notably those associated to Minimum Requirement for own funds and Eligible Liabilities (MREL). ### New Financial Supervision Framework Bill - Bill proposes creation of National System of Financial Supervision (NSFS) to improve functioning of financial supervision, promote cooperation among Portuguese authorities, and foster financial stability. NSFS comprises Banco de Portugal, Portuguese Securities Market Commission, Insurance and Pension Funds Supervisory Authority, and two new legal entities: National Council of Financial Supervisors (NCFS) and Resolution and Guarantees Authority (RGA). - Creation of a resolution authority separated from banking supervisor aims to limit conflicts of interest among supervision and resolution functions. - Government view: proposal respects and strengthens independence of supervisors, is consistent with European framework, cost-efficient, and fosters timely well-informed supervisory decisions with participation of all supervisors. - Supervisors’ concerns: bill may introduce complexity, uncertainty and generate costs for supervisors and financial market; Banco de Portugal conveyed specific concerns regarding central bank and SSM member’s independence and autonomy. ECB issued an opinion (CON/2019/19) on May 21, 2019 raising concerns regarding central bank independence, macroprudential mandate, and resolution function. Proposal under discussion in Parliament. ### Conclusion (authorities’ closing) - In line with Stability Programme 2019-2023, Government committed to sound public finances and to continue fiscal consolidation while implementing structural reform agenda to foster social cohesion and sustainable growth as foreseen in National Reform Programme. Authorities look forward to next Article IV Consultation in 2020 to deepen dialogue with IMF. *Source: 1prtea2019001 - References (PORTUGAL — Staff Report and informational annex, June 18, 2019; Statement July 1, 2019).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1prtea2019001.pdf_