## 1prtea2022001 ## Source details **Canonical URL:** [1prtea2022001](https://www.imf.org/-/media/files/publications/cr/2022/english/1prtea2022001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1prtea2022001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1prtea2022001.pdf.json) --- ### Covid-19 shock, health indicators, and recovery trajectory - Growth and labor pre-pandemic: - Growth averaged 3 percent in 2017–19. - Unemployment fell to a 15-year low of 6.7 percent pre-pandemic. - Per-capita income remained "some 30 percent below the EU average." - Pandemic impact and recovery: - GDP fell 8.4 percent in 2020 (EA: -6.5 percent). - Growth rebounded to 4.9 percent in 2021. - GDP rose by 2.6 percent q/q in 2022:Q1 and surpassed the pre-pandemic level. - Portugal reported 95 percent of the population is fully vaccinated. - Omicron effects were "relatively muted"; activity restrictions were lifted in early-2022. - Labor market and mobility: - Employment and labor force participation in 2021 surpassed the 2019 level. - Unemployment reached 5.9 percent by March 2022. - Total hours worked in 2022:Q1 stood around 1 per cent above the 2019 level. - Contact-intensive sectors lagged in employment recovery; young, low-skilled, and temporary contract workers were worse affected. - Refugee inflows from Ukraine exceeded 36 thousand in early May (since the start of the war). - Health system and mobility metrics: - Mortality and hospitalizations during Omicron were significantly lower than previous peaks (7-day moving average per 100K people). - Mobility on retail and recreation recovered in 2022 supporting economic recovery (baseline: median value during Jan 3–Feb 6, 2020). ### Inflation and wages (2021–2022) - Inflation readings: - HICP inflation: 7.4 percent (y/y) in April 2022 (EA: 7.4 percent). - Core inflation (HICP excluding energy and unprocessed food): 5.3 percent (y/y) in April 2022 (EA: 3.9 percent). - Energy prices increased by 27 percent (y/y) in April 2022 (EA: 38 percent). - Wages: - Wage inflation (compensation per employee) was 2.9 percent (y/y) in 2021:Q4 (EA average: 3.5 percent). - Gross monthly earnings per employee grew by 3.4 percent in 2021 and decelerated to 2.2 percent in 2022:Q1. ### Exposure to the war in Ukraine and commodity vulnerabilities - Direct bilateral trade and tourist exposures (latest year available): - Exports of Goods & Services to Russia: 0.3% - Exports of Goods & Services to Ukraine: 0.1% - Imports of Goods & Services from Russia: 0.7% - Imports of Goods & Services from Ukraine: 0.3% - Tourist Arrivals from Russia: 0.7% - Tourist Arrivals from Ukraine: 0.2% - Energy and food vulnerabilities: - Russian energy imports comprise less than 10 percent of total energy supply. - Oil and gas account for 70 percent of energy use. - Reliance on cereal imports is "sizeable". - Anticipated channels of impact: sharp increases in energy and food prices, and lower demand from European trading partners. - Policy coordination: Portugal and Spain granted an exception to set maximum price ceilings for gas in the Iberian market to control electricity inflation. ### Policy response to the pandemic and energy shock - Pandemic fiscal support 2020–21: - Above-the-line discretionary measures: 6.1 percent of GDP. - Automatic stabilizers: 2¾ percent of GDP. - Below-the-line and other measures: 4.5 percent of GDP in 2020–21 (mainly state-guaranteed credit lines). - State-guaranteed credit lines covered 12 percent of NFC loans at end-September 2021. - Public moratorium peaked at 18.7 percent of total loans in September 2020; fell under 0.1 percent at end-2021. - NGEU / NRRP financing: - EU’s NGEU of 8 percent of GDP in grants over 2021–26. - Portugal receiving €13.9bn (7 percent of 2020 GDP) in grants and another €14.2 bn (7 percent of 2020 GDP) in loans; government intends to use only some 1½ percent of GDP in loans (out of 7 percent of 2020 GDP available). - Staff estimate: NRRP investments and reforms raise output by 2 percent over the medium term (Annex V); authorities estimate a 3.5 percent GDP level increase by 2025. - Eurosystem and sovereign financing: - Eurosystem holdings rose from 18 percent of sovereign debt in 2019 to 29½ percent in 2021. - Public debt: 127.4 percent of GDP in 2021; sovereign long-term bond yields rose by 125 basis points since mid-2021; spreads to German bunds rose by 40 basis points. - Energy-related measures (quantified): - Above-the-line measures total: 333 million euros and 1,443 million euros reported in two rows (source formatting preserved); totals reported as "as percent of GDP 0.2 0.6". - Liquidity and below-the-line measures quantified at 459 million euros. - Specific support examples and quantifications: - Subsidies to energy-intensive companies: 30% of increase up to €400,000 per company. - Extraordinary EUR 60 support to households receiving social electricity tariff or minimum social benefits (about 800 thousand households). - Bottled LPG subsidy of 10 EUR (once for 3 months) for same beneficiary group. - Support for refugees: EUR 50 million. - Credit lines: "Production Support" credit line at 400 million euros and "agriculture" credit line at 59 million euros. - Temporary reduction in standard VAT rate for energy from 23% to 13% was "under considerations or pending approval"; interim temporary reduction of oil taxes equivalent to a 10-pp cut on fuel VAT implemented. ### Effects on firms, credit, and financial stability - Firm-level impacts: - Pandemic support estimated to have saved about one-third of jobs and one-fifth of NFC output (Selected Issues Paper, SIP I). - During 2020, about 40 percent of Portuguese firms experienced an increase in leverage. - Share of firms in financial difficulty (leverage ratio above 7.5) rose from 20 to 28 percent. - NFC solvency needs estimated to have increased by some 2¼ percent of GDP (SIP I). - Public corporate support: - Resilience and Capitalization Fund created at ¾ percent of GDP. - Solvency support programs (Strategic Recapitalization Program and Consolidar) have viability requirements; take-up was limited due to difficult qualifications and perceived better alternatives. - Banking sector and credit: - The share of stage 2 loans is 13 percent in total loans. - Banks’ direct linkages to Russian banks total around 0.1 percent of banking system assets (June 2021 BIS/SSM note). - Non-performing loans declined (NPLs to gross loans fell from higher pre-pandemic levels to lower values; Table 4 notes NPLs falling to 3.6 across the series). - Regulatory capital to risk-weighted assets ranged around 13.9–18.0 (quarterly series). - Loans to deposits ranged in the 80s–90s percent across quarters. ### Housing market, private credit, and macroprudential stance - House price dynamics: - Residential real estate prices gained nearly 20 percentage points in real terms and relative to rents since 2015. - Overvaluation estimates: Banco de Portugal: 8 to 16.5 percent; IMF model-based: 7 percent as of mid-2021. - Since mid-2021 house prices increased by 5.7 percent by end-2021. - Housing credit and exposures: - Housing credit averaged 4 percent y/y growth in 2021:H2–2022:Q1. - Stock of housing credit has been rising. - Share of residential real estate transactions financed by domestic credit: 55 percent (some 20 p.p. lower than prior to the sovereign debt crisis). - Three quarters of housing loans have rate fixation of up to one year; average interest rate on all outstanding mortgages: 0.8 percent; average maturity: 35 years. - Mortgage interest payments declined from about 12 percent of disposable income in 2012H1 to about 3 percent in 2021. - A 1 pp interest-rate increase would raise household interest payments from 3.2 percent to about 7.2 percent of average household income (BdP and Annex III). - Macroprudential and supervisory actions: - BdP tightened macroprudential measures in 2018; guidance in April 2022 to reduce average maturity of housing loans and to consider a 300 basis point interest-rate shock in DSTI calculations for new mortgages. - BdP could consider a positive rated CCyB or a sectoral SRyB once recovery is well established. ### External position, tourism, and short-term outlook - Current account and tourism: - Tourism receipts collapsed in 2020; current account recorded a deficit of -1.1 percent of GDP in 2020. - Balance on tourism: 2020 exports = 7.7 billion euros; 2021 exports = 16.0 billion euros; 2022 exports = 18.7 billion euros (Table 3a/3b). - Tourist receipts (percent of total exports): 2019 = 19.5; 2020 = 10.4; 2021 = 11.2; 2022 = 14.7. - External position assessment: - 2021 external position assessed broadly in line with medium-term fundamentals (Annex IV). - Net international investment position (NIIP): 2019 = -100.0 percent of GDP; 2020 = -104.8; 2021 = -95.9; projected 2022 = -84.5. - Gross external debt: 193 percent of GDP in 2021. - Near-term projections and baseline assumptions: - Growth projected to average 5.8 percent in 2022 and 1.9 percent in 2023. - Baseline assumes: no escalation of the war; softening in commodity price growth in 2023; gradually rising interest rates; fiscal policy supportive in 2022 and neutral in 2023. - Factoring in Q1 growth outturn, entails a 2022 GDP downgrade of some 1–1½ percent relative to pre-war. - Tourism expected to reach its 2019 level in 2023 (SIP II). ### Projections (selected numbers from staff tables) - Real GDP: 2020 = -8.4; 2021 = 4.9; 2022 = 5.8; 2023 = 1.9; 2024 = 2.4; 2025 = 2.1; 2026 = 1.9; 2027 = 1.9 - Unemployment rate (Percent; average): 2020 = 7.1; 2021 = 6.6; 2022 = 5.8; 2023 = 6.4; 2024 = 6.4; 2025 = 6.4; 2026 = 6.3; 2027 = 6.3 - Consumer prices (HICP): 2020 = -0.1; 2021 = 0.9; 2022 = 6.1; 2023 = 3.5; 2024 = 2.3; 2025 = 2.0; 2026 = 1.8; 2027 = 1.7 - General government balance (Percent of GDP): 2020 = -5.8; 2021 = -2.8; 2022 = -2.2; 2023 = -1.0; 2024 = -0.9; 2025 = -1.1; 2026 = -1.1; 2027 = -1.2 - General government debt (Percent of GDP): 2020 = 135.2; 2021 = 127.4; 2022 = 115.8; 2023 = 110.7; 2024 = 106.4; 2025 = 102.7; 2026 = 99.7; 2027 = 97.0 - Revenues (Percent of GDP): 2022 = 45.3 - Expenditures (Percent of GDP): 2022 = 48.1 - Primary government balance (Percent of GDP): 2022 = -0.5 ### Fiscal policy assessment and medium-term recommendations - Recent fiscal outcomes and stance: - Fiscal deficit fell to 2.8 percent of GDP in 2021, beating budget projections. - Some 2 percent of GDP of the 2020–21 fiscal measures relative to 2019 are expected to be permanent; ¾ of the 1 percent GDP increase in wage bill reflected trend increases. - The 2022 fiscal position expected to remain suitably accommodative; fiscal deficit expected to narrow to 2.2 percent of GDP. - NGEU grant-financed spending will provide additional support (1.5 percentage points). - Targeting and composition: - Recommend replacing broad-based energy price relief and general tax relief with more targeted and temporary support for vulnerable households and the most affected and viable firms while preserving price signals. - Better target measures: expansion of ALMPs, social housing, education, public sector digitalization, and NFC solvency support. - Contingency planning: - Fully deploy automatic stabilizers if growth disappoints. - For severe pandemic waves, consider short-term work schemes, social benefits, and turnover loss compensation grants, balancing short-term stabilization with medium-term debt sustainability. - Medium-term consolidation: - From 2023, a gradual and steady growth-friendly fiscal adjustment is needed to rebuild policy space. - Pace recommended: averaging annually 0.5 percent of GDP in the structural fiscal balance during 2023–26 (relative to the authorities Stability Program), with flexibility to respond to shocks. - Policy tools: tax reforms, rationalizing current spending, and improving composition of public investment. - Tax and spending reform specifics: - Tax expenditure estimated to have reached more than 7 percent of GDP in 2020. - Reduced VAT rates account for 52 percent of total estimated revenue forgone. - The non-regular resident scheme costs about 0.4 percent of GDP annually. - Ageing-related fiscal outlays estimated increase: ¾ percent of GDP is a key medium-term headwind. - Portugal: net pension replacement rate for average wage workers at 90 percent of pre-retirement earnings (one of the most generous in the OECD). - Pension reforms suggested: simplify non-contributory benefits regimes; eliminate duplication; strengthen contributory incentives of minimum pensions; extend link between retirement age increases and life expectancy gains to minimum early retirement age; abolish special early retirement ages for specific subgroups. - Governance and transparency: - Amendments to Budgetary Framework Law in April-2022 strengthen ex-post evaluation of macro forecasts and the Public Finance Council. - Recommendation: centralize integrated reporting of Covid-19 spending and RRP implementation; reinvigorate NHS reforms; improve SOEs’ financial performance monitoring. ### Corporate sector solvency, insolvency regimes, and recapitalization - Corporate solvency and risks: - NFC solvency needs estimated to have increased by some 2¼ percent of GDP (SIP I). - Share of zombie or low-productivity firms expected to rise, risking depressed productivity and investment. - Additional vulnerabilities: war in Ukraine, cost-push pressures, supply-chain disruptions, higher interest rates. - Policy recommendations: - Leverage banking sector technical expertise for NFC viability assessments. - Prompt recapitalization to help viable firms handle the energy crisis. - BPF manages capitalization fund; solvency support programs have viability requirements but may need augmentation in size and instrument mix. - Strengthen restructuring and insolvency regimes: simplify and strengthen law, clear guidelines for public creditors’ participation, streamline liquidation procedures, strengthen insolvency statistics. - Clear communication and a short deadline for lifting duty to file for insolvency to allow corporate debtors to prepare. ### Banking sector resilience, macroprudential options, and AML/CFT - Banking resilience and supervision: - Capital and asset quality improved in 2021 though still weaker than EA averages. - Heterogeneity across banks: average resilience but considerable variation; a few legacy domestic banks still to complete restructuring. - Recommendations: apply well-defined loan classification strategies, maintain adequate provisioning, rebuild capital buffers, exercise caution on dividends/share buybacks. - Macroprudential and housing policy: - April 2022 guidance to reduce average maturity of housing loans. - Potential future measures: positive rated CCyB or sectoral SRyB in line with CRDV and EBA Guidelines once recovery stabilizes. - Longer-term housing policy note: stronger property taxes may be needed; Golden Visa program terminated in Lisbon, Porto and Algarve in December 2021. - AML/CFT and cross-border flows: - Portugal as a transit country for financial flows; policy recommendations: - Focus AML/CFT on cross-border dimension; strengthen FIU collection and dissemination of intelligence on suspicious cross-border flows. - Ensure RCBE contains complete, accurate and up-to-date data on all relevant legal entities, including foreign trusts operating in the Madeira FTZ. - Strengthen AML/CFT risk-based supervision of banks and real estate agents; regulate virtual assets sector in line with international standards. ### Structural reforms, NRRP, and climate transition - NRRP objectives and financing: - NGEU package: 9 percent of 2020 GDP—of which 7 percent of GDP is for the NRRP. - Portugal allocation: €13.9bn in grants (7 percent of 2020 GDP); another €14.2 bn in loans (7 percent of 2020 GDP) with planned loan use of 1½ percent of GDP. - NRRP pillars: Economic Resilience (€11.13 bn), Climate Transition (€3.06 bn), Digital transition (€2.46 bn). - Skills, labor market, and digitalization: - Share of low-skilled workers: 35 percent (EA average: 18 percent). - About 17 percent of all workers employed on a temporary basis. - 51 percent of Portuguese companies had basic digital intensity in 2021 (60 percent EA/EU average). - NRRP reforms: vocational and educational training, cooperation between higher education and enterprises, teachers’ digital skills, tax credits for companies’ digital transition, digitalization of public administration. - Climate transition and carbon pricing: - Target: carbon neutral by 2050, implying reduction of emissions of 85–90 percent relative to 2005. - Staff estimate under unchanged policies: GHG emissions to increase by about 5 percent between 2022 and 2030. - Scenario: gradual increase of carbon price to $100 per ton of CO2e, elimination of energy subsidies and broader carbon tax coverage could reduce GHG emissions by about 15 percent by 2030 while raising revenues. - Short-run distributional concern: carbon pricing would weigh on vulnerable households; recommend complementary transfers and energy-poverty policies. - Authorities to submit revised NECP to the EC in July 2023. ### Risks, RAM, and stress tests - Risk outlook: - Risks tilted to the downside: war in Ukraine, faster ECB normalization, tighter financial conditions, end of moratoria exposing higher insolvencies, slower NGEU absorption, protracted supply-side bottlenecks, higher commodity prices, and wage pressures. - Upside risks: stronger tourism recovery, pent-up demand, higher payoffs from NGEU investments. - RAM selected entries (likelihood and policy responses): - Russia’s invasion escalation: High likelihood; Impact—High. Responses: targeted support to viable firms; broaden ALMPs to facilitate refugee employment. - Rising and volatile food and energy prices: High likelihood; Impact—High. Responses: targeted support to vulnerable households; accelerate renewable energy and energy efficiency. - Outbreaks of lethal Covid-19 variants: Medium likelihood; Impact—Medium. Responses: scale up public health measures; reintroduce targeted support for viable firms and workers. - Public Debt Sustainability Analysis (Annex VII): - Baseline: debt-to-GDP projected to decline by 30.4 pp over 2022–27; staff projects debt-to-GDP decline to 97 percent of GDP by 2027 (multiple series show 97.0 and 99.7/97.0 variations preserved from source). - Baseline drivers: 25.5 pp of decline from interest-growth dynamics; primary deficit contributes 4.2 pp to increase in debt over forecast horizon. - Gross financing needs decline from a peak of 16.5 percent of GDP in 2020 to around 11.1–11.5 percent in 2027 (series preserved). - Stress scenarios: - Growth shock: debt rises to 124.5 percent of GDP in 2024 then declines to 114.4 percent by 2027. - Contingent liabilities shock (≈3½ percent of GDP): debt rises to around 118.6 percent of GDP in 2023 then declines to 106.8 percent in 2027. - Interest rate shock (560 basis points calibration): effective interest rate rises to about 3.9 percent by 2027 in the scenario. - Combined shock: debt peaks at 125 percent of GDP in 2024 and declines to 119.3 percent by 2027. - Fan chart and probabilistic assessment: 50 percent probability of debt being between 87.7 and 107.9 percent of GDP by 2027 (unconstrained distribution); constrained range 94.3–111.6 percent (50 percent). - SRDSF: medium-term risks assessed as moderate; probability of debt stabilization: 93 percent. ### Authorities’ views and governance - Authorities broadly agreed with staff’s assessment of outlook and risks but expected stronger 2022 growth reflecting carryover from 2022:Q1. - Authorities expected headline deficit to fall to 1.9 percent of GDP in 2022. - Authorities affirmed commitment to fiscal discipline, NRRP implementation, public debt reduction, structural reforms, and strengthened fiscal oversight. - April-2022 amendments to the Budgetary Framework Law strengthen fiscal policy evaluation and oversight. - Authorities plan a consolidation effort of 0.3 percent of GDP on average each year over the 2023-2025 period and target MTO of 0.5 structural deficit by 2023 and balanced structural position by 2025 (authorities’ statement). ### Concluding policy priorities - Near term: keep fiscal policy appropriately accommodative, ensure support measures are temporary and well-targeted, preserve price signals, and fully deploy automatic stabilizers if needed. - Medium term: implement a gradual, growth-friendly fiscal consolidation from 2023 (recommended pace: average 0.5 percent of GDP annually in structural balance during 2023–26), rationalize tax expenditures, bolster pension sustainability, improve public investment composition and governance, and prioritize efficient NRRP absorption. - Financial sector: continue close monitoring of bank credit quality, rebuild capital buffers where needed, apply prudent NPL management and provisioning, and consider targeted macroprudential measures if vulnerabilities increase. - Structural reforms: deepen labor-market, education, digitalization and insolvency reforms to raise potential growth and support external adjustment; accelerate climate transition while protecting vulnerable households. *Source: IMF staff report — "1. Covid-19 Developments, March 2020–May 2022" and selected chapters from content unit 1prtea2022001.* ### 1. Covid-19 Developments, March 2020–May 2022 ________________________________________________5 ### 1. Covid-19 Developments, March 2020–May 2022 ### Context and pre-pandemic conditions - Growth averaged 3 percent in 2017–19. - Unemployment fell to a 15-year low of 6.7 percent pre-pandemic. - Public and private debt were on a downward path but "still elevated." - Productivity growth remained modest; per-capita income remained "some 30 percent below the EU average." - Banking system improvements: steady reduction of impaired assets and improved capital positions. - Structural constraints cited: low share of skilled labor, dominance of small and low-productivity firms, an ageing population, and structurally high youth unemployment. ### Covid-19 shock and recovery trajectory - GDP fell 8.4 percent in 2020 (EA: -6.5 percent). - Growth rebounded to 4.9 percent in 2021. - Portugal reported 95 percent of the population is fully vaccinated. - Omicron effects were "relatively muted"; activity restrictions were lifted in early-2022. - GDP rose by 2.6 percent q/q in 2022:Q1 and surpassed the pre-pandemic level. - Tourism reliance amplified the initial shock and recovery profile. ### Exposure to the war in Ukraine and commodity shocks - Direct bilateral trade exposures (latest year available): - Exports of Goods & Services to Russia: 0.3% - Exports of Goods & Services to Ukraine: 0.1% - Imports of Goods & Services from Russia: 0.7% - Imports of Goods & Services from Ukraine: 0.3% - Tourist Arrivals from Russia: 0.7% - Tourist Arrivals from Ukraine: 0.2% - Energy/import structure and vulnerabilities: - Russian energy imports comprise less than 10 percent of total energy supply. - Oil and gas account for 70 percent of energy use. - Reliance on cereal imports is "sizeable"; cereal imports shown as percent of GDP (chart listing countries; Portugal included among many). - Anticipated channels of impact: sharp increases in energy and food prices, and lower demand from European trading partners. - Refugee inflows from Ukraine exceeded 36 thousand in early May (timeframe: since the start of the war). ### Inflation dynamics (2021–2022) - HICP inflation stood at 7.4 percent (y/y) in April 2022 (EA: 7.4 percent). - Core inflation (HICP excluding energy and unprocessed food) rose to 5.3 percent (y/y) in April 2022 (EA: 3.9 percent). - Energy prices increased by 27 percent (y/y) in April 2022 (EA: 38 percent). - Wage inflation (compensation per employee) was 2.9 percent (y/y) in 2021:Q4, below the EA average of 3.5 percent (y/y) in 2021:Q4. - Gross monthly earnings per employee grew by 3.4 percent in 2021 and decelerated to 2.2 percent in 2022:Q1. ### Policy response to the pandemic and to the war-related shocks - Pandemic fiscal support 2020–21: - Above-the-line cumulative measures: discretionary measures of 6.1 percent of GDP and automatic stabilizers of 2¾ percent of GDP. - Below-the-line and other measures: 4.5 percent of GDP in 2020–21 (mainly state-guaranteed credit lines). - State-guaranteed credit lines covered 12 percent of NFC loans at end-September 2021. - A large public moratorium peaked covering 18.7 percent of total loans in September 2020, falling under 0.1 percent at end-2021. - Bankruptcy filing obligations remained suspended during the moratoria period. - NGEU funding: the EU’s NGEU (mainly RRF and REACT-EU) of 8 percent of GDP in grants over 2021–26. - Government intends to use only some 1½ percent of GDP in loans (out of 7 percent of 2020 GDP available). - SURE loans provided 2.9 percent of GDP against unemployment risk. - Eurosystem holdings rose from 18 percent of sovereign debt in 2019 to 29½ percent in 2021. - Despite high public debt (127.4 percent of GDP in 2021), sovereign spreads remained compressed; long-term bond yields rose by 125 basis points since mid-2021, while spreads to German bunds rose by 40 basis points. - Measures in response to surging energy prices (quantified): - Above-the-line measures total: 333 million euros and 1,443 million euros in two rows (quantification table format in source); totals reported as "as percent of GDP 0.2 0.6" (source formatting preserved). - Liquidity and below-the-line measures quantified at 459 million euros. - Specific measures listed with quantifications: - Oil tax unit rate reductions, temporary suspension of carbon tax increases, temporary monthly subsidies for public buses and heavy goods carriers, Autovoucher rebate on refined oil products, subsidies to energy-intensive companies (30% of increase up to €400,000 per company), extraordinary EUR 60 support to households receiving social electricity tariff or minimum social benefits (about 800 thousand households), bottled LPG subsidy of 10 EUR (once for 3 months) for same beneficiary group, support for refugees (quantified EUR 50 million), reduction of electricity network access tariffs funded by transfer from the Environmental Fund (requires parliamentary approval), subsidy for photovoltaic installation (up to €200,000 per company), among others. - A temporary reduction in the standard VAT rate for energy from 23% to 13% was "under considerations or pending approval." - Credit lines for companies more dependent on energy: "Production Support" credit line quantified at 400 million euros and an "agriculture" credit line at 59 million euros. - Exception from European Commission: Portugal and Spain granted an exception to set maximum price ceilings for gas in the Iberian market to control electricity inflation. - Pending EC approval: temporary lowering of fuel VAT rates; in the interim the government temporarily reduced oil taxes (equivalent to a 10-pp cut on fuel VAT). ### Effects on firms, credit, and financial stability - Pandemic support estimated to have saved about one-third of jobs and one-fifth of NFC output (Selected Issues Paper, SIP I). - During 2020, about 40 percent of Portuguese firms experienced an increase in leverage. - Share of firms in financial difficulty (leverage ratio above 7.5) rose from 20 to 28 percent. - A Resilience and Capitalization Fund was created (¾ percent of GDP) to support debt reduction and recapitalization of viable corporates with equity and quasi-equity instruments. - Authorities launched a program to incentivize distressed but viable firms to restructure bank loans with a partial government guarantee; take-up was limited due to difficult qualifications and perceived better alternatives (including EIB Group credit guarantee operations). ### Labor market developments - Employment and labor force participation in 2021 surpassed the 2019 level. - Unemployment reached 5.9 percent by March 2022. - The unemployment rate rose only ½ percentage point during the pandemic and has since recovered. - Total hours worked in 2022:Q1 stood around 1 per cent above the 2019 level. - Contact-intensive sectors lagged in employment recovery; young, low-skilled, and temporary contract workers were worse affected. - Several sectors face labor shortages across skill levels, partly reflecting early retirement during the pandemic and lower inflows of foreign workers. ### Vaccination, mobility, and health system indicators - Daily COVID-19 cases in Portugal picked up sharply due to Omicron (figures show 7-day moving average per 100K people). - Mortality rates during Omicron were significantly lower than in previous peaks (7-day moving average per 100K people). - Covid-related hospitalizations rose slightly after Omicron; ICU and hospital occupancy shown in patients per 100K people. - Vaccination effectiveness during the Omicron era illustrated by charts: percent share of vaccinated population on Nov. 24th and new deaths between Nov. 24 and May 2022 (per 1M people). - Vaccination doses (per 100k people, 7-day moving average) tracked along with Mobility on retail and recreation (percent deviation from baseline, 7-day moving average), showing improved mobility in 2022 that supported economic recovery. - Baseline for mobility indices is the median value during Jan 3–Feb 6, 2020. ### Political and programmatic context - The center left socialist party that led a minority government during 2015–2021 emerged with an outright majority in the January 2022 elections. - The new government recommitted to timely implementation of the NRRP financed by the Next Generation EU (NGEU) funds, public debt reduction, and structural reforms. *Source: IMF staff report — "1. Covid-19 Developments, March 2020–May 2022" (selected chapter content).* ### 11. In contrast to previous crises, private credit held up and residential real estate prices ### 11. In contrast to previous crises, private credit held up and residential real estate prices surged ### Private credit and housing market - Residential real estate prices: gaining 20 pp in real terms and relative to rents; suggesting overvaluation of 8–17 percent (Annex III). - Housing credit: - Not a factor behind the rise in house prices and has picked up only recently (averaging 4 percent y/y growth in 2021:H2–2022:Q1). - The stock of housing credit has been rising. - Financing and market dynamics: - The share of residential real estate transactions financed by domestic credit is 55 percent, still some 20 p.p. lower than prior to the sovereign debt crisis. - Nonresidents have reportedly played an increasing role in the housing market. - Macroprudential assessment: - The tightening of macroprudential measures by the BdP in 2018 is assessed to have reduced the probability of default of this market segment during the pandemic (see Macroprudential Recommendation on new credit agreements for consumers – progress report, Banco de Portugal, March 2021). - Housing affordability concerns have risen. ### Banking sector resilience and credit risks - Financial health improved in 2021 though capital and asset quality remained weaker than EA averages. - The drop in NPLs reflected policy support, NPL sales to investors, and write-offs. - Heterogeneity across banks: staff estimates suggest the banking system, on average, should be fairly resilient to adverse shocks, but there is considerable variation across banks; a few legacy domestic banks are still to complete their restructuring process. - Credit quality indicators: - The share of stage 2 loans is 13 percent in total loans. - Non-bank financial sector: relatively much smaller and growing moderately. - Bank linkages to Russia: banks’ direct linkages to Russian banks, based on BIS data, total around 0.1 percent of banking system assets (June 2021 EBA/SSM stress tests note). ### External position and near-term outlook - External position: the 2021 external position is assessed to be broadly in line with medium-term fundamentals and desirable policies (Annex IV). - Current account: - Tourism receipts collapsed at the onset of the pandemic; the current account recorded its first deficit since 2011 at -1.1 percent of GDP in 2020. - The deficit remained broadly similar in 2021 as higher imports offset improving exports. - Growth projections and assumptions: - Growth is projected to average 5.8 percent in 2022 and 1.9 percent in 2023. - The pickup in 2022 reflects the strong bounce-back in tourism and domestic demand in Q1. - Baseline projections assume: no escalation of the war; softening in commodity price growth in 2023; gradually rising interest rates; and fiscal policy supportive in 2022 and neutral in 2023. - Factoring in the Q1 growth outturn, this entails a 2022 GDP downgrade of some 1–1½ percent relative to pre-war. - Growth drivers: private consumption (household saving rates fall to pre-pandemic levels faster), net exports, and NGEU-backed investment. - Tourism is expected to reach its 2019 level in 2023 (SIP II). - Medium-term prospects and scarring: - Medium-term growth is expected to converge to below 2 percent with some scarring. - NRRP investments and reforms are expected to raise output by 2 percent over the medium term (Annex V), without which scarring would be higher. - Staff estimates: the share of tourism in GVA could stay some ½-2 percentage points below its pre-pandemic trend, offset by higher shares of sectors such as ICT (SIP II). - If heightened NFC leverage and zombification risks are unresolved or amplified by war-related shocks, medium-term TFP growth could be weakened materially due to allocative efficiency and productivity losses (SIP I). - The output gap is expected to close gradually and GDP to remain some ½ percent below the pre-pandemic trend. - Inflation: - Projected to average 6.1 percent in 2022 and start receding in 2023 as energy price growth softens and supply-side disruptions ease. - Core inflation is expected to average 4.5 percent in 2022 and decline slowly over the forecast horizon. - Second-round effects expected to remain broadly contained and inflation expectations anchored, allowing inflation to decelerate towards 2 percent in the medium term. - External and NIIP outlook: - The current account deficit is expected to widen significantly in 2022 before narrowing over the medium term. - The negative NIIP position is projected to decline over the medium term as the current account deficit narrows and the fiscal balance improves. - Risks: - Risks remain tilted to the downside amid high uncertainty (Annex VI): the war in Ukraine, faster normalization of ECB monetary policy, tighter financial conditions, end of loan moratoria exposing higher insolvencies, slower use of NGEU funds, protracted supply-side bottlenecks, higher commodity prices, and wage pressures. - On the upside: stronger tourism recovery, continued strength in pent-up demand, and higher payoffs from NGEU investments. ### Authorities’ views - Authorities broadly agreed with staff’s assessment of the outlook and risks but expected annual growth in 2022 to be stronger, reflecting carryover effects from 2022:Q1. - They noted labor market employment and participation rates were already above pre-pandemic levels. - They agreed inflation will likely peak this year but noted persistence could imply inflation converging to a slightly higher than pre-pandemic level. - Views on risks broadly aligned; authorities highlighted stronger bounce-back in tourism and manufacturing exports as important upsides. - They concurred with staff’s external sector assessment and that a significant reduction of the NIIP to more prudent levels would require a sustained current account surplus over the medium term. ### Fiscal policy assessment and recommendations - Recent fiscal outcomes: - The fiscal deficit fell to 2.8 percent of GDP in 2021, beating budget projections. - VAT and PIT overperformed and capital allocations were underspent. - The overall fiscal position was appropriately supportive. - Some 2 percent of GDP of the 2020–21 fiscal measures relative to 2019 are expected to be permanent—¾ of the 1 percent GDP increase in wage bill reflected trend increases in public wage and employment growth; reference increases in pensions and other social spending will also add to recurrent spending. - 2022 fiscal stance: - The 2022 fiscal position is expected to remain suitably accommodative with a structural primary balance broadly similar to 2021. - The fiscal deficit is expected to narrow to 2.2 percent of GDP, largely reflecting the recovery and unwinding of the remaining temporary Covid-19 measures, despite additional measures in response to higher energy prices. - NGEU grant-financed spending will provide additional support (1.5 percentage points). - Targeting and composition of measures: - Some fiscal measures should be better targeted: expansion of ALMPs, social housing, education, public sector digitalization, and NFC solvency support welcome; general tax relief and expanded family support allowance should be better targeted. - Broad-based energy price relief, caps on wholesale electricity prices, and energy tax cuts should preferably be replaced with more targeted and temporary support for vulnerable households and the most affected and viable firms, while preserving price signals for most users. - Contingency planning: - Automatic stabilizers should be fully deployed if growth disappoints. - For severe pandemic waves with extensive restrictions, consider extension of short-term work schemes, social benefits, and turnover loss compensation grants, balancing short-term stabilization with medium-term debt sustainability. - Medium-term fiscal consolidation: - Starting 2023, a gradual and steady growth-friendly fiscal adjustment is needed to rebuild policy space, improve expenditure composition, address longer-term fiscal pressures and alleviate public debt risks. - Motivation: under baseline unchanged policies, public debt projected to steadily decline to below 100 percent of GDP but remain high and more market-reliant as ECB support normalizes; contingent liabilities and end of moratoria risks add vulnerability. - Pace: a sustained and gradual discretionary consolidation—averaging annually 0.5 percent of GDP in the structural fiscal balance during 2023–26 is advisable (relative to the authorities Stability Program, which assumes no policy change), with flexibility to respond to shocks. - Measures: tax reforms, rationalizing current spending, and improving composition of public investment. - Tax and spending reform specifics: - Tax reforms should aim at greater efficiency, remove distortions, and broaden the tax base; scope for institutional reform to strengthen tax policy and tax expenditure analysis, reduce proliferation of tax incentives, and revisit reduced VAT rates. - Increase property taxes to raise revenue and improve the tax mix. - Tax expenditure and incentives: - Tax expenditure estimated to have reached more than 7 percent of GDP in 2020. - The number of tax deviations increased by 40 percent over the past decade. - Reduced VAT rates account for 52 percent of total estimated revenue forgone. - The non-regular resident scheme (reduced PIT rate of 20 percent for 10 years for certain activities) costs about 0.4 percent of GDP annually. - Rationalizing current spending: - Estimated increase in ageing-related fiscal outlays of ¾ percent of GDP is a key medium-term headwind. - Spending reforms include bolstering pension sustainability: simplify non-contributory benefits regimes, eliminate duplication, strengthen contributory incentives of minimum pensions, extend link between retirement age increases and life expectancy gains to minimum early retirement age, and abolish special early retirement ages for specific subgroups. - Portugal has one of the most generous pension systems in the OECD (net pension replacement rate for average wage workers at 90 percent of pre-retirement earnings). - Strengthen financial management and spending rationalization in the NHS; improve social benefits targeting and spending reviews; improve SOEs’ financial sustainability and governance. - Containing the public wage bill will require a comprehensive review of public employment and compensation structure. - Composition and investment: - Public investment fell over the last decade to below EU peers. - The NRRP can reverse this trend with significant investment in R&D, digital and climate transitions; transparent planning, budgeting, implementation, and oversight will be key for timely and effective absorption of EU funds. - Distributional and social considerations: - Covid-19 reinforced regional inequality of opportunity, poverty, social exclusion and housing affordability challenges. - Some 21.1 percent of the population was at risk of poverty or social exclusion in 2019. - Vulnerable groups: workers with short-term contracts, rural residents, and children. - Strengthening social assistance will require streamlining complex regulations and entitlement requirements. - Governance and transparency: - Completing ongoing structural fiscal reforms would strengthen fiscal sustainability: centralize integrated reporting of Covid-19 spending and RRP implementation; amendments to Budgetary Framework Law approved in April strengthen ex-post evaluation of macro forecasts and the Public Finance Council. - Further reforms needed to fully implement the 2015 Budgetary Framework Law, reinvigorate NHS reforms, and timely, transparent monitoring of SOEs’ financial performance and management. *Source: IMF staff report (content unit: 1prtea2022001 - 11. In contrast to previous crises, private credit held up and residential real estate prices surged).* ### 27. The authorities were confident that fiscal performance would improve significantly ### 27. The authorities were confident that fiscal performance would improve significantly ### Fiscal outlook and policy stance - Authorities expected headline deficit to fall to 1.9 percent of GDP in 2022, despite new energy crisis measures. - Rationale for improved fiscal performance: - Strong recovery improving the revenue outlook. - Unwinding of Covid-19 emergency measures expected to more than compensate discretionary energy-related expenditure. - On the war in Ukraine: new measures focused on ameliorating effects of heightened energy prices on overall inflation, vulnerable households, and energy-intensive sectors. - Authorities cautioned that downside risks may require some measures to be maintained for longer and stressed the importance of prompt adoption of a joint European strategy. ### Fiscal governance and public sector reforms - Authorities reiterated commitment to fiscal discipline and highlighted a strong track record of fiscal overperformance. - Political stability in parliament cited as conducive for policy continuity and implementing the RRP to promote potential growth while maintaining sound public finances. - Pension system: - Past pension reforms mitigated fiscal effects of an ageing population, but additional effort will be needed. - Plan to create a working group to explore options to strengthen pension system sustainability. - April-2022 amendments to the Budgetary Framework Law strengthened fiscal policy evaluation and oversight. - Ongoing efforts: improve efficiency of public investment and strengthen governance and financial performance of SOEs. *Source: 1prtea2022001 (IMF staff report).* ### Corporate sector solvency and policy responses - NFC solvency needs estimated to have increased by some 2¼ percent of GDP (SIP I). - Impacted firms include micro and small firms (lower capital needs but higher employment base) and medium and large firms, particularly in the transport sector, with systemic economic presence. - Share of zombie or low-productivity firms expected to rise, risking depressed productivity and investment. - Additional vulnerabilities: war in Ukraine, cost-push pressures, supply-chain disruptions, higher interest rates. - Policy recommendations and program design: - Leverage banking sector technical expertise for NFC viability assessments. - Prompt recapitalization to help viable firms handle the energy crisis. - Banco Portugues de Fomento (BPF) manages capitalization fund; solvency support programs (Strategic Recapitalization Program and Consolidar) have viability requirements but may need augmentation in size and instrument mix. - BPF should draw on commercial banks’ expertise; mandate should be clearly defined to increase accountability and avoid market distortions. ### Restructuring, insolvency, and liquidation - Strong restructuring and insolvency regimes needed to facilitate reorganization and exit of businesses and optimize resource reallocation. - Recommendations: - Clear communication and a short deadline for lifting the duty to file for insolvency to allow corporate debtors to prepare. - Simplify and strengthen effectiveness of restructuring and insolvency law; establish clear guidelines for participation of public creditors (tax, social security, other public administrations). - Streamline liquidation procedures by addressing bottlenecks in verification of claims and asset sales. - Strengthen insolvency statistics to analyze effectiveness and efficiency of systems. - Consider broader reform to rationalize the insolvency regime and coordinate procedures, building on EU Restructuring Directive implementation. ### Banking sector resilience and macroprudential stance - Need for close monitoring of banks’ credit quality after moratoria and amid housing market risks. - Observations: - Bank capital buffers and asset quality have steadily improved but remain below EA averages. - Forward-looking assessments of bank financial soundness are a priority given overlapping exogenous shocks and sovereign-bank-corporate-housing market linkages. - Policy and supervisory recommendations: - Banks should apply well-defined strategies for loan classification, NPL management, and maintain adequate provisioning. - Continued strong supervisory pressure by prudential authorities; rebuild capital buffers where needed, particularly for relatively weaker domestic banks. - Caution on dividend distributions and share buybacks given uncertainties on capital needs and new shocks. - Banks should value exposures to restructuring funds at market or fair values; deferred tax assets should follow prudent valuations. - Housing market specifics and macroprudential options: - Macroprudential policy measures are already relatively tight and have helped contain leverage ratios. - April 2022 guidance issued to reduce average maturity of housing loans. - Mortgage structure: three-quarters with rate fixation of up to one year, with an average interest rate of 0.8 percent on all outstanding mortgages; average maturity 35 years. - An interest rate increase of 100bps would raise the average per-capita interest burden from 3¼ to 7¼ percent of gross disposable incomes. - Once recovery is well established, BdP could consider introducing a positive rated CCyB or a sectoral systemic risk buffer (SRyB), in line with the CRDV and following EBA Guidelines, to contain macro-financial risks from banks’ real-estate exposures. - Such buffers would bolster banking system strength gradually while avoiding distributional costs of tighter macroprudential measures. - Longer-term housing policy note: stronger property taxes may be needed; the Golden Visa program was terminated in Lisbon, Porto and Algarve in December 2021. ### AML/CFT and cross-border financial flow risks - Portugal is a transit country for financial flows and provides incentives to attract foreign investment (Golden Visa Program, Madeira FTZ) with potential impact on non-resident banking-sector deposits and house prices. - Recommendations: - Focus AML/CFT policies on the cross-border dimension; close monitoring of cross-border flows. - Portugal’s Financial Intelligence Unit should prioritize collecting and disseminating financial intelligence related to suspicious cross-border flows. - Strengthen AML/CFT risk-based supervision of banks and real estate agents commensurate with risks. - Ensure Central Registry of Beneficial Ownership (RCBE) contains complete, accurate and up-to-date data on all relevant legal entities, including foreign trusts operating in the Madeira FTZ. - Ensure AML/CFT framework provides regulation of virtual assets sector in line with international standards. ### Authorities’ views (corporate and financial policies) - Authorities noted corporate sector handled the pandemic well but solvency risks may take time to materialize; continued close monitoring warranted. - Agreed on importance of prompt recapitalization of viable firms and resumption of duty to file for insolvency to allow market forces to enable exit of non-viable firms. - Authorities broadly agreed with recommended financial sector priorities: - Ongoing close monitoring of banks' credit quality and adequacy of loan loss provisions, especially for NFC exposures that benefited from moratoria. - Supervisory focus on strengthening bank capitalization, particularly for institutions with weaker-than-average capitalization and profitability. - Housing market risks recognized but important mitigants in place, notably borrower-based macroprudential measures effective at lowering risk level of new mortgages, borrowers’ leverage ratios and related macro-financial risks. - Targeted measures to build banks’ systemic resilience could be assessed when recovery risks subside. - On AML/CFT, cross-border dimension integrated into supervisory risk assessment; risks related to Madeira FTZ not considered material and Golden Visa Program strictly monitored. *Source: 1prtea2022001 (IMF staff report).* ### Structural reforms and the NRRP - NRRP aims to address long-term challenges: raise skill levels, increase competitiveness, strengthen NFC health, and support green and digital transitions to underpin medium-term saving, investment rates and growth without generating external imbalances. - Skills and labor market: - Share of low-skilled workers is 35 percent versus 18 percent for EA average. - Share of young low-skilled reduced to 20 percent of all employees. - About 17 percent of all workers are employed on a temporary basis (3–4 percentage points above the EA-EU averages). - NRRP reforms include: reinforce vocational and educational training; strengthen cooperation between higher education, public administration and enterprises; strengthen teachers’ digital skills; improve digital infrastructure of schools. - Measures to ease immigration, training incentives, and reforms to reduce employment protection costs for permanent contracts proposed to reduce labor duality. - Combining more flexible permanent contracts with ALMPs and stronger social safety net recommended. - Digitalization: - In 2021, some 51 percent (60 percent EA/EU average) of Portuguese companies had basic digital intensity. - NRRP Digital Transition measures include: (i) tax credits for companies’ digital transition; (ii) digitalization of public administration, including the judicial and educational systems; (iii) digital skill training to SMEs. ### Transition towards carbon neutrality - Authorities’ commitments and targets: - Portugal announced target to become carbon neutral by 2050, implying a reduction of emissions of 85–90 percent relative to 2005. - Long-term strategy: Roadmap for Carbon Neutrality 2050 (RCN) and National Energy and Climate Plan (NECP). - Authorities committed to overall investment of 3 percent of GDP by 2030 to support climate-related research and innovation. - NRRP funding for sustainable mobility, energy efficiency, renewables, decarbonization and the bioeconomy. - Tackling energy poverty: some 15 percent of the population without proper access to heating. - Staff assessment and projections: - Total GHG emissions, having peaked in 2005, are now close to 1990 level; with three-quarters of total electricity supply from renewable sources and the last coal-based power plant closed in 2021, electricity generation emissions expected to decline further. - Under unchanged current policies, staff estimate GHG emissions to increase by about 5 percent between 2022 and 2030. - A gradual increase of carbon price to $100 per ton of CO2e, accompanied by elimination of energy subsidies and broader coverage of the carbon tax, could reduce GHG emissions by about 15 percent by 2030 while gradually raising revenues. - To achieve carbon neutrality by 2050, additional measures in NECP and RNC are critical: public transportation investment and urban planning; renewable-based power generation; higher efficiency standards; water, land and forest management; investment in R&D. - Distributional and adaptation considerations: - Carbon pricing would weigh on vulnerable households; reforms need to be complemented with transfers to offset regressive effects. - Policies to promote sustainable mobility, energy efficiency, renewables, and development of financial devices to reduce cost of low-carbon technologies recommended. - Investments in risk prevention and preparedness for extreme weather events (floods, coastal erosion, droughts, heat waves, forest fires) may be needed. - Authorities’ views on energy transition: - Energy crisis seen as an opportunity to accelerate energy transition; Portugal well positioned to comply with Fit for 55 targets. - A revised NECP to be submitted to the EC in July 2023 will include plans to contain impact from current energy crisis and strengthen energy risk preparedness. - Ultimate long-term goal is to tax all carbon production, but timing is uncertain; national strategy to tackle energy poverty expected to be approved soon. *Source: 1prtea2022001 (IMF staff report).* ### 45. The recovery is expected to continue despite adverse spillovers from the war in ### 45. The recovery is expected to continue despite adverse spillovers from the war in ### Near-term outlook and inflation - The recovery is expected to continue despite adverse spillovers from the war in Ukraine. - Near-term growth, while remaining strong, is expected to be affected by second-round effects from the war in Ukraine. - The effects of two consecutive shocks will likely result in scarring. - Inflation is expected to increase in 2022 before receding in 2023, reflecting surging energy prices, but also broader pressures. ### Greenhouse gas emissions scenario (figure notes) - CO2 emissions shown for 1990–2030. - Scenario labels preserved as in source: - Baseline - Carbon Price = $75/tCO2e in 2030 - Carbon Price = $100/tCO2e in 2030 - Coverage increasing - Carbon Price = $100/tCO2e in 2030 + coverage increase - Source for emissions data: UNFCCC GHG Data Interface and IMF staff calculations. ### Risks - Risks are to the downside. - Key risks stem from the war and the pandemic. - Tighter financial conditions could hurt growth and the fiscal position. - The end of loan moratoria could expose higher insolvencies, lowering investment and bank capital, and amplifying fiscal strains. - Upside risks: a stronger tourism recovery, pickup in pent-up demand and higher-than-projected payoffs from the NRRP would brighten the outlook. ### Fiscal policy recommendations - Fiscal policy should remain appropriately accommodative in the near term, with support measures carefully designed to be temporary and well-targeted. - Broad-based tax cuts and price measures to alleviate the energy shock could be preferably replaced with more targeted support for vulnerable households and the most affected and viable firms. - Policies need to be flexible to provide more support should severe downside risks materialize. - Fiscal overperformance should be saved. - A growth-friendly fiscal consolidation from 2023 is key to rebuilding fiscal space, preparing for long-term fiscal pressures, and alleviating risks from high public debt. - A stronger consolidation path—centered on reducing tax expenditures, bolstering pension sustainability, and stronger financial management—would rebuild fiscal space for much-needed investment even after NGEU funds end, while helping offset longer-term ageing and health spending pressures. ### Corporate sector adjustments - Timely adjustments in the corporate sector are key to a smooth reallocation of resources. - The ultimate effect of the pandemic on corporate, bank, and public sector balance sheets remains uncertain, potentially amplified by war-related strains. - Prompt recapitalization of viable firms to leverage private funds and expertise will help mitigate debt overhang, productivity losses, and better handle the energy crisis. - Further improvements in the insolvency regime with active labor market policies are needed to smooth exit for unviable businesses, reallocation, and limit scarring. ### Financial sector vigilance - Vigilance on financial sector health with continued efforts to rebuild weak balance sheets is critical in the context of the roll back of Covid-19 measures. - The banking system has held up well so far, and, on average, should be resilient to adverse shocks. - Nonetheless, capital and asset quality still lag behind the EA and a few domestic banks are yet to complete their restructuring. - Continued close monitoring of banks’ credit quality is essential given downside risks to the outlook. ### Structural reforms and climate policy - Advancing structural reforms on multiple fronts—anchored by the NRRP—are essential to raise growth potential durably. - The NRRP reforms and investments appropriately focus on addressing Portugal’s structural challenges and facilitating the climate and digital transition. - Efficient planning, budgeting, implementation, and oversight will be key to maintain strong investment absorption capacity. - Reforms to strengthen insolvency regimes and reduce labor market fragmentation are also important. - To achieve Portugal’s ambitious climate targets, the authorities may consider further adjustment of the carbon price when uncertainty surrounding the energy crisis subsides, combined with measures further improving energy efficiency and offsetting the impact on the most vulnerable households. *Source: UNFCCC GHG Data Interface and IMF staff calculations.* ### 52. It is proposed that the next Article IV consultation takes place on the standard ### 1prtea2022001 - 52. It is proposed that the next Article IV consultation takes place on the standard ### Covid-19 pandemic and economic impact (2020–2022) - The economy was "buffeted by recurring waves of the pandemic, which particularly affected the tourism sector." - The pandemic "necessitated several rounds of mobility restrictions to contain the spread of the virus." - The pandemic "induced a severe recession in 2020... primarily reflecting a sharp decline in tourism." - Confidence indicators "have improved despite a recent soft patch." - Output recovery "has been strong, although divergent across sectors." - Sources cited: "IMF WEO; Eurostat; Bloomberg; Oxford University; and Banco de Portugal." ### Sectoral activity and tourism developments - Sectoral Gross Value Added indexed to 2019Q4 = 100 shown across Agriculture, Industry (ex construction), Manufacturing, Construction, Trade/Hospitality, Public Services, Total. - Tourism series (sum of last 4 quarters): hotel revenues (billion euros), overnight stays (millions, rhs), number of travellers (millions, rhs) are tracked with notable declines in 2020 and partial recovery in 2021. - Real GDP growth in EU countries displayed for 2020 and 2021 (Percent), with Portugal among other EU members. - Oxford Stringency Index tracked Mar.2020–May.2022 (Index, 0-100). ### Labor market indicators (2017–2021) - "The employment recovery has been strong, but also divergent across sectors and different demographic groups." - Employment indicators "have recovered well and reached pre-pandemic levels" but "sectoral job growth has been slower for tourism." - Hours worked and wage recovery: "Hours worked are also divergent across sectors.... and wage recovery is weaker in affected sectors." - "Unit labor costs have risen in construction, industry and manufacturing reflecting higher energy and material costs." - "Labor market duality remains a key challenge." - Employment and unemployment dynamics: - Employment year-on-year percent change and Unemployment rate (percent) tracked (charts cover 2017Q1–2021Q4). - Sectoral Employment (2019Q4=100) and Sectoral Compensation of Employees (2019Q4=100) series displayed. - Portugal: Employment Growth, 2021Q4 (Percent Change Relative to 2019Q4) chart disaggregates by sector and demographic groups (including Temporary contracts, Youth (15-24), Female employees). ### Inflation developments (2020–2022) - "Inflation has picked up on higher energy prices, and has broadened more recently though second-round effects through wages are limited so far." - "Inflation has risen sharply relative to the recent past... but has remained below the EA average." - "Reflecting the more limited increase in domestic energy prices relative to other EA countries." - "Among sectors, transport and hospitality have been harder hit." - "Overall wage pressures have remained limited so far... although there are sectoral differences." - Portugal: HICP inflation series (Jan-20 to Apr-22) includes HICP, Core HICP, Food/Alcohol/Tobacco, Energy. - Chart: Headline Inflation and Energy Inflation — regression line y = 0.0945x + 3.1482, R² = 0.3311. - Growth of Compensation Per Employee by sector (Y-O-Y Percent Change) shown for 2020Q1–2021Q4. ### Fiscal sector indicators and outlook - "A timely fiscal response to the pandemic, helped by accommodative funding conditions, widened the deficit." - "Over the medium term, containing expenditure, particularly relating to ageing, and improving revenue efficiency will be key." - Fiscal balance "fell sharply as prompt fiscal support was deployed in response to the pandemic... causing public debt to rise significantly." - Low interest rates and "the ECB’s asset purchase programs have provided ample funding." - OECD VAT revenue ratio (2018) and Ageing: Change in fiscal outlays on pensions and health: 2019-2025 (Percent of GDP) are presented; Portugal shown among peers. - 10-Year Govt Bond Spreads Relative to German Bunds series through Apr-2022. - General government balance and primary balance series (2007–2021) displayed. - Government gross debt: 2021 Government gross debt (Percent of GDP) chart shows Portugal among peers. Key fiscal numbers from Table 1 (selected): - Real GDP: 2020 = -8.4, 2021 = 4.9, 2022 = 5.8, 2023 = 1.9, 2024 = 2.4, 2025 = 2.1, 2026 = 1.9, 2027 = 1.9 - Unemployment rate (Percent; average): 2020 = 7.1, 2021 = 6.6, 2022 = 5.8, 2023 = 6.4, 2024 = 6.4, 2025 = 6.4, 2026 = 6.3, 2027 = 6.3 - Consumer prices (Harmonized index): 2020 = -0.1, 2021 = 0.9, 2022 = 6.1, 2023 = 3.5, 2024 = 2.3, 2025 = 2.0, 2026 = 1.8, 2027 = 1.7 - General government balance (Percent of GDP): 2020 = -5.8, 2021 = -2.8, 2022 = -2.2, 2023 = -1.0, 2024 = -0.9, 2025 = -1.1, 2026 = -1.1, 2027 = -1.2 - General government debt: 2020 = 135.2, 2021 = 127.4, 2022 = 115.8, 2023 = 110.7, 2024 = 106.4, 2025 = 102.7, 2026 = 99.7, 2027 = 97.0 - Revenues: 2022 = 45.3 (Percent of GDP) - Expenditures: 2022 = 48.1 (Percent of GDP) - Primary government balance: 2022 = -0.5 (Percent of GDP) From Table 2a and 2b (General Government Accounts): - Revenue (Billions of euros): 2020 = 87.0; 2021 = 95.8; 2022 = 105.3; 2023 = 110.7; 2024 = 115.0 - Expenditure (Billions of euros): 2020 = 98.7; 2021 = 101.7; 2022 = 110.4; 2023 = 113.3; 2024 = 117.4 - Net lending (+)/borrowing (–) (Billions of euros): 2020 = -11.7; 2021 = -6.0; 2022 = -5.2; 2023 = -2.6; 2024 = -2.4 - Debt at face value (EDP notification) (Billions of euros): 2020 = 270.5; 2021 = 269.3; 2022 = 274.6; 2023 = 277.2; 2024 = 279.6 ### Bank loans under moratoria and financial sector risks - "The end of loan moratoria presents a key uncertainty for the health of the financial system over the medium term." - Loans under moratoria "peaked in September 2020 and have been declining since the end of moratoria." - "All non-financial sectors of the economy benefited from moratoria." - "The share of stage 2 and 3 loans in total loans is relatively high... although this share in government-guaranteed loans (about 4 percent of total loans) is relatively low." - "The credit quality has fallen for loans that were under moratoria." - "Bankruptcies still remain low, partly reflecting the continued suspension on duty to file for bankruptcies." - Portugal: Loans to NFCs under moratoria (Percent of total loans to NFC) series across Mar.20–Oct.21 by sector (Manufacturing; Construction/RealEstate; Wholesale/Retail/Accommodation/Food; Others). - Portugal: Bank Loans under Moratoria (Billions of Euros) shows Household loans, Nonfinancial corporate loans, Total. - IFRS9 staging (2021Q4): - Stage 2 and Stage 3 shares for Portugal compared with peers; chart shows Stage 2 and Stage 3 percentages by country. - Bank Loans Subject to Public Guarantee Schemes by IFRS9 Stage, 2021Q4: government-guaranteed loans represent "about 4 percent of total loans." Selected banking system indicators (Table 4): - Regulatory capital to risk-weighted assets ranged around 13.9–18.0 (series by quarter). - Non-performing loans to total gross loans declined from 16.3 to 3.6 across the series. - Return on assets around 0.0–0.8 (quarterly observations). - Return on equity varied, with values such as 0.2, 1.1, 2.0, -0.3, 8.2, etc., across quarters. - Loans to deposits ranged in the 80s–90s percent across quarters. ### External sector indicators - "The current account position suffered a sharp decline during the pandemic, mainly due to tourism." - "The current account turned negative with a sharper decline of exports relative to imports... reflecting a collapse of international tourism receipts, that partially recovered in 2021." - "Goods exports have recovered with a simultaneous rebound in the rest of the euro area." - "The ULC-based REER appreciated slightly reflecting support measures to employment." - "The financial account strengthened in 2021 as net liabilities fell, driven by a reduction of Portuguese long-term public debt held by non-residents." - "The NIIP deteriorated in 2020, worsening an already high negative balance, but slightly recovered in 2021." - Travel Services Export (Million Euros) series: 2010–2021 shows collapse in 2020 and partial recovery in 2021. - Net IIP by Functional Categories and NIIP (Percent of GDP) series documented. - REER based on ULC (2010=100) Last obs. 2021Q4. - Trade in Goods and Services (Percent of GDP; 12-month rolling sum) Last obs. Feb. 2022. - Financial Account (Billions of euros; 12-month rolling sum) Last obs. Feb. 2022. Selected external figures from Tables 3a/3b: - Current account (Billions of euros): 2020 = -2.1; 2021 = -2.4; 2022 = -3.1; 2023 = -1.2 - Balance on tourism (Billions of euros): 2020 exports = 7.7; 2021 exports = 16.0; 2022 exports = 18.7 - Net international investment position (Percent of GDP): 2019 = -100.0; 2020 = -104.8; 2021 = -95.9; 2022 = -84.5 - Tourist receipts (percent of total exports): 2017 = 18.5, 2018 = 19.0, 2019 = 19.5, 2020 = 10.4, 2021 = 11.2, 2022 = 14.7 ### Projections and macro outlook (selected) - Real GDP projections: 2022 = 5.8, 2023 = 1.9, 2024 = 2.4, 2025 = 2.1, 2026 = 1.9, 2027 = 1.9 - Consumer prices (HICP): 2022 = 6.1, 2023 = 3.5, 2024 = 2.3, 2025 = 2.0, 2026 = 1.8, 2027 = 1.7 - General government debt (Percent of GDP): 2022 = 115.8, 2023 = 110.7, 2024 = 106.4, 2025 = 102.7, 2026 = 99.7, 2027 = 97.0 - Current account balance (Percent of GDP): 2022 = -1.3, 2023 = -0.5, 2024 = -0.5, 2025 = -0.4, 2026 = -0.4, 2027 = -0.3 Sources cited across projections and tables: Bank of Portugal; Ministry of Finance; National Statistics Office (INE); Eurostat; IMF WEO; IMF staff projections; Haver Analytics; ECB; OECD; European Commission; IMF staff calculations. *Source: 1prtea2022001 - 52. It is proposed that the next Article IV consultation takes place on the standard (PDF chapter/section).* ### Annex I. Status of Past Article IV Recommendations ### Annex I. Status of Past Article IV Recommendations ### Labor markets - Labor market flexibility - Recommendation: Safeguard reforms during 2012-14 to make: (i) hiring and collective bargaining more flexible; and (ii) permanent contracts more flexible rather than restricting temporary contracts. - Progress: Partially implemented. Agreed measures would mostly discourage temporary contracts, and constrain flexibility afforded by "banks of hours;" however, allowances would be made for sectoral differences, and longer probation periods would improve permanent contracts. - Gender gap - Recommendation: Develop strategies to reduce the under-representation of women in positions with higher qualifications and higher pay and the overrepresentation in low-paying occupations with part-time and fixed-term contracts to not only close gender pay gaps but also reduce overqualification mismatches. - Progress: Partially implemented: Gender pay gap is on a declining path. ALMPs introduce incentives to increase employment of women in under-represented professions. Initiative Portugal INCoDe.2030 targets increasing the share of women in the ICT and higher education. ### Structural reforms - Private pensions - Recommendation: Enact the regulations needed for the complementary second-tier occupational pension schemes mandated in the pension law. - Progress: Implemented. Decree-Law 27/2020 has introduced new rules applicable to employer-provided pension funds, reflecting changes required by the European Union (EU) Institutions for Occupational Retirement Provision (IORP) Directive (EUD 2016/2341 on the activities and supervision of institutions for occupational retirement provision) as well as certain further reforms. To implement the changes, effective August 1, 2020, external pension fund managers must modify existing pension fund agreements. For some of the changes, an implementation period of up to 12 months will be permitted. European Union (EU) Directive on the activities and supervision of institutions for occupational retirement provision (IORP) that aims to improve the governance of workplace pensions and ease workers’ job mobility within the EU. The law generally took effect in Portugal on 1 Aug 2020. - Investment and productivity - Recommendation: Improve the regulatory environment, strengthen competitiveness, and make more efficient use of labor, building on past reforms. Promote competition in network industries. - Progress: Partially implemented: The NRRP envisages reforms to improve vocational education and training, strengthen cooperation between higher education and companies, remove restrictions in highly regulated sectors and reduce gender inequality. ALMPs under Ativar.pt promote employment and improve workers' skills. Recent changes to Labor Code (July 2021) introduce new reskilling and upskilling programs (Upskill, EU Sou Digital, Impulso Jovens STEAM). To address labor shortages, hiring and training subsidies to promote employment of underrepresented and disadvantaged (long-term unemployed) groups have been increased. - Education - Recommendation: Raise the quality of education and training in vocational schools. Foster exchanges between universities and industry. - Progress: Partially implemented: New Special Technological Centers connecting students with companies contribute to improved on-job training. Authorities remain committed to improve quality of education of middle aged workers; however, participation in adult education remains low. Recent changes to Labor Code (July 2021) introduce new reskilling and upskilling programs (Upskill, EU Sou Digital, Impulso Jovens STEAM). The NRRP Component 6 focuses on upskilling. Other programs focus on improving matching between labor demand and supply. ### Financial sector and Macro-financial Issues - Profitability - Recommendation: Supervisors to ensure that banks improve their operational efficiency and profitability. - Progress: Implemented. A thorough supervisory review of banks' business models has been conducted in the context of SREP, leading to recommendations to improve operational efficiency and streamline activities. Progress has been made on these two fronts. Nevertheless, further efforts are needed to continue to improve profitability. - Non-performing loans - Recommendation: Supervisors to ensure that banks should follow through their NPL reduction targets and strengthen their corporate governance, internal controls, and risk management. - Progress: Ongoing. Prudential supervisors are actively monitoring NPL levels and NPL reduction strategies. - Capital - Recommendation: Supervisors to ensure that banks’ capital ratios are resilient to adverse macro scenarios. - Progress: Ongoing. In the context of the SREP capital decision, supervisors are monitoring capital adequacy. Stress tests are performed to complement these efforts. ### Fiscal sector - Budgetary process, monitoring and control - Recommendation: Finalization the Budget Framework Law to improve budget preparation and execution. - Progress: Ongoing. Implementation of the Budgetary Framework Law (BFL) saw a number of milestones in the 2021 Budget, such as inclusion of no policy change scenario, enhanced fiscal risk disclosure and tax expenditure reporting. Implementation of accrual accounting and reporting, and performance-based budgeting has proceeded with delays. Amendments to the Budgetary Framework Law approved in April-2022 will strengthen the ex-post evaluation of macroeconomic forecasts, and the role of the Public Finance Council. Further reforms are needed to strengthen and better integrate the annual and medium-term budgets. - Structural primary adjustment - Recommendation: One percent of GDP tightening of the structural primary balance (relative to 2018) over 2019–2020. - Progress: Not applicable. As per guidance, given the size of the COVID-19 shock, this falls under "past policy advice may no longer be relevant in many cases". - Public employment - Recommendation: Review the level, composition and rules of public employment comprehensively to identify ways to control increases in the wage bill without affecting service delivery. - Progress: Not implemented. Public employment has grown, though in part in response to urgent and immediate service sector delivery needs in the healthcare and education sectors. Offsetting measures have been introduced. - Civil service reform - Recommendation: A well-designed reform of the civil service, aimed at improving the level and composition of public employment, and guided by the demographic needs of the population. - Progress: Partially implemented. While there has been no wholesale review or reform of the civil service, the authorities have demonstrated restraint on wages and career unfreezing, and have focused new hiring in areas where the demographic demands are highest (in particular, health personnel). - Capital spending - Recommendation: In the context of changing the expenditure composition, increase capital spending to maintain the level of public capital stock. - Progress: Not applicable. As per guidance, given the size of the COVID-19 shock, this falls under "past policy advice may no longer be relevant in many cases". Although public investment has increased markedly, this has not been done via the changing expenditure composition. - Pension reforms (1) - Recommendation: Revisit recent pension reforms to reduce grandfathering. - Progress: Not implemented. No major reforms of the pension system have been implemented. - Pension reforms (2) - Recommendation: Identify measures to offset the costs of reducing the penalties for the early retirement of long-career employees. - Progress: Not implemented. No offsetting measures introduced. - Pension reforms (3) - Recommendation: Re-examine 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. - Progress: Not implemented. Bonus regime for those retiring after statutory age remains generous and unchanged. Also, new flexibility rule for early retirement entered into force in 2019. It exempts from the application of the sustainability factor all workers aged 60 or more, and who have attained a contributory period of at least 40 years at the age of 60. - Public sector payments discipline - Recommendation: Address the root causes of arrears, particularly from hospitals, such as under-budgeting, as well as weaknesses in monitoring and enforcement practices. - Progress: Partially implemented. In the context of the ongoing spending review, the initiatives in the healthcare sector to increase central control of budgetary execution, decrease arrears, strengthen the joint performance monitoring and control from the MoF and MoH have improved efficiency but have been insufficient to prevent hospitals from accumulating new arrears. *Source: IMF staff compilation from Annex I. Status of Past Article IV Recommendations* ### Annex II. Key Policy Measures in Response to Covid-19, 2020–2021 - Containment of the outbreak - Duty of self isolation - Temporary reinstatement of border controls - Closure of selected activities - Secure jobs - Short term employment protection scheme - Deferral of tax/social security payments - State guaranteed credit lines - Moratoria on bank credits - Ensure adequate welfare provision - Moratoria on households’ bank loans - Enhanced social benefits - Increase the response capacity of the National Health Service - Boost employment - Extension of short term employment protection scheme - Incentives to the gradual increase in working hours and labor income - Launch of small public works - Increase firms’ capital and liquidity - Extension of moratoria on bank credits - Maximum amount of State guaranteed credit lines increased to 6.6 percent GDP - Added flexibility in compliance with tax obligations - Suspension of insolvency filing obligations for debtors - Launch of the Portuguese development bank, tasked with direct lending, managing state guarantees and company capitalization - Incentives to SME consolidation and improved access to capital markets - Increase banks' capital and liquidity - Relaxation of macroprudential policies - Enhance social welfare - Wider range of social benefits enhancement of the National Health Service - Digital transition in public schools - Improved access to affordable housing - Improve institutional set up - Streamlined public administration procedures - Added support/flexibility for local and regional administrations - Focus on the judicial system - Strengthen capacity of the National Health Service - Additional liquidity to the most affected firms - Entertainment, restaurants, exporting, firms - Adjust the short term employment protection scheme - Accumulation with other measures allowed Timeline highlights (selected) - March - April 2020: Contain the surge in COVID 19 cases; closure of non essential activities; closure of schools universities from 22 Jan; duty of self isolation; country wide mobility restrictions; tighter control; heavier fines. - May - September 2020: Stabilize economic and social conditions; emergency measures; support to firms including turnover loss and fixed cost compensation grants (Apoiar programs); credit guarantees up to 25 percent to support loan renegotiation of most affected sectors. - End 2020: Resilience and Capitalization Fund (€1.3 billion) supporting debt reduction and recapitalization of firms via equity and quasi-equity instruments. - January - September 2021: Refocus on public health; strengthen policy action including extension/recalibration of employment support schemes; enhanced support to the cultural sector; renewed benefits for the educational community. *Source: IMF staff compilation from Annex II. Key Policy Measures in Response to Covid-19, 2020–2021* ### Annex III. Residential Housing and Mortgage Market Development - House price dynamics and valuation - Since 2015, Portuguese house price growth outpaced the EA average by almost 30 percentage points. This pace was sustained throughout the pandemic, with residential real estate prices gaining nearly 20 percentage points in real terms and relative to rents. - Available estimates suggest overvaluation of residential real estate: Banco de Portugal estimates point to an over-valuation of 8 to 16.5 percent. IMF model-based estimates point to an overvaluation of 7 percent as of mid-2021. Since mid-2021 house prices increased by 5.7 percent by end-2021. Price-to-rent and price-to-income ratios have reached the highest levels since 2000. - Drivers of price growth - Domestic bank credit has not been a key driver of house prices yet. Portugal became one of EA’s most dynamic real estate markets partly reflecting tax incentives for foreigners and the Golden Visa program, whereby non-resident flows contributed to drive up housing prices. - With households deleveraging since 2012–13, outstanding house credit to disposable incomes declined by 100 pp between 2014 and 2019. Housing credit growth turned positive only from 2019, driven by improved consumer confidence and low interest rates. - Housing supply shortages also played a role, with relatively subdued construction activity in pre-pandemic years, although construction remained resilient throughout the pandemic. Some cities (e.g., Lisbon) saw compression in price variation, with lower-end prices seeing steep gains. - Housing debt service and interest rate sensitivity - Aggregate housing debt service as a share of disposable income was declining before the pandemic, but the trend slowed. - On a per capita basis, average mortgage payments correspond to about 1/5 th of household gross disposable income, marginally lower than the peak during the 2012–13 sovereign debt crisis. - Mortgage interest payments declined from about 12 percent of disposable income in 2012H1 to about 3 percent in 2021. Principal repayments dipped temporarily due to moratoria. - With house lending relying predominantly on variable rate mortgages, a significant increase in interest rates would quickly erode household incomes: Three quarters of housing loans have rate fixation of up to one year, with Euribor as the benchmark, while only a small fraction has fixed rates for longer than 10 years. - Compared to early 2021, 2-year swap rates have widened by over 150 basis points reflecting expectations of ECB monetary tightening. - With historic and euro-area’s lowest mortgage interest rates as of 2021Q4 – 0.7 percent for new mortgages and 0.8 percent for all outstanding – a 1 pp higher rate could raise household interest payments from 3.2 percent to about 7.2 percent of average household income, potentially also impacting aggregate demand. - As per BdP’s borrower-based macroprudential policy measures, banks are recommended to consider a 300 basis point interest rate shock in the calculations of DSTIs for new mortgages. - Macroprudential and supervisory actions - The Bank of Portugal expanded its macroprudential toolkit in 2018, including measures on new credit agreements relating to residential property and consumer credit. - Supervisory data indicate borrower profiles improved in 2019, partly reflected in the increase in the share of mortgage credit granted to borrowers with net income above median. - The average maturity of new loans has not converged towards 30 years, prompting new macroprudential guidance from April 2022 on limits to maximum maturities. - Measures stipulate that banks should take into account the impact of higher interest rates in the calculations of DSTI, which is a mitigating factor. - More generally, risks need to be closely monitored and consideration should be given on further strengthening capital positions, in accordance with the ESRB guidance, should vulnerabilities from the residential real estate sector continue increasing. *Source: IMF staff compilation from Annex III. Residential Housing and Mortgage Market Development* ### 7. In view of rising house prices and limited ### 1prtea2022001 - 7. In view of rising house prices and limited ### Housing affordability and social housing - Finding: House prices to disposable income are high among EA countries; housing affordability is a growing concern. - Finding: Social housing is limited in Portugal at about 2 percent of the total housing stock compared to EA average of 7.5 percent. - Opportunity: The NGEU financed NRRP provides an opportunity to increase the stock of affordable rental housing for low-income families and to facilitate job mobility. - Social Housing Stock, 2020 or latest (In percent, social rental dwellings as a share of the total number of dwellings) — listed values by country code as presented: - 0.8 - 1.1 - 1.1 - 1.6 - 1.6 - 1.9 - 2.0 - 2.4 - 2.7 - 4.2 - 4.7 - 10.0 - 12.7 - 14.0 - 23.6 - 34.1 - Country labels as shown: LTU EST ESP LUX SVK LVA PRT ITA DEU BEL SVN FIN IRL FRA AUT NLD - Source cited: OECD affordable housing database. Euro Area average noted. ### Annex IV — External Sector Assessment, 2021: overall assessment and key metrics - Overall assessment: The external position in 2021 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - Context: Large adjustment in the current account since the 2012–13 sovereign debt crisis helped reduce the large negative NIIP via higher tourism revenues and improved public sector savings-investment balance from fiscal adjustment. - 2021 current account: -1.1 percent (reflecting a sharp decline in tourism revenues due to the pandemic). - NIIP projection: NIIP projected to strengthen from –95.8 percent of GDP in 2021 to below -62 percent in 2027. - Medium-term vulnerabilities: Large negative NIIP and high gross external debt imply external vulnerabilities. ### Foreign asset and liability position and trajectory - Background: Negative NIIP declined from peak of 124 percent of GDP in 2014 to 96 percent of GDP in 2021, after rebound to 106 percent in 2020 due to pandemic-induced GDP decline. - Gross external debt: 193 percent of GDP in 2021. - Projection and assessment: - NIIP projected to decline to -85 percent in 2022 and to below 70 percent in 2025 on the back of RRP primary (current) and secondary (capital) transfers and tourism recovery. - Assessment notes external vulnerabilities from large gross financing needs and potential valuation changes; debt management efforts (smoothing redemptions, lengthening maturities) and sovereign asset purchase programs have mitigated risks. - 2021 (% GDP) summary figures presented: - NIIP: ‐95.8 - Gross Assets: 177.4 - Debt Assets: 53 - Gross Liab.: 273.2 - Debt Liab.: 47.5 ### Current account: background, assessment, and staff-calculated gaps - Background: Current account in surplus during 2013–19; registered a deficit of 1.1 percent of GDP in 2021 (similar to 2020) driven by lower tourism revenues. - Near-term outlook: CA expected to further deteriorate in 2022 due to deteriorating terms of trade and adverse spillovers from the Russia-Ukraine war. - Model and adjustments: - Cyclically adjusted current account (EBA model-based): -1.2 percent of GDP. - Adjustments: +3.4 percent to account for Covid-19 effects (tourism, medical imports, consumption shift), and -1.0 percent to offset uncertainty in retained earnings and inflation biases. - Staff cyclically adjusted current account after adjustments: 1.2 percent of GDP. - EBA CA norm: -1.2 percent of GDP. - Staff normative assessment: - Guided by objective of increasing NIIP to under -50 percent over medium term, and assuming no valuation effects, a CA norm of 1 percent of GDP is estimated (within a range of 0 to 2 percent). - Implied staff gap: 0.2 percent of GDP. - Accounting for uncertainty: CA gap range of -0.8 to 1.2 percent of GDP. - Policy gaps contribute 2.1 percent while unexplained residual is -2.2 percent. - Key policy message: Strengthen external position via sustained fiscal adjustment paired with structural reforms to support both saving and investment. - 2021 (% GDP) summary figures presented: - CA: ‐1.1 - Cycl. Adj. CA: ‐1.2 - EBA Norm: ‐1.2 - EBA Gap: 0.0 - Covid‐19 Adj.: 3.4 - Other Adj.: ‐3.2 - Staff Gap: 0.2 ### Real exchange rate (REER) - Background: CPI-based REER and ULC-based REER diverged in 2021: - CPI-based REER appreciated to pre-2015 level. - ULC-based REER depreciated for a second consecutive year due to labor market support measures during the Covid-19 pandemic. - Trend: Both measures appreciated between 2015 and 2019; ULC-based REER expected to resume appreciating trend once support measures withdrawn. - Assessment: - EBA REER index model suggests marginal undervaluation of -1.0 percent in 2021. - Level REER model implies marginal overvaluation of 1 percent in 2021. - Staff note: Putting NIIP on a faster downward track will require stronger adjustment in REER, achievable through quality upgrades and innovation to improve non-price competitiveness. - REER gap from staff-assessed CA gap: range of -3.4 to 2.1 percent, midpoint at -0.7 percent (based on 0.36 model elasticity). ### Capital and financial accounts: flows and policy measures - Background: Financing conditions remained favorable in 2021 due to ECB asset purchases and European institutional measures. - Sovereign spreads: Lower than 70 basis points at end-December 2021 (after being above 300 basis points in early 2017); spreads have started to increase following Russia’s invasion of Ukraine. - Credit ratings: Stable at investment grade since end-2018; last notch upgrade by Moody’s in September 2021. - Financial account: 0.9 percent of GDP in 2021 (higher FDI liabilities more than offset by higher net portfolio investment inflows). - Assessment: Active debt management supported external financing rollover needs and lowered funding costs with positive spillovers for the private sector. ### FX intervention and reserves - Background: The euro has the status of a global reserve currency. - Assessment: Reserves held by the Euro Area are typically low relative to standard metrics, but the currency is free floating. ### Annex V — The National Recovery and Resilience Plan (NRRP) and NGEU - NGEU package: 9 percent of 2020 GDP—of which 7 percent of GDP is for the NRRP. - Portugal allocation and use: - Portugal is receiving €13.9bn (7 percent of 2020 GDP) in grants. - Another €14.2 bn (7 percent of 2020 GDP) is available in loans; government plans on utilizing only (1½ percent of GDP) of the latter during 2021–26. - NRRP pillars and amounts: - Economic Resilience: €11.13 bn - Climate Transition: €3.06 bn - Digital transition: €2.46 bn - The three major areas are divided into twenty components. - NRRP aims and reforms: - Address longstanding labor market issues: improve vocational education and training, strengthen cooperation between higher education and companies, remove restrictions in highly regulated sectors, reduce gender inequality. - Targets: raise exports to 53 percent of GDP and R&D investment to 3 percent of GDP by 2030. - Sizable green investment planned for energy efficiency of residential and administrative buildings and increasing renewable energy share. - Investments planned for affordable social housing and student accommodation to support integration of disadvantaged communities and more inclusive growth. - Emphasis: strong governance and spending accountability will be key. - Growth impact estimates: - Staff estimate assuming frontloaded deployment of NGEU funds over 2021–26 with public investment multiplier of 0.8 and 0.4 in the first two years and public consumption multiplier of 0.3 and 0.1, respectively: - GDP impact at 2 percent by 2025, which would close almost 40 percent of gap between projected 2026 GDP relative to its pre-pandemic projected level. - Authorities’ estimate: raise real GDP level by 3.5 percent by 2025. - Implementation caveats: - Structural bottlenecks (ageing, low share of skilled labor, low investment absorption capacity, risks to productivity) and global supply-side bottlenecks could result in a longer lag before potential growth gains materialize. - Upside conditional on efficient absorption of EU funds in public investment complemented with well-sequenced structural reforms. ### NRRP spending and output indicators presented - Real Output Loss (2019=100) chart referenced with scenarios: January 2020 WEO; May 2022 Update; May 2022 Update w/o RRP. - Total new spending by year (values listed in table as presented): - 2021 2022 2023 2024 2025 2026 (columns implied; aggregated row values shown) - Total new spending: 294030883460306524991091 (presented as a continuous string in source) - Consumption: 1544577720643569100 - RRF 1/2: 25577720643569100 - REACT: 8565560 - Investment: 13962511274024221930991 - RRF 1/8: 842262274024221930991 - REACT: 188122 - Other 2/1: 05256119 - Note: Table entries are presented in the source as shown; rows/columns and footnotes indicate (1) Based on the timeframe of the Recovery and Resilience Plan and (2) Just Transition, European Agricultural Fund for Rural Development. ### Annex VI — Risk Assessment Matrix (RAM) - Overview: RAM (as of April 2022) lists global and domestic risks, their likelihood, impacts if realized, and suggested policy responses. - Selected global risks and policy responses: - Russia’s invasion of Ukraine leads to escalation (High likelihood): Impact—High: extended supply-side disruptions, higher commodity prices, tighter financial conditions, refugee inflows could induce social tensions. - Policy responses: Additional temporary and targeted support to viable firms; protect the most vulnerable households; broaden ALMPs to facilitate employment of refugees in sectors facing labor shortages. - Outbreaks of lethal and highly contagious Covid-19 variants (Medium likelihood): Impact—Medium: limited negative impact given high vaccination rates but demand in contact-intensive sectors remains low; slow tourist recovery increases scarring. - Policy responses: Scale up public health measures; reintroduce targeted and time-bound support to contain pandemic effects on viable firms and workers (e.g., short-term work schemes). - Rising and volatile food and energy prices (High likelihood): Impact—High: higher input and household energy costs will damp output. - Policy responses: Consider increasing targeted support to the most vulnerable households; promote faster transition to renewable energy and support energy efficiency. - De-anchoring of inflation expectations in the U.S. or advanced European economies (Medium to Medium-Low likelihood): Impact—Medium: repricing of risk assets, wider sovereign spreads, tighter global financial conditions, reduced credit supply and bank balance sheet strains. - Policy responses: Coordinated monetary policy at euro area level; focus supervision on credit origination and refinancing; protect bank capital by restricting dividends and bonuses where needed. - Natural disasters related to climate change (Medium likelihood): Impact—Medium: slower recovery and lower medium-term growth. - Policy responses: Support affected sectors and rebuild damaged infrastructure. - Selected domestic risks and policy responses: - Sharp tightening of financial conditions combined with an unexpected house price correction (Low likelihood): Impact—Medium/High: higher interest rates weaken balance sheets, amplify credit-related strains, deteriorate banks’ credit quality given sizeable mortgage exposure, negative wealth effects reduce consumption. - Policy responses: Announce credible plans to strengthen bank capital buffers; continue close monitoring of financial conditions and recalibrate macroprudential policy as needed. - Lower absorption of NGEU funds (Medium likelihood): Impact—Medium: slow implementation of investment and reform agenda could slow growth and affect disbursement of NGEU funds. - Policy responses: Strengthen administrative capacity to facilitate project implementation. ### Annex VII — Public Debt Sustainability Analysis (DSA) - Context: Covid-19 economic contraction and fiscal response led to sizable increase in Portugal’s public debt from an already high level, increasing debt sustainability risks. - Baseline projection: - Debt-to-GDP ratio projected to resume downward trajectory and decline to 97 percent of GDP by 2027, benefiting from sustained strong growth, still-low interest rates, and primary fiscal surpluses. - Shock scenarios and risks: - Materialization of a growth shock or combined shock to public finances and growth could add close to 20 pp of GDP to public debt over the medium term. - Contingent liabilities from Covid-19 state-backed credit guarantees could also impact debt. - Interest rate shock would not lead to significant deviations in debt during forecasting horizon due to improved debt maturity profile. - Policy recommendation: Stronger consolidation plans should be put in place to reduce high public debt while creating space for investment and addressing longer-term ageing and health spending pressures. *Source: Excerpted content from 1prtea2022001 - 7. In view of rising house prices and limited (PDF chapter/section).* ### 1. Prior to the pandemic, Portugal’s public debt, while high, was on a declining trend. ### 1. Prior to the pandemic, Portugal’s public debt, while high, was on a declining trend. ### Pre-pandemic debt dynamics and context - Debt-to-GDP ratio declined from its pre-pandemic peak of 132.9 percent in 2014 to 116.6 percent at the end of 2019, but remained above the pre-GFC level of 75 percent of GDP. - Structural primary surpluses averaged 3¾ percent of GDP during 2014–19. - Maturity profile of outstanding marketable debt extended from 5 to 7 years over 2014–19. - Benchmark 10-year bond yield declined from about 5½ percent in early 2014 to 0.4 percent at the end of 2019. - Interest bill declined from 5 to 3 percent of GDP over 2014–19. - Staff’s pre-pandemic baseline projected debt would decline to about 100 percent of GDP by 2024. ### Baseline scenario (2022–27) — projections and drivers - Overall projection: debt-to-GDP ratio is projected to decrease by 30.4 pp over 2022–27. - 25.5 pp of the decline accounted by interest-growth dynamics. - Primary deficit contributes 4.2 pp to increase in debt over the forecast horizon. - Average projected annual decline: about 5 percent of GDP during 2022–27 a year (driven by economic recovery and gradual return to primary surpluses). - Recent developments and near-term path: - Debt-to-GDP rose by 18.6 pp to 135.2 percent of GDP in 2020 due to the 2020 recession and fiscal response. - Debt-to-GDP declined to 127.4 percent in 2021 driven by real GDP growth of 4.9 percent. - 2021 primary deficit narrowed to 0.5 percent of GDP from 3.1 percent of GDP in 2020. - Primary balance expected to return to a surplus of about 1.0 percent of GDP by 2023. - Growth and inflation assumptions: - GDP projected to grow by 5.8 percent 2022 and average 2 percent during 2023–2027. - Real interest-rate and financing assumptions: - Real interest rate projected to reduce public debt ratio by 5.1 pp in 2022 and by a further 3.3 pp over 2023–27. - Portuguese 10-year yield assumed to rise from the average of 0.3 percent in 2021 to an average of 2.2 percent in 2022 and further to 3.5 percent in 2027. - Effective interest rate projected to decline from 2.3 percent in 2020 to 1.9 percent in 2025, then pick up to 2.4 percent in 2027. - Gross financing needs decline from a peak of 16.5 percent of GDP in 2020 to 11.5 percent in 2027. - Fiscal deficit and structural assumptions: - Staff projects primary fiscal balance to improve from -0.5 percent of GDP in 2021 to 1.0 percent of GDP in 2023 and average around 0.8 percent of GDP in 2024–27. - Improvement underpinned by: (i) expiration of exceptional Covid-19 stimulus measures (job retention schemes and turnover loss compensation programs), and (ii) winding down of support via automatic stabilizers as output gap narrows from about 2.5 percent of potential GDP in 2021 to 0.1 percent by 2024. - Baseline assumes current policy framework (draft 2022 Budget, 2022 Stability Program, and NRRP); no additional consolidation effort is assumed. - Structural primary balance assumed to deteriorate by ¾ of a percentage point over the forecast horizon from 1.6 percent of potential GDP in 2021 to about 0.9 percent in 2027, driven by rise of demographic ageing-related social spending. ### Risk assessment — vulnerabilities and mitigating factors - Public debt would remain high despite downward momentum; near-term reoccurrences of shocks could spike the debt ratio. - Key vulnerabilities: - Two deep recessions in past decade (real GDP cumulative decline of 6.5 percent during 2011–13 and an 8.4 percent drop in 2020). - High share of public debt held by non-residents (end-2020: 43.5 percent of outstanding general government debt securities held by non-resident investors; Non-euro area holders comprise about 16 percent of total public debt) creates vulnerability to foreign risk appetite and financial conditions (but does not bear foreign exchange risk). - Risks from sharp increase in contingent liabilities (calling of state guarantees on bank lending extended during the pandemic or capital support needs from end of moratoria impacts). - Mitigating factors: - ECB’s accommodative monetary stance expected to keep funding costs low for some time, even after ending of APP and commencement of policy rate hikes. - Financing from the EU. - Negligible share of foreign currency debt. - Comfortable cash buffers, currently about 6 percent of GDP, and availability of NGEU loans not currently envisaged to be utilized. - High average residual maturity of debt of 7.7 years (average residual maturity of debt excluding loans from European institutions is 7 years as of March-2022). - Considerable share of official debt (19.8 percent). - Projected return to primary surpluses and extended maturity profile keep gross financing needs below the 20 percent of GDP benchmark. ### Authorities’ stance and realism of projections - Authorities’ Stability Program 2022–2026 sees stronger outcomes than staff: - Authorities project 2026 primary balance of 2.0 percent of GDP vs. staff’s 0.7 percent of GDP. - Authorities project GDP growth of 2.5 percent vs staff’s 1.9 percent. - Staff projects 2022 nominal GDP growth at 12.2 percent which exceeds Stability Program’s 7.4 percent (as of April-2022), implying an additional automatic debt-dynamics impact close to 4½ pp on the 2022 debt ratio. - Despite differences, debt-to-GDP reach projected to be close to 100 percent under both authorities’ and staff’s baseline scenarios. - Forecast errors and biases: - Median forecast error for real GDP growth during 2012–20 is 0.15 suggesting a downward bias in staff projections for growth. - Median forecast errors: -1.42 percent for the primary balance and 0.19 percent for inflation. - Forecast error for primary balance size explained by two economic crises in the reference sample (sovereign debt and Covid-19 pandemic). ### Heat map, probabilistic outcomes, and fan chart - Risks from the debt level deemed high, given Portugal is above the threshold of 85 percent of GDP under the baseline and all stress scenarios. - Fan chart results: - Unconstrained distribution: 50 percent probability of debt reaching between 87.7 and 107.9 percent of GDP by 2027. - Constrained upside risks: 50 percent probability of debt being between 94.3 and 111.6 percent of GDP by 2027. ### Shocks and stress tests — scenarios and outcomes - Growth shock: - Assumption: real output growth rates in 2023–24 are lower than baseline by one standard deviation (2011–2020: 4.0 pp). - Lower growth leads to lower inflation (0.25 percent per 1 pp decrease in GDP growth). - Interest rate assumed to increase by 25 basis points for every 1 percent of GDP worsening in the primary balance. - Outcome: Public debt rises to 124.5 percent of GDP in 2024 and declines towards 114.4 percent of GDP by 2027. - Gross financing needs peak at 17.0 percent of GDP in 2024 before declining to about 13.7 percent of GDP in 2027. - Financial contingent liabilities shock: - Assumptions: ½ percent of GDP in bank recapitalization needs and 3 percent of GDP in Covid-19 guarantees being called (approximately ¾ of the guaranteed credit lines); total contingent liability shocks ≈ 3½ percent of GDP. - Real growth assumed 2 pp (0.5 standard deviation) lower than baseline. - Outcome: Debt rises to around 118.6 percent of GDP in 2023, then declines to 106.8 percent of GDP in 2027. - Interest rate shock: - Shock calibrated as an increase of 560 basis points (difference between average effective real interest rate level over the projection period and the maximum historical level of 4.5 percent). - Impact is backloaded as old debt matures and new debt is contracted at higher rates. - By 2027 the effective interest rate would rise from 1.9 percent in the baseline to 3.9 percent, still below the peak of 4.2 percent reached in 2012 owing to much lower gross financing needs (average of 26 percent during 2012–14 vs. average of about 13 percent during 2025–27). - Gross financing needs would rise by 3 pp from 2023 but remain below the 20 percent of GDP threshold. - Combined macro-fiscal shock: - Results in debt peaking at 125 percent of GDP in 2024 and declining to 119.3 percent of GDP by 2027. - GFNs would peak at 17.6 percent of GDP. - Effective interest rate would rise to 4.2 percent by 2027, which is 0.3 p.p. higher than under the interest rate shock due to higher gross financing needs. - Main driver of this scenario is the growth shock component. - Other standardized macro shocks (primary balance shock and real exchange rate shock) do not lead to significant deviations from the baseline debt path over the forecast horizon. ### Box 1 — Sovereign Risk and Debt Sustainability Analysis (SRDSF) summary - Medium-term risks (up to 5 years) assessed as moderate based on: - Financing risk module (rollover risks, creditor composition). - Debt fan chart for probabilistic assessment of debt stabilization prospects. - Financing risks judged moderate: - Average GFN/GDP, baseline projections: 12.0 (weight 0.35). - Initial bank claims on government/assets: 9.6 (weight 0.32). - Change in bank claims on government in stress: 3.1 (weight 0.33). - Total index: 8.3 → Signal: Moderate risk. - Key supportive indicators and caveats: - Gross financing needs average 12 percent of GDP over 2022–27. - Initial bank claims on government are low around 9.6 percent of banking sector assets. - Banking sector assets are large relative to the economy (209–210 percent of GDP). - Eurosystem holdings at 29½ percent and foreign official creditors at 20.5 percent are important composition features assumed to act as shock absorbers. - As ECB support normalizes, the mitigating impact of Eurosystem holdings may weaken over time. - GFN module mechanics: - Domestic banking sector may need to provide an additional 3 percent of bank assets to absorb sovereign debt in stress, which appears manageable. - Memo: Bank assets/GDP 209%. *Source: IMF staff estimates.* ### Box 1. Portugal: Sovereign Risk and Debt Sustainability Analysis (concluded) ### Box 1. Portugal: Sovereign Risk and Debt Sustainability Analysis (concluded) ### Fan chart and sovereign risk assessment - The fan chart module assesses Portugal at moderate risk of medium-term sovereign stress. - Main contributors to the fan chart risk index: - Fan’s width (a measure of uncertainty): 51.1 percent of GDP. - Debt level indicator (median debt level interacted with the institutional quality index) projected for 2027: 123 percent of GDP. - Probability of debt stabilization: 93 percent. - Heat‑map and indicators referenced include: - Debt burden benchmark of 85% (used for cell highlighting logic). - Bond spread metrics: EMBIG and CDS data referenced; example spread shown: 91 bp (and 109 bp noted elsewhere as EMBIG). - External financing requirement benchmarks: 17 and 25 percent of GDP. - Change in share of short‑term debt benchmarks: 1 and 1.5 percent. - Public debt held by non‑residents benchmarks: 30 and 45 percent. ### Baseline projections and debt dynamics (public DSA baseline scenario) - Nominal gross public debt trajectory (in percent of GDP): - 2020: 126.1 - 2021: 135.2 - 2022: 127.5 - 2023: 115.8 - 2024: 110.7 - 2025: 106.4 - 2026: 102.7 - 2027: 99.7 (also shown as 97.0 in one series) - Public gross financing needs (in percent of GDP): - 2020: 21.5 - 2021: 16.5 - 2022: 13.9 - 2023: 12.8 - 2024: 10.7 - 2025: 10.3 - 2026: 11.4 - 2027: 11.1 (11.5 noted in another series) - Net public debt (in percent of GDP): - 2020: 115.6 - 2021: 123.2 - 2022: 119.5 - 2023: 108.7 - 2024: 103.9 - 2025: 100.0 - 2026: 96.5 - 2027: 93.8 (91.3 noted in another series) - Real GDP growth (in percent): - 2020: 0.8 - 2021: -8.4 - 2022: 4.9 - 2023: 5.8 - 2024: 1.9 - 2025: 2.4 - 2026: 2.1 - 2027: 1.9 - Inflation (GDP deflator, in percent): - 2020: 1.2 - 2021: 1.9 - 2022: 0.7 - 2023: 6.1 - 2024: 3.6 - 2025: 2.4 - 2026: 2.5 - 2027: 2.3 - Nominal GDP growth (in percent): - 2020: 2.0 - 2021: -6.7 - 2022: 5.6 - 2023: 12.2 - 2024: 5.6 - 2025: 4.9 - 2026: 4.7 - 2027: 4.2 - Effective interest rate (in percent): - 2020: 3.5 - 2021: 2.3 - 2022: 1.9 - 2023: 1.9 - 2024: 2.0 - 2025: 2.0 - 2026: 1.9 - 2027: 2.0 (2.4 noted in another series) - Change in gross public sector debt (annual, in percent of GDP): - Cumulative change over projection horizon: -30.6 - Identified debt‑creating flows (cumulative): -29.7 - Primary deficit (in percent of GDP): - 2020: 0.1 - 2021: 3.1 - 2022: 0.5 - 2023: 0.1 - 2024: -1.0 - 2025: -1.0 - 2026: -0.7 - 2027: -0.7 - Cumulative over projections: -4.2 - Primary (noninterest) revenue and grants (in percent of GDP): 42.8, 43.4, 45.2, 44.2, 44.0, 43.6, 43.2, 42.6, 42.4 cumulative 60.0 - Primary (noninterest) expenditure (in percent of GDP): 43.0, 46.4, 45.7, 44.4, 43.0, 42.6, 42.5, 41.9, 41.5 cumulative 55.9 - Automatic debt dynamics (cumulative): -25.5 - Interest rate/growth differential (cumulative): -25.5 - Real interest rate contribution (cumulative): -8.3 - Real GDP growth contribution (cumulative): -17.1 - Residual, including asset changes (cumulative): -0.9 - Footnote assumptions include: public sector defined as general government and includes public guarantees defined as COVID19 guarantees. ### Composition of public debt and alternative scenarios - Baseline underlying assumptions (selected): - Real GDP growth: 2022: 5.8; 2023: 1.9; 2024: 2.4; 2025: 2.1; 2026: 1.9; 2027: 1.9 - Inflation: 2022: 6.1; 2023: 3.6; 2024: 2.4; 2025: 2.5; 2026: 2.3; 2027: 2.2 - Primary Balance: 2022: -0.1; 2023: 1.0; 2024: 1.0; 2025: 0.7; 2026: 0.7; 2027: 0.9 - Effective interest rate: 2022: 1.9; 2023: 2.0; 2024: 2.0; 2025: 1.9; 2026: 2.0; 2027: 2.4 - Historical scenario (example assumptions): - Real GDP growth: 5.8, 0.5, 0.5, 0.5, 0.5, 0.5 - Primary Balance: -0.1 repeated across years - Effective interest rate: 1.9, 2.0, 2.2, 2.3, 2.6, 3.2 - Constant Primary Balance scenario: - Primary Balance: -0.1 across 2022–2027 - Other variables same as baseline. - Composition charts record: - Net debt and gross nominal public debt by year (percent of GDP series shown). - Public gross financing needs (in percent of GDP) by year. - By maturity: medium and long‑term vs short‑term (historical series and projections). - By currency: local currency‑denominated vs foreign currency‑denominated (historical series and projections). ### Stress tests and shock scenarios - Macro‑fiscal stress tests presented include: - Primary Balance Shock - Real GDP Growth Shock - Real Interest Rate Shock - Real Exchange Rate Shock - Combined Shock - Contingent Liability Shock - Selected scenario inputs and resulting paths (examples shown): - Baseline real GDP growth: 5.8, 1.9, 2.4, 2.1, 1.9, 1.9 - Real GDP Growth Shock path example: 5.8, -2.1, -1.6, 2.1, 1.9, 1.9 - Primary balance under Real GDP Growth Shock: -0.1, -1.2, -3.5, 0.7, 0.7, 0.9 - Effective interest rate under Real Interest Rate Shock: 1.9, 2.0, 2.4, 2.6, 3.1, 3.9 - Combined Shock effective interest rate: 1.9, 2.0, 2.5, 2.9, 3.4, 4.2 - Contingent Liability Shock primary balance example: -0.1, -3.5, 1.0, 0.7, 0.7, 0.9 - Stress outputs include: - Gross nominal public debt paths in percent of GDP and in percent of revenue under each scenario. - Public gross financing needs (in percent of GDP) under scenarios. ### Fiscal policy stance and consolidation plans (authorities' statement) - 2021 headline deficit: 2.8 percent of GDP (below the 3 percent threshold). - Debt‑to‑GDP ratio drop in 2021: 7.8 percentage points of GDP. - Authorities plan a consolidation effort of 0.3 percent of GDP on average each year over the 2023-2025 period. - Medium‑Term budgetary Objective (MTO) target: 0.5 structural deficit (in percent of GDP) by 2023 and a balanced structural position by 2025. - Under authorities’ consolidation plans, public debt‑to‑GDP will reach its pre‑pandemic level already in 2023. ### Corporates, financial sector, and macroprudential stance - Solvency support programs: amount 650 M€ (for recapitalization and support measures). - Non‑Performing Loans (NPLs) ratio (NPLs to gross loans, net of impairments): 1.7 percent in December 2021. - Mortgage loan share with Loan‑to‑Value below 80 percent: 92 percent. - Authorities’ macroprudential approach: - With risks currently well contained, authorities prefer to avoid introducing measures that could have procyclical effects. - If needed in future, preference for more targeted/sectoral capital instruments. ### Structural reforms, Recovery and Resilience Plan (RRP), and climate transition - National Reform Program (NRP): 5‑Pillar program updated yearly with timelines and quantitative benchmarks. - RRP dimensions: Resilience, Climate Change and Digital Transition. - RRP allocations and priorities: - 22 percent of RRP funds devoted to digitalization initiatives (including students’ and workers’ digital competences). - 38 percent of RRP funds allocated to the climate transition. - Judicial reforms: revised legal framework for insolvency and recovery of companies; legal regime to encourage extinction of proceedings by judicial and extrajudicial agreements. - Labor market and skills: - Progress in youth qualifications; authorities prioritize digital skills and lifelong learning. - Active Labor Market Policies include support for insertion of young people and long‑term unemployed, conversion of traineeships into permanent employment, direct hiring incentives, and promotion of entrepreneurship. - Climate policy priorities: - Strategy focused on renewable energy sources. - Measures to simplify energy production procedures from renewable sources in current crisis context. - Plans to increase production of biomethane and renewable hydrogen, deploy solar and wind energy, and simplify licensing procedures. - Draft National Strategy to Tackle Energy Poverty aims to: (i) increase energy performance of households; (ii) strengthen conditions of access to energy services; (iii) reduce energy consumption costs; (iv) strengthen knowledge and access to information on energy. - Authorities welcome the Special Issues Paper on reducing Greenhouse Gas Emissions and see carbon pricing tools as important, envisioning a gradual increase in carbon taxing, while noting current pressure on energy prices makes immediate implementation difficult. - Authorities plan to work within the Eurosystem context to upgrade financial stability and prudential frameworks to incorporate climate‑related financial risks and to re‑orient lending towards greener activities. *Source: IMF staff and Portuguese authorities (Box 1. Portugal: Sovereign Risk and Debt Sustainability Analysis, concluded).* ### Conclusion ### Conclusion ### Policy priorities and objectives - The authorities will continue to strengthen public f inances, implement structural reforms and investments to foster resilience and higher productivity levels, in the context of the Portuguese Recovery and Resilience Plan and of th e Portugal 2030 programming period. - The goal is to promote sustainable, green and inclusive growth, while reaping the benef its of the digital transition. ### International engagement and next steps - The authorities look forward to the next Article IV Consultation in 2023, which will constitute another excellent opportunity to continue closely working with the Fund, deepening our dialogue, and promoting an ever-closer mutual understanding. *1prtea2022001 — Conclusion* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1prtea2022001.pdf_