## 1prtea2023001 - 0.4 percent of GDP in 2022, mainly reflecting stronger tax revenues. Public debt fell below its ## Source details **Canonical URL:** [1prtea2023001 - 0.4 percent of GDP in 2022, mainly reflecting stronger tax revenues. Public debt fell below its](https://www.imf.org/-/media/files/publications/cr/2023/english/1prtea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1prtea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1prtea2023001.pdf.json) --- ### Overview and recent developments - Real GDP growth averaged 6.7 percent in 2022 and surpassed its pre-pandemic level in 2022:Q1. - Growth drivers in 2022: - Private consumption (supported by policy measures, a strong labor market, and a receding saving rate). - Sustained rebound in exports, including tourism. - Early 2023 momentum: growth at 2.5 percent (year-on-year) in Q1. - Investment: subdued despite sizeable EU funds from the Recovery and Resilience Facility (about 7 percent of 2022 GDP at €16.6 billion: €13.9 billion in grants, € 2.7 billion in loans). - Inflation and rates: - Headline inflation averaged 8.1 percent in 2022 (euro area: 8.4). - Core inflation averaged 6.2 percent in 2022 (euro area: 4.8 percent). - Borrowing rates rose by 250 to 300 basis points since early 2022—mortgages reached nearly 4 percent in March 2023; sovereign and corporate yields rose above 3 percent and 5 percent, respectively. - Labor market: participation and employment improved in 2022; unemployment averaged 6 percent in 2022; minimum wage hikes were 6 percent in 2022 and 7.8 percent in 2023. - Government support to address cost of living: amounted to 2 percent of GDP in 2022 (one-off income support, support to energy-intensive firms, reduction in excises on petroleum products and energy (ISP), suspension of scheduled carbon tax increase). ### Outlook and risks - Growth projection: 2.6 percent in 2023; domestic demand weighed down by high cost of living and export growth expected to soften. - Inflation projection: - Headline: 5.6 percent in 2023. - Core: expected to decline more gradually (staff notes). - Risks — broadly balanced: - Downside: tighter-than-projected financial conditions (potential sharp housing price correction), deeper global/regional slowdown, persistently higher energy prices. - Upside: continued strong tourism momentum, resilient labor market. - Baseline assumptions (selected): no escalation of the war and related sanctions; commodity prices easing per April 2023 WEO; ECB policy rate rise of some 150 bps between end-2022 and end-2023; NRRP implementation rate of about 1 pp of GDP in 2023 and thereafter. ### Fiscal position, public debt, and policy guidance - General government balance: -2.9 percent of GDP in 2021; -0.4 percent of GDP in 2022; projected -0.4 percent of GDP in 2023. - Primary government balance: -0.6 percent of GDP in 2021; 1.4 percent of GDP in 2022; projected 1.8 percent of GDP in 2023. - Structural primary balance (percent of potential GDP): 0.6 in 2021; 0.7 in 2022; projected 1.2 in 2023. - General government debt: 125.4 percent of GDP in 2021; 113.9 percent of GDP in 2022; projected 107.9 percent of GDP in 2023. - Nominal GDP: 214.7 (Billions of euros) in 2021; 239.3 (Billions of euros) in 2022; projected 255.3 (Billions of euros) in 2023. - Fiscal assessment and recommendations: - Improvement in 2022 mainly reflecting stronger tax revenues and revenue windfalls from strong nominal GDP growth despite additional policy support. - Recommended: maintain a contractionary fiscal policy stance in 2023 to build fiscal space and support monetary policy in reducing inflation pressures. - If growth weakens appreciably: fully deploy automatic stabilizers; save fiscal overperformance. - Reserve further fiscal support only for severe downside scenarios; ensure it is temporary, non-price-distortionary, and targeted to the most vulnerable households. - Staff projection: public debt on a downward track; public debt-to-GDP ratio expected to dip below 100 percent in 2025. - Staff proposal: discretionary fiscal effort averaging annually ¼-⅓ percent of GDP during 2024–28 to achieve a balanced budget; sustaining path beyond medium term would bring debt to under 60 percent of GDP within two decades. ### Financial sector and housing market vulnerabilities - Banking and credit: - Nominal private credit growth: 2.1 percent in 2022 (down from 3.1 percent in 2021). - Real private credit: contracted by -6 percent in 2022, pushing the credit-to-GDP gap to -7.5 percent (EA: -4.5 percent). - Households’ debt: 64 percent of GDP in 2022 (down from 72 percent pandemic peak). - NFC debt decreased by 18 pp to 125 percent of GDP in 2022. - Lending standards tightened, especially for households and small companies. - Housing market indicators and vulnerabilities: - Nominal residential real estate prices rose by 11 percent (y/y) in 2022:Q4 (EA: 3 percent). - Cumulative real house prices risen by about70 percent since 2015. - Price-to-income rose by 25 percent relative to pre-pandemic levels. - Non-residents account for an estimated 10-12 percent of housing sales. - Around half of RRE transactions are mortgage financed. - Nearly 90 percent of the mortgage stock is at variable interest rates. - Macroprudential borrower-based measures since 2018 reduced high credit risk loans—DSTI (LTV) higher than 50 (90) percent—yet share of new loans in 2022 with DSTI between 50 and 60 percent and LTV between 80 and 90 percent is sizeable. - Average maturity of housing loans: 31years. - Banking sector health: - NPL ratio: 3.0 percent at end-2022; Stage 2 loans: 11.5 percent of total credit (EU average 9.4 percent). - Profitability rose supported by declining pandemic-related provisions and strong interest income. - CET1 ratio declined somewhat due to dividend distributions and valuation losses. - Bank holdings of sovereign debt: 13.4 percent of total assets, with three-quarters booked at amortized cost. - Liquidity buffers high; banking system health heterogeneous due to legacy issues. - Policy guidance for financial stability: - Maintain vigilance on credit quality, market and interest rate risk, and liquidity management. - Banks should hold prudent forward-looking provisions and improve capital headroom. - Fine-tune macroprudential mix; consider a sectoral systemic risk capital buffer for real estate exposures with holistic calibration to avoid procyclical effects. - Continue efforts to contain transnational money laundering risks. - Policies to support housing supply and affordability, without market distortions, to alleviate strains. - Consider positive neutral CCyB rate over medium term to build releasable capital buffers; flexibly adjust borrower-based measures if downside risks materialize. ### Structural reforms, NRRP implementation, and productivity - Priority: strengthen productivity. - NRRP focus areas: raising R&D, improving education system, judicial system and business regulations, scaling up green investment; timely implementation is crucial. - Structural reform recommendations: - Fiscal: steady fiscal consolidation; broad public expenditure reform; contain ageing-related spending (pensions and health care); improve revenue performance; simplify tax system; eliminate tax distortions; roll back reduced VAT rates; reinstate carbon taxes; improve tax administration. - Expenditure composition: increase public investment share relative to current spending. - Institutional: strengthen medium-term budgetary framework; strengthen financial sustainability of SOEs; improve social safety net. - Labor market: improve dynamism with active labor market policies and skilling/reskilling support. - Climate policy: gradually increase carbon taxes as energy prices recede, combined with targeted protection for vulnerable households. - EU funds absorption: efficient planning, budgeting, implementation, and oversight to maintain strong investment absorption capacity of EU funds. - Productivity and structural facts: - Share of low-skilled workers: 32 percent (Portugal) versus 18 percent (EA average). - Tertiary educational attainment: 47 percent (Portugal) versus 41/42 percent in EU/EA in 2021. - Share of temporary employment: 14.3 percent in 2021 (Portugal) versus 11 and 12 percent for EA and EU. - ICT sector: about 4.5 percent of total value added in 2022 and 2.6 percent of total employment (EA peers: 5.7 percent and 3.1 percent). - NRRP envisages EUR 3.7 billion to support digital transition initiatives (2020 Digital Transition Action Plan and INCode2030 initiative). ### Policy measures to raise revenues and adjust spending (selected recommendations) - Revenue measures: - Improve tax administration efficiency; simplify and modernize tax system; digitalize tax administration. - Rationalize preferential regimes and tax expenditures; reduce administrative costs; provide room to reduce high labor tax wedge. - Centralized tax policy unit to support reforms; roll back reduced VAT rates; improve property taxes over medium term. - Gradually raise the carbon tax over time. - Expenditure measures: - Contain age-related spending pressures; priority on pension reform. - Strengthen financial position of National Health Service via spending efficiency and rationalization (NRRP measures expected). - Comprehensive review of public employment and compensation to contain public sector wage bill. - Spending composition: - Reverse recent bias toward current spending; favor investment spending to accelerate green and digital transformation; ensure transparent planning and oversight for timely EU funds absorption. ### Key statistics and projections (selected exact figures) - Real GDP: 5.5 (2021), 6.7 (2022), 2.6 (2023) - Private consumption: 4.7 (2021), 5.8 (2022), 1.0 (2023) - Public consumption: 4.6 (2021), 1.7 (2022), 3.0 (2023) - Gross fixed investment: 8.7 (2021), 3.0 (2022), 4.3 (2023) - Exports: 13.4 (2021), 16.7 (2022), 4.4 (2023) - Imports: 13.2 (2021), 11.1 (2022), 2.8 (2023) - Contribution to growth — Total domestic demand: 5.8 (2021), 4.7 (2022), 1.9 (2023) - Contribution to growth — Foreign balance: -0.3 (2021), 2.0 (2022), 0.7 (2023) - Employment: 1.9 (2021), 2.1 (2022), 0.7 (2023) - Unemployment rate (Percent): 6.6 (2021), 6.0 (2022), 6.6 (2023) - GDP deflator: 1.5 (2021), 4.4 (2022), 4.0 (2023) - Consumer prices (Harmonized index): 0.9 (2021), 8.1 (2022), 5.6 (2023) - Current account balance: -0.8 (2021), -1.3 (2022), -0.4 (2023) ### Sovereign risk, debt sustainability, and external position (selected projections and risks) - Public debt: 113.9 percent of GDP in 2022. - DSA baseline projection: public debt projected to decline to 89.3 percent of GDP by 2028; projected path declines by an annual average of about 4.1 pp of GDP during 2023–28. - Contributions to debt reduction (2023–28): strong real GDP growth ~50 percent of total reduction (12.5 pp); primary balance improvement ~8.9 pp; real interest rate ~2.5 pp reduction. - Selected baseline debt series (percent of GDP): - 2022: 113.9; 2023: 107.9; 2024: 103.4; 2025: 99.3; 2026: 95.6; 2027: 92.3; 2028: 89.3. - Gross financing needs (GFN): expected around 10 percent of GDP over medium and long term; GFN series (percent of GDP) sample: 2022: 6.8; 2023: 6.8; 2024: 6.7; 2025: 7.7; 2026: 8.6. - Interest rate assumptions: long-term sovereign yields assumed to increase from 2.2 percent in 2022 to 4.0 in 2024 and edge down to 3.5 percent by 2028; effective interest rate expected to rise to 2.5 percent by 2028. - Risk assessment: - Overall risk of sovereign stress: Moderate. - Medium-term risks: Low; Long-term risks: Moderate (age-related expenditure pressures). - Key downside risks: large negative growth shocks, faster-than-expected monetary normalization, prolonged war in Ukraine, higher pension/health spending, slow NRRP ramp-up, real wage pressures beyond productivity. - Mitigants: Financing from NGEU, large share of debt to official creditors (~20 percent at end-2022), long average residual maturity (7.5 years), negligible foreign currency debt. - External position and external debt: - Gross external debt fell to 168 percent of GDP in 2022 (down 23 pp vs 2021). - Baseline projection: gross external debt projected to decline to 129.7 percent of GDP in 2028. - External debt-to-exports ratio: 2022: 335.1. - NIIP: -85.7 percent of GDP in 2022; projected to fall to -59.6 percent by 2028 under baseline. - Current account: -1.3 percent of GDP in 2022; staff cyclically adjusted CA: 0.1 percent of GDP; staff gap: 0.1 percent of GDP. - Policy takeaway: sustained fiscal consolidation paired with structural reforms to support saving and investment and improve competitiveness is key to strengthen external position and reduce NIIP. ### Financial stability policy recommendations (condensed) - Banks and supervisors: maintain vigilance on credit quality, market and interest rate risk, liquidity; strengthen provisioning and capital buffers; cautious capital distributions. - Macroprudential: gradually tighten to build resilience; consider sectoral SyRB on real estate exposures phased in gradually; consider positive CCyB; flexibly adjust borrower-based measures. - Housing supply: increase residential and rental supply; scale up social housing investment (including NRRP). - Private debt resolution and AML/CFT: progress on debt restructuring and insolvency regime; continue AML/CTF efforts; termination of Golden Visa expected to alleviate some money laundering risks. ### Annex I — 2022 Article IV Recommendations (selected) - Fiscal: - Near-term: maintain accommodative fiscal stance in 2022; target discretionary support to vulnerable households and affected firms. - Starting 2023: engage in gradual, growth-friendly fiscal adjustment while increasing investment share. - Medium-term: tax reforms to reduce distortions and expenditures, raise property tax revenues, roll back reduced VAT rates; pension sustainability reforms; strengthen NHS efficiency; implement 2015 Budgetary Framework Law fully. - Financial sector: - Recapitalization support for viable NFCs; close monitoring of banks’ credit quality; consider CCyB or sectoral buffer once recovery established. - Restore duty to file for insolvency and strengthen insolvency regime. - Strengthen AML supervision and RCBE coverage. - Structural reforms: - Reduce labor market duality (Decent Work Agenda adopted May 1, 2023). - Expand vocational and on-the-job training; leverage NRRP digitalization projects. - Gradually increase effective carbon pricing when appropriate. *Source: PORTUGAL STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION, International Monetary Fund.* ### 0.4 percent of GDP in 2022, mainly reflecting stronger tax revenues. Public debt fell below its ### 1prtea2023001 - 0.4 percent of GDP in 2022, mainly reflecting stronger tax revenues. Public debt fell below its ### Overview and recent developments - Real GDP growth averaged 6.7 percent in 2022 and surpassed its pre-pandemic level in 2022:Q1. - Growth drivers in 2022: private consumption (supported by policy measures, a strong labor market, and a receding saving rate) and a sustained rebound in exports, including tourism. - GDP growth momentum continued into early 2023 with growth at 2.5 percent (year-on-year) in Q1. - Investment growth has been subdued despite sizeable EU funds from the Recovery and Resilience Facility (about 7 percent of 2022 GDP at €16.6 billion: €13.9 billion in grants, € 2.7 billion in loans). - Headline inflation averaged 8.1 percent in 2022 (euro area: 8.4); core inflation (HICP excluding energy and unprocessed food) averaged 6.2 percent in 2022 (euro area: 4.8 percent). - Borrowing rates rose by 250 to 300 basis points since early 2022—mortgages reached nearly 4 percent in March 2023; yields on sovereign and corporate bonds rose above 3 percent and 5 percent, respectively. - Labor market: participation and employment rates improved in 2022, unemployment averaged 6 percent in 2022; minimum wage hikes were 6 percent in 2022 and 7.8 percent in 2023. - Government support measures to address rising cost of living amounted to 2 percent of GDP in 2022, including one-off income support, support to energy-intensive firms, reduction in excises on petroleum products and energy (ISP), and suspension of the scheduled increase in the carbon tax. ### Outlook and risks - Growth is projected to slow to 2.6 percent in 2023, with domestic demand weighed down by high cost of living and export growth expected to soften. - Headline inflation is expected to decline from 8.1 percent in 2022 to 5.6 percent in 2023, while core inflation is expected to decline more gradually. - Risks to the outlook are broadly balanced: - Downside risks: tighter-than-projected financial conditions (potentially with a sharp correction in housing prices), a deeper global or regional slowdown, and persistently higher energy prices. - Upside risks: continued strong tourism momentum and a resilient labor market. ### Fiscal position and public debt - General government balance: -2.9 percent of GDP in 2021; -0.4 percent of GDP in 2022; projected -0.4 percent of GDP in 2023. - Primary government balance: -0.6 percent of GDP in 2021; 1.4 percent of GDP in 2022; projected 1.8 percent of GDP in 2023. - Structural primary balance (percent of potential GDP): 0.6 in 2021; 0.7 in 2022; projected 1.2 in 2023. - General government debt: 125.4 percent of GDP in 2021; 113.9 percent of GDP in 2022; projected 107.9 percent of GDP in 2023. - Nominal GDP: 214.7 (Billions of euros) in 2021; 239.3 (Billions of euros) in 2022; projected 255.3 (Billions of euros) in 2023. - Fiscal assessment: - The fiscal position improved in 2022 (narrowed deficit) mainly reflecting stronger tax revenues and revenue windfalls from strong nominal GDP growth despite additional policy support. - Maintaining a contractionary fiscal policy stance in 2023 is recommended to build fiscal space and support monetary policy in reducing inflation pressures. - If growth weakens appreciably, automatic stabilizers should be fully deployed; fiscal overperformance must be saved. - Further fiscal support should be reserved only for severe downside scenarios and designed to be temporary, non-price-distortionary, and targeted to the most vulnerable households. ### Financial sector and housing market vulnerabilities - The banking system and household and corporate sectors have been resilient to recent shocks so far. - Tighter financial conditions and a buoyant housing market have increased financial risks. - Policy guidance for financial stability: - Banks and supervisors should maintain vigilance on credit quality, market and interest rate risk, and liquidity management. - Banks should maintain prudent levels of forward-looking provisions and continuously improve capital headroom as a safeguard. - Further fine-tuning of the macroprudential policy mix, including consideration of a sectoral systemic risk capital buffer for real estate exposures, could reduce systemic risk; such a buffer would need holistic calibration considering other macroprudential measures, resolvability requirements, compliance costs, and avoidance of procyclical effects. - Efforts to contain risks from transnational money laundering should continue. - Policies to support housing supply and affordability, without generating market distortions, would alleviate housing market strains. ### Structural and medium-term reforms - Strengthening productivity is a priority. - Timely implementation of the National Recovery and Resilience Plan (NRRP) is crucial; NRRP focuses on raising R&D, improving the education system, judicial system and business regulations, and scaling up green investment. - Reforms recommended: - Fiscal side: steady fiscal consolidation focused on broad public expenditure reform, containing ageing-related spending (pensions and health care), improving revenue performance, simplifying the tax system, eliminating tax distortions, rolling back reduced VAT rates, reinstating carbon taxes, and improving tax administration. - Expenditure composition: increase the share of public investment relative to current spending. - Institutional: strengthen the medium-term budgetary framework, strengthen the financial sustainability of SOEs, and further improve the social safety net. - Labor market: reforms to improve labor market performance and dynamism, supported by active labor market policies and support for skilling and re-skilling workers. - Climate policy: receding energy prices provide an opportunity to gradually increase carbon taxes, combined with targeted measures to protect the most vulnerable. - EU funds absorption: efficient planning, budgeting, implementation, and oversight are key to maintain strong investment absorption capacity of EU funds. ### Key statistics and projections (selected) - Real GDP: 5.5 (2021), 6.7 (2022), 2.6 (2023) - Private consumption: 4.7 (2021), 5.8 (2022), 1.0 (2023) - Public consumption: 4.6 (2021), 1.7 (2022), 3.0 (2023) - Gross fixed investment: 8.7 (2021), 3.0 (2022), 4.3 (2023) - Exports: 13.4 (2021), 16.7 (2022), 4.4 (2023) - Imports: 13.2 (2021), 11.1 (2022), 2.8 (2023) - Contribution to growth — Total domestic demand: 5.8 (2021), 4.7 (2022), 1.9 (2023) - Contribution to growth — Foreign balance: -0.3 (2021), 2.0 (2022), 0.7 (2023) - Employment: 1.9 (2021), 2.1 (2022), 0.7 (2023) - Unemployment rate (Percent): 6.6 (2021), 6.0 (2022), 6.6 (2023) - GDP deflator: 1.5 (2021), 4.4 (2022), 4.0 (2023) - Consumer prices (Harmonized index): 0.9 (2021), 8.1 (2022), 5.6 (2023) - Current account balance: -0.8 (2021), -1.3 (2022), -0.4 (2023) *Source: PORTUGAL STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION, International Monetary Fund.* ### 6. Despite new support, the fiscal deficit ### 6. Despite new support, the fiscal deficit ### Fiscal outcomes and public debt - Overall fiscal deficit fell to 0.4 percent of GDP in 2022 from 2.9 percent of GDP in 2021. - Primary balance improved to 1.4 percent of GDP in 2022 relative to -0.6 percent of GDP in 2021. - Public debt-to-GDP ratio fell to 113.9 percent of GDP at end-2022. - Revenue overperformance (stronger-than-expected nominal GDP growth) and phasing out of some Covid-related measures more than offset additional policy support. ### Credit, household and corporate balance sheets - Nominal private credit growth: 2.1 percent in 2022 (down from 3.1 percent in 2021). - Real private credit: contracted by -6 percent in 2022, pushing the credit-to-GDP gap to -7.5 percent (EA: -4.5 percent). - Households’ debt declined to 64 percent of GDP in 2022 from a 72 percent pandemic peak. - NFC debt decreased by 18 pp to 125 percent of GDP in 2022. - Lending standards tightened, especially for households and small companies. ### Housing market and macroprudential environment - Nominal residential real estate (RRE) prices rose by 11 percent (y/y) in 2022:Q4 (EA: 3 percent). - Cumulative real house prices have risen by about70 percent since 2015. - Price-to-income has risen by 25 percent relative to pre-pandemic levels. - Non-residents estimated to account for 10-12 percent of housing sales. - Around half of all RRE transactions are mortgage credit financed. - Nearly 90 percent of the mortgage stock is at variable interest rates. - Macroprudential borrower-based measures since 2018 reduced the share of high credit risk loans—DSTI (LTV) higher than 50 (90) percent—yet: - The share of new loans in 2022 with DSTI between 50 and 60 percent and LTV between 80 and 90 percent is sizeable. - Average maturity of housing loans is 31years. ### Recent policy measures on housing affordability - Late-2022 temporary mortgage relief allowing eligible borrowers to renegotiate first-residence floating-rate mortgages with debt service ratio exceeding 50 percent or above 36 percent and increasing by more than 5pp. - New 2023 measures for interest burden relief, rental support to lower-income families, and extension of some credit lines; fiscal costs expected to be contained given strict eligibility criteria. - Policies to increase housing supply focus on land-use, zoning, simplifying regulations and tax incentives. ### Banking sector health and financial stability - NPL ratio fell to 3.0 percent at end-2022; Stage 2 loans declined to 11.5 percent of total credit (EU average 9.4 percent). - Profitability rose supported by declining pandemic-related provisions and strong interest income. - CET1 ratio declined somewhat due to dividend distributions and valuation losses. - Bank holdings of sovereign debt estimated at 13.4 percent of total assets, with three-quarters booked at amortized cost. - Liquidity buffers are high; banking system health remains heterogeneous due to legacy issues. - Non-bank financial sector relatively small in EA comparison but market risks warrant attention. ### External position - 2022 external position assessed as in line with medium-term fundamentals and desirable policies. - Current account deficit widened to 1.3 percent of GDP in 2022 from 0.8 percent of GDP in 2021. - Deterioration driven by goods income and transfer balances, reflecting a 3 pp deterioration in the terms-of-trade, partly offset by tourism revenue overperformance. ### Outlook and risks (baseline and projections) - Baseline assumptions include: no escalation of the war and related sanctions; commodity prices easing per April 2023 WEO; gradual alleviation of global supply bottlenecks; ECB policy rate rise of some 150 bps between end-2022 and end-2023; NRRP implementation rate of about 1 pp of GDP in 2023 and thereafter. - Fiscal stance projected to remain slightly contractionary in 2023; overall deficit broadly unchanged at the 2022 level; medium-term overall deficit around -0.3 percent of GDP. - Growth projections: average 2.6 percent in 2023 and 1.8 percent in 2024; stabilize to trend of about 2 percent in the medium term. - Inflation projections: headline inflation average 5.6 percent in 2023 and 3.1 percent in 2024; core inflation average 5.9 percent in 2023 and retreat to 2 percent more gradually. - Current account projected to narrow to -0.4 percent of GDP in 2023. - Key risks: greater-than-expected tightening of financial conditions; sharper global or regional slowdown; persistently higher energy prices; tighter lending and potential sharp housing price correction; conversely, stronger tourism or resilient labor market could strengthen growth. - Medium-term risks include global fragmentation or slower use of NGEU funds; inflation risks from nominal wage passthrough versus negative risks from weaker demand. ### Policy discussion and fiscal recommendations - 2023 fiscal projection: overall balance projected at -0.4 percent of GDP (in line with authorities’ 2023 Stability Program). - New support of 2 percent of GDP for 2023 (public wage and pension increases, temporary VAT exemptions, housing support); continued growth and withdrawal of remaining Covid measures expected to offset new support. - Public debt projected to decline to 107.9 percent of GDP in 2023 due to lower deficit and nominal GDP growth offsetting higher financing costs. - Cyclically adjusted balance estimated to improve by 0.1 pp to -1.2 percent of potential GDP in 2023. - Public investment scaled up to 2.8 percent of GDP in 2023 versus 2.5 percent of GDP in 2022, largely NGEU-financed. - Under severe downside scenarios: deploy automatic stabilizers fully; any additional support should be temporary, non-price-distortionary, and well targeted; preserve NGEU-financed public investment. - Medium-term staff projection: fiscal deficit averaging 0.3 percent of GDP and public debt on a downward track; public debt-to-GDP ratio expected to dip below 100 percent in 2025. - Staff proposal: discretionary fiscal effort averaging annually ¼-⅓ percent of GDP during 2024–28 to achieve a balanced budget; sustaining the path beyond medium term would bring debt to under 60 percent of GDP within two decades. ### Recommended revenue and expenditure measures - Revenue measures: - Improve tax administration efficiency, simplify and modernize the tax system, digitalize tax administration. - Rationalize preferential regimes and tax expenditures to reduce administrative costs and tax-induced misallocation; provide room to reduce the high labor tax wedge. - Centralized tax policy unit to support tax reforms; roll back reduced VAT rates; improve property taxes over the medium term. - Gradually raise the carbon tax over time. - Expenditure measures: - Contain age-related spending pressures; priority on pension reform. - Strengthen the financial position of the National Health Service via spending efficiency and rationalization (NRRP measures expected). - Comprehensive review of public employment and compensation to contain the public sector wage bill. - Composition of spending: - Reverse recent bias toward current spending and favor investment spending to accelerate green and digital transformation; ensure transparent planning, budgeting, implementation, and oversight for timely EU funds absorption. *Source: IMF staff report excerpt.* ### 1. Lowering tax expenditure policy gap to euro area average 1/0.6 - 1.5 ### 1. Lowering tax expenditure policy gap to euro area average 1/0.6 - 1.5 ### Potential fiscal measures and quantified impacts - 1. Lowering tax expenditure policy gap to euro area average 1/0.6 - 1.5 - 2. Reducing VAT compliance losses to EU average 2/0.1 - 0.3 - 3. Bringing Property Tax to OECD Average 3/0.04 - 0.27 - 4. Carbon Price Reform 4/0.23 - 0.27 - 4. Controlling Wage Pressure 5/0.07 - Source: GTAP, European Commission, and IMF staff estimates. - Notes: - 1/ Direct cross-country comparisons of the value of tax expenditures need to be interpreted with caution. Tax expenditures are departures from country-specific benchmark tax systems and their aggregation can result in over- or underestimation. - 2/ Revenue lost to VAT fraud and evasion, VAT avoidance and optimisation practices, bankruptcies and financial insolvencies, as well as miscalculations and administrative errors. - 3/ Bringing property tax revenue to OECD average of 1.8 percent of GDP in 2021. - 4/ Please see 2021 PRT Selected Issues Paper "Reducing Greenhouse Gas Emission in Portugal: the Road Ahead" for details. - 5/ Measures to bring wage spending to pre-Pandemic period. ### Key implication - The package of selected recommended fiscal measures has quantified potential impacts on revenues expressed as percent of GDP according to the ranges listed above. *Source: IMF staff estimates and supporting datasets.* ### Distributional and social-policy findings - Addressing distributional challenges remains critical, particularly for vulnerable groups: - Young workers (15-29 yrs old), low-skilled workers (below tertiary), women, workers in contact-intensive non-digital jobs were among the most impacted during the Covid pandemic (SIP III). - Persistent challenges include regional inequality of opportunity, poverty, social exclusion, and housing affordability. - Policy directions to address distributional challenges: - Improve targeting of social assistance. - Alleviate labor market duality. - Improve job quality. - Invest in education with emphasis on digital literacy. - Implement the National Strategy to Combat Poverty (ENCP). ### Authorities’ fiscal stance and targets - Authorities aim to: - Use 2022 revenue windfalls to alleviate cost-of-living pressures in a targeted and time-consistent way. - Sustain growth in 2023 and fully withdraw Covid-19 measures to offset new fiscal support. - Scale-up investment through the RRP while maintaining sound public finances. - Reduce public debt to below 100 percent of GDP by 2025. - Specific medium-term commitments: - Modernize the tax system and reduce the high tax wedge on labor. - Draw on a working group’s recommendations for pension system sustainability expected in late-2023. - Full implementation of the 2015 Budgetary Framework Law, including a multi-year expenditure ceiling submitted to Parliament. - Strengthen governance, improve financial performance, and increase SOE efficiency (including NHS). --- ### Financial sector vulnerabilities and policy recommendations ### Systemic risks and vulnerabilities (findings) - Households: - Under adverse scenarios (higher interest rates and slower household gross income growth), almost half of households could be pushed to spend over 70 percent of their income on food, utilities, and debt repayments (SIP IV). - Low-income households face sharper effects. - Firms: - Some 20 (35) percent of large firms (SMEs) have interest coverage ratios less than 1. - Housing market: - House prices are estimated to be around 20 percent above long-term values (SIP IV, Figure 7). - The Golden Visa program reportedly accounted for some 5 percent of transactions in new dwellings over the past decade. - The impact on bank capital could reach 100 basis points under an adverse scenario that combines shocks to household balance sheets with a 20 percent house price correction (SIP IV). - Resilience indicators and systemic risk heatmap show increased systemic risk in 2022 relative to 2021 driven by higher share of overstretched households and rising imbalances in the residential real estate market. ### Policy recommendations for financial stability - Maintain prudent risk management practices and close monitoring of financial sector vulnerabilities: - Enhanced vigilance on market risk, liquidity risks, credit impairments, and capital levels. - Strengthen contingency planning and be cautious in capital distributions, especially if buffers weaken. - Comply with final MREL targets. - Macroprudential measures: - Gradually tighten macroprudential policy under the baseline to build bank resilience in mortgage portfolios. - Consider introducing a sectoral Systemic Risk Buffer (SyRB) on banks’ residential real estate exposures, phased in gradually to avoid procyclical credit tightening. - Over the medium term, consider a positive neutral CCyB rate to build releasable capital buffers. - Flexibly adjust borrower-based measures (e.g., DSTI application rules) if downside risks to the financial cycle materialize. - Housing supply and affordability: - Increase supply of residential and rental property. - Scale up public investment for social housing, including under the NRRP, to reduce housing market imbalance and improve affordability. - Private debt resolution and AML/CFT: - Continue progress on strengthening the private debt resolution regime; restore duty to file for bankruptcy (suspended during Covid). - Continue efforts to contain transnational money laundering risks by keeping risk assessment studies updated and ensuring availability of relevant data (e.g., beneficial ownership information). - Termination of Golden Visa expected to alleviate additional money laundering risks from foreign investors. ### Authorities’ views on financial policies - Authorities concurred on need for continued prudent risk management and close monitoring of vulnerabilities. - Emphasized building CET1 capital levels, sound prudential policies on dividends, addressing legacy issues, and strengthening contingency planning. - A bill was with the parliament (since November 2022) to revoke Covid-19’s suspension of the duty to file for insolvency. - Authorities highlighted recent AML/CTF strengthening, including thematic inspections of correspondent banking relationships and Golden Visa safeguards. - Authorities argued for a balanced macroprudential approach: - Concerned that additional capital buffers could be procyclical and constrain lending given final MREL targets. - Stand ready to adjust borrower-based measures if they excessively tighten credit conditions. --- ### Structural reforms, productivity, and the NRRP ### Key structural challenges and findings - Portugal’s productivity growth lags average wage growth and EA best performers due to: - Educational and skill levels, innovation, investment, digitalization gaps, adverse demographics, and low R&D spending. - Labor market composition and skills: - Share of low-skilled workers: 32 percent (Portugal) versus 18 percent (EA average). - Tertiary educational attainment: 47 percent (Portugal) versus 41/42 percent in EU/EA in 2021. - Share of temporary employment: 14.3 percent in 2021 (Portugal) versus 11 and 12 percent for EA and EU. - Temporary employment among young workers: 45 percent (Portugal) versus 39 percent (EA). - In-work at-risk-of-poverty indicators and labor productivity growth exhibit room for improvement. - Digitalization and ICT: - ICT sector represents about 4.5 percent of total value added in 2022, and 2.6 percent of total employment (5.7 percent and 3.1 percent, respectively in EA peers). - Share of population with digital skills: 52 percent (Portugal) versus EA 59 percent and EU 56 percent. - The NRRP envisages EUR 3.7 billion to support digital transition initiatives (2020 Digital Transition Action Plan and INCode2030 initiative). - Firm size and investment: - Portuguese firms are smaller, less capitalized, and less productive relative to other OECD economies. - Policy recommendations include harmonizing tax rates and reporting standards, applying labor code regardless of firm size, improving access to long-term financing, and supporting R&D and SME access to technology and finance. ### Energy transition and climate commitments - Authorities announced plan to achieve carbon neutrality by 2045, 5 years before the original target. - Portugal’s share of energy from renewable sources: 34 percent (Portugal) versus 22 percent (EU average). - Some 60 percent of electricity generation is from renewable energy. - Authorities plan to increase share of renewable electricity generation to 80 percent by 2026. - Despite progress, dependence on imported fossil fuels has not fallen in recent years. - Policy directions: - Continue efforts to increase energy efficiency in consumption and production. - With energy prices abating, consider gradually raising carbon taxes while protecting vulnerable households. ### Recommended structural reforms under the NRRP - Timely implementation of NRRP reforms focused on: - Education and skill building (including vocational education and ALMPs promoting learning, vocational training and re-skilling). - Digitalization and digital skills upgrading. - Improving functioning of the judicial system and business regulation. - Reforms to boost innovation capacity and higher public spending on R&D. - Policies to reduce labor market duality and improve job quality (Decent Work Agenda). - Harmonizing firm-related distortions to encourage firm growth and investment. ### Authorities’ views on structural reform - Authorities stressed leadership in NRRP implementation, with almost one fifth of milestones and targets already met. - Portugal allocates a higher share of RRF funds directly to the private sector than EA average, notably through Innovation Agendas and long-term lending via Banco Português de Fomento (BPF). - The Decent Work Agenda aims to reduce labor market segmentation and strengthen labor security, especially for younger workers. - The Medium-term tripartite agreement on income, wages and competitiveness aims to foster convergence of the wage share in GDP with the European Union average until 2026; authorities were not concerned about the impact of wage growth on competitiveness. - Authorities support ALMPs and expanded vocational training to reduce structural unemployment and address skill mismatches. *Source: IMF staff report excerpts as provided in the content unit.* ### 43. The authorities stressed that Portugal was on track to meet the Fit for 55 climate ### 1prtea2023001 - 43. The authorities stressed that Portugal was on track to meet the Fit for 55 climate ### Climate targets and energy policy - Authorities view Portugal as on track to meet the Fit for 55 climate targets. - Measures under the 2023 NECP are expected to guarantee achieving carbon neutrality by 2045. - NGEU is identified as a key source of funding to accelerate green investment and mobilizing private investment. - A National Strategy to Tackle Energy Poverty is expected to be integrated into the National Poverty Strategy. - Authorities confirmed commitment to fully eliminate energy subsidies. ### Near-term macroeconomic outlook (Staff appraisal) - Portugal's strong recovery continued till early 2023, but near-term growth is expected to soften. - Domestic demand growth is projected to be dragged down by high cost of living and export growth to soften. - After peaking in late 2022, inflation is expected to gradually ease over 2023 but remain above its target for some time, reflecting the broad-based nature of inflationary pressures. ### Risks to the outlook - Downside risks: - Tighter financial conditions—potentially accompanied by a sharp correction in housing prices. - A deeper global or regional slowdown. - Persistently higher energy prices. - Upside risks: - Continued strong tourism momentum. - A resilient labor market. ### Fiscal policy guidance - Maintaining a contractionary fiscal policy stance in 2023 is appropriate to build fiscal space and support monetary policy in reducing inflation pressures. - If growth weakens appreciably, automatic stabilizers should be fully deployed. - Fiscal overperformance must be saved. - Further fiscal support should be reserved only for severe downside scenarios and designed to be temporary, non-price-distortionary, and targeted to the most vulnerable households. ### Medium-term fiscal strategy and reforms - A stronger medium-term fiscal effort relative to the baseline, comprising both revenue and expenditure measures, would: - Build fiscal space. - Mitigate debt-related risks further. - Improve resilience to contingency risks. - Revenue-side priorities: - Simplifying the tax system and eliminating tax distortions. - Rolling back reduced VAT rates. - Reinstating carbon taxes. - Improving tax administration. - Expenditure-side priorities: - Reforms to contain age-related spending pressures from pensions and health care. - Increase the share of public investment relative to current spending. - Other medium-term reforms: - Strengthening of the medium-term budgetary framework. - Strengthening the financial sustainability of SOEs. - Further improving the social safety net. ### Financial sector and housing vulnerabilities - Financial policies should focus on containing systemic risks, which have risen on the back of tighter financial conditions and rising housing market vulnerabilities. - Supervisory and bank actions: - Maintain vigilance on credit quality, market and interest rate risk, and liquidity management. - Continuously improve capital headroom as an important safeguard. - Continue efforts to contain risks from transnational money laundering. - To address residential real estate sector vulnerabilities: - Authorities could gradually phase in a sectoral systemic risk capital buffer. - Such a buffer would need holistic calibration considering other macroprudential measures, the cost of complying with resolvability requirements, and avoiding procyclical effects. - Further support to housing supply and affordability, without generating market distortions, would alleviate housing market strains. ### Structural reforms and investment absorption - Structural policies should focus on boosting productivity growth. - Timely implementation of the NRRP is crucial; NRRP focuses on: - Raising R&D. - Improving the education system, judicial system, and business regulations. - Scaling up green investment. - Labor market reforms: - Improve labor market performance and dynamism. - Support with active labor market policies and support for skilling and re-skilling workers to spur private sector-driven growth. - Environment and fiscal complementarities: - Receding energy prices provides an opportunity to gradually increase carbon taxes, combined with targeted measures to protect the most vulnerable. - EU funds management: - Efficient planning, budgeting, implementation, and oversight will be key to maintain strong investment absorption capacity of EU funds in the economy. *Source: STAFF APPRAISAL* ### 51. It is proposed that the next Article IV consultation takes place on the standard 12- ### 1prtea2023001 - 51. It is proposed that the next Article IV consultation takes place on the standard 12- ### Real sector - A dynamic recovery continued through 2022 and activity recovered to pre-Covid levels across most sectors. - Tourism and related sectors contributed the most to overall growth. - Economic sentiment has been deteriorating sharply since 2022H2, reflecting a worsened financial situation of households and lower savings. - Real GDP Growth (Percent, quarter-over-quarter) shown for 2021–2023Q1 with EA-19 and PRT average (2014–2019) benchmarks (figure sources: Eurostat, Haver Analytics, and IMF staff calculations). - Sectoral Gross Value Added indexed to 2019Q4 = 100 shows differential performance across Agriculture; Industry (ex. construction); Manufacturing; Construction; Trade/hospitality; Public services; Total (sources: Haver Analytics and IMF staff calculations). - Gross Value Added Growth Decomposition (Percent, year-over-year) presented for sector groups including Agriculture, forestry, and fishing; Industry (ex. energy); Energy; Construction; Trade, restaurants, and hotels; Transportation and communication; Financial activities and real estate; Other services (sources: Statistics Portugal, Haver Analytics, and IMF staff calculations). ### Inflation and price developments - Commodity prices grew rapidly in 2022H1 and higher production costs were passed through to prices. - By mid-2022 price pressures became broad-based and core inflation exceeded EA average. - Inflation expectations remain anchored. - Wages have responded only partially to past inflation so far, at different paces across sectors. - Commodity Price Growth (Percent, year-over-year) reported for PRT: Import and EA-19: Import (sources: IMF Commodity Terms of Trade Database and IMF staff calculations). - Real Wage Growth and Inflation reported for 2022Q4 across EA members and PRT (sources: Haver Analytics and IMF staff calculations). - Sectoral Compensation of Employees (2019Q4 = 100) and Unit contributions to GDP Deflator (Percent, year-over-year, quarterly average) presented (sources: Haver Analytics, Eurostat, and IMF staff calculations). - Consumer Prices: Trends over next and past 12 Months (Percent, SA) from Statistics Portugal and Haver Analytics. ### Labor market - The labor market has remained strong, with employment growth largely driven by services. - Record low unemployment, labor shortages, and signs of labor market tightness indicate limited slack. - Labor force participation has reached pre-pandemic levels overall, but hours worked remain below pre-pandemic levels in many sectors. - Contribution to New Employment (Percent, year-over-year) decomposed by Agr/forestry/fishing; Industries; Services; Total (sources: Instituto Nacional de Estatistica Portugal, Haver Analytics, and IMF staff calculations). - Labor Shortage in Construction (Percent) series comparing EA-19 and PRT (sources: European Commission and Haver Analytics). - Market Tightness measured as ratio of vacancies over unemployment (Percent) (sources: Haver Analytics and IMF staff calculations). - Sectoral Employment and Sectoral Hours Worked (2019Q4 = 100) show sectoral heterogeneity (sources: Haver Analytics and IMF staff calculations). ### Public finances - Portugal’s fiscal balance recovered fast, with the overall balance stronger than EA in 2022. - Public debt remains high but is on a downward trend. - Tighter financial conditions increased borrowing costs. - Public investment is lower than the EA median. - Pension and health spending is expected to continuously increase over the long horizon. - Tax revenue shortfalls from the VAT gap remain sizeable. - Ageing: Change in Fiscal Outlays on Pensions and Health, 2019–2030 presented as Percent of GDP (sources: European Commission and IMF staff calculations). - Public Gross Fixed Capital Formation (Percent of GDP) and General government gross debt (Percent of GDP) displayed; 10-Year Gov. Bond Spreads Relative to German Bunds (Basis points) time series shown (sources: Eurostat, IMF WEO database, Tullett Prebon Information, Refinitiv, Haver Analytics). - VAT Gap (Percent of VAT revenue loss) shown for 2019 and 2020 with medians (sources: European Commission and IMF staff calculations). - Fiscal Overall and Primary Balance, 2022 (Percent of GDP) reported with April 2023 WEO values for non-PRT countries (source: IMF WEO database and IMF staff calculations). ### External sector - The current account mostly deteriorated in 2022 reflecting surging commodity prices, partially offset by strong revenue from tourism. - The financial account recorded a small deficit for the year and the net international investment position continued to strengthen. - The real effective exchange rate depreciated slightly in 2022 but remained above the EA. - Nominal Goods Imports Growth Decomposition (Percent, year-over-year) shows contributions from Real goods imports and Goods imports deflator (sources: Statistics Portugal, Haver Analytics, and IMF staff calculations). - Tourism Arrivals and Revenue shown in millions of Euros and thousands of travellers (sources: Statistics Portugal, Haver Analytics, and IMF staff calculations). - Real Effective Exchange Rate (2010Q1 = 100) presented for ULC-based and CPI-based indices with last observations 2022Q4 and 2023Q1 respectively (sources: ECB and IMF staff calculations). - Net International Investment Position (Percent of GDP) and Financial Account Decomposition (Percent of GDP) reported (sources: Banco de Portugal, Haver Analytics, and IMF staff calculations). - Current Account Decomposition (Percent of GDP) shows Goods balance (energy and non-energy), Services balance, Primary income, Secondary income, and Current account (sources: Statistics Portugal, Haver Analytics, and IMF staff calculations). ### Financial position of vulnerable households and corporates - Households are disproportionally affected by rising food and energy prices and overburdened by housing costs; one third of low-income households with a mortgage are overburdened by debt service. - Over one third of firms affected by the two shocks are vulnerable. - A large share of firms faces liquidity pressures, particularly in the SME segment. - Definition: a household is considered vulnerable if the share of mortgage repayment exceeds 40 percent of gross income or the share of basic expenditure including food, utilities, debt repayments, and housing costs, exceeds 70 percent of gross income. A firm is considered to have liquidity pressures if the ratio of EBIT to interest payments is below 1. Simulations are conducted for 2023; the baseline scenario for firms is based on the October 2022 WEO forecast of interest rates and real GDP growth (proxy for dynamics in operational revenue). - Share of Firms with ICR < 1, by Firm Size (Percent of total, end-2023) shown for multiple countries with PRT included (sources: Orbis and IMF staff calculations). - Share of Vulnerable Firms in Portugal by Sector (percent) and Share of Vulnerable Households by Income (Percent, debt-service-to-income ratio ≥ 40%) displayed (sources: Orbis, EBA Risk Dashboard, HFCS microdata, and IMF staff calculations). ### Housing market systemic risk - Real house prices increased substantially in recent years, reflecting partly strong demand and a spike in construction costs. - House prices have risen faster than fundamental factors can explain, resulting in overvaluation pressures. - Growth in House Prices and Construction Costs (Percent, year-over-year) and Real House Price Growth Rate (Percent, year-over-year, annualized) comparisons across countries presented (sources: Haver Analytics, OECD, and IMF staff calculations; latest data generally 2022Q4 except specified exceptions). - Price-to-Income in European Countries (Long-term average = 100) shows Portugal among comparable peers (sources: OECD, Haver Analytics, and IMF staff calculations; latest data 2022Q4 except specified exceptions). ### Productivity and competitiveness - Despite Portugal's low productivity, wages (including the minimum wage) have been growing fast, on average, both in nominal and real terms, resulting in growing unit labor costs (ULC) and loss of competitiveness. - Structural reforms focusing on education, on-job training and digitalization are expected to boost productivity; some past policies have already started bearing fruit. - Tertiary Education Attainment (Percent, ages 25–34 years) and Early Leavers from Education and Training (Percent, ages 18–24 years) time series shown (source: Eurostat). - Labor Productivity and Real Wage Growth (Percent, year-over-year) and Unit Labor Costs (2018Q1 = 100) comparisons across PRT and EA-19 presented (sources: Haver Analytics and IMF staff calculations). - Labor Productivity (GDP in const. 2015 prices divided by hours worked) historical series provided (sources: Eurostat, Haver Analytics, and IMF staff calculations). - Wages and Productivity (2018Q1 = 100) series show Compensation per employee, Labor productivity, and Minimum wage (sources: Haver Analytics and IMF staff calculations). ### Climate indicators - Portugal’s GHG emissions have been on a downward trend and are below the EA average. - Portugal has been a leader in renewable energy, though its reliance on fossil fuels remains high. - Greenhouse Gas Emission by Sector (MtCO2e) time series displayed across Energy; Manufacturing & construction; Transport; Industrial processes & product use; Agriculture; Waste management; Other emission (sources: Eurostat and IMF staff calculations). - Share of Natural Gas in Electricity Production, 2021 (Percent) presented across European countries with Portugal included (source: Eurostat and IMF staff calculations). ### Fiscal and macro tables (selected) - Table 1: Selected Economic Indicators, 2018–28 (Percent, year-over-year, unless otherwise indicated). - Table 2a: General Government Accounts, 2018–28 (Billions of Euros) with detailed annual series for Revenue, Taxes, Social contributions, Grants and other revenue, Property income, Sales of goods and services, Expenditure, Expense, Compensation of employees, Interest, Social benefits, Gross fixed capital formation, Gross Operating Balance, Net lending (+)/borrowing (–), Primary balance, Structural balance, Debt at face value (EDP notification), Nominal GDP, and Expenditure growth, nominal, percent (sources: INE, Bank of Portugal, and IMF staff projections; GFSM 2001 presentation). - Table 2b: General Government Accounts, 2018–28 (Percent of GDP) includes Revenue, Taxes, Social contributions, Grants and other revenue, Expenditure, Expense, Compensation of employees, Interest, Social benefits, Capital transfers, Gross fixed capital formation, Gross Operating Balance, Net lending (+)/borrowing (–), Primary balance, Cyclically adjusted balance, Structural balance, Change in structural balance, Debt at face value (EDP notification, percent of GDP), and Nominal GDP (Billions of euros) (sources: INE, Bank of Portugal, and IMF staff projections; GFSM 2001 presentation). - Table 3a/3b: Balance of Payments, 2018–28 presented in both Billions of Euros and Percent of GDP. - Table 4: Selected Financial Indicators of the Banking System, 2018–22 (Percent). *Source: IMF staff figures, tables, and text in the provided content unit.* ### Annex I. 2022 Article IV Recommendations ### Annex I. 2022 Article IV Recommendations ### Fiscal Policy - Near-term recommendations: - Maintain an accommodative fiscal stance in 2022 given headwinds to growth and economic slack. - Target any discretionary support to vulnerable households and most affected and viable firms. - Starting 2023, engage in gradual and growth-friendly fiscal adjustment, while increasing the share of investment spending. - Authorities' actions and outcomes: - The outlook was overtaken by spillovers from Russia's war in Ukraine and broader inflation pressures. - Growth remained strong and the fiscal deficit in 2022 was reduced significantly more than staff's projections (during the 2022 Article IV Consultations). - The public debt-to-GDP ratio fell below its 2019 level to 107.9 percent. - A sizeable fiscal support package, mostly broad based, was implemented in 2022-23 (annually 2 percent of GDP), especially to support vulnerable households and firms with higher cost of living. - Medium-term recommendations: - Implement tax reforms to reduce tax distortions and expenditures, raise property tax revenues and roll back reduced VAT tax rates. - Reforms to bolster pension sustainability, review of public employment and compensation structure, strengthen social assistance. - Structural fiscal reforms including through the full implementation of the 2015 Budgetary Framework Law, reform of the NHS and boost efficiency and health of SOEs. - Authorities' actions on medium-term items: - On pensions, the government provided two payouts in 2022 and 2023 fully reflecting CPI indexation. - A spending review is expected to be launched in Spring 2023, with technical support from the OECD, mostly focused on improving efficiency. - VAT rate reductions have been introduced on several essential food products. - A multi-year expenditure ceiling has been submitted to the Parliament and multi-year budgetary plans are being developed for the NHS. ### Financial Sector and Macro-Financial Issues - Corporate sector recommendations: - Engage in prompt recapitalization of viable NFCs - supported by commercial banks technical expertise. - Authorities' actions: - The envelope for recapitalization of NFCs, as managed by Banco Portugues de Fomento (BdF) via several programs, was increased to account for broader needs from two consecutive shocks. - All recapitalizations require market tests as BdF only provides up to 70 percent of funding requested. - There are plans for closer cooperation with commercial banks. - Banks recommendations: - Continued close monitoring of banks’ credit quality and financial soundness, including with forward-looking assessments. - Exposures to restructuring funds and deferred tax assets should follow prudent valuations. - Authorities' actions: - Supervisors are closely monitoring vulnerabilities and risks. - Banks have made significant efforts to reduce their exposure to restructuring funds; capital inefficiencies related to deferred tax assets are contained. - Macroprudential recommendations: - Once the recovery is well established, a positive-rated CCyB or a sectoral risk buffer should be considered to contain risks from banks real-estate exposures. - Authorities' actions: - The authorities did not consider the timing appropriate for implementing additional macroprudential sectoral or cyclical capital buffers. - New housing relief measures were put in place to support families with interest burden relief and rental support (Mais Habitaçao). - Insolvency regime recommendation: - Lift the suspension of the duty to file for insolvency. Further strengthen the insolvency regime by building on recent reforms. - Authorities' actions: - A bill revoking the suspension on the duty to file for insolvency was submitted to the Parliament and the law is expected to take effect later in 2023. - Anti-money laundering recommendation: - Address cross-border money laundering risks, e.g., by improving the coverage and information of the central register of the beneficial owner (RCBE). - Authorities' actions: - The government announced an end of the golden visa regime, which has been seen as a risk factor for money laundering. - Progress has been made in strengthening risk-based AML supervision. ### Structural Reforms - Labor market flexibility recommendation: - Alleviate labor market duality by allowing permanent contracts to be more flexible and by active labor market policies. - Authorities' actions: - The Decent Work Agenda’ (Agenda do Trabalho Digno) was adopted on May 1, 2023. It is expected to further reduce labor market duality, reducing the share of precarious jobs. - Skills/digitalization recommendation: - More vocational and on-the-job training, also for older cohorts, by increasing training incentives. Leverage digitalization to improve productivity, in particular among SMEs. - Authorities' actions: - The NRRP is focused on projects related to digitalization, for example, Enterprises 4.0, Quality and Sustainability of Public Finances, Economic Justice System and Business Environment, Digital Public Administration, and Digital School. - Effective carbon pricing recommendation: - Increase effective cost of carbon emission by gradual increases in carbon prices, eliminating subsidies and a broader coverage of the carbon tax. - Authorities' actions: - With the onset of the energy crisis, the carbon tax update was temporarily suspended. ### Annex II. External Sector Assessment — Overall Assessment - Overall assessment: - The external position in 2022 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - The NIIP-to-GDP ratio further improved from -95 percent in 2021 to -86 percent in 2022, and under baseline assumptions is projected to fall to -59.6 percent by 2028, reflecting both an improvement in the current account balance and sustained GDP growth. - IMF staff assesses Portugal’s current account norm to be relatively high due to external sustainability risks from a still large negative NIIP. - A stronger current account balance over the medium term would enable a faster strengthening of the NIIP. - Potential policy responses: - Keeping the current account in line with its norm requires sustained fiscal consolidation efforts and structural reforms to improve Portugal’s savings rate, competitiveness, diversification, and economic resilience. - Improvements in wage flexibility and labor market duality, as well as further measures to enhance education outcomes and encourage innovation would contribute to productivity gains. - Public investments under the RRP provide an opportunity to transition to a greener, more competitive, and digital economy. - Private investment can be further spurred by enhancing business conditions, streamlining regulations, and implementing labor market reforms to raise skills and reduce duality. ### Foreign Asset and Liability Position and Trajectory - Background and trends: - The negative NIIP declined from its peak in 2014 of 124 percent of GDP to 86 percent of GDP in 2022, after a rebound to 105 percent in 2020, because of the pandemic-induced decline in GDP. - The improvement compared to 2021 reflects a larger decrease in gross liabilities than in assets as a percent of GDP, even though the current account balance deteriorated in 2022. - The gross external debt position has also been on a downward trend, but still remains high at 168 percent in 2022. - Both NIIP and gross external debt are expected to continue to decline, but at a decelerating rate over the medium term as the evolution of the CA remains less favorable. - Assessment and risks: - The still large negative NIIP position induces external vulnerabilities, particularly from large gross financing needs from external debt (estimated at an average 66 percent of GDP over 2023-28, Annex V), and potential valuation changes. - Past debt management efforts to reduce sovereign external risk, including by smoothing the profile for redemptions and lengthening the average maturity, and sizeable central bank holdings through the ECB’s asset purchase programs are important risk mitigants. - Going forward, the NIIP is projected to stay on a downward path and reach -59.6 percent of GDP by 2028, reflecting a sustained improvement in the current account. - 2022 (% GDP) figures: - NIIP: -85.7 - Gross Assets: 158.7 - Debt Assets: 127.3 - Gross Liab.: 244.4 - Debt Liab.: 41.6 ### Current Account - Background: - The current account was in surplus during 2013–19, after an extended period of deficits. - The surpluses were driven by a significant improvement in the balance of trade in goods and services, including on the heels of strong growth in tourism, and a substantial improvement in the savings-investment balance from fiscal adjustment. - The current account balance registered a modest deficit of 1.3 percent of GDP in 2022, widening by 0.5 pp relative to 2021, driven by surging global commodity prices that were partially offset by higher tourism revenues. - Assessment and model results: - EBA model-based estimates suggest a cyclically adjusted current account balance at 0.1 percent of GDP. - Adjusting by 0.5 percent to account for the effect of the Covid-19 pandemic on transportation costs yields a staff cyclically adjusted current account amounting to 0.6 percent of GDP. - The EBA CA model suggests a norm of -1.4 percent of GDP. - Given external risks from a large and negative NIIP, staff’s assessment puts more weight on external sustainability, aligned with past advice. - Guided by the objective of reducing the negative NIIP position to under -50 percent over the medium-term, and assuming no valuation effects, which adds some 1.9 pp of GDP to the model’s CA norm, results in an adjusted CA norm of 0.5 percent of GDP (within a range of -0.2 to 1.2 percent to recognize the uncertainty in the economic outlook), implying a staff gap of 0.1 percent of GDP. - Accounting for uncertainty in the estimates, this implies a CA gap in the range of -0.6 to 0.8 percent of GDP. - Policy gaps, reflecting deviations of current policy settings in Portugal from their desired settings, contribute 1.3 percent while the unexplained residual represents 0.2 percent. - Key policy takeaway: - To strengthen the external position, given the high level of public debt, a sustained fiscal adjustment paired with structural reforms to support both saving and investment and improve external competitiveness is key. - 2022 (% GDP) summary: - CA: -1.3 - Cycl. Adj. CA: 0.1 - EBA Norm: -1.4 - EBA Gap: 1.5 - Covid-19 Adj.: 0.5 - Other Adj.: -1.9 - Staff Gap: 0.1 ### Real Exchange Rate - Background: - The CPI-based real effective exchange rates (REER) for Portugal and the Eurozone are on a similar level. - Since 2010, the ULC-based REER measure fell by 11 pp in Portugal, while the decrease for the Euro area was twice as high (22 pp). - Focusing on the manufacturing sector only, the ULC-based REER measure continued to appreciate and is now above its 2010 level. - Assessment: - The EBA REER index model suggests a marginal undervaluation of -0.8 percent while the level REER model implies a marginal overvaluation of 1.8 percent in 2022. - Putting the NIIP on a continued downward track will require an improvement in the REER to contain further appreciation, which could be accomplished through sustained quality upgrades and innovation to improve non-price competitiveness. - Reforms under the NRRP focused on raising productivity are critical in this regard. - Model note: - Based on the 0.38 model elasticity, the REER gap obtained from the staff-assessed CA gap is assessed to be in the range of -2.12 to 1.58 percent, with a midpoint at -0.26 percent. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - Financing conditions became more challenging in 2022 on the back of market uncertainty and a tighter monetary stance by the ECB amid inflationary pressures. - Sovereign spreads relative to the bund reached 100 basis points in 2022, from a level of around 70 basis points at the end of 2021. - The financial account recorded a small deficit driven by negative contributions of financial derivatives and direct investments. - Credit ratings have been positive with a one notch rating upgrade by S&P and Fitch to BBB+ in 2022 (Moody’s maintained their grade rating at Baa2). - Assessment: - Active debt management has helped support external financing rollover needs for the near term in the public sector and had positive spillover effects for the private sector, including by lowering funding costs. - Still, existing external financing needs leave Portugal exposed to market volatility, especially in a context of tightening global financial conditions. ### FX Intervention and Reserves Level - 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 III. Risk Assessment Matrix — Key Risks, Likelihood, Impact, and Policy Responses - Global Risks - Intensification of regional conflicts (High). - Impact if realized: High. Negative energy, food and tourism shocks would impede the recovery. Increased inflow of refugees could raise unemployment pressures and trigger social tensions. - Policy responses: - Full use of automatic stabilizers if a recession begins to unfold. - Avoid broad-based discretionary support unless the shock amplifies in scale. - Augment the scope of ALMPs to facilitate refugees’ transitions into the labor market, particularly in sectors facing labor shortages. - Commodity price volatility (Medium). - Impact if realized: High. Higher commodity price volatility may discourage investment and consumption and dampen growth further. - Policy responses: - If prolonged and begins to materially affect domestic demand, reintroduce temporary and targeted support to the most vulnerable households and highly affected firms that are under pressure. - The intensity of firm support could be linked to energy efficiency targets. - Speed up green transition by investing in renewable energy. - Pre-announced fiscal measures to reduce fiscal imbalances can reinforce fiscal discipline and maintain investor confidence. - Monetary policy miscalibration (Medium). - Impact if realized: Medium. Monetary tightening would increase borrowing costs and, if combined with de-anchored inflation expectations, could push the economy to stagflation and amplify financial strains on households and firms. - Policy responses: - Engage in fiscal policy consolidation (while protecting the poor), to reduce domestic demand pressures and further support the ECB in containing inflation and avoid inflation de-anchoring to minimize the risk of an emergence of wage-price spiral. - Promote flexible work arrangements to boost labor supply to mitigate the increase in labor market tightness. - Abrupt global slowdown or recession (High for Europe). - Impact if realized: High. Negative spillover effects on Portugal through trade linkages and supply chains, and lower tourism arrivals. - Policy responses: - Full use of automatic stabilizers if a recession begins to unfold. - Provide temporary and targeted support to the most vulnerable groups. - Systemic financial instability (Medium). - Impact if realized: Medium. A sharp increase in interest rates will deteriorate both public and private sector balance sheets; floating rate loans for house purchase (90 percent of the stock) make borrowers vulnerable; sharp correction in house prices could increase bank losses. - Policy responses: - Intensify monitoring of banks’ capital positions and risk management practices to contain systemic risk. - Further strengthen guidance on prudent lending standards. - In the event of a sharp downturn, relax macroprudential settings so that banks can keep credit flowing. - Structural Risks - Deepening geo-economic fragmentation and geopolitical tensions (High). - Impact if realized: High. Extended supply-side disruptions could induce higher commodity prices and slow down the recovery and impact private and public balance sheets. Inflow of refugees could induce social tensions. - Policy responses: - Accelerate investments in digitalization and green energy. - Continue to promote international cooperation via active participation in joint efforts to promote green transitions and policy coordination in Euro Area and beyond. - Domestic Risks - A sharp tightening of domestic financial conditions combined with a sharp correction in real estate markets (High). - Impact if realized: Medium. A sudden correction in house prices could increase bank losses on defaulted exposures. Lower bank capital could unduly constrain credit. The negative wealth effect and weaker consumer confidence could weigh on consumption. - Policy responses: - Ensure that banks adopt appropriate provisioning practices and capital conservation practices. - Continue to closely monitor the build-up of systemic risk and consider building capital buffers on real estate exposures. - Further macroprudential policy interventions if imbalances in the housing market persist. - Lower absorption of NGEU funds (Medium). - Impact if realized: Medium. Repeated underspending of investment financed by NGEU funds could slow medium-term growth and delay the push for a more digital and greener economy. - Policy responses: - Further strengthen administrative capacity to implement projects. *Source: Annex I. 2022 Article IV Recommendations.* ### Annex IV. The Sovereign Risk and Debt Sustainability ### Annex IV. The Sovereign Risk and Debt Sustainability Assessment ### Background - Public debt was 113.9 percent of GDP in 2022. - The Covid-19 recession and fiscal response raised the debt-to-GDP ratio by more than 18 percentage points to 134.9 percent of GDP in 2020. - Subsequent drivers of the decline to 113.9 percent by end-2022: - Real GDP growth of 5.5 and 6.7 percent in 2021 and 2022, respectively. - High inflation in 2022 yielding nominal GDP growth of 11.4 percent in 2022. - Improvement in the primary balance from -3.1 percent in 2020 to a primary surplus of 1.4 percent by 2022. ### Baseline scenario and projections - Projected path: - Public debt is projected to decline by an annual average of about 4.1 pp of GDP during 2023–28. - Public debt is projected to decline to 89.3 percent of GDP by 2028. - Contribution to the projected reduction in debt (2023–28): - Strong real GDP growth: around 50 percent of the total reduction or 12.5 pp of GDP. - Primary balance improvement: contributing some 8.9 pp reduction. - Real interest rate: contributing some 2.5 pp reduction. - Growth and fiscal assumptions: - Staff’s baseline projects medium-term growth to converge to about 2 percent, bolstered by public investments and reforms under the NRRP. - The overall balance is projected to remain flat at -0.4 percent in 2023. - Over the medium term, the overall balance is projected to average around -0.3 percent of GDP. - Pressures expected from pension and health-related spending and a slightly increasing public wage bill. - Interest rates and gross financing needs: - Gross financing needs (GFN) are expected to remain around 10 percent of GDP over the medium and long term. - Long-term sovereign yields are assumed to increase from 2.2 percent in 2022 to 4.0 in 2024 and edge down to 3.5 percent by 2028. - The effective interest rate is expected to rise to reach 2.5 percent by 2028. - Selected baseline series (percent of GDP unless indicated): - Public debt: 2022: 113.9; 2023: 107.9; 2024: 103.4; 2025: 99.3; 2026: 95.6; 2027: 92.3; 2028: 89.3; 2029: 86.4; 2030: 83.6; 2031: 82.0; 2032: 80.7; 2033: 80.5. - Change in public debt: 2023: -11.5; 2024: -6.1; 2025: -4.5; 2026: -4.1; 2027: -3.7; 2028: -3.4; 2029: -3.0; 2030: -3.0; 2031: -2.8; 2032: -1.5; 2033: -1.3; 2034: -0.2. - Primary deficit (percent of GDP): 2022: -1.4; 2023: -0.5; 2024: -1.5; 2025: -1.7; 2026: -1.7; 2027: -1.8; 2028: -1.7; 2029: -1.5; 2030: -1.6; 2031: -0.5; 2032: -0.5; 2033: 0.4. - Gross financing needs: 2022: 6.8; 2023: 6.8; 2024: 6.7; 2025: 7.7; 2026: 8.6; 2027: 7.8; 2028: 7.7; 2029: 7.2; 2030: 7.9; 2031: 12.1; 2032: 8.3; 2033: 8.6. - Memo indicators: - Real GDP growth (percent): 2022: 6.7; 2023: 2.6; 2024: 1.8; 2025: 2.2; 2026: 2.0; 2027: 1.9; 2028: 1.9; 2029: 1.9; 2030: 1.9; 2031: 1.9; 2032: 1.9; 2033: 1.9. - Inflation (GDP deflator; percent): 2022: 4.4; 2023: 4.0; 2024: 2.7; 2025: 2.2; 2026: 2.1; 2027: 1.9; 2028: 1.8; 2029: 1.8; 2030: 1.8; 2031: 1.8; 2032: 1.8; 2033: 1.8. - Nominal GDP growth (percent): 2022: 11.4; 2023: 6.7; 2024: 4.6; 2025: 4.4; 2026: 4.1; 2027: 3.9; 2028: 3.8; 2029: 3.8; 2030: 3.8; 2031: 3.8; 2032: 3.8; 2033: 3.8. - Effective interest rate (percent): 2022: 0.0; 2023: 1.6; 2024: 1.8; 2025: 2.1; 2026: 2.2; 2027: 2.3; 2028: 2.5; 2029: 2.3; 2030: 2.5; 2031: 2.6; 2032: 2.9; 2033: 3.1. ### Risk assessment (near-, medium-, and long-term) - Overall assessment: - The overall risk of sovereign stress is assessed as Moderate. - Medium-term risks are assessed as Low (consistent with the mechanical low signal). - Long-term risks are assessed as Moderate due to current high-level debt and age-related expenditure pressures. - Key downside risks: - Large negative growth shocks similar to past deep recessions (cumulative real GDP contraction of 6.6 percent during 2011–13 and an 8.3 percent contraction in 2020) could push debt up and sharply increase borrowing costs. - Faster-than-expected normalization of monetary policy, with higher policy rates and lower reinvestment of maturing sovereign debt held by the ECB, would increase yields and generate vulnerabilities. - Prolonged war in Ukraine could add fiscal pressure. - Risks from higher pension and health-related spending, slow ramp-up of public investment under the NRRP, and real wage pressures beyond productivity growth. - Mitigating factors: - Financing from the EU under the NGEU. - A considerable share of debt to official creditors (close to 20 percent of total debt at end-2022). - Relatively long tenure of existing debt: 7.5 years of average residual maturity. - Negligible share of foreign currency debt. - Realism and stress testing: - Forecast errors for debt-related variables (primary balance, r-g, and gross financing needs) generally in the 25th to 75th percentile for one-year, three-year and five-year horizons; public debt is shown to be optimistic mainly because of past deep recessions. - Fan chart indicates baseline projection is close to the lower end of the distribution; large negative growth shocks could derail the downward debt path. - Medium-term tools: Debt Fanchart Module points to Moderate risk, GFN Financeability Module suggests Low risk. - Probability metrics (medium-term analysis): - Fanchart width: 49.0 - Probability of debt not stabilizing (pct): 1.5 - Average GFN in baseline: 7.5 - Bank claims on government (pct bank assets): 8.6 - Probability of missed crisis, 2023-2028 (if stress not predicted): 9.1 pct. - Probability of false alarm, 2023-2028 (if stress predicted): 48.9 pct. ### Long-term risks and demographic analysis - Triggered long-term module: demographics on pension and health only. - Pension costs: - The 2021 Ageing Report projects an increase in pension costs for Portugal, peaking in 2035 before gradually coming down. - Decline in pension spending later is partly explained by projected increase in employment rate for ages 55–74 and old-age dependency ratio plateauing slightly towards the late 2040s. - The scenario is illustrative and underscores the importance of pension reforms. - Health expenditure: - If healthcare expenditure were to exceed medium-term inflation (labeled as ECG), public debt would be pressured over the long horizon. - Notes on module: - The exercise is mechanical and does not consider pension reforms or pension payment adjustments linked to changes in life expectancy; it can be considered a worst-case scenario. ### Staff commentary and policy implications - Summary assessment: Portugal is at moderate overall risk of sovereign stress. Most indicators have started to normalize as the recovery from the Covid-19 shock has proceeded and cost-of-living crisis measures are projected to expire after 2024. - Policy implications and recommendations reflected in the assessment: - Continue fiscal consolidation consistent with the baseline to keep debt on a downward trajectory. - Implement reforms to tackle risks arising from population aging on pension spending. - Address pressures from potential increases in wages beyond levels consistent with productivity growth. - Monitor and manage rollover and interest rate risks, given the projected rise in long-term sovereign yields and effective interest rates. - Ensure effective implementation and timely ramp-up of public investment under the NRRP to support medium-term growth assumptions. *Source: Fund staff.* ### Annex IV. Figure 7. Portugal: Long-term Risk Assessment ### Annex IV. Figure 7. Portugal: Long-term Risk Assessment ### Overall risk indication and projection frameworks - Projection variants shown: - Baseline with t+5 - Baseline with t+5 and DSPB - Historical 10-year average - Medium-term extrapolation - Medium-term extrapolation with debt stabilizing - Historical average assumptions - Time horizon displayed: 2015–2051 (projection and long run projection segments identified). - Indicators visualized (per figure labels): - GFN-to-GDP ratio - Amortization-to-GDP ratio - Total public debt-to-GDP ratio ### GFN-to-GDP ratio and total public debt-to-GDP ratio projections (figure panel details) - Horizontal axis years explicitly shown: 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051. - Vertical scales depicted in two ranges: - 0.0 to 30.0 (for GFN-to-GDP ratio panels with tick labels 0.0, 5.0, 10.0, 15.0, 20.0, 25.0, 30.0). - 0 to 160 (for total public debt-to-GDP ratio panels with tick labels 0, 20, 40, 60, 80, 100, 120, 140, 160). - Baseline and scenario lines identified in figure legend: - Projection - Long run projection - Baseline with t+5 - Baseline with t+5 and DSPB - Historical 10-year average ### Demographics: Health scenarios (figure panel details) - Scenario labels: - Baseline: Extension of fifth projection year - Health (Demographics) - Health (Demographics + ECG) - Same year axis as other panels: 2015–2051. - Vertical scales used: - 0.0 to 30.0 (tick labels 0.0, 5.0, 10.0, 15.0, 20.0, 25.0, 30.0) for GFN-to-GDP panels. - 0 to 160 (tick labels 0, 20, 40, 60, 80, 100, 120, 140, 160) for total public debt-to-GDP panels. ### External debt sustainability (Annex V summary and table highlights) - Key assessment statement: - "External debt is assessed to be sustainable over the medium term, but subject to risks related to the growth outlook." - 2022 outcome and comparison: - "Gross external debt fell to 168 percent of GDP in 2022, a reduction by 23 pp compared to 2021." - Staff’s pre-Covid projection for 2022: "182 percent of GDP for 2022." - Staff baseline projection: - "Gross external debt is projected to decline to 130 percent of GDP at the end of the forecast horizon (solid line), with gross external financing needs at 66 percent of GDP on average." - Sensitivity to growth shocks: - A permanent one-half standard deviation growth shock described as "roughly 2.1 pp reduction in growth" yields a projection of gross external debt reaching "144 percent of GDP at the end of the projection horizon (dashed line)." ### Portugal: External Debt Sustainability Framework table (2018–2028) — selected series and exact values - Baseline: External debt (percent of GDP) - 2018: 195.6 - 2019: 191.6 - 2020: 204.8 - 2021: 191.0 - 2022: 168.1 - 2023: 158.9 - 2024: 153.9 - 2025: 148.7 - 2026: 141.8 - 2027: 135.6 - 2028: 129.7 - Change in external debt (percent of GDP) - 2018: -5.5 - 2019: -4.0 - 2020: 13.2 - 2021: -13.8 - 2022: -23.0 - 2023: -9.2 - 2024: -5.0 - 2025: -5.2 - 2026: -7.0 - 2027: -6.2 - 2028: -5.9 - Identified external debt-creating flows (4+8+9) (percent of GDP) - 2018: -7.8 - 2019: -5.9 - 2020: 15.9 - 2021: -10.2 - 2022: -14.8 - 2023: -7.3 - 2024: -3.6 - 2025: -3.3 - 2026: -2.8 - 2027: -2.5 - 2028: -2.3 - Current account deficit, excluding interest payments (percent of GDP) - 2018: -3.9 - 2019: -3.8 - 2020: -2.2 - 2021: -2.7 - 2022: -1.6 - 2023: -2.4 - 2024: -2.1 - 2025: -2.2 - 2026: -2.7 - 2027: -2.9 - 2028: -2.9 - Deficit in balance of goods and services (percent of GDP) - 2018: -0.9 - 2019: -0.8 - 2020: 1.9 - 2021: 2.6 - 2022: 2.1 - 2023: 1.2 - 2024: 1.0 - 2025: 0.5 - 2026: 0.2 - 2027: 0.0 - 2028: 0.0 - Exports (percent of GDP) - 2018: 43.7 - 2019: 43.7 - 2020: 37.1 - 2021: 41.7 - 2022: 50.2 - 2023: 49.5 - 2024: 50.3 - 2025: 49.9 - 2026: 49.6 - 2027: 49.6 - 2028: 49.9 - Imports (percent of GDP) - 2018: 42.8 - 2019: 42.9 - 2020: 39.1 - 2021: 44.3 - 2022: 52.2 - 2023: 50.7 - 2024: 51.2 - 2025: 50.4 - 2026: 49.9 - 2027: 49.6 - 2028: 49.8 - Net non-debt creating capital inflows (negative, percent of GDP) - 2018: 1.8 - 2019: 2.9 - 2020: 1.7 - 2021: 2.6 - 2022: 3.4 - 2023: 2.9 - 2024: 2.9 - 2025: 2.9 - 2026: 2.8 - 2027: 2.8 - 2028: 2.7 - Automatic debt dynamics (percent of GDP) - 2018: -5.7 - 2019: -5.0 - 2020: 16.5 - 2021: -10.1 - 2022: -16.6 - 2023: -7.9 - 2024: -4.4 - 2025: -4.0 - 2026: -2.9 - 2027: -2.4 - 2028: -2.1 - Contribution from nominal interest rate (percent of GDP) - 2018: 3.4 - 2019: 3.4 - 2020: 3.3 - 2021: 3.5 - 2022: 3.0 - 2023: 2.7 - 2024: 2.5 - 2025: 2.5 - 2026: 3.0 - 2027: 2.9 - 2028: 2.8 - Contribution from real GDP growth (percent of GDP) - 2018: -5.5 - 2019: -5.0 - 2020: 17.0 - 2021: -10.5 - 2022: -11.5 - 2023: -4.1 - 2024: -2.8 - 2025: -3.2 - 2026: -2.9 - 2027: -2.6 - 2028: -2.5 - Contribution from price and exchange rate changes (percent of GDP) - 2018: -3.6 - 2019: -3.4 - 2020: -3.8 - 2021: -3.0 - 2022: -8.1 - 2023: -6.5 - 2024: -4.2 - 2025: -3.3 - 2026: -3.0 - 2027: -2.7 - 2028: -2.5 - Residual, incl. change in gross foreign assets (2-3) (percent of GDP) - 2018: 2.3 - 2019: 1.9 - 2020: -2.7 - 2021: -3.5 - 2022: -8.2 - 2023: -1.9 - 2024: -1.4 - 2025: -1.8 - 2026: -4.2 - 2027: -3.7 - 2028: -3.6 - External debt-to-exports ratio (percent) - 2018: 447.9 - 2019: 438.5 - 2020: 551.8 - 2021: 457.9 - 2022: 335.1 - 2023: 321.1 - 2024: 306.1 - 2025: 297.9 - 2026: 285.6 - 2027: 273.4 - 2028: 260.2 - Gross external financing need (in billions of US dollars) - 2018: 186.3 - 2019: 181.0 - 2020: 192.8 - 2021: 190.2 - 2022: 192.0 - 2023: 191.7 - 2024: 191.1 - 2025: 185.4 - 2026: 182.5 - 2027: 183.6 - 2028: 184.9 - Gross external financing need (percent of GDP) - 2018: 90.8 - 2019: 84.4 - 2020: 96.1 - 2021: 88.6 - 2022: 80.3 - 2023: 75.1 - 2024: 71.6 - 2025: 66.5 - 2026: 62.9 - 2027: 60.9 - 2028: 59.1 ### Key macroeconomic assumptions underlying baseline (exact series) - Real GDP growth (in percent) - 2018: 2.8 - 2019: 2.7 - 2020: -8.3 - 2021: 5.5 - 2022: 6.7 - 2023: 1.7 - 2024: 4.1 - 2025: 2.6 - 2026: 1.8 - 2027: 2.2 - 2028: 2.0 - 2029: 1.9 - 2030: 1.9 - Exchange rate appreciation (US dollar value of local currency, change in percent): 0.0 for all years shown. - GDP deflator in US dollars (change in percent) - 2018: 1.8 - 2019: 1.7 - 2020: 2.0 - 2021: 1.5 - 2022: 4.4 - 2023: 2.0 - 2024: 1.0 - 2025: 4.0 - 2026: 2.7 - 2027: 2.2 - 2028: 2.1 - 2029: 1.9 - 2030: 1.8 - Nominal external interest rate (in percent) - 2018: 1.8 - 2019: 1.8 - 2020: 1.6 - 2021: 1.8 - 2022: 1.7 - 2023: 2.0 - 2024: 0.3 - 2025: 1.7 - 2026: 1.7 - 2027: 1.7 - 2028: 2.1 - 2029: 2.2 - 2030: 2.2 - Growth of exports (US dollar terms, in percent) - 2018: 6.5 - 2019: 4.5 - 2020: -20.6 - 2021: 20.4 - 2022: 33.9 - 2023: 7.3 - 2024: 13.9 - 2025: 5.3 - 2026: 6.2 - 2027: 3.7 - 2028: 3.5 - 2029: 3.8 - 2030: 4.3 - Growth of imports (US dollar terms, in percent) - 2018: 8.0 - 2019: 4.8 - 2020: -14.9 - 2021: 21.5 - 2022: 31.3 - 2023: 7.5 - 2024: 12.4 - 2025: 3.6 - 2026: 5.7 - 2027: 2.8 - 2028: 3.0 - 2029: 3.3 - 2030: 4.3 - Current account balance, excluding interest payments (percent of GDP) - 2018: 3.9 - 2019: 3.8 - 2020: 2.2 - 2021: 2.7 - 2022: 1.6 - 2023: 3.6 - 2024: 1.5 - 2025: 2.4 - 2026: 2.1 - 2027: 2.2 - 2028: 2.7 - 2029: 2.9 - 2030: 2.9 - Net non-debt creating capital inflows (percent of GDP) - 2018: -1.8 - 2019: -2.9 - 2020: -1.7 - 2021: -2.6 - 2022: -3.4 - 2023: -1.9 - 2024: 1.6 - 2025: -2.9 - 2026: -2.9 - 2027: -2.9 - 2028: -2.8 - 2029: -2.8 - 2030: -2.7 *Source: Annex IV. Figure 7 and Annex V (Portugal: External Debt Sustainability Framework, 2018–2028) as presented in the provided document.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1prtea2023001.pdf_