## 1prtea2024001-print-pdf ## Source details **Canonical URL:** [1prtea2024001-print-pdf](https://www.imf.org/-/media/files/publications/cr/2024/english/1prtea2024001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1prtea2024001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1prtea2024001-print-pdf.pdf.json) --- ### Recent macroeconomic developments - Growth and labor market - Portugal grew by 5.9 percent cumulatively during 2019-23, exceeding its pre-covid trend and euro area (EA) growth of 3.3 percent. - Growth moderated to 2.3 percent in 2023 from 6.8 percent in 2022; in 2024Q2 growth was 1.5 percent y/y. - Total hours worked continued rising, supported by increased labor force participation and net migration inflows; unemployment remained at historically-low levels and real wages continued growing. - Inflation - Headline inflation decelerated to 1.9 percent y/y in December 2023 from a peak of 10.6 percent in October 2022; after a transitory bump in May 2024, it returned to 1.8 percent in August 2024. - Core inflation decelerated to 2.6 percent y/y in July 2024 from a peak of 8.2 percent in April 2023. - Fiscal and public debt - Fiscal balance recorded a surplus of 1.2 percent of GDP in 2023 (EA average: -3.4 percent of GDP), up from -0.3 percent of GDP in 2022. - Public debt fell from a peak of 135 percent of GDP in 2020 to 99 percent of GDP in 2023. - External position and housing - Current account improved from -1.1 percent of GDP in 2022 to a surplus of 1.4 percent of GDP in 2023; NIIP-to-GDP increased from -84 percent in 2022 to -73 percent in 2023. - Housing prices increased by 111 percent from 2015 to 2023 (EA average: 42 percent); in 2023 housing prices rose by 3.7 percent in Portugal while real housing prices decreased in most EA countries by 3.6 percent on average. - Non-resident residential real estate buyers accounted for 8 percent of transactions and 13 percent of their values in 2023 (BdP, 2024). - Credit and banking - Real credit to NFCs and households contracted by 7 percent and 2.2 percent y/y respectively in 2023Q4. - Loans-to-GDP ratios in 2023: NFCs 29, households 50 (pre-sovereign crisis peaks were 67 and 80). - Banking sector: ROA reached 1.4 percent in 2024Q1, up from 0.7 percent in 2022Q4; CET1 capital ratio increased to 17.1 percent from 15.4 percent. NPL ratio fell to 2.7 percent of total assets in 2023Q4 from 3.0 percent in 2022Q4. ### Outlook and risk assessment - Growth and inflation projections - Growth projections: 1.9 percent in 2024 and 2.3 percent in 2025. - Headline inflation projected to average 2.5 percent in 2024 and reach about 2 percent by end-2025. - Core inflation projected to average 2.8 percent in 2024 and 2.3 percent in 2025. - Medium-term growth projected to slow to 1.9 percent. - External and fiscal outlook - Current account expected to improve to 2.0 percent of GDP in 2024; medium-term surpluses of about 1½ percent of GDP are expected. - Key risks (selected) - Downside: escalation of geopolitical tensions; premature loosening or prolonged tightness of monetary policy; lower-than-expected global growth (affecting tourism); slow RRP implementation; new minority government’s lack of parliamentary majority increasing uncertainty. - Upside: faster-than-expected easing of financial conditions with inflation falling faster to target; labor market resilience; tourism momentum. - Inflation upside risk: stickier-than-expected core inflation, notably if wage growth continues to outpace productivity. ### Authorities’ views - Authorities broadly shared staff’s assessment of the outlook and risks. - Authorities expected 2024 growth to remain robust driven by exports growth, accelerated absorption of RRP funds, and resilient private consumption. - Authorities expect headline inflation to decelerate to around 2 percent in 2025 and view core inflation as likely to remain stickier amid tight labor markets. - Government believes medium-term growth could be somewhat higher than staff projections and notes recent wage growth reflects an improved skill mix. ### Fiscal policy assessment and recommendations - 2023 fiscal performance and 2024 stance - CAPB increased by 1.8 ppt of GDP to 2.2 percent of GDP in 2023. - Government’s 2024 fiscal target implies an expansionary fiscal stance with a projected 0.6 ppt of GDP decline in the CAPB. - Staff view: the 2024 stance is broadly appropriate but should not be further loosened given positive real wage growth, upside inflation risks, expected gradual ECB policy loosening, and the need to keep reducing debt. - Aim: neutral stance in 2025 with a small positive overall balance to further reduce debt. - 2024 budget measures (staff preliminary estimates) - Total measures: 2.6 percent of GDP (Total measures 2.2; New Measures 0.4). - Revenue measures total -0.6 percent of GDP (Personal income tax (PIT) -0.6; PIT for the young -0.1; PIT reform -0.5; Corporate income tax (CIT) -0.1; VAT and other indirect taxes 0.1 each). - Expenditure measures total 2.0 percent of GDP (Personal expenditure 0.6; Social benefits 1.1; Pensions 0.8; other items noted). - Parliament approved additional PIT tax cuts of 0.14 percent of GDP in June. - Specific announced measures and staff views - Replacement of 2024 youth PIT cuts with a preferential PIT flat rate for people up to 35 years old starting in 2025. - PIT flat tax rate for foreigners of 20 percent (not applying to pensions and dividends). - Plan to reduce CIT base rate by 6 ppts to 15 percent over three years by 2027, and for SMEs from 17 percent to 12.5 percent; tax reductions for R&D. - Wage increases for teachers and armed forces; relaxed eligibility criteria for minimum income for pensioners. - Staff expects targeted fiscal surpluses in 2024 and 2025 to be achieved partly due to cyclical revenue increases, notably a 35 percent increase in CIT revenue in Jan-July 2024 compared to the same period in 2023, driven by banks’ exceptionally-high profits in 2023–24. - Medium-term fiscal strategy guidance - Maintain a broadly neutral stance with continued small fiscal surpluses to ensure debt reaches 60 percent of GDP within 15 years. - Additional offsetting measures needed given some permanent negative revenue and expenditure measures decided in 2024. - Rebalance fiscal composition toward growth-friendly public investment. - Tax reform guidance and potential fiscal impacts (Percent of GDP) - Lowering tax expenditure policy gap to EA average: 0.27-0.56 - Controlling wage pressure: 0.05 - Bringing property tax to OECD Average: 0-0.06 - Carbon price reform: 0.23 - 0.27 - Other guidance: PIT revenue and average PIT rate are below EA average; PIT revenue should not fall further; age-based preferential tax rates are costly and raise equity issues; priority for CIT should be reducing progressive and local surcharges rather than lowering base rate; tax expenditures exceeded 6 percent of GDP in 2023; new “U-TAX” unit (created Feb 2024) expected to assess tax benefits by end-2025; consider raising property tax revenue toward OECD average over the medium term; resume carbon tax adjustment mechanism. ### Public investment, aging, and public sector efficiency - Public investment and RRP - Public investment is below the EA average despite a faster RRP execution than in most EU countries. - Recommendation: Full utilization of RRP funds to boost infrastructure and human capital investment. - Aging-related spending - Pension spending projected annual increases over 2025-30: 0.14 ppts of GDP annually (EA median: 0.06 ppts of GDP). - Health spending projected annual increases over 2025-30: 0.04 ppts of GDP annually (EA median: 0.02 ppts of GDP). - Preliminary estimate of the NHS loss: 0.16 percent of GDP in 2023 (compared with 0.5 percent of GDP in 2022). - Policy recommendations: further adjustments to the pension system, including linking the minimum age of early retirement to life expectancy; use the ongoing update of the “green book” assessing the pension system to inform reforms; reforms to improve NHS transparency, monitoring, governance, and performance-oriented management. - Public sector efficiency - Recommendations: conduct a comprehensive review of public employment and compensation to contain wage bill growth; integrate spending reviews into the budgetary process; fully implement the 2015 Budgetary Framework Law (now slated for 2026); consider a public investment management assessment (PIMA); enhance fiscal council’s role; strengthen SOE financial situations and proceed with planned privatization of the national airline; strengthen safeguards on public-private partnerships. ### Financial sector resilience, real estate, and macroprudential policy - Financial sector - Systemic risks have declined and appear moderate; capital adequacy and asset quality indicators improved but remain lower than most EA peers. - Nonbank financial sector small: NBFI assets ≈ 10 percent of the banking sector. - Structural features reducing vulnerabilities: reliance on traditional deposit-based model with non-deposit funding share about half of the EA average; stable sector size and concentration; relatively low bank interconnectedness. - Real estate and household credit risks (key statistics) - Residential real estate (RRE) NPL ratio: 2.5 percent in 2023Q4. - Share of stage 2 loans: 11.9 percent. - Banks’ exposure to commercial real estate (CRE) loans: 6.8 percent of total loans. - CRE NPL share: 8.9 percent (EA average 4.6 percent). - Estimates of RRE price overvaluation range: 15– 30 percent. - Dynamics: stock of mortgage loans did not increase in tandem with house prices since 2015, suggesting limited role of credit in price doubling; structural constraints in construction kept supply low; number of RRE transactions started to decline in 2023; staff expect RRE prices to gradually moderate over the medium term. - Macroprudential policy and buffers - BdP announced a sectoral systemic risk buffer (sSyRB) for household loans secured by housing properties (for IRB institutions), effective October 2024. - Current sSyRB calibration: 4 percent systemic risk buffer. - Recommendations: monitor RRE risk evolution to ensure sSyRB and borrower-based measures remain adequately calibrated; no change to the countercyclical capital buffer (CCyB) appears necessary at this stage given concentration in RRE; BdP could consider implementing a positive neutral CCyB to help lock-in banks’ temporarily high profits into releasable capital. ### AML/CFT and monitoring risks - Ongoing initiatives: comprehensive national risk assessment underway covering legal persons and virtual assets. - Recommendations: further upgrade AML/CFT framework to ensure timely access to adequate, accurate, and up-to-date beneficial ownership information in line with the revised international standard; leverage AML tools to tackle tax evasion and support domestic revenue mobilization. - Continued monitoring required for non-resident deposits, financial flows, and foreign beneficial ownership given remaining FDI channels linked to golden visa programs. ### Structural reforms, productivity, labor market, and digitalization - Productivity and firm structure - Portugal lags EA peers in productivity and GDP per capita; firms tend to be smaller, less capitalized, and less productive. - Resource reallocation hindered by labor market duality. - Catching up half-way to the top five EU performers in PMR indicators could raise total factor productivity by an estimated 2¼ percent in the steady state. - Product market and regulatory reforms - Suggested reforms: promote competition; evaluate regulatory impact on competition; improve stakeholder interaction in regulation; streamline administrative/regulatory burdens in service and construction sectors. - Labor market, wages, and skills - Employment protection legislation among the most stringent; recent reforms limit duration and renewability of fixed-term contracts. - Minimum wage path proposed: €1,000 monthly by 2028 from €820 in 2024; recommendation to pace increases along with productivity. - Share of high-skilled labor with tertiary education: 29.9 percent in 2023 (EA: 35.7 percent). - Immigrants: 15 percent of the population. - Active labor market policies and the Sustainable Employment Commitment (Recuperar Portugal) (adopted in 2024) aim to encourage hiring young people and persons with disabilities and promote gender equality. - Continued upskilling and digitalization emphasized; RRP focuses on digitalization and upskilling. ### Green transition and climate policy - Targets and policies - Authorities committed to achieving carbon neutrality by 2045. - NECP 2030 is being revised to set more ambitious 2030 emissions reduction and renewables share targets. - Operationalization of EU ETS2 in 2027 will extend emissions trading to transport and buildings; transport sector accounts for about 30 percent of total GHG emissions. - Recommendation: reactivate the carbon tax adjustment mechanism and gradually expand carbon tax coverage. - Social Climate Fund (financed from ETS and ETS2 auction revenues and national contributions) can help mitigate ETS2 impacts on the most vulnerable. - Authorities reported receipt in June 2024 of the remaining €700 million from the fourth RRP payment and submission of the fifth payment request in July 2024. ### Housing affordability: key findings and policy implications (Annex II) - Price and rental dynamics - Housing prices in Portugal increased by 111 percent since 2015, compared with EA average of 42 percent. - Price for actual housing rentals (component of HICP) increased by 29.5 percent between 2015 and June 2024; total HICP increased by 23.5 percent over the same period. - Estimates of overvaluation range between 15 and 30 percent. - Affordability indicators - About 70 percent of dwellings are occupied by owners; 30 percent by renters. - Average mortgage payments: 32.8 percent of average income (up from 23.8 percent four years earlier). - New IMF housing affordability index indicates a median-income household no longer qualified for a mortgage to purchase an average-priced home in 2023. - By 2023Q2, 1½ times the median income was needed to obtain a mortgage for an average-priced home. - Median price of new rental agreements: €7.465 per sqm as of 2024Q1, a real increase of 12 percent over three years. - In 2023, 12.9 percent of the population lived in dwellings with insufficient habitable rooms — an increase of 3.4 percentage points from 2022. - Policy responses and assessment - Demand-side measures enacted: suspension of early repayment fees extended through end-2024; banks required to proactively offer restructuring; temporary postponement of amortization Oct 2023–Mar 2024; interest rate subsidy recalibrated Oct 2023; rent increase caps applied. - Supply-side initiatives: ‘Mais Habitação’ package (Oct 2023); ‘Construir Portugal’ to replace ‘Mais Habitação’ emphasizing new housing construction, regulatory reforms, use of public land, subsidies and grants; many reforms supported by RRP. - Recommendation: continued improvement in housing supply is crucial; address construction labor shortages; carefully target subsidies and public guarantees to avoid threshold effects and unintended distortions. ### External sector and NIIP (Annex I) - NIIP and external debt - NIIP-to-GDP improved from -84 percent in 2022 to -73 percent in 2023. - Under baseline assumptions, NIIP projected to fall to -39 percent by 2029. - Gross external debt at end-2023: 143 percent. - 2023 (% GDP) key figures: NIIP: -72.5; Gross Assets: 152.2; Debt Assets: 131.0; Gross Liab.: 224.7; Debt Liab.: 31.7. - Current account (2023) - CA: 1.4 percent of GDP. - Cyclically adjusted CA: 2.0 percent of GDP. - EBA Norm: -0.6 percent of GDP. - EBA Gap: 2.6 percent of GDP (range of CA gap: 1.9 to 3.3 percent of GDP; point estimate 2.6 percent). - Policy recommendation: sustained tight fiscal policy paired with structural reforms to support saving and investment and improve external competitiveness. - REER assessment - CPI-based REER appreciated by 1.8 percent between 2022 and 2023. - ULC-based REER appreciated by 0.8 percent between 2022 and 2023. - Staff-estimated REER undervaluation range: 4.3 to 9.7 percent; midpoint 7 percent. EBA CPI-based REER index model suggests undervaluation of 4.5 percent. Level REER model estimate: 4.7 percent undervaluation in 2023. ### Sovereign risk, debt sustainability, and stress tests (Annex IV) - Recent debt dynamics and baseline path - Public debt declined from 135 percent of GDP in 2020 to 99 percent of GDP in 2023. - Under the baseline scenario, public debt projected to reach 76 percent of GDP by 2029. - Public debt is projected to decline by an annual average of about 3.8 pp of GDP during 2024–29 to 76 percent by 2029. - Drivers of debt reduction: (i) strong real GDP growth (about half of the total reduction of around 10.5 ppt of GDP), and (ii) primary balance surpluses. - Baseline projections (selected series, Percent of GDP) - Public debt: 99.1 (2023); 94.4 (2024); 89.8 (2025); 86.2 (2026); 82.8 (2027); 79.4 (2028); 76.2 (2029). - Change in public debt: -13.3 (2023); -4.7 (2024); -4.6 (2025); -3.6 (2026); -3.4 (2027). - Primary deficit: -3.1 (2023); -1.5 (2024); -1.7 (2025); -1.6 (2026); -1.6 (2027). - Gross financing needs: 6.7 (2023); 2.8 (2024); 6.1 (2025); 6.7 (2026); 8.0 (2027). - Memo: Real GDP growth (percent): 2.3 (2023); 1.9 (2024); 2.3 (2025); 2.0 (2026); 1.9 (2027). - Memo: Inflation (GDP deflator; percent): 7.1 (2023); 2.8 (2024); 2.4 (2025); 1.9 (2026); 1.9 (2027). - Memo: Effective interest rate (percent): 2.1 (2023); 1.7 (2024); 1.9 (2025); 2.0 (2026); 2.0 (2027). - Risk assessment - Overall risk of sovereign stress assessed as moderate. - Debt fanchart index (DFI) 1.7; Probability of missed crisis, 2024-2029, if stress not predicted: 9.1 percent. - Large negative growth shocks comparable to past recessions could push debt up and sharply increase borrowing costs. - Mitigants: financing from NGEU; share of debt to official creditors around 26 percent at end-2023; average residual maturity around 7.5 years; negligible share of foreign currency debt. - Policy implications - Remain committed to announced fiscal target and debt reduction plan. - Ensure RRP and productivity-enhancing reforms are implemented. - Strengthen administrative capacity to absorb NGEU funds and implement investments. - Pursue structural reforms to address aging-related pension and healthcare pressures. ### Selected cross-cutting policy recommendations (concise) - Fiscal - Targeted small fiscal surpluses in 2024 and 2025 to secure debt reduction and support a soft landing; avoid additional fiscal loosening given upside inflation risks. - Implement comprehensive tax reform to reduce tax expenditures and reorient composition toward growth-friendly public investment. - Financial stability and housing - Maintain vigilance on credit quality, market and interest rate risk, and liquidity management. - Fully utilize macroprudential tools (sSyRB in place at 4 percent; consider a positive neutral CCyB). - Increase housing supply via regulatory reforms, repurposing public buildings, public-private partnerships, and easing construction constraints. - Structural reforms - Streamline regulations to promote competition, reduce red tape, and attract investment. - Labor market: make open-ended contracts more flexible, pace minimum wage increases with productivity, integrate immigrants into the labor market. - Invest in upskilling, digitalization, and AI preparedness to raise productivity. - Green transition - Reactivate carbon tax adjustment mechanism, phase out fuel subsidies by 2030, and operationalize ETS2 coverage while using Social Climate Fund to protect vulnerable households. - AML/CFT and governance - Upgrade AML/CFT to ensure timely access to beneficial ownership information; strengthen SOE governance and public investment management. ### Key numerical highlights from projections and tables (exact values preserved) - Inflation reaching around 2 percent in 2025. - Real GDP growth (percent, y/y): 2023: 2.3; 2024: 1.9; 2025: 2.3; 2026: 2.0; 2027: 1.9. - General government balance (percent of GDP): 2023: 0.3; 2024: 0.2; 2025: 0.2; 2026: 0.2; 2027: 0.2. - General government debt (percent of GDP): 2023: 99.1; 2024: 94.4; 2025: 89.8; 2026: 86.2; 2027: 82.8. - Current account balance (percent of GDP): 2023: 1.4; 2024: 2.0; 2025: 2.3; 2026: 2.2; 2027: 1.8. - Nominal GDP (billions of Euros): 2023: 265.5; 2024: 278.1; 2025: 291.5; 2026: 303.0; 2027: 314.9. - Banking system indicators (2024Q1 values): - Regulatory capital to risk-weighted assets: 19.6 - Common Equity Tier 1 capital to risk-weighted assets: 17.1 - Non-performing loans to total gross loans: 2.7 - Return on assets: 1.4 - Loans to deposits: 76.7 ### EU Funds and firm-level productivity (PT2020) - PT2020 program and scale - Total PT2020 value: € 26.5 billion. - PT2020 funded 171,000 projects across 98,000 firms. - Priorities by fund share: competitiveness and internationalization 41 percent; social inclusion and employment 17 percent; human capital 17 percent; sustainability and efficiency 25 percent. - Empirical findings on productivity - Matched baseline sample: 2,419 treated firms and 6,696 control firms (single-project recipients). - Baseline labor productivity impact: recipient firms’ labor productivity increases by close to five percent and reaches around 7 percent five years after receipt of funds. - Heterogeneity: impacts larger for smaller firms (fewer than 10 employees) and younger firms. - Policy implication: continue leveraging EU funds to boost labor productivity, especially targeted to smaller and younger firms, and complement with product market reforms to raise potential output. *Source: 1prtea2024001-print-pdf (excerpt).* ### 1. Macroeconomic Developments _______________________________________________________________ 23 ### 1. Macroeconomic Developments ### Recent developments - Portugal grew by 5.9 percent cumulatively during 2019-23, exceeding its pre-covid trend and euro area (EA) growth of 3.3 percent. - Growth moderated to 2.3 percent in 2023 from 6.8 percent in 2022; in 2024Q2 growth was 1.5 percent y/y. - Headline inflation decelerated to 1.9 percent y/y in December 2023 from a peak of 10.6 percent in October 2022; after a transitory bump in May 2024, it returned to 1.8 percent in August 2024. - Core inflation decelerated to 2.6 percent y/y in July 2024 from a peak of 8.2 percent in April 2023. - Labor market: total hours worked continued rising, supported by increased labor force participation and net migration inflows; unemployment remained at historically-low levels and real wages continued growing. - Fiscal position: fiscal balance recorded a surplus of 1.2 percent of GDP in 2023 (EA average: -3.4 percent of GDP), up from -0.3 percent of GDP in 2022. - Public debt fell from a peak of 135 percent of GDP in 2020 to 99 percent of GDP in 2023. - External position: current account improved from -1.1 percent of GDP in 2022 to a surplus of 1.4 percent of GDP in 2023; NIIP-to-GDP increased from -84 percent in 2022 to -73 percent in 2023. - Housing prices increased by 111 percent from 2015 to 2023Q4 (EA average: 42 percent); in 2023 housing prices rose by 3.7 percent in Portugal while real housing prices decreased in most EA countries by 3.6 percent on average. - Non-resident residential real estate buyers accounted for 8 percent of transactions and 13 percent of their values in 2023 (BdP, 2024). - Credit: real credit to NFCs and households contracted by 7 percent and 2.2 percent y/y respectively in 2023Q4. Loans-to-GDP ratios in 2023: NFCs 29, households 50 (pre-sovereign crisis peaks were 67 and 80). - Banking sector: ROA reached 1.4 percent in 2024Q1, up from 0.7 percent in 2022Q4; CET1 capital ratio increased to 17.1 percent from 15.4 percent. NPL ratio fell to 2.7 percent of total assets in 2023Q4 from 3.0 percent in 2022Q4. ### Outlook and risks - Growth projections: 1.9 percent in 2024 and 2.3 percent in 2025. - Headline inflation projected to average 2.5 percent in 2024 and reach about 2 percent by end-2025. - Core inflation projected to average 2.8 percent in 2024 and 2.3 percent in 2025. - Medium-term growth projected to slow to 1.9 percent. - Current account expected to improve to 2.0 percent of GDP in 2024; medium-term surpluses of about 1½ percent of GDP are expected. - Key downside risks: escalation of geopolitical tensions, premature loosening or prolonged tightness of monetary policy, lower-than-expected global growth (affecting tourism), slow RRP implementation, new minority government’s lack of parliamentary majority raising uncertainty. - Key upside risks: faster-than-expected easing of financial conditions with inflation falling faster to target, labor market resilience, tourism momentum. - Inflation upside risk: stickier-than-expected core inflation, notably if wage growth continues to outpace productivity growth. ### Authorities' views - Authorities broadly shared staff’s assessment of the outlook and risks. - Authorities expected 2024 growth to remain robust driven by exports growth, accelerated absorption of RRP funds, and resilient private consumption. - Authorities expect headline inflation to decelerate to around 2 percent in 2025 and view core inflation as likely to remain stickier amid tight labor markets. - Government believes medium-term growth could be somewhat higher than staff projections and notes recent wage growth reflects an improved skill mix. ### Policy discussions — Near term and medium term - Near term: fiscal policy should be consistent with achieving a soft landing and further lowering debt. - Medium term: sustained reduction of public debt is a priority; should be supported by: - a comprehensive tax reform, - measures to contain pressures from aging, - greater spending efficiency, - more productivity-enhancing public investment. - Financial sector policies: focus on further strengthening buffers and vigilance on potential systemic risks, notably from the real estate market. - Structural reforms remain critical to increase productivity, potential growth, and income levels. ### Fiscal policy — Assessment and recommendations - 2023: cyclically-adjusted primary balance (CAPB) increased by 1.8 ppt of GDP to 2.2 percent of GDP. - Government’s 2024 fiscal target implies an expansionary fiscal stance with a projected 0.6 ppt of GDP decline in the CAPB. - Staff view: the 2024 stance is broadly appropriate but should not be further loosened given positive real wage growth, upside inflation risks, expected gradual ECB policy loosening, and the need to keep reducing debt. - Aim: neutral stance in 2025 with a small positive overall balance to further reduce debt. - 2024 budget measures (staff preliminary estimates where calibration not decided for all measures): - Total measures: 2.6 percent of GDP (Total measures 2.2; New Measures 0.4). - Revenue measures total -0.6 percent of GDP (breakdown includes Personal income tax (PIT) -0.6; PIT for the young -0.1; PIT reform -0.5; Corporate income tax (CIT) -0.1; VAT and other indirect taxes 0.1 each). - Expenditure measures total 2.0 percent of GDP (Personal expenditure 0.6; Social benefits 1.1; Pensions 0.8; other items noted). - Parliament approved additional PIT tax cuts of 0.14 percent of GDP in June. - Specific announced measures: - Replacement of 2024 youth PIT cuts with a preferential PIT flat rate for people up to 35 years old starting in 2025. - PIT flat tax rate for foreigners of 20 percent (not applying to pensions and dividends). - Plan to reduce CIT base rate by 6 ppts to 15 percent over three years by 2027, and for SMEs from 17 percent to 12.5 percent; tax reductions for R&D. - Wage increases for teachers and armed forces; relaxed eligibility criteria for minimum income for pensioners. - Staff expects targeted fiscal surpluses in 2024 and 2025 to be achieved partly due to cyclical revenue increases, notably a 35 percent increase in CIT revenue in Jan-July 2024 compared to the same period in 2023, driven by banks’ exceptionally-high profits in 2023–24. - Medium-term fiscal strategy: - Maintain a broadly neutral stance with continued small fiscal surpluses to ensure debt reaches 60 percent of GDP within 15 years. - Additional offsetting measures needed given some permanent negative revenue and expenditure measures decided in 2024. - Rebalance fiscal composition toward growth-friendly public investment. - Tax reform guidance: - PIT revenue and average PIT rate are below EA average; PIT revenue should not fall further. - Greater use of means-tested social spending could reduce inequality more efficiently than altering PIT progressiveness. - Age-based preferential tax rates are costly and raise equity issues; reintroducing preferential tax rates for foreign professionals may distort the tax system and exacerbate housing affordability. - For CIT, priority should be given to reducing progressive and local surcharges rather than lowering the base rate. - Tax expenditures exceeded 6 percent of GDP in 2023; the new “U-TAX” unit (created Feb 2024) is expected to assess tax benefits by end-2025. - Over the medium term, consider raising property tax revenue toward the OECD average as housing affordability concerns subside. - The carbon tax adjustment mechanism, suspended in September 2023, should resume. - Potential fiscal impacts of selected measures (Percent of GDP): - Lowering tax expenditure policy gap to EA average: 0.27-0.56 - Controlling wage pressure: 0.05 - Bringing property tax to OECD Average: 0-0.06 - Carbon price reform: 0.23 - 0.27 *Source: 1. Macroeconomic Developments (excerpt).* ### 18. An increase in public investment in infrastructure and human capital would enhance ### 1prtea2024001-print-pdf - 18. An increase in public investment in infrastructure and human capital would enhance ### Public investment and growth prospects - Public investment is below the EA average despite a faster RRP execution than in most EU countries. - Increasing investment, notably through the full utilization of RRP funds, is critical for the green and digital transitions and a more sustainable and resilient economy (Shibata, 2023). - Recommendation: Full utilization of RRP funds to boost infrastructure and human capital investment. ### Aging-related spending and social sector pressures - Pension and health spending projected annual increases over 2025-30: - Pension spending: 0.14 ppts of GDP annually (EA median: 0.06 ppts of GDP) - Health spending: 0.04 ppts of GDP annually (EA median: 0.02 ppts of GDP) - Preliminary estimate of the NHS loss: 0.16 percent of GDP in 2023 (compared with 0.5 percent of GDP in 2022). - Policy recommendations: - Further adjustments to the pension system, including linking the minimum age of early retirement to life expectancy. - Use the ongoing update of the “green book” assessing the pension system to inform reforms. - Reforms to improve NHS transparency, monitoring, governance, and performance-oriented management to make space for rising needs. ### Public sector efficiency and fiscal sustainability - Measures and recommendations: - Conduct a comprehensive review of public employment and the compensation structure to contain wage bill growth. - Integrate spending reviews into the budgetary process; continue enhancements of the information system. - Fully implement the 2015 Budgetary Framework Law (now slated for 2026). - Consider a public investment management assessment (PIMA) to increase investment efficiency. - Enhance the fiscal council’s role in supervising efficiency improvements and assessing fiscal risks and sustainability. - Continue efforts to strengthen SOE financial situations and proceed with planned privatization of the national airline. - Strengthen safeguards on public-private partnerships to robustly assess contingent liabilities and share risks and benefits appropriately. ### Authorities’ fiscal stance and views - Authorities’ commitments and views: - Committed to continuing debt reduction and maintaining small fiscal surpluses in 2024 and beyond. - Primary goal of fiscal measures (including CIT reductions, preferential tax rates for youth and foreign skilled workers) is to boost productivity by promoting firm investment and retaining/attracting skilled talent. - Do not plan at this stage to engage in pension reform. - Expectation that higher productivity growth, higher tax revenues from higher corporate profits, the reversal of energy tax reductions, and some increase in carbon taxation should be sufficient to meet fiscal targets, even in the medium term. - Highlighted fiscal reform efforts: new tax unit assessment to guide reduction of tax expenditures; implementation of Budgetary Framework Law measures; integration of spending reviews; upgrade of information system; green budgeting; enhancements of treasury management; new accounting reforms. - Emphasized governance, financial performance, and efficiency improvements for SOEs including the NHS. ### Financial sector resilience and risks - Overall assessment: - Systemic risks have declined and appear moderate. - Banking sector stability indicators improved, reflecting a buildup of financial buffers. - Portugal’s capital adequacy and asset quality indicators remain lower than most EA peers. - Contraction in real credit to the private sector continued long-term deleveraging. - Nonbank financial sector small: NBFI assets ≈ 10 percent of the banking sector. - Structural features reducing vulnerabilities: - Reliance on traditional deposit-based business model with non-deposit funding share about half of the EA average. - Stable sector size and concentration; relatively low bank interconnectedness. - Recommendations: - Continue improvements in transparency and reporting for growing NBFI segments (e.g., investment funds). ### Real estate and household credit risks - Key statistics and observations: - Residential real estate (RRE) NPL ratio: 2.5 percent in 2023Q4. - Share of stage 2 loans: 11.9 percent. - Banks’ exposure to commercial real estate (CRE) loans: 6.8 percent of total loans. - CRE NPL share: 8.9 percent (EA average 4.6 percent). - Estimates of RRE price overvaluation range: 15– 30 percent. - Dynamics and drivers: - Stock of mortgage loans did not increase in tandem with house prices since 2015, suggesting limited role of credit in price doubling. - Structural constraints in the construction sector have kept housing supply low. - Signs of market cooling: number of RRE transactions started to decline in 2023; staff expect RRE prices to gradually moderate over the medium term. - End of the “golden visa” program for RRE investments may create tension in higher-end market segments. - Policy recommendations to alleviate imbalances: - Increase housing supply by relaxing construction regulations, repurposing underused public buildings, and fostering public-private partnerships for large-scale housing programs. - Continued monitoring of real estate borrower repayment capacity, given rising DSTI ratios and use of interest subsidies and loan restructurings. ### Macroprudential policy and capital buffers - Recent actions: - BdP announced a sectoral systemic risk buffer (sSyRB) for household loans secured by housing properties (for IRB institutions), effective October 2024. - The sSyRB will complement borrower-based measures in place since 2018. - Current sSyRB calibration: 4 percent systemic risk buffer. - Recommendations and considerations: - Monitor RRE risk evolution to ensure sSyRB and borrower-based measures remain adequately calibrated. - No change to the countercyclical capital buffer (CCyB) appears necessary at this stage given concentration in RRE. - BdP could consider implementing a positive neutral CCyB to help lock-in banks’ temporarily high profits into releasable capital, given comfortable capital positions. ### Anti–money laundering/combating the financing of terrorism (AML/CFT) - Ongoing initiatives and risks: - Continue initiatives to contain transnational money laundering risks; a comprehensive national risk assessment is underway. - Assessment includes risks related to legal persons and virtual assets. - Continued monitoring required for non-resident deposits and their financial flows, and foreign beneficial ownership given remaining FDI channels linked to golden visa programs. - Recommendations: - Further upgrade AML/CFT framework to ensure timely access to adequate, accurate, and up-to-date beneficial ownership information in line with the revised international standard. - Leverage AML tools to tackle tax evasion and support domestic revenue mobilization. ### Productivity, structural reforms, and human capital - Productivity challenges: - Portugal lags EA peers in productivity and GDP per capita; higher inequality and poverty. - Firms tend to be smaller, less capitalized, and less productive. - Resource reallocation hindered by labor market duality. - Product market reforms: - Suggested reforms to promote competition, evaluate regulatory impact on competition, improve stakeholder interaction in regulation, and streamline administrative/regulatory burdens in service and construction sectors. - Catching up half-way to the top five EU performers in PMR indicators could raise total factor productivity by an estimated 2¼ percent in the steady state. - Labor market and wages: - Employment protection legislation is among the most stringent. - Recent reforms limit duration and renewability of fixed-term contracts to promote open-ended contracts. - Minimum wage path proposed: €1,000 monthly by 2028 from €820 in 2024; recommendation to pace increases along with productivity to preserve competitiveness. - Labor skills and upskilling: - Share of high-skilled labor with tertiary education: 29.9 percent in 2023 (EA: 35.7 percent). - Immigrants: 15 percent of the population. - Active labor market policies and the Sustainable Employment Commitment (Recuperar Portugal) (adopted in 2024) aim to encourage hiring young people and persons with disabilities and promote gender equality. - Continued upskilling to increase productivity and counterbalance declining working-age population. - Digitalization: - Performance on digital integration improved to EU average, though mobile broadband capacity still lags peers. - RRP focuses on further improving digitalization. ### Green transition and climate policy - Targets and timelines: - Authorities committed to achieving carbon neutrality by 2045 (five years ahead of the EU target). - NECP 2030 is being revised to set more ambitious 2030 emissions reduction and renewables share targets. - Policy measures and recommendations: - Reactivate the carbon tax adjustment mechanism and gradually expand carbon tax coverage. - Operationalization of EU ETS2 in 2027 will extend emissions trading to transport and buildings; transport sector accounts for about 30 percent of total GHG emissions. - ETS2 expected to incentivize investment in energy-efficient transportation and buildings and contribute to reduced carbon intensity. - The new Social Climate Fund (financed from ETS and ETS2 auction revenues and national contributions) can help mitigate ETS2 impacts on the most vulnerable. - Authorities’ views: - Government reported receipt in June 2024 of the remaining €700 million from the fourth RRP payment and submission of the fifth payment request in July 2024. - Emphasized ongoing measures: phase-out of coal-fired plants via subsidy removal and carbon tax application; integration and incentives for renewables, including green hydrogen and green gases partially supported by RRP funds. - Noted need to sequence reactivation of carbon tax adjustment and excise tax returns carefully considering fuel prices and auctioned greenhouse-gas license prices. - National Climate Law envisages green fiscal and budgetary principles including phasing out fuel subsidies by 2030 and earmarking green tax revenues for decarbonization and adaptation. *PORTUGAL INTERNATIONAL MONETARY FUND* ### 34. The economy is expected to achieve a soft landing, with moderate growth and ### The economy is expected to achieve a soft landing, with moderate growth and declining inflation. ### Outlook - Growth is projected to slow but remain robust in 2024, supported by exports, strong private consumption backed by a resilient labor market, and public investment under RRP. - Growth is expected to accelerate slightly in 2025 as financial conditions gradually ease. - Over the medium term, an aging population, relatively low investment, and subdued productivity will weigh on growth. - Inflation is expected to further decline, reaching around 2 percent in 2025. - The external position in 2023 is assessed to be moderately stronger than implied by medium-term fundamentals and desirable policies. ### Risks to the outlook - Risks are broadly balanced. - Downside risk: an escalation in geopolitical tensions could cause further economic fragmentation, lower external demand, and increase commodity prices and market volatility. - Downside risk: core inflation may become even stickier if wage growth continues outpacing productivity growth. - Upside: labor market resilience and stronger tourism momentum may provide an additional boost to growth. ### Fiscal policy stance and recommendations - Targeted small fiscal surpluses are appropriate to help achieve a soft landing while continuing to reduce debt, when combined with the gradual loosening of the ECB’s monetary policy. - Considering upside risks to inflation, additional relaxation of fiscal policy should be avoided. - Planned new tax cuts and spending increases should be carefully designed and, as needed, supplemented by measures to achieve the target. - Over the medium term, a neutral fiscal stance will: - achieve the needed continuous reduction of debt, - rebuild fiscal buffers against future shocks, - reduce vulnerability to changes in market sentiment. ### Fiscal reform priorities - Fiscal policy should gradually make room for more public investment through well-designed tax and expenditure reforms. - A comprehensive tax reform to reduce tax expenditure could generate significant savings. - Specific tax measures flagged as problematic: - Age-based preferential PIT rates will lead to revenue losses and raise equity issues; their effectiveness is uncertain. - Preferential PIT rates for foreign professionals could further distort the tax system and risk exacerbating housing shortages. - Suggested tax adjustments: - Reducing the CIT surcharges would help align tax policies with EA peers while promoting corporate growth. - As housing affordability concerns subside, the property tax rate could be increased. - On the expenditure side, continued efforts are needed to increase the efficiency of spending and address growing spending pressures from aging. ### Financial sector risks and macroprudential stance - Systemic financial risks have declined and are moderate, but continued vigilance is needed. - Developments and risks: - Private and public sectors continued to deleverage. - High net-interest margins led to soaring profits and increased capitalization of banks while NPLs declined. - Borrowers’ repayment capacity was strained by high interest rates and NPLs may increase with a lag. - The sharp RRE price increase largely reflects housing supply constraints; the risk of an abrupt correction appears limited barring significant growth slowdown, but the sector’s imbalance requires close monitoring. - Policy recommendations: - BdP should stand ready to further recalibrate its macroprudential tools. - The introduction of sSyRB for household loans secured by housing properties is welcome. - A positive neutral CCyB could be considered to support financial stability in potential downturns. - The government’s focus on increasing housing supply is appropriate to reduce imbalances and improve housing affordability. - Efforts to contain risks from transnational money laundering should continue. ### Structural reforms to raise living standards and productivity - Reforms are needed to foster higher living standards and faster income convergence with the EA. - Product Market Reforms (PMRs): - Streamlining red tape and regulations at all levels of government to facilitate a more competitive environment, stimulate investment, encourage corporate growth, and reorient resources to more productive firms. - Labor market reforms: - Make open-ended contracts more flexible to reduce the use of fixed-term contracts. - Continue to integrate immigrants into the labor market. - Prioritize digitalization, upskilling the labor force, and boosting AI preparedness to raise productivity. ### Green transition - The authorities’ ambitious targets for the green transition are commendable. - Recommended supporting measures: - Reactivation of the carbon tax adjusting mechanism. - Further reduction of fuel subsidies. - Support for the planned broadening of the EU emission trading system coverage. ### Timing of next consultation - The next Article IV consultation is proposed to take place on the standard 12-month cycle. ### Key numerical highlights from projections and tables (exact values preserved) - Inflation reaching around 2 percent in 2025. - Real GDP growth (selected years, percent, year-over-year from Table 1): 2023: 2.3; 2024: 1.9; 2025: 2.3; 2026: 2.0; 2027: 1.9. - General government balance (percent of GDP, Table 2B): 2023: 0.3; 2024: 0.2; 2025: 0.2; 2026: 0.2; 2027: 0.2. - General government debt (percent of GDP, Table 2B): 2023: 99.1; 2024: 94.4; 2025: 89.8; 2026: 86.2; 2027: 82.8. - Current account balance (percent of GDP, Table 3B): 2023: 1.4; 2024: 2.0; 2025: 2.3; 2026: 2.2; 2027: 1.8. - Nominal GDP (billions of Euros, Table 1): 2023: 265.5; 2024: 278.1; 2025: 291.5; 2026: 303.0; 2027: 314.9. - Banking system indicators (Table 4, select 2024Q1 values): - Regulatory capital to risk-weighted assets: 19.6 - Common Equity Tier 1 capital to risk-weighted assets: 17.1 - Non-performing loans to total gross loans: 2.7 - Return on assets: 1.4 - Loans to deposits: 76.7 *Source: IMF staff report text and tables provided in the content unit.* ### References ### 1prtea2024001-print-pdf - References ### References - List of cited works (authors, titles, outlets, years) included in the source document: Autor, D.H., Manning, A., Smith, C.L., 2016; Banco de Portugal, 2023; Banco de Portugal, 2024; Detragiache, E., Ebeke, C.E., Jirasavetakul, L.F., Kirabaeva, K., Malacrino, D., Misch, F., Park, H., Shi, Y., 2020; Duval, R., Ji, Y., Papageorgiou, C., Shibata, I., Spilimbergo, A., 2024; Government of Portugal, 2023; GPEARI, Ministry of Finance, Portugal, 2024; IMF, 2016; IMF, 2022; IMF, 2023; National Agency for Innovation, 2022; OECD, 2021; OECD, 2023; Oliveira, C., 2023; Recuperar Portugal, 2024; Shibata, I., 2023; Solano, G., Huddleston, T., 2020. ### Annex I. External Sector Assessment — Overall assessment and policy implications - Overall assessment: - The external position improved in 2023 and was moderately stronger than the level implied by medium-term fundamentals and desirable policies. - NIIP-to-GDP ratio: improved from -84 percent in 2022 to -73 percent in 2023. - Under baseline assumptions, NIIP projected to fall to -39 percent by 2029. - Tourism dependence increases susceptibility to external demand shocks; reduction in NIIP reduces external sustainability risks. - Potential policy responses: - Sustained tight fiscal policy to continue reducing external debt and keep the current account in line with its norm. - Structural reforms to improve savings rate, competitiveness, diversification, and economic resilience. - Improvements in education outcomes, innovation, and real wage flexibility while reducing labor market duality to boost productivity. - Public investments under the RRP to transition to a greener, more competitive, and digital economy; associated grants boost the capital account. - Reforms to streamline regulations to spur private investment. ### Foreign asset and liability position and trajectory - Background and recent trajectory: - Negative NIIP declined from a peak of 124 percent of GDP in 2014 to 73 percent of GDP in 2023, after a rebound to 105 percent in 2020. - Improvement in 2023 driven by a larger decrease in gross liabilities than in assets in percent of GDP, supported by a current account surplus of 1.4 percent of GDP. - Gross external debt at end-2023: 143 percent. - NIIP and gross external debt expected to continue improving but at a decelerating rate as the CA surplus shrinks. - Assessment and projections: - Large negative NIIP reduced to a more moderate level, alleviating external sustainability concerns. - Gross financing needs estimated at an average 57 percent of GDP over 2024-29 — a source of vulnerability. - Risk mitigants: past debt management efforts, smoothing redemptions, lengthening average maturity. - NIIP expected to reach 38.7 percent of GDP by 2029, below the earlier objective of reducing the negative NIIP below -50 percent of GDP, indicating a CA broadly in line with its norm. - 2023 (% GDP) key figures: - NIIP: -72.5 - Gross Assets: 152.2 - Debt Assets: 131.0 - Gross Liab.: 224.7 - Debt Liab.: 31.7 ### Current Account - Background: - CA returned to a surplus in 2023 after surpluses during 2013–19 and modest deficits during the pandemic. - Drivers of past surpluses: improvement in trade in goods and services (tourism) and improved savings-investment balance from fiscal adjustment. - 2023 CA balance: surplus of 1.4 percent of GDP, up 2.5 percentage points relative to 2022. - Drivers in 2023: stronger increase in export volumes than import volumes; fall in import prices as energy costs normalized. - Services balance contributed positively; tourism accounts for 67 percent of services balance; goods balance was negative. - Assessment (EBA model): - Cyclically adjusted CA: 2.0 percent of GDP. - EBA Norm: -0.6 percent of GDP. - EBA Gap: 2.6 percent of GDP (range of CA gap: 1.9 to 3.3 percent of GDP; point estimate 2.6 percent). - Policy gaps contribute 0.8 percent while unexplained residual represents 1.6 percent. - Policy recommendation: sustained tight fiscal policy paired with structural reforms to support saving and investment and improve external competitiveness. - 2023 (% GDP) key figures: - CA: 1.4 - Cyclically adjusted. CA: 2.0 - EBA Norm: -0.6 - EBA Gap: 2.6 ### Real Exchange Rate (REER) - Background: - CPI-based REER appreciated by 1.8 percent between 2022 and 2023. - ULC-based REER appreciated by 0.8 percent between 2022 and 2023. - Assessment: - Based on staff-assessed CA gap range, REER undervaluation estimated in the range of 4.3 to 9.7 percent, midpoint 7 percent (using estimated elasticity of CA to REER of 0.37). - EBA CPI-based REER index model suggests undervaluation of 4.5 percent. - Level REER model estimate: 4.7 percent undervaluation in 2023. ### Capital and Financial Accounts: Flows and policy measures - Background: - Financing conditions tightened in 2023 due to the ECB’s monetary tightening. - Public debt reduced to just below 100 percent of GDP at end-2023. - Sovereign interest rates: increased from an average of 2.16 in 2022 to 3.21 in 2023. - Spreads relative to the bund: fell from an average of 96 basis points in 2022 to 76 basis points in 2023. - Financial account posted a surplus of 3.2 percent of GDP owing to portfolio investments. - Credit rating improvements between 2023 and early 2024; ratings as of August 2024: S&P: A-, Moody’s: A3, Fitch: A-, DBRS: A. - Assessment: - Active debt management supported external financing rollover in the public sector and reduced private sector funding costs via positive spillovers. - Despite improvements, existing external financing needs leave Portugal exposed to market volatility under tight global financial conditions. ### 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 II. Housing Affordability — Background and policy implications - Executive summary: - Housing affordability significantly declined over the last decade for mortgage holders, tenants, and would-be homeowners. - Mortgage holders face rising variable interest rates; tenants face rents that increased substantially faster than CPI; residential property buyers face soaring prices and higher interest rates. - Overcrowding is increasing, especially in urban areas. - Recent housing policies targeted demand-side relief with mixed results. - Supply-side barriers (regulatory, administrative, labor shortages in construction) need to be addressed. A. Background - Price and rental dynamics: - Housing prices in Portugal increased by 111 percent since 2015, compared with EA average of 42 percent. - Estimates of overvaluation range between 15 and 30 percent (European Commission, 2024; Valderrama, 2023). - Price for actual housing rentals (component of HICP) increased by 29.5 percent between 2015 and June 2024; total HICP increased by 23.5 percent over the same period. - Affordability measures and impacts: - About 70 percent of dwellings are occupied by owners; 30 percent by renters. - Average mortgage payments: 32.8 percent of average income (up from 23.8 percent four years earlier). - New IMF housing affordability index (Biljanovska, et al, 2023) indicates a median-income household no longer qualified for a mortgage to purchase an average-priced home in 2023. - By 2023Q2, 1½ times the median income was needed to obtain a mortgage for an average-priced home. - Median price of new rental agreements: €7.465 per sqm as of 2024Q1, a real increase of 12 percent over three years. - From 2022 to 2023, rents (HICP measure) grew by 4.5 percent versus 2.9 percent in the EU. - Overcrowding: - In 2023, 12.9 percent of the population lived in dwellings with insufficient habitable rooms for household size and composition — an increase of 3.4 percentage points from 2022. - Overcrowding rose across all age groups and more in urban than rural areas. B. Underlying trends - Regional differences and tenure: - Prices per square meter in Lisbon are about twice those in Alentejo; the gap increased over the last three years. - Portugal exhibits sizeable shares of both underoccupied dwellings and overcrowding. - Ownership rate around 75 percent over two decades, modestly increasing to 78 percent during the negative interest rate environment. - Among owners, share with mortgages has been increasing since 2007, with a slight reversal in 2022. - Golden visas and investor demand: - Investors seeking residency permits (“golden visas”) accounted for about 1 percent of transactions and about 2 percent of transaction values in recent years. - Minimum spending required for such visas: €350K for specific cases and €500K for most properties. - Government abolished the RRE component of golden visas; given small aggregate scope, change unlikely to have material aggregate impact but may affect specific markets. - Household composition scenarios and housing needs: - Average household size: 2.4 persons in 2022, down from 2.8 in 2006; EA average 2.2 persons. - Three scenarios for household size evolution to 2100 considered by staff: - Scenario A: unchanged — housing needs fall to around 3.7 million units (similar to early 2000s). - Scenario B: gradually falling to reach EA average — housing needs stabilize at over 4 million units. - Scenario C: falling to 2.0 (German 2022 average) — housing needs expand to more than 4.4 million units by 2100. - Different household compositions imply demand for different housing types. C. Recent housing policies and new initiatives - Measures enacted to alleviate mortgage-holder burdens (demand-side): - Suspension of early repayment fees to help borrowers restructure debts; extension through end-2024. - Banks required to proactively offer restructuring when significant worsening of the “effort rate” (debt-service-to-income) identified. - Temporary postponement of amortization: October 2023 to March 2024 allowed holders of mortgages on primary residence to fix monthly installments of variable rate loans at a certain level for 24 months. - Average monthly capital amortization reduced from €215 in February 2022 to €155 in February 2024. - Interest rate subsidy for vulnerable groups introduced March 2022 and recalibrated October 2023; 65 percent of applications were rejected. - Rent increase caps: 2023 cap at 2 percent with compensating tax measures for landlords; in 2024 cap returned to previous year’s CPI inflation excluding housing (about 7 percent). - ‘Mais Habitação’ package (effective October 2023): aimed to increase rental market supply via tax incentives, including tax exemption for capital gains from property sales to the state, beneficial tax treatments for landlords, and rewards for switching vacation rentals to housing. - New government measures (focus on direct support and supply): - Public guarantee for young first-time homebuyers: - Eligible ages: 18 to 35 years. - Income eligibility: up to the 8th income tax bracket. - Guarantee: up to 15 percent of transaction value for properties valued up to 450 thousand euros. - ‘Construir Portugal’ to replace ‘Mais Habitação’: - Retains key elements but emphasizes new housing construction. - Includes regulatory reforms to streamline housing development, zoning revisions, use of public land, and more extensive subsidies and grants for various demographics. - Many reforms supported by RRP. D. Conclusion and policy implications - Primary recommendation: Continued improvement in house supply where needed is crucial to solving housing problems. - Assessment of ‘Construir Portugal’: - Could address root causes if successful in reducing regulatory barriers to construction. - Subsidies and grants can help if properly targeted to vulnerable households. - Age-based public guarantee for first-time homebuyers will ease credit access for eligible groups but is prone to threshold issues. - Labor shortages in construction: - Labor shortages consistently reported as a limiting factor for building activity; efforts to alleviate these shortages are important, particularly for the construction sector. *Source: 1prtea2024001-print-pdf - References.* ### Annex III. Risk Assessment Matrix ### Annex III. Risk Assessment Matrix ### External Risks — Key Risks, Likelihood, Time Horizon, Expected Impact, Policy Responses - Intensification of regional conflicts. - Relative Likelihood: High - Time Horizon: ST - Expected Impact: Medium - "A commodity price shock could slow growth and rekindle inflation. But if Portugal is seen as a safer destination, its economy could benefit from tourism diversion, which would mitigate the growth slowdown. Increased inflow of refugees could raise unemployment and may cause political polarization." - Policy Response: - "Make full use of automatic stabilizers to address the growth slowdown." - "Well-targeted and temporary support to vulnerable groups." - "Expand Active Labor Market Policies (ALMPs) to aid refugees in entering sectors with labor shortages." - Commodity price volatility. - Relative Likelihood: High - Time Horizon: MT - Expected Impact: High - "Higher commodity price volatility may discourage investment and consumption and dampen growth." - Policy Response: - "In case of a persistent recession that impacts domestic demand, consider reintroducing temporary and well-targeted support to vulnerable households and struggling yet viable businesses." - "Tie the level of support for businesses to their achievement of energy efficiency goals." - "Accelerate the transition to renewable energy by increasing investment in this sector." - Global growth slowdown. - Relative Likelihood: Medium - Time Horizon: ST, MT - Expected Impact: High - "Negative spillover effects on Portugal through trade linkages and supply chains, especially lower tourism." - Policy Response: - "Automatic stabilizers should first be deployed." - "In a severe recession, temporary fiscal loosening may be needed to support the economy (depending on the ECB’s monetary policy in this scenario), while credibly committing to return to a fiscal position consistent with the debt reduction goals as the economy recovers." - "For the medium term, reduce the reliance on tourism by diversifying the economy or explore avenues to reduce its cyclicality to build a more resilient economy." - Monetary policy calibration. - Relative Likelihood: Medium - Time Horizon: ST, MT - Expected Impact: Medium - "Prematurely loosening monetary policy could trigger inflation while delayed monetary loosening could overly restrict lending, amplify financial strains on both households and firms, and dampen growth." - Policy Response: - "Fiscal policy will need to adjust to the monetary policy (mis)calibration to help foster a soft landing of the economy." - "Financial sector policies should ensure close monitoring of financial conditions and make use of macro-prudential buffers to sustain credit provision in a healthy manner." - Systemic financial instability. - Relative Likelihood: Medium - Time Horizon: ST, MT - Expected Impact: Medium - "A sudden correction in house prices could increase bank losses on defaulted exposures. Banks’ sizable exposure to housing mortgages imply that a worsening credit quality would shrink their capital. Lower bank capital could in this case unduly constrain credit." - Policy Response: - "Continue close 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 buffers so that banks could keep credit flow." - Sovereign debt distress. - Relative Likelihood: Medium - Time Horizon: ST, MT - Expected Impact: Medium - "Considering Portugal’s still-high debt level, a sovereign debt distress could result in higher spreads that would disrupt the debt reduction path. Lower investment due to lost confidence and higher financing costs would negatively impact the economy." - Policy Response: - "Remain committed to debt reduction in the medium-term budget planning to contain bond spreads from increasing." - Deepening geo-economic fragmentation. - Relative Likelihood: High - Time Horizon: MT - Expected Impact: Medium - "Portugal is vulnerable to deglobalization due to its strong dependence on international trade and tourism. EU/EA membership mitigates geo-economic fragmentation risk via possible opportunities associated with nearshoring." - Policy Response: - "Promote international cooperation via active participation in joint efforts to promote green transitions and policy coordination in Euro Area and beyond." - "Reduce regulatory barriers to provide an attractive environment for nearshoring." - "Diversify the economy to reduce the dependence on tourism and external environment." ### Portugal-Specific Risks — Key Risks, Likelihood, Time Horizon, Expected Impact, Policy Responses - Political uncertainty. - Relative Likelihood: High - Time Horizon: ST, MT - Expected Impact: High - "Prolonged inaction in urgent policy areas may dampen economic outlook, weaken competitiveness, and result in social frictions. Deviating from the commitment to fiscal consolidation could result in substantial increases in borrowing costs." - Policy Response: - "Build political consensus." - Lower absorption of NGEU funds / Slow implementation of the NGEU investment and reform agenda. - Relative Likelihood: Medium - Time Horizon: MT - Expected Impact: Medium - "Delayed investment financed by NGEU funds could slow medium-term growth and delay the push for a more digital and greener economy." - Policy Response: - "Strengthen administrative capacity to implement projects." - "Build consensus on reforms that are milestones for fund disbursements." --- ### Annex IV. Sovereign Risk and Debt Sustainability Assessment — Key Findings and Projections ### Recent public debt developments and baseline outlook - "Public debt sharply declined from a peak of 135 percent of GDP in 2020 to 99 percent of GDP in 2023." - Under the baseline scenario: - Public debt is projected to reach 76 percent of GDP by 2029. - "Public debt is projected to decline by an annual average of about 3.8 pp of GDP during 2024–29 to 76 percent by 2029." - Debt reduction drivers: - "(i) strong real GDP growth (accounting for about half of the total reduction of around 10.5 ppt of GDP), and (ii) primary balance surpluses." - Historical and recent macro-fiscal numbers: - Nominal GDP growth rate: "12.2 and 9.6 percent in 2022 and 2023, respectively." - Primary balance: "from a deficit of 3.1 percent in 2020 to a surplus of 3.1 percent by 2023." - Gross financing needs (GFN): "expected to remain slightly below 10 percent of GDP over the medium and long term." - Effective interest rate: "expected to rise to reach 2.5 percent by 2029." - Average residual maturity of existing debt: "around 7.5 years." - Share of debt to official creditors: "around 26 percent of the total debt at end-2023." - Foreign currency debt share: "negligible." ### Baseline scenario assumptions and sensitivities - Growth assumptions: - "Staff’s baseline scenario projects medium-term growth to converge to about 2 percent." - Downside risks include: failure to implement RRP reforms, insufficiently counter-cyclical monetary policy, global fragmentation, corporate vulnerabilities, intensified regional conflict, and global slowdown. - Upside: "faster-than-expected improvement in financial conditions, coupled with a faster decline in inflation to its target." - Fiscal assumptions: - "The overall balance is projected to remain in a small surplus in 2024" with personal and corporate income tax reductions and pension and public wage increases offset by withdrawal of cost-of-living measures. - "Assuming the achievement of the targeted small fiscal surpluses, the overall balance is projected to be broadly balanced over the medium." - Debt amortization and issuance: - "The current debt amortization schedule includes some years with redemption above the 10-year average by over one standard deviation; the debt management office is expected to continue smoothing redemption profile going forward." ### Risk Assessment and Stress Factors - Debt vulnerability: - "Although declining, public debt is expected to remain high under the baseline and its trajectory susceptible to shocks." - Large negative growth shocks similar to past recessions (cumulative real GDP contraction of 6.6 percent during 2011–13 and 8.3 percent in 2020) could push debt up and sharply increase borrowing costs. - "Higher-than-needed policy rates would increase yields and could generate vulnerabilities." - Mitigating factors: - "Financing from the EU under the NGEU." - "A considerable share of debt to official creditors (around 26 percent of the total debt at end-2023)." - "The relatively long tenure of the existing debt (around 7.5 years of average residual maturity)." - "The negligible share of foreign currency debt." - Forecast realism and fan chart: - Past forecast errors for debt-related variables remained in the range of "25th to 75th percentile for one-year, three-year and five-year horizons, except for public debt, which is shown to be optimistic mainly due to the past two deep recessions." - "The fan chart based on historical observations shows that public debt projections could deteriorate. The baseline projection for the debt path close to the lower end of the fan chart is mainly attributable to the two deep recessions that Portugal experienced in the past decade." ### Long-term risks - Aging-related fiscal pressures: - "The European Commission’s 2024 Ageing Report projects an increase in pension costs for Portugal, peaking in 2035 before gradually coming down." - "Healthcare expenditure is also expected to grow in Portugal, posing risks to public debt reduction over the long horizon." - Policy implication: "Highlights the importance of reforms to address the impact of aging on pension and healthcare." ### Overall assessment and policy implications - Final assessment: "The overall risk of sovereign stress is moderate." - Near- and medium-term: "a relatively low level of vulnerability in the near- and medium-term on the basis of a projected strong fiscal position." - Long-term: "moderate levels of vulnerability in the long-term horizons due to the still high debt level and age-related expenditures pressures." - Policy recommendations (implied across text): - Remain committed to the announced fiscal target and debt reduction plan. - Ensure the RRP and productivity-enhancing reforms are implemented as planned. - Strengthen administrative capacity to absorb NGEU funds and implement investments. - Pursue structural reforms to address aging-related pension and healthcare pressures. - Maintain prudent debt management to smooth redemption profile and contain financing costs. *Source: Annex III. Risk Assessment Matrix and Annex IV. The Sovereign Risk and Debt Sustainability Assessment.* ### Annex IV. Figure 2. Portugal: Debt Coverage and Disclosures ### Annex IV. Figure 2. Portugal: Debt Coverage and Disclosures ### Debt coverage and disclosures - Commentary: A large fraction of central government's debt is held by the central bank and social security funds. - Reporting perimeter acronyms defined: - CG=Central government; GG=General government; NFPS=Nonfinancial public sector; PS=Public sector. - Notes on recording and valuation: - 2/ Stock of arrears could be used as a proxy in the absence of accrual data on other accounts payable. - 3/ Insurance, Pension, and Standardized Guarantee Schemes, typically including government employee pension liabilities. - 4/ Includes accrual recording, commitment basis, due for payment, etc. - 5/ Nominal value at any moment in time is the amount the debtor owes to the creditor. It reflects the value of the instrument at creation and subsequent economic flows (such as transactions, exchange rate, and other valuation changes other than market price changes, and other volume changes). - 6/ The face value of a debt instrument is the undiscounted amount of principal to be paid at (or before) maturity. - 7/ Market value of debt instruments is the value as if they were acquired in market transactions on the balance sheet reporting date (reference date). Only traded debt securities have observed market values. ### Public debt structure indicators (Annex IV. Figure 3) - Commentary: Portugal's debt is local currency-denominated and is not exposed to exchange rate risks. - Residual maturity: - Residual maturity: 7.5 years - Currency composition (perimeter: general government): foreign currency / local currency / local-linked (chart referenced; no numeric breakdown provided in text). - Creditor composition (chart referenced; categories: External private creditors, External official creditors, Domestic other creditors, Domestic commercial banks, Domestic central bank). - Governing law composition (chart referenced; categories: Domestic law, Foreign law ex. multilateral, Multilateral). - Marketability (chart referenced): Marketable debt vs Nonmarketable debt. ### Baseline scenario projections (Annex IV. Figure 4) — key projected series (Percent of GDP unless indicated otherwise) - Public debt (Actual 2023; then 2024–2033): - Public debt 99.1 94.4 89.8 86.2 82.8 79.4 76.2 73.0 70.7 68.6 66.6 - Change in public debt: - Change in public debt -13.3 -4.7 -4.6 -3.6 -3.4 -3.4 -3.2 -3.2 -2.2 -2.2 -2.0 - Contribution of identified flows: - Contribution of identified flows -11.0 -4.7 -4.6 -3.6 -3.4 -3.4 -3.2 -3.2 -2.2 -2.2 -2.0 - Primary deficit: - Primary deficit -3.1 -1.5 -1.7 -1.6 -1.6 -1.8 -1.9 -1.6 -0.8 -0.9 -0.9 - Noninterest revenues: - Noninterest revenues 43.3 43.2 43.0 42.8 42.4 42.4 42.4 42.4 42.4 42.4 42.4 - Noninterest expenditures (partial series shown): - Noninterest expenditures 40.2 41.7 41.3 41.2 40.8 40.6 40.6 40.8 41.6 41.5 41.5 - Automatic debt dynamics: - Automatic debt dynamics -7.6 -2.9 -2.6 -1.7 -1.6 -1.3 -1.1 -1.3 -1.2 -1.0 -0.8 - Real interest rate and relative inflation (components and series): - Real interest rate and relative inflation -5.1 -1.0 -0.5 0.0 0.1 0.2 0.4 0.1 0.2 0.3 0.5 - Real interest rate -5.1 -1.0 -0.5 0.0 0.1 0.2 0.4 0.1 0.2 0.3 0.5 - Relative inflation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Real growth rate: - Real growth rate -2.5 -1.9 -2.2 -1.8 -1.6 -1.5 -1.5 -1.4 -1.4 -1.3 -1.3 - Other identified flows: - Other identified flows -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 - (minus) Interest Revenues: - (minus) Interest Revenues -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 - Contribution of residual: - Contribution of residual -2.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Gross financing needs: - Gross financing needs 6.7 2.8 6.1 6.7 8.0 7.1 6.1 6.7 8.5 7.2 6.0 - of which: debt service (local currency shown; foreign currency 0.0): - of which: debt service 10.1 4.6 8.1 8.6 9.8 9.1 8.2 8.6 9.6 8.4 7.2 - Local currency 10.1 4.6 8.1 8.6 9.8 9.1 8.2 8.6 9.6 8.4 7.2 - Foreign currency 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Memo: - Real GDP growth (percent) 2.3 1.9 2.3 2.0 1.9 1.9 1.9 1.9 1.9 1.9 1.9 - Inflation (GDP deflator; percent) 7.1 2.8 2.4 1.9 1.9 2.0 2.0 2.0 2.0 2.0 2.0 - Nominal GDP growth (percent) 9.6 4.7 4.8 3.9 3.9 3.9 3.9 3.9 3.9 3.9 3.9 - Effective interest rate (percent) 2.1 1.7 1.9 2.0 2.0 2.2 2.5 2.1 2.3 2.5 2.7 ### Realism of baseline assumptions (Annex IV. Figure 5) — key findings - Commentary: Realism analysis shows that the public debt forecast is shown to be optimistic mainly due to the past two deep recessions Portugal experienced. Primary balance and r-g projections are well within norms. - Past drivers of public debt reduction (Past 5 years): - Primary deficit, Real interest rate and relative inflation, Real GDP growth (charts and contributions referenced). - Next 5 years drivers (Next 5 years): - Projected contributions from Primary deficit and Real GDP growth expected to continue reducing public debt. - Three-year debt reduction: - 3-year debt reduction above 75th percentile: 5.9 ppts of GDP - Percentile rank: 87. - Three-year adjustment in cyclically-adjusted primary balance: - 3-year adjustment above 75th percentile (2 ppts of GDP) - Percentile rank: 44 - Laubach (2009) rule note: - 4/ The Laubach (2009) rule is a linear rule assuming bond spreads increase by about 4 bps in response to a 1 ppt increase in the projected debt-to-GDP ratio. ### Medium-term risk assessment (Annex IV. Figure 6) — indices and signals - Debt fanchart module: - Debt fanchart index (DFI) 1.7 - Fanchart width (percent of GDP) 56.6 0.8 - Terminal debt-to-GDP x 35.6 0.8 - Probability of debt non-stabilization (percent) 7.0 0.1 - Risk signal: Moderate (DFI = 1.7) - Gross financing needs (GFN) module: - Average baseline GFN (percent of GDP) 6.1 2.1 - Initial Banks' claims on the gen. govt (pct bank assets) 6.8 2.2 - Chg. In banks' claims in stress (pct banks' assets) 0.7 0.2 - GFN financeability index (GFI) 4.5 - Risk signal: Low - Medium-term index: - Medium-term index components: Debt fanchart index 1.7; GFN financeability index 4.5 - Final assessment: - Prob. of missed crisis, 2024-2029, if stress not predicted: 9.1 pct. - Prob. of false alarms, 2024-2029, if stress predicted: 48.9 pct. - Commentary: Of the two medium-term tools, the debt fanchart module is pointing a moderate risk, while the gross financing needs module suggests a low risk. Final fanchart is not centered because it is based on a combination of the historical and the baseline forecast. ### Triggered modules and stress tests - Triggered Modules listed: Pensions; Health; Long-Term Risk Assessment: Large Amortization. - Stress tests: Triggered stress tests (stress tests not activated in gray). Charts referenced for financing provided by banks under Actual, Baseline, and Stress scenario. ### Long-term risk assessment (Annex IV. Figure 7) - Commentary: Over the long-term, rising pensions and health pension spending are concerning as Portugal's age dependency ratio is projected to grow faster than their peers. The current debt amortization schedule includes some years with high redemption above the 10-years average by more than one standard deviation. However, the debt management office is expected to continue smoothing redemption profile going forward. - Long-run projection elements and scenarios referenced: - Medium-term extrapolation with debt stabilizing primary balance - Large amortizations - Climate change: Adaptation and Mitigation - Natural Resources - Charts compare: Baseline with t+5; Baseline with t+5 and DSPB; Historical 10-year average (no numeric series provided in text body). ### Annex V. 2023 Article IV Recommendations — select fiscal and financial policy actions (summary) - Fiscal policy — Near term: - Recommendation: Maintain slightly contractionary fiscal stance in 2023; deploy automatic stabilizers if growth weakens; save fiscal overperformance; reserve further support for severe downside scenarios; design support as temporary, non-price-distortionary, and targeted. - Authorities' actions: Fiscal stance in 2023 was contractionary; fiscal outcome produced a surplus of 1.2 percent of GDP; most cost-of-living support phased out; interest and rental relief targeted to most vulnerable borrowers. - Fiscal policy — Medium term: - Recommendation: Build fiscal space and mitigate public debt risks via sustained consolidation; simplify tax system; roll back reduced VAT rates; reinstate carbon taxes; improve tax administration; implement pensions and health care reforms; increase public investment share; strengthen budgetary framework and SOE sustainability. - Authorities' actions: Stability program targeted primary surpluses consistent with reducing public debt to 79.8 percent of GDP in 2028; public investment accelerated via RRF; VAT exemptions for food and basic items terminated by December 2023, VAT reduction for electricity remains; tax unit formed in February 2024 assessing tax expenditures; carbon tax readjustment reintroduced May 2023 but suspended September 2023; “green” book to assess pension system under preparation; NHS deficit narrowing. - Financial policies — Supervision and macroprudential: - Recommendation: Maintain vigilance on credit quality, market and interest rate risk, and liquidity management; gradually phase in sectoral systemic risk buffer for residential real estate exposures; consider a positive neutral CCyB over time. - Authorities' actions: Supervisors closely monitoring vulnerabilities; banks reduced non-performing loans and built capital buffers; sectoral systemic risk buffer for residential real estate exposures of IRB banks introduced, effective October 2024; authorities considering a positive neutral CCyB. - Insolvency and AML/CFT: - Recommendation: Strengthen private debt resolution regime including restoring duty to file for insolvency; improve AML/CFT framework and availability/verification of beneficial ownership information. - Authorities' actions: Obligation to file for insolvency restored July 2023 with a 30-day duty to file once legally insolvent; golden visa regime terminated for real estate purchases but maintained for other investment options; beneficial ownership register based on self-declaration and needs improved collection/verification. - Structural reforms: - Recommendation: Alleviate labor market duality by making permanent contracts more flexible with a strong social safety net; leverage digitalization to boost productivity; reinstate and increase carbon tax with targeted relief. - Authorities' actions: Decent Work Agenda (May 2023) promoted job security of fixed-term workers but did not make open-ended contracts more flexible; RRP promotes upskilling and digitalization; carbon tax adjustment mechanism reintroduced May 2023 then suspended September 2023. ### Annex VI. European Union Funds and Firms’ Performance — key findings - Headline finding: EU funds boost recipient firms' labor productivity relative to control firms, with larger impacts for younger and smaller firms. - Context and drivers of Portugal’s labor productivity gap: - Portugal lags European peers in labor productivity; main contributors include resource misallocation, predominance of small firms, sectoral composition, and predominantly low within-firm productivity. - Misallocation of capital: Deteriorated over past two decades for both firms with large and small capital; more pronounced among firms older than 10 years and firms with fewer than 10 employees. - Misallocation of labor: Worsening observed across young and old firms but more pronounced among firms with less capital and larger employment. - Firm size and sector composition: Firms in Portugal tend to be smaller. Share of accommodation and food service activities higher in Portugal than EU: - Employment share in accommodation and food service activities: Portugal 10.5 percent; EU 7.3 percent. - Value added share in accommodation and food service activities: Portugal 4.3 percent; EU 2.3 percent. - Firm size distribution: - In Portugal, 40 percent of employees work in enterprises with fewer than ten employees; in the EU, 29 percent. - Firms with fewer than 50 employees employ 60 percent of the total Portuguese labor force, compared to 47 percent in the EU. - Policy implication: EU funds should continue to be leveraged to address long-standing low productivity, given evidence of positive effects on recipients—especially younger and smaller firms. *Source: IMF staff estimates and projections.* ### 2. EU Funds aim to lift potential output and labor productivity. Portugal 2020 (“PT2020”), ### EU Funds aim to lift potential output and labor productivity. Portugal 2020 (“PT2020”) ### PT2020 program design and allocation - PT2020 forms part of the Europe 2020 Strategy and comprises five European structural and investment funds disbursed between 2014 and 2022. - Total PT2020 value: € 26.5 billion. - Comparison benchmark: total gross fixed capital formation in 2014: € 26 billion or 13.9 percent of GDP. - Average annual size: roughly represented an average of 1.5 percent of GDP annually. - REACT-EU provided additional cohesion funds for crisis resolution related to the COVID-19 crisis. - Projects and recipients: - PT2020 funded 171,000 projects across 98,000 firms. - Priorities by fund share: - competitiveness and internationalization: 41 percent of the total funds - social inclusion and employment: 17 percent - human capital: 17 percent - sustainability and efficiency in the use of resources: 25 percent - Sectoral disbursement shares: - administrative service: 37.3 percent - manufacturing: 21.2 percent - education: 11.9 percent - arts and recreation: 5.9 percent - Distributional statistics for EU funding received per recipient (Euros): - 25th percentile: 3,702.96 - Median: 10,366.98 - Mean: 268,394.20 - 75th percentile: 28,255.81 - Project counts per firm: - Around 38 percent of all firms receive funding for a single project - 32 percent receive two projects - 30 percent receive three or more funded projects - Median size of funds per recipient firm: around € 10k - Mean fund size (skewed distribution): € 268k - Note: a few firms (notably in education) receive funding for several hundred projects. ### Context: firm-size and sectoral composition in Portugal - Portuguese firms tend to be smaller than other European peers. - Smaller firms tend to be less productive across most industries in Portugal (as in other countries). - Portugal has higher shares of employment and value added in accommodation and food services and smaller shares in manufacturing than EU peers. - Misallocation of capital and labor: worsening capital (labor) misallocation is more pronounced among smaller (larger) firms. ### Empirical strategy and data - Matched dataset: - From 171,000 PT2020 projects, about 91,000 projects were matched to firm-level data from the ORBIS database. - Matched annual data spans 2014-22. - ORBIS coverage: close to 100 percent of employment for firms with 10 or fewer employees and about 50 percent of small-sized firms (with fewer than 10 employees). - The merged dataset underrepresents administrative firms compared to the universe of funded projects because government-associated entities lack ORBIS balance sheets. - Sample construction: - Baseline sample limited to firms that received EU funds for a single project. - Final sample used in baseline matching: 2,419 treated firms and 6,696 firms in the control group. - Example comparability: average age of a treated firm: 25.5 years; average age of untreated firm: 26.9 years. Average treated firm employees: 26; average untreated firm employees: 23. - Matching approach: - Propensity-score-matching: treated firms matched to untreated firms by assets within industry (4-digit Nace), age group (fewer than 10 years old or above), and size group (number of employees). - Each treated firm receives at most three neighbors, weighted accordingly. - Difference-in-differences specification (qualitative description): - Dependent variable: firm annual labor productivity measured as value added per employee (in logs). - Treatment dummy: equals 1 if firm received EU funds with treatment reference year T (T=0 is year of receipt). - Controls: firm fixed effects; industry-year (Nace-2-level) fixed effects; region-year fixed effects; treatment-time fixed effects consistent with matched groups. - Standard errors: heteroscedasticity-robust. ### Firm characteristics (selected statistics) - Recipients (percentiles and moments reported): - Age (years): Mean 24.9; 50th percentile 22.0; Standard deviation 17.6; 25th percentile 13.0; 75th percentile 31.0 - Capital/assets(%): Mean 45.3; 50th percentile 41.5; Standard deviation 27.5; 25th percentile 22.7; 75th percentile 66.6 - Added value: Mean 905,443.4; 50th percentile 96,722.5; Standard deviation 9,995,875.4; 25th percentile 31,738.5; 75th percentile 340,394.0 - Added value/employee: Mean 28,001.1; 50th percentile 20,864.7; Standard deviation 221,234.5; 25th percentile 13,595.3; 75th percentile 32,469.0 - ROA (%): Mean 9.2; 50th percentile 8.6; Standard deviation 25.3; 25th percentile 3.1; 75th percentile 17.1 - Employees: Mean 21.4; 50th percentile 5.0; Standard deviation 171.5; 25th percentile 2.0; 75th percentile 13.0 - Assets: Mean 4,994,891.1; 50th percentile 306,899.0; Standard deviation 150,000,000.0; 25th percentile 95,519.0; 75th percentile 1,169,280.0 - Revenue: Mean 3,560,926.0; 50th percentile 311,995.0; Standard deviation 77,000,000.0; 25th percentile 100,367.0; 75th percentile 1,119,910.0 - All firms (selected percentiles reported for comparison): - Age (years): Mean 21.9; 50th percentile 20.0; Standard deviation 14.3; 25th percentile 12.0; 75th percentile 28.0 - Capital/assets(%): Mean 46.1; 50th percentile 42.3; Standard deviation 31.2; 25th percentile 20.4; 75th percentile 70.8 - Added value: Mean 458,575.2; 50th percentile 56,873.0; Standard deviation 11,000,000.0; 25th percentile 19,307.0; 75th percentile 159,427.0 - Added value/employee: Mean 41,008.5; 50th percentile 19,812.0; Standard deviation 1,253,115.5; 25th percentile 12,309.0; 75th percentile 32,487.5 - ROA (%): Mean 4.6; 50th percentile 7.6; Standard deviation 6,483.3; 25th percentile 1.8; 75th percentile 17.4 - Employees: Mean 10.8; 50th percentile 3.0; Standard deviation 114.9; 25th percentile 1.0; 75th percentile 6.0 - Assets: Mean 2,977,020.3; 50th percentile 212,392.0; Standard deviation 110,000,000.0; 25th percentile 72,493.0; 75th percentile 674,513.0 - Revenue: Mean 1,740,024.1; 50th percentile 167,000.0; Standard deviation 44,000,000.0; 25th percentile 59,000.0; 75th percentile 510,704.0 ### Key empirical results - Baseline labor productivity impact: - The labor productivity of recipient firms increases by close to five percent and remains stronger, reaching around 7 percent five years after the receipt of the funds. - Alternative samples and sectoral result: - Including firms with multiple projects and matching within NUTS2 regions, estimated initial effect in the manufacturing sector: around 3 percent two years after the start of supported projects (smaller than baseline single-project result). - Heterogeneity by firm size and age: - Impact is larger for smaller firms (fewer than 10 employees) compared to medium (10 to 49 employees) and large (50 and + employees) firms. - Impact is larger for younger firms compared to older firms. - Robustness: - Baseline results hold when including firms with multiple projects for the manufacturing sector. - Comparison to related literature: - Productivity gains observed are higher than in Cabral and Campos (2023), who use a different identification set-up (non-successful applicants vs. successful applicants). ### Interpretation and conclusions - EU funds boost labor productivity of recipient firms relative to matched control firms, with effects building over time (close to 5 percent initially; around 7 percent at five years). - Productivity gains are concentrated among smaller and younger firms. - Resource misallocation and firm-size distributions partially explain Portugal’s productivity gap with European peers, but within-firm productivity differences remain predominant. - The benefits of EU funds should continue to be tapped to help lift potential output and labor productivity, especially by targeting smaller and younger firms. ### Policy implications and recommendations (from related sections) - Continue leveraging EU funds to boost labor productivity, with attention to smaller and younger firms where impacts are larger. - Complement funding with product market reforms to raise potential output and productivity: - Streamline administrative processes, notably those required to establish new businesses. - Improve methods for evaluating the influence of new and existing laws and regulations on competitive dynamics. - More effectively engage stakeholders in the regulatory consultation process. - Align management of state-owned enterprises with best practices to guarantee fair competition with private companies. - Estimated medium-term productivity payoff from regulatory reforms: - Catching up half-way to the top five performer in the EU in terms of the overall PMR indicator could raise total factor productivity by 2¼ percent over the medium term (based on Barnes and others (2013) estimates). *Source: IMF staff analysis in “EU Funds aim to lift potential output and labor productivity. Portugal 2020 (“PT2020”)” from the provided PDF content.* ### Annex VIII. Data Issues ### Annex VIII. Data Issues ### Data adequacy assessment (Table 1) — overall findings - Median Rating: AAAAAAA - Detailed sectoral/characteristic assessments (as presented): - National Accounts: Coverage A; Consistency AA; Frequency and Timeliness AAA - Prices: Coverage A; Consistency A; Frequency and Timeliness A - Government Finance Statistics: Coverage AAA; Consistency B; Frequency and Timeliness C - External Sector Statistics: Coverage AAA; Consistency A; Frequency and Timeliness D - Monetary and Financial Statistics: Coverage AA; Consistency A; Frequency and Timeliness A - Inter-sectoral Consistency: Granularity A - Questionnaire Results: Assessment — The data provided to the Fund is adequate for surveillance. - Use of data and/or estimates different from official statistics in the Article IV consultation: Staff do not use data and/or estimates different from official statistics. - Other data gaps: "More detailed/recent data on commercial real estate would aid the team's assessment of the sector." - Changes since the last Article IV consultation: "No weaknesses were identified in the last consultation and no new weaknesses have emerged since then." - Corrective actions and capacity development priorities: "N.A." - Rationale for staff assessment (verbatim excerpts): - "Data provision is adequate for surveillance. Portugal’s economic and financial statistics are comprehensive, generally of high quality, and are provided to the Fund in a comprehensive manner." - "The authorities regularly publish a full range of economic and financial data, as well as a calendar of dates for the main statistical releases." - "Portugal is also subject to the statistical requirements of Eurostat and the European Central Bank, including the timeliness and reporting standards, and it has adopted the European System of Accounts 2010." - "Portugal's relatively weak correlation between CPI and GDP deflator inlfation can be attributed to its susceptibility to fluctuations in the terms-of-trade as an open, export-oriented economy." - Note on interpretation: "When the questionnaire does not include a question on a specific dimension of data quality for a sector, the corresponding cell is blank." ### Data Standards Initiatives and Common Indicators (Table 2 / Table 3) - Table of Common Indicators Required for Surveillance (as of July 29, 2024): data items and metadata (dates, frequencies, timeliness, and reporting) are reported in the annex. - Example reporting entries (verbatim presentation style preserved): - Date of Latest Observation / Date Received / Frequency of Data / Frequency of Reporting / Expected Frequency / Portugal⁸ / Expected Timeliness / Portugal⁸ - Specific series referenced include: Exchange Rates; International Reserve Assets and Reserve Liabilities of the Monetary Authorities; Reserve/Base Money; Broad Money; Central Bank Balance Sheet; Consolidated Balance Sheet of the Banking System; Interest Rates; Consumer Price Index; Revenue, Expenditure, Balance and Composition of Financing ‒ General Government; Revenue, Expenditure, Balance and Composition of Financing ‒ Central Government; International Investment Position; Stocks of Central Government and Central Government-Guaranteed Debt; External Current Account Balance; Exports and Imports of Goods and Services; GDP/GNP; Gross External Debt. ### Data provision characterization and caveats - Data Provision to the Fund: "The data provided to the Fund has some shortcomings that somewhat hamper surveillance." (also alternative phrasing in annex: "The data provided to the Fund has serious shortcomings that significantly hamper surveillance." — the annex lists both explanatory statements associated with scoring categories) - Granularity notes: - Government Finance Statistics: the top cell for "Granularity" refers to granularity of reported government operations data; the bottom cell refers to public debt statistics. - Monetary and Financial Statistics: the top cell for "Granularity" refers to granularity of MFSM data; the bottom cell refers to Financial Soundness indicators. ### Selected macroeconomic and institutional numerical facts reported elsewhere in the annex - Quota (General Resources Account): 2,060.10 (SDR Million) — Percent Quota: 100.00 - Fund holdings of currency: 1,563.96 (SDR Million) — Percent: 77.37 - Reserve position in Fund: 466.27 (SDR Million) — Percent: 22.63 - Net cumulative allocation (SDR Department): 2,780.99 (SDR Million) — Percent Allocation: 100.00 - Holdings (SDR Department): 2,816.20 (SDR Million) — Percent: 101.27 - Projected Payments to Fund (Forthcoming): Principal and Charges/Interest entries: 0.02 for forthcoming years (2024, 2025, 2026, 2027, 2028) — Total each year: 0.02 - Membership status: Joined: March 29, 1961; Article IV Consultations: standard 12-month consultation cycle; previous consultation discussions: April 26-May 5, 2023; staff report discussed on June 13, 2023. - Safeguards assessment: first-time safeguards assessment of the Bank of Portugal (BdP) finalized in September 2011; BdP implemented all safeguards recommendations though proposed BdP law amendments "have not been enacted." ### Authorities’ views and key policy-relevant numeric projections and indicators (statements preserved verbatim) - Economic outlook: - Staff projection for real GDP growth rate in 2024: 1.9 percent (authorities align "around staff’s projection of 1.9 percent in 2024") - Authorities expect inflation: latest reading "1.8 percent" in August; expect inflation to stabilize "around 2 percent in 2025." - Fiscal: - General government surplus in 2023: 1.2 percent of GDP - Authorities plan to preserve "annual small surpluses" and prudent net expenditure growth in the medium-term. - Public debt: "In 2022, the public debt-to-GDP ratio was already below its pre-covid level, falling below the 100 percent mark in 2023." - Portugal "now ranks within the 75-percentile interval of public debt ratios in the euro area" and is expected to converge "steadily toward the median." - Financial sector and real estate: - Mortgage loans represent "around 25 percent of total assets" of the banking sector. - House purchases financed with domestic credit: "around 46 percent of house purchases were financed with domestic credit" in 2022 and 2023, "reducing to 33 percent in 2023 when excluding renegotiations and transfers." - Authorities introduced a sectoral systemic risk buffer (sSyRB) "of 4 percent" on this portfolio, effective from October 2024, for banks using the IRB approach. - Residential real estate (RRE) prices: "nearly doubled since 2016" and rose "8.2 percent in 2023." - Labor market and demographics: - Authorities cite "historically high participation rates and low unemployment," net immigration, higher women participation rate, and increasing retirement age bolstering labor force. - Structural policies and investment: - RRP (Recovery and Resilience Plan) projected to peak in investment in 2026 per authorities’ view; RRP focus areas include housing, digitalization, transportation and climate transition; RRP supports partnerships between businesses and universities for innovation and R&D. ### Identified data limitations and surveillance implications - Principal identified data gap: "More detailed/recent data on commercial real estate would aid the team's assessment of the sector." - Overall surveillance implication statements preserved: - "The data provided to the Fund is adequate for surveillance." - "The data provided to the Fund has some shortcomings but is broadly adequate for surveillance." - "The data provided to the Fund has some shortcomings that somewhat hamper surveillance." - "The data provided to the Fund has serious shortcomings that significantly hamper surveillance." (these are the categorical phrasings used to map scoring to surveillance impact) *Source: Annex VIII. Data Issues, 1prtea2024001-print-pdf (Portugal — Staff Report for the 2024 Article IV Consultation — Informational Annex).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1prtea2024001-print-pdf.pdf_