Portugal: Concluding Statement of the First Post-Program Monitoring Discussion
IMF News, November 5, 2014
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- Published: November 5, 2014
Mission overview and main assessment
- An IMF mission visited Lisbon from October 28 to November 4, 2014, for the first Post-Program Monitoring discussion—part of the IMF’s regular surveillance of countries with IMF credit outstanding above 200 percent of quota. The mission was coordinated with the European Commission and the European Central Bank (ECB).
- The authorities consented to publication. The views expressed are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.
- Main judgments:
- The Portuguese economy continues to recover from a severe debt crisis: output began to recover in 2013 and unemployment is receding from very high levels.
- The large pre-crisis current account deficit has turned into a surplus; private indebtedness growth has been arrested; substantial fiscal consolidation has been achieved.
- With access to sovereign debt markets restored, Portugal ended its EU-IMF supported program at the end of June 2014, after strong policy implementation and steps to tackle structural obstacles to growth and job creation.
- Persistent challenges: a pressing growth challenge, high private sector leverage, and the need to continue fiscal consolidation while safeguarding financial stability.
The growth challenge — findings and implications
- Findings:
- Output recovery began in 2013 but has been slow even by Portugal’s historical standards.
- Employment expanded by 2 percent year-on-year in Q2 2014; this partly reflects private consumption-led growth and one-off effects from active labor market policies and rehiring.
- Medium-term growth is assessed as insufficient to absorb the bulk of labor market slack.
- Available labor resources include the unemployed, discouraged workers, and underemployed part-time workers, indicating untapped opportunities for growth.
- Binding growth bottlenecks identified: low external competitiveness and excessive corporate leverage.
- Boosting external competitiveness is difficult without devaluation tools; structural reforms are the only viable route.
- Portugal has upside potential (first-rate public infrastructure; high-quality health and education; strong capacity for innovation and research; relative ease of starting new businesses) but faces onerous constraints (inefficient public administration; slow judicial system; restrictive labor regulations; lack of effective competition in local product markets).
- Policy implications and risks:
- Faster absorption of labor slack requires forceful action to address export constraints and corporate leverage.
- Higher exports would allow sustainable increases in imports, especially investment goods, creating a virtuous growth circle.
- Failure to meet the growth challenge could lead to continued outward migration of large numbers of workers and skills degradation among the unemployed who remain.
Recommended reform focus and policy priorities
- The mission’s recommendations and observations:
- Reinforce reform momentum, particularly in areas crucial for external competitiveness; recent reform momentum appears to have flagged since program expiration.
- The recent increase in the minimum wage was judged premature given sizable labor market slack; alternative tools such as earned-income tax credits were noted as more effective for helping low-income workers.
- Reorient the reform process away from compliance with statutory measures toward achieving measurable outcomes and dynamically adjusting reform inputs as needed.
- Address the corporate debt overhang more decisively by:
- Tackling the incentives that led to widespread corporate over-borrowing.
- Alleviating constraints and coordination failures that prevent firm owners, creditors, and potential new investors from agreeing debt restructurings for viable firms — acknowledging this may entail additional losses for banks.
Financial stability — assessment and priorities
- Findings:
- Operating conditions for the financial sector remain difficult; bank balance sheet repair is prolonged.
- Despite challenges, financial stability has been preserved to date.
- Recent events underscore the protracted and uncertain nature of post-crisis recovery.
- The ECB’s Comprehensive Assessment of the largest banks is an important opportunity to strengthen banking system resilience.
- Banks should avoid taking excessive risks to compensate for weak profitability, which would create additional supervisory challenges.
- The authorities’ strategy for Novo Banco will need to balance preserving financial stability and safeguarding public finances.
Fiscal consolidation — assessment and risks
- Findings:
- Portugal has little leeway to deviate from fiscal policy commitments given still very high public debt and the need to maintain market credibility.
- Constitutional Court rulings may have constrained some fiscal consolidation options, increasing the need for sustained structural fiscal measures.
- Recent improvements in tax compliance and control of spending arrears, especially in the health sector, are welcome.
- Specific budget assessment:
- The 2015 budget increased its deficit target moderately from 2.5 to 2.7 percent of GDP.
- IMF staff assessment indicates the 2015 budget would produce a markedly higher deficit than the authorities’ target, reflecting more conservative macroeconomic and revenue projections.
- This entails a worsening in the structural primary balance by 0.3 percent of potential GDP in 2015.
- Under the staff’s baseline, absent further fiscal measures in 2015 and over the medium term, the projected deficit would continue to diverge from the authorities’ medium-term budgetary commitments and lead to an upward shift in the medium-term debt path.
- Policy priority: continue fiscal consolidation within a medium-term perspective and advance the fiscal structural agenda.
Selected economic indicators (year-on-year percent change, unless otherwise indicated; projections)
- Real GDP:
- 2013: -1.4
- 2014: 0.8
- 2015: 1.2
- 2016: 1.3
- Private consumption:
- 2013: 1.6
- Public consumption:
- 2013: -1.9
- 2014: -0.6
- 2015: -0.5
- 2016: 0.0
- Gross fixed capital formation:
- 2013: -6.3
- 2014: 1.4
- 2015: 1.8
- 2016: 2.2
- Exports:
- 2013: 6.4
- 2014: 3.5
- 2015: 4.5
- Imports:
- 2013: 3.6
- 2014: 4.4
- Contribution to growth (percentage points):
- Total domestic demand 2013: -2.4
- Total domestic demand 2014: 1.1
- Foreign balance 2013: 1.0
- Foreign balance 2014: -0.4
- Foreign balance 2015: 0.1
- Resource utilization:
- Employment 2013: -2.8
- Employment 2014: 2.3
- Employment 2015: 0.6
- Unemployment rate (percent):
- 2013: 16.2
- 2014: 14.2
- 2015: 13.5
- 2016: 13.0
- Prices:
- GDP deflator 2013: 0.4
- Consumer prices (harmonized index) 2013: 0.4
- Money and credit (end of period, percent change):
- Private sector credit 2013: -5.2
- Private sector credit 2014: -3.2
- Broad money 2013: 2.0
- Broad money 2014: 2.6
- Fiscal indicators (percent of GDP):
- General government balance 2/:
- 2013: -4.9
- 2014: -5.0
- 2015: -3.4
- 2016: -3.3
- Primary government balance 2013: 1.5
- Structural primary balance (percent of potential GDP) 2013: 2.7
- Structural primary balance 2014: 2.4
- General government debt:
- 2013: 128.0
- 2014: 127.8
- 2015: 125.7
- 2016: 125.5
- Current account balance (percent of GDP):
- 2013: 0.7
- 2014: 0.2
- Nominal GDP (billions of euros):
- 2013: 171.2
- 2014: 174.6
- 2015: 178.5
- 2016: 183.2
- Notes:
- Projections for 2016 reflect current policies.
- General government balance includes one-off measures from SOE and banking sector support operations, CIT credit, and the upfront costs of mutual agreements for 1.1 percent of GDP.
Source: Portugal: Concluding Statement of the First Post-Program Monitoring Discussion (Mission Concluding Statement), November 5, 2014. International Monetary Fund.