IMF Executive Board Concludes 2017 Article IV Consultation with Portugal

IMF News, September 15, 2017

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Published: September 15, 2017

Summary

On September 13, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Portugal.
Portugal made notable progress over the past year in reducing uncertainty over near-term risks.
Exit from the Excessive Deficit Procedure in 2017 and improved stability and confidence in the banking system contributed to a sharp narrowing in sovereign debt spreads since mid-March.
The near-term growth outlook improved as the recovery gained momentum, supported by a pickup in exports and investment alongside continued growth in private consumption.
Tourism remains a key driver of growth and has been accompanied by a broad-based pickup in exports of goods; domestic confidence indicators strengthened and employment continued to rise.

Executive Board Assessment

Directors agreed with the thrust of the staff appraisal and welcomed progress in reducing near-term uncertainty.
Key positive developments noted:
- Exit from the EU Excessive Deficit Procedure in 2017.
- Improved banking system stability and confidence following successful efforts to raise capital.
- Recovery gaining momentum with pickup in exports and investment, continued growth in private consumption, and rising employment.
Key concerns and recommendations:
- Elevated public debt in the context of a modest medium-term growth outlook leaves Portugal vulnerable to shocks.
- Directors encouraged authorities to use current benign macroeconomic conditions to:
- Further improve financial sector resilience.
- Ensure durable fiscal consolidation.
- Raise potential growth.

Financial Sector

Directors welcomed improvement in financial sector stability after recent capital augmentations.
Risks and required actions:
- The large stock of NPLs could limit banks’ ability to finance productive investment.
- Called for comprehensive efforts to strengthen bank balance sheets by removing impediments to NPL resolution and boosting internal capital generation to maintain appropriate buffers, including in view of upcoming regulatory hurdles.

Fiscal Outlook and Recommendations

Directors commended authorities’ strong efforts to reduce the headline fiscal deficit in 2016; this year’s headline target also appears well within reach.
Emphasis on medium-term fiscal priorities:
- Keep public debt on a firmly downward trajectory over the medium term.
- Take advantage of favorable cyclical conditions to pursue more ambitious structural fiscal consolidation.
- Focus on durable expenditure reform to improve the efficiency of public spending while protecting public investment.

Structural Reforms and Growth Potential

Raising Portugal’s productivity and growth potential is central to reducing medium-term vulnerabilities.
Key areas to address to raise investment and improve the business environment:
- Reduce rigidities in the labor market.
- Improve the efficiency of judicial processes.
- Enhance the predictability of the regulatory environment.
Directors welcomed the authorities’ National Reform Program focus on developing human capital and fostering innovation.

Portugal: Selected Economic Indicators (Year-on-year percent change, unless otherwise indicated)

Projections
- 2016 / 2017 / 2018
Real GDP
- 1.4 / 2.5 / 2.0
Private consumption
- 2.3 / 2.2 / 1.8
Public consumption
- 0.5 / 0.6
Gross fixed capital formation
- 0.1 / 6.9 / 5.7
Exports
- 4.4 / 7.6 / 5.2
Imports
- 4.5 / 7.3 / 5.1
Contribution to growth (Percentage points)
- Total domestic demand: 1.5 / 2.6
- Foreign balance: -0.1
Resource utilization
- Employment: 1.2 / 1.6 / 0.9
Unemployment rate (Percent)
- 11.1 / 9.7 / 9.0
Prices
- GDP deflator: 1.7
- Consumer prices (Harmonized index): (no figure provided)
Money and credit (End of period, percent change)
- Private sector credit: -3.7 / -1.5
- Broad money: -0.4 / 4.3 / 3.3
Fiscal indicators (Percent of GDP)
- General government balance: -2.0 / -1.4
- Primary government balance: 2.7
- Structural primary balance (Percent of potential GDP): 3.0
- General government debt: 130.3 / 125.7 / 122.5
Current account balance (Percent of GDP)
- 0.8
Nominal GDP (Billions of euros)
- 184.9 / 193.8 / 201.1

IMF Communications Department — Press Release No. 17/349 (September 15, 2017) — Executive Board summary transmitted following the Article IV consultation concluded on September 13, 2017.