Portugal: Staff Concluding Statement of the Sixth Post-Program Monitoring Mission

December 7, 2017

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

An International Monetary Fund (IMF) mission visited Lisbon during November 28- December 6, 2017, for the sixth Post-Program Monitoring (PPM) discussions—part of the IMF’s regular surveillance of countries with IMF credit outstanding above the smaller between the values of SDR 1.5 billion and 200 percent of quota. PPM missions are especially focused on vulnerabilities and risks. The IMF mission was coordinated with the European Commission, the European Central Bank, and the European Stability Mechanism.

At the end of the visit, the mission issued the following statement:

Portugal’s near-term outlook remains favorable, supported by a pick-up in investment and continued growth in exports and private consumption. Fiscal targets for 2017 and 2018 appear within reach and bond spreads have narrowed substantially, while stability and confidence in the banking system have improved as banks have raised more capital.

Sustained strong growth is central to lowering the vulnerabilities from high public and private debt, and requires continued efforts to address structural rigidities. Current favorable conditions provide an opportunity for more ambitious structural fiscal consolidation and an even faster reduction in public debt.

1. Economic activity strengthened in 2017, boosted by a significant pickup in investment and continued growth in exports and private consumption. Investment rose 10 percent during January-September (year-on-year) compared with 1.6 percent in 2016, supported by a marked rebound in construction. Construction has been strongly driven by tourism-related projects, as the expansion of the tourist sector has continued in 2017. Household consumption has also remained a key driver of growth as the labor market continues to improve, with the unemployment rate falling to 8.5 percent in the third quarter from 10.5 percent a year ago, and domestic confidence indicators are at their highest level in over a decade.

2. Prospects for growth in the baseline scenario are positive, and risks appear broadly balanced in the near term. Growth is holding up well amid the cyclical deceleration in the two most recent quarters. At the same time, economic conditions in some of Portugal’s main European partners appear better than anticipated. As a result, real GDP growth is now projected to reach 2.6 percent in 2017 and 2.2 percent in 2018, and then to moderate over the medium term. The potential threats to this baseline scenario could come from a repricing of risk in global markets, prolonged uncertainty in Spain, and insufficient progress on reforms; while a stronger cyclical momentum in euro zone economies could surprise on the positive side. Medium-term risks include a rise in volatility in European bond markets as monetary accommodation is gradually reduced in the euro zone, and structurally weak growth in key trading partners.

3. Strong growth, together with continued efforts to contain spending, should allow headline fiscal deficit targets for 2017 and 2018 to be achieved comfortably. Fiscal performance is benefitting from the continued decline in interest costs, as improved market sentiment towards Portugal has contributed to a sharp narrowing in sovereign debt spreads during 2017. Based on the latest data, staff projects a headline fiscal deficit of 1.4 percent of GDP in 2017 (excluding costs associated with the recapitalization of CGD, whose classification in the fiscal accounts is still under review); the 2018 budget targets a further decline to 1.1 percent of GDP. This would imply a small loosening of the primary structural balance in both years. The ratio of public debt to GDP is projected to decline to 126 percent of GDP at the end of 2017, and to continue declining over the medium term.

4. Favorable borrowing conditions and the economic upswing provide an auspicious opportunity for an even faster reduction of public debt. High public debt remains a vulnerability over the medium term, as it constrains the government’s ability to respond to adverse shocks that might arise down the road. While strong growth and lower interest costs are presently supporting the reduction in indebtedness, these tailwinds are likely to moderate over time as real GDP growth eases back to its medium-term potential and as the stimulus from monetary policy is eventually reduced. Structural consolidation in the primary fiscal balance therefore remains essential to keep public debt on a firmly downward trajectory over the medium-term, and the current cyclical conditions offer an opportunity to make faster progress in this direction. An adjustment focused on durable expenditure reform is likely to prove more sustainable and supportive of growth. The authorities should be cautious about permanent increases in spending that would reduce the flexibility of public expenditure when cyclical conditions change. Such caution is especially important in relation to decisions that may affect the trajectory of the government wage bill in coming years.

5. Together with the recent increases in capital, Portuguese banks have increased their liquidity and continue to make progress on cleaning up bad loans. Banks’ capital ratios have improved, with the common equity tier 1 ratio increasing by 1.8 percentage points since end- 2016 to 13.2 percent in June, and the completion of the Novo Banco sale further contributed to reducing uncertainty. Nonperforming loans (NPLs) declined to 15.5 percent of gross loans from 17.2 percent at end-2016, and the NPL coverage ratio improved marginally to 45.9 percent in June. Banks also returned to modest profitability in the first half of the year after a negative outturn in 2016, owing to an increase in net interest margins and a decline in provisioning.

6. Continued progress on reducing still-elevated NPL ratios and costs in the banking system are essential to support more effective intermediation of savings to productive investment. Financial stability has improved over the past year, but the high level of NPLs limits banks’ internal capacity to generate stronger returns and increase their capital. Also, some upcoming regulatory changes in the euro area, although aiming to boost resilience, could affect some banks’ funding structure and costs. Banks’ improved financial results this year are encouraging, as is the ongoing implementation of ECB guidance to banks on NPLs. Continued efforts in this area, including by improving business models and cost efficiency, so banks can generate new capital from their own profits, are necessary to ensure that they remain resilient and better support the real economy. New initiatives to support the reorganization of viable debtors in distress and the recovery of collateral, including through proposed out-of-court mechanisms, need to be implemented and closely monitored.

7. Raising the economy’s growth potential and resilience to shocks will also require further structural reforms and higher investment and productivity. A flexible labor market is key for the economy’s capacity to absorb negative shocks and adapt to new opportunities that arise with structural change. Wages that are well aligned with productivity would help Portugal take fuller advantage of higher-skilled entrants to the labor force while safeguarding competitiveness. Investment also needs to increase substantially to raise the economy’s medium-term growth potential; preserving external balance along the way requires strengthening national saving rates as well. Ongoing initiatives in a number of areas already mentioned should help, but structural reforms should also focus on other factors that continue to influence investors’ perceptions of the business environment.

The mission would like to express its gratitude to the Portuguese authorities and other interlocutors, and our counterparts at the European Commission, the European Central Bank, and the European Stability Mechanism for a close and constructive dialogue.

Portugal: Selected Economic Indicators

(Year-on-year percent change, unless otherwise indicated)

  2016 2017 2018
Real GDP 1.5 1.5 2.6 2.2

Private consumption




Public consumption




Gross fixed capital formation












Contribution to growth (Percentage points)

Total domestic demand




Foreign balance




Resource utilization Employment




Unemployment rate (Percent)





GDP deflator




Consumer prices (Harmonized index)




Money and credit (End of period, percent change)

Private sector credit




Broad money




Fiscal indicators (Percent of GDP) General government balance




Primary government balance




Structural primary balance (Percent of potential GDP)




General government debt




Current account balance (Percent of GDP)




Nominal GDP (Billions of euros)




Sources: Bank of Portugal; Ministry of Finance; National Statistics Office (INE); Eurostat; and IMF staff projections.


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