IMF Executive Board Concludes 2022 Article IV Consultation with Portugal
IMF News, June 30, 2022
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- Published: June 30, 2022
Overview
- The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Portugal on Friday, June 23, 2022.
- Growth in 2021 rebounded to 4.9 percent, driven by private consumption, investment, exports of goods, and gradually recovering tourism.
- The unemployment rate dropped to pre-pandemic levels on account of rising employment and participation rates.
- The war in Ukraine is expected to dampen the recovery for the rest of 2022 through a significant deterioration in external demand, higher commodity prices, longer-lasting supply-side disruptions, lower confidence and tighter financial conditions.
Growth, Inflation, and External Sector
- Growth projections:
- 2022: 5.8 percent
- 2023: 1.9 percent
- Inflation projections:
- 2022: 6.1 percent (projected average)
- 2023: 3.5
- Current account:
- The current account deficit is set to widen in 2022, before narrowing over the medium term as exports and tourism strengthen.
Fiscal Outlook
- 2021 headline fiscal deficit: 2.8 percent of GDP (down despite an accommodative fiscal stance).
- 2022 fiscal deficit: expected to narrow to 2.2 percent of GDP, reflecting the recovery and unwinding of remaining temporary Covid-19 economic support measures.
- Fiscal stance in 2022: will remain suitably accommodative with measures to mitigate impacts of high energy prices and grant-financed investment supporting the recovery.
- Public debt: projected to steadily decline to below 100 percent of GDP over the medium term.
Financial Sector and Corporate Sector Risks
- Corporate sector:
- Has withstood recent shocks well so far, although solvency gaps are estimated at more than 2 percent of GDP.
- Credit quality deterioration after the end of the relatively extensive loan moratoria has yet to fully materialize.
- Banking sector:
- Bank capital, profitability, and asset quality have steadily improved in 2021 but remain below EA averages.
- A few legacy domestic banks are still to complete their restructuring process.
- Real estate:
- As in rest of EA, residential real estate prices have risen sharply, though attendant risks appear contained.
Executive Board Assessment and Policy Recommendations
- Directors agreed with the thrust of the staff appraisal and commended the authorities’ comprehensive policy response to the pandemic, including their successful vaccination campaign.
- Directors' overall guidance:
- Strike the right balance between supporting the recovery and rebuilding fiscal buffers and continuing with structural reforms that bolster stronger, more resilient, and private sector-led growth.
- Fiscal policy recommendations:
- Near-term fiscal policy should remain accommodative and better targeted.
- Broad-based measures implemented in response to the energy shock should be kept temporary and preferably replaced with more targeted support.
- Fiscal policy should remain flexible in 2022, with greater savings if fiscal outcomes overperform.
- Pursue a gradual and growth-friendly fiscal consolidation starting from 2023 to rebuild fiscal space for future shocks, address long-term ageing pressures, and mitigate public debt risks.
- In particular: reduce tax expenditures, enhance pension sustainability, and strengthen public financial management.
- Financial sector recommendations:
- Carefully monitor risks and maintain close vigilance of banks’ asset quality.
- Further strengthen banks’ capital buffers.
- Continue monitoring risks from rising house prices.
- Strengthen corporate debt restructuring frameworks and further improve the insolvency regime.
- Encourage prompt private-led recapitalization of viable firms to mitigate corporate debt overhang risks, smooth resource reallocation, and limit scarring.
- Structural reforms and investment:
- Welcome the authorities’ comprehensive structural reform and investment agenda anchored in the National Recovery and Resilience Plan (NRRP).
- Emphasize the need for efficient implementation and oversight to maintain strong investment absorption capacity and maintain the reform momentum.
- Underscore the potential of the NRRP to raise skill levels, digitalization, productivity, and living standards durably.
- Call for complementary reforms to address labor market duality and reduce youth unemployment.
- Commend the authorities’ ambitious targets and policies to address climate change challenges.
- See merit in considering further increasing the carbon price—once the energy crisis subsides—while protecting the most vulnerable households.
Key Statistics and Projections (Portugal: Selected Economic Indicators, 2020–23)
- Real GDP (Year-on-year percent change)
- 2020: -8.4
- 2021: 4.9
- 2022: 5.8
- 2023: 1.9
- Private consumption (Year-on-year percent change)
- 2020: -7.1
- 2021: 4.5
- 2022: 3.4
- 2023: 2.0
- Public consumption (Year-on-year percent change)
- 2020: 0.4
- 2021: 4.1
- 2022: 1.3
- 2023: 1.2
- Gross fixed capital formation (Year-on-year percent change)
- 2020: -2.7
- 2021: 6.5
- 2022: 5.9
- Exports (Year-on-year percent change)
- 2020: -18.6
- 2021: 13.1
- 2022: 7.2
- 2023: 2.5
- Imports (Year-on-year percent change)
- 2020: -12.1
- 2021: 1.7
- Contribution to growth (Percentage points)
- Total domestic demand
- 2020: -5.5
- 2021: 5.2
- 2022: 3.5
- Foreign balance
- 2020: -2.9
- 2021: -0.3
- 2022: 2.2
- 2023: 0.2
- Resource utilization
- Employment (Year-on-year percent change)
- 2021: 0.8
- Unemployment rate (Percent)
- 2020: 7.1
- 2021: 6.6
- 2022: 6.4
- Prices
- GDP deflator
- 2020: 0.7
- 2021: 6.0
- 2022: 3.1
- Consumer prices (Harmonized index)
- 2020: -0.1
- 2021: 0.9
- 2022: 6.1
- Fiscal indicators (Percent of GDP)
- General government balance
- 2020: -5.8
- 2021: -2.8
- 2022: -2.2
- 2023: -1.0
- Primary government balance
- 2020: -3.1
- 2021: -0.5
- 2022: 1.0
- Structural primary balance (Percent of potential GDP)
- 2021: 1.6
- General government debt
- 2020: 135.2
- 2021: 127.4
- 2022: 115.8
- 2023: 110.7
- Current account balance (Percent of GDP)
- 2020: -1.1
- 2021: -1.3
- Nominal GDP (Billions of euros)
- 2020: 200.1
- 2021: 211.3
- 2022: 237.1
- 2023: 249.3
IMF Executive Board Concludes 2022 Article IV Consultation with Portugal, Press Release No. 22/244, June 30, 2022.
