Press Release: IMF Executive Board Concludes Third Post-Program Monitoring with Portugal

IMF News, April 1, 2016

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On March 30, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the third post-program monitoring with Portugal.
Highly accommodative macroeconomic conditions (low interest rates, a weak euro, and low oil prices) supported growth reaching 1.5 percent in 2015.
With the consumption-driven recovery losing momentum, GDP is projected to expand by 1.4 percent in 2016 and to moderate to 1.2 percent over the medium term.

Real GDP growth:
- 2014: 0.9
- 2015: 1.5
- 2016: 1.4
- 2017: 1.3
Domestic demand and trade:
- Private consumption: 2014: 2.2; 2015: 2.6
- Public consumption: 2014: -0.5; 2015: 0.8; 2016: 0.0; 2017: 0.5
- Gross fixed capital formation: 2014: 2.8; 2015: 3.7; 2016: 3.0; 2017: 2.5
- Exports: 2014: 3.9; 2015: 5.1; 2016: 4.2; 2017: 4.3
- Imports: 2014: 7.2; 2015: 7.3; 2016: 4.0; 2017: 4.5
Employment and unemployment:
- Employment growth: 2014: 1.6; 2015: 1.1; 2016: 1.0
- Unemployment rate (Percent): 2014: 13.9; 2015: 12.4; 2016: 11.6; 2017: 11.1
Prices and money:
- GDP deflator: 2014: 1.9
- Consumer prices (Harmonized index): 2014: 0.7; 2015: 1.2
- Private sector credit (End of period, percent change): 2014: -8.0; 2015: -4.1; 2016: 0.3; 2017: 0.6
- Broad money: 2014: -0.9; 2015: 2.4

Staff estimate for the full-year general government deficit in 2015: 4.4 percent of GDP (missed budget target of 2.7 percent).
Implication: a loosening of 0.5 percent of GDP in structural primary terms.
Despite larger-than-expected savings on interest and social expenditures (reflecting the fall in unemployment), revenues fell well short of authorities’ ambitious targets.
Fiscal indicators (Percent of GDP):
- General government balance: 2014: -7.2; 2015: -4.4; 2016: -2.9
- Primary government balance: 2014: -2.3; 2015: 1.7
- Structural primary balance (Percent of potential GDP): 2014: 3.5; 2015: 2.0
- General government debt: 2014: 130.2; 2015: 128.8; 2016: 127.9; 2017: 127.3
Nominal GDP (Billions of euros): 2014: 173.4; 2015: 179.4; 2016: 184.6; 2017: 189.6
Note on one-offs: In 2014, one-off measures from SOE and banking sector support operations, CIT credit, and the upfront costs of mutual agreements amounted to 3.7 percent of GDP. In 2015, fiscal cost from the resolution of Banif amounted to 1.2 percent of GDP.
Portugal appears to have missed the 2015 fiscal deficit target and is expected to remain in the EU’s Excessive Deficit Procedure.

Findings:
- The banking system is hobbled by low profitability and poor asset quality, and required public support as recently as December 2015.
- Portugal’s stock of corporate debt remains one of the highest in the EU, precluding the allocation of credit to new productive sectors of the economy and holding back growth potential.
Directors’ recommendations:
- Strengthen bank balance sheets and build on past measures to improve bank profitability, asset quality, and governance.
- Maintain vigilance, build-up fiscal buffers, and ensure greater transparency with regard to financial sector operations to maintain confidence.
- Adopt a more comprehensive strategy to address nonperforming loans and pursue an ambitious approach to corporate debt workouts.

Directors emphasized that continued progress on structural reforms is critical to enhance medium-term growth prospects, employment, and income.
Recommended priorities:
- Keep making progress on labor market and public administration reforms.
- Avoid any perception of reversal of recent and complex reforms to maintain investor confidence and boost growth potential.
- Rationalize public spending to contain pressures from public wages and pensions.
- Develop contingency plans to ensure that the 2016 budget targets are met and maintain fiscal buffers to guard against fiscal risks and preserve market confidence.

Directors welcomed the successful stabilization of Portugal’s economy under the Fund-supported program and the ongoing recovery and decline in unemployment.
Significant challenges remain: high public and corporate debt, unresolved structural impediments, the need to raise underlying growth potential, and an uncertain global environment.
Directors encouraged the authorities to pursue prudent policies and reforms to secure sustainability of public finances, maintain market confidence, address financial sector vulnerabilities, and boost competitiveness and potential growth.

Source: Press Release No. 16/147 — IMF Executive Board Concludes Third Post-Program Monitoring with Portugal (April 1, 2016).