Portugal: IMF Executive Board Concludes 2012 Article IV Consultation
IMF News, January 18, 2013
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- Published: January 18, 2013
Background and crisis origins
- Since the last Article IV consultation in early 2010, Portugal faced mounting funding pressures leading to an acute economic crisis and a request for financial support from the European Union and the IMF in May 2011.
- Real GDP contracted by close to 5 percent during 2011–12.
- Unemployment edged up to about 16¼ percent in recent months.
- Roots of the crisis:
- Failure to adapt to the rigors of monetary union amid a rapidly changing and more competitive international environment.
- Accumulation of economic and financial imbalances: eroding competitiveness of the tradable sector, muted policy responses.
- Counter-cyclical fiscal policy during the 2008–09 crisis led to ballooning government deficits and debt.
- Banks lost access to the wholesale funding market in mid-2010; in the first half of 2011, Portugal’s government was shut out from financial markets.
Portugal’s program and adjustment outcomes
- Portugal launched a comprehensive economic and financial program with key elements:
- Front-loaded fiscal adjustment to restore fiscal credibility and jump-start external adjustment.
- Financial sector measures to keep banks well capitalized and liquid while facilitating orderly deleveraging.
- Implementation of a number of important structural reforms.
- Fiscal and external adjustment progress:
- Underlying fiscal adjustment advanced markedly—by an estimated 6 percent of GDP in primary structural terms over 2011–12.
- External account adjustment: the 12-month rolling deficit reached 2½ percent of GDP in September—an adjustment of 10 percentage points from the low point in late 2008.
- Significant decline in sovereign spreads from the heights of early 2012.
- Outlook:
- Near-term outlook remains negative—with the economy likely to be in recession in 2013 and growth in trading partners slowing.
- Growth expected to gradually pick up over time.
- With fiscal adjustment proceeding as per the authorities’ program, debt would peak at about 122 percent of GDP in 2013–14.
Executive Board assessment — main findings and policy guidance
- Directors’ appraisal:
- Welcomed the authorities’ impressive policy effort to gradually reverse imbalances and prevent future crises.
- Noted considerable progress in fiscal and external adjustment, and in implementing structural reforms.
- Welcomed the significant narrowing in sovereign spreads and improvements in euro-area crisis management.
- Risks and challenges:
- Near-term outlook uncertain; sizable medium-term economic challenges remain.
- Need to sustain efforts to make the tradable sector more competitive, boost long-term growth, and further advance fiscal consolidation.
- Fiscal policy guidance:
- Considered the authorities’ fiscal objectives appropriate provided economic developments remain as expected.
- Emphasized striking the right balance between fiscal consolidation and measures supportive of economic growth.
- Called for a public debate on how to best share the burden of the remaining adjustment.
- Noted a strong case for focusing on expenditure savings going forward, given the current high level of taxation.
- Welcomed the ongoing public expenditure review to help rebalance the adjustment mix.
- Stressed the need to build broad consensus given spending is concentrated on sensitive outlays such as social transfers and public wages.
- Tax policy and administration:
- While reducing the overall tax burden may be difficult in coming years, a broader tax base and strengthened compliance could generate space for lower income tax rates.
- Welcomed planned corporate income tax reform to foster investment and competitiveness.
- Encouraged follow-through on measures to fight tax evasion.
- Stressed continued strong implementation of the fiscal structural reform agenda to underpin durable consolidation.
- Financial sector and credit conditions:
- Welcomed authorities’ strong track record in preserving financial stability, but urged continued vigilant risk monitoring.
- Encouraged improved credit conditions to facilitate economic recovery and orderly deleveraging by highly indebted firms.
- Structural reforms:
- Encouraged vigorous pursuit of structural reforms targeting growth bottlenecks, reducing production costs, and compressing excessive profit mark-ups in the non-tradable sector.
- External support and euro-area policies:
- Noted success also depends critically on continued external support and successful crisis policies at the euro area level.
- Observed that support from the Eurosystem is important to contain credit market segmentation and restore appropriate monetary policy transmission.
Portugal: Selected Economic Indicators (Percent of GDP, unless otherwise stated)
- Gross Domestic Product (percent change):
- 2009: -2.9
- 2010: 1.4
- 2011: -1.6
- 2012 Est.: -3.0
- 2013 Proj.: -1.0
- 2014 Proj.: 0.8
- Consumer Price Index (percent change):
- 2009: -0.9
- 2010: 3.6
- 2011: 2.8
- 2012 Est.: 1.2
- Unemployment (percent) 1/:
- 2009: 9.5
- 2010: 10.8
- 2011: 12.7
- 2012 Est.: 15.5
- 2013 Proj.: 16.4
- 2014 Proj.: 15.9
- Current Account balance:
- 2009: -10.9
- 2010: -10.0
- 2011: -6.5
- 2012 Est.: -2.5
- 2013 Proj.: -1.1
- Government balance:
- 2009: -10.2
- 2010: -9.8
- 2011: -4.4
- 2012 Est.: -5.0
- 2013 Proj.: -4.5
- Government debt:
- 2009: 83.1
- 2010: 93.3
- 2011: 108.1
- 2012 Est.: 120.0
- 2013 Proj.: 122.2
- 2014 Proj.: 122.3
- Source: Authorities and IMF staff calculations
- Note: 1/ Structural break in 2011.
Public Information Notice No. 13/07, January 18, 2013.