IMF Executive Board Concludes 2016 Article IV Consultation with Portugal
IMF News, September 22, 2016
Source details
- Canonical URL
- IMF Executive Board Concludes 2016 Article IV Consultation with Portugal
Other formats
Bibliographic details
- Published: September 22, 2016
Economic outlook and recent developments
- The economic recovery in Portugal is losing momentum; the slowdown that began in the second half of 2015 has persisted despite favorable cyclical tailwinds and supportive macroeconomic policy settings.
- Robust consumption growth has resulted from fiscal loosening in place since last year and the ECB’s appropriately supportive monetary policy stance.
- Overall GDP growth is expected to increase by only 1.0 percent in 2016.
- Weaker export growth and sluggish investment are holding back overall GDP growth; investment is weighed down by uncertainty, high levels of corporate debt, and pronounced structural bottlenecks.
Executive Board assessment — main findings
- Directors welcomed that Portugal has achieved a major economic turnaround since the onset of the sovereign debt crisis: market access has been restored, fiscal and current account balances have improved, and unemployment, though still high, has fallen substantially.
- Notwithstanding progress, the recovery is moderating and risks are tilted to the downside.
- The slowdown in activity, banking sector vulnerabilities, and high public debt pose challenges to macroeconomic stability.
- Sovereign financing conditions remain subject to global developments; staff assesses risks to Portugal’s capacity to repay the Fund as manageable.
- Given the authorities’ intention to repay the Fund early, Directors underscored the importance of maintaining adequate cash buffers.
- Directors welcomed the ex post evaluation of exceptional access under the 2011–14 Extended Fund Facility: the program was a qualified success in stabilizing the Portuguese economy, but concerns about debt levels remain.
Policy recommendations (fiscal, banking, structural)
- Fiscal policy
- The 2016 budget deficit target, 2.2 percent of GDP, is considered appropriately ambitious, but achieving it is difficult given declining GDP growth and emerging expenditure pressures.
- Encourage the authorities to pursue a well‑specified adjustment path, focused largely on expenditure, that balances the need to put debt on a firmly downward trajectory while supporting growth.
- Call for a comprehensive spending review, aiming particularly at better means‑testing of social benefits and controlling pensions and public sector wages.
- Tax policy should be more stable and predictable and designed to boost competitiveness and growth.
- Banking sector
- Addressing banking sector vulnerabilities should be a top priority.
- Banks should clean up their balance sheets, including by tackling nonperforming loans, supported by an increase in capital and provisions.
- Banks should reduce operating costs and improve internal governance so lending decisions are guided solely by commercial criteria.
- Directors saw merit in finding national‑level solutions to challenges facing Portuguese banks, using the existing regulatory toolkit.
- Structural reforms
- Pushing ahead with structural reforms remains critical to enhancing competitiveness and promoting growth.
- Authorities should fully implement already‑enacted reforms in labor and product markets, with particular focus on streamlining the functioning of the public sector and limiting energy costs.
- To support implementation, authorities should engage all stakeholders by means of an inclusive social dialogue.
- Program design and lessons learned
- Need to develop program modalities and a toolkit for effective adjustment through internal devaluation.
- Importance of strong forward‑looking banking supervision and a proactive approach to private sector deleveraging.
- Need to handle effectively legal constraints in program design.
- Key role of country ownership in all branches of government to enable and sustain reforms.
- For future Fund programs with members of currency unions, high priority should be put on clarifying options for union‑level conditionality and instruments to ensure program goals can be met in the face of asymmetric shocks.
Portugal: Selected Economic Indicators (Year-on-year percent change, unless otherwise indicated) — projections and levels
- Real GDP
- 2014: 0.9
- 2015: 1.5
- 2016: 1.0
- 2017: 1.1
- Private consumption
- 2014: 2.2
- 2015: 2.6
- 2016: 1.4
- Public consumption
- 2014: -0.5
- 2015: 0.6
- 2016: 0.3
- Gross fixed capital formation
- 2014: 2.8
- 2015: 4.1
- 2016: -1.2
- 2017: 2.0
- Exports
- 2014: 3.9
- 2015: 5.2
- 2016: 2.9
- 2017: 3.4
- Imports
- 2014: 7.2
- 2015: 7.6
- 2016: 3.2
- 2017: 3.8
- Contribution to growth (Percentage points)
- Total domestic demand: 2.5 (2014), 1.3 (2015)
- Foreign balance: -1.3 (2014), -1.1 (2015), -0.2 (2016), -0.3 (2017)
- Resource utilization
- Employment: 1.6 (2014), 0.8 (2015), 0.5 (2016)
- Unemployment rate (Percent): 13.9 (2014), 12.4 (2015), 11.8 (2016), 11.3 (2017)
- Prices
- GDP deflator: 1.9 (2014), 1.7 (2015)
- Consumer prices (Harmonized index): 0.7 (2014)
- Money and credit (End of period, percent change)
- Private sector credit: -8.0 (2014), -4.1 (2015), -2.2 (2016)
- Broad money: -0.9 (2014), 2.3 (2015)
- Fiscal indicators (Percent of GDP)
- General government balance: -7.2 (2014), -4.4 (2015), -3.0 (2016)
- Primary government balance: -2.3 (2014), 0.2 (2015)
- Structural primary balance (Percent of potential GDP): 3.7 (2014), 3.3 (2015), 2.4 (2016)
- General government debt: 130.2 (2014), 129.0 (2015), 128.5 (2016), 128.2 (2017)
- Current account balance (Percent of GDP)
- 2014: 0.1
- 2015: 0.0
- 2016: -0.6
- Nominal GDP (Billions of euros)
- 2014: 173.4
- 2015: 179.4
- 2016: 184.4
- 2017: 188.9
Source: IMF Communications Department, September 22, 2016.