IMF Executive Board Concludes Fifth Post-Program Monitoring with Portugal

IMF News, February 22, 2017

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Canonical URL: IMF Executive Board Concludes Fifth Post-Program Monitoring with Portugal

Date: February 22, 2017
After a sluggish first half, the economy experienced an upturn in growth in the second half of 2016, boosted by stronger exports and a further decline in unemployment to pre-crisis levels.
Revised 2016 fiscal target appears likely to have been met.
Prospective public outlays for banking sector recapitalization continue to weigh on public debt trends.
Portugal has continued to successfully access bond markets and its capacity to repay the Fund is expected to be adequate.
Public debt remains high and large annual financing needs, combined with banking system challenges, leave Portugal vulnerable to shocks and tightening financing conditions.

Directors agreed with the thrust of the staff appraisal and welcomed improved macroeconomic performance in H2 2016: pick‑up in growth, decline in unemployment, and a fiscal outturn in line with the target.
Emphasis on the need for stronger momentum to:
- improve financial sector resilience,
- ensure durable fiscal consolidation,
- raise potential growth.
Authorities’ capacity to repay the Fund assessed as adequate.

Directors welcomed authorities’ recognition that continued efforts to improve banking sector soundness are warranted.
Key recommendations and observations:
- A comprehensive clean‑up of bank balance sheets is essential to break the vicious circle between weak banks, high non‑performing loans (NPLs), and low growth.
- Clean‑up should include a predictable, time‑bound, and credible plan for banks to write‑off or restructure non‑performing legacy assets.
- Strengthen internal governance and improve bank profitability, including by further cutting costs.
- Measures to attract new private capital to support bank balance sheet clean‑up.
- Encouragement of authorities’ proposals to address NPLs, including supervisory, legal, and judicial measures to incentivize banks to dispose of non‑performing loans and reduce corporate debt.

Directors welcomed the authorities’ commitment to continued fiscal consolidation and noted their five‑pillar strategy.
Fiscal policy guidance:
- Need for a well‑specified medium‑term fiscal adjustment path balancing debt reduction and support for growth.
- Preference for consolidation relying more on durable expenditure reform and greater spending efficiency, and less on one‑off measures and capital expenditure compression.
- Importance of strengthening the budget process.
Note: Prospective public outlays for banking sector recapitalization continue to weigh on public debt trends.

Reinvigorating macro‑critical structural reforms is essential to boost competitiveness, growth potential, and resilience to shocks.
Encouraged reform areas:
- Labor and product markets, with focus on tackling labor market segmentation.
- Improving education and skills.
- Enhancing public sector efficiency.
- Removing regulatory barriers and strengthening institutional capacity.
- Addressing other supply bottlenecks.
Cautionary note: Ensure increases in the minimum wage do not impair labor competitiveness and undermine prospects for new entrants to the labor force.

Prices
- GDP deflator: 2.1
- Consumer prices (Harmonized index): [no figure provided in source]

Nominal GDP (Billions of euros)
- 2015: 179.5
- 2016: 184.7
- 2017: 189.7
- 2018: 194.6

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

Press Release No. 17/57, IMF Communications Department, February 22, 2017.