## Portugal: Staff Concluding Statement of the 2017 Article IV Mission

_IMF News, June 30, 2017_

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## Bibliographic details
- Published: June 30, 2017

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### Overview
- An IMF mission visited Lisbon during June 19—29, 2017, for the 2017 Article IV consultation and issued this concluding statement.
- Near-term outlook strengthened considerably, supported by a pick-up in investment and continued growth in exports as the euro area recovery gained momentum.
- Notable progress in addressing near-term risks: exit from the Excessive Deficit Procedure following a strong 2016 fiscal outturn; improvements in banking system stability and confidence.

### Growth and near-term outlook
- Drivers:
  - Continued strong growth in tourism and related construction.
  - Tourism revenues on track for a fourth consecutive year of near double-digit growth.
  - Investment in tourism has supported a marked rebound in the construction sector in H1 2017.
  - Broad-based pickup in exports, boosted by the robust euro area recovery.
  - Strengthened domestic confidence indicators and rising employment.
  - House price increases in 2017, supported in part by non-resident real estate investment.
- Projections:
  - Real GDP growth projected to accelerate to around 2.5 percent in 2017 and remain at 2 percent in 2018.

### Fiscal developments and policy implications
- 2016 fiscal outturn significantly better than expected, allowing Portugal to exit the Excessive Deficit Procedure (in place since 2009).
- The 2017 headline fiscal deficit target of 1.5 percent of GDP appears well within reach due to stronger growth and containment of spending.
- Policy recommendations:
  - Use favorable cyclical conditions to pursue a more ambitious reduction of public debt in support of the authorities’ Stability Program medium-term targets.
  - Maintain durable structural fiscal consolidation to ensure sustainability of public finances as monetary accommodation is eventually reduced.
  - Focus fiscal adjustment on reforms to improve public spending efficiency to be more growth-friendly and reinforce predictability of the tax regime over the investment horizon.

### Banking system: progress and remaining vulnerabilities
- Recent improvements:
  - Stability and confidence have improved, including public recapitalization of Caixa Geral de Depósitos and ongoing sale of Novo Banco.
  - BCP received a large capital injection; BPI taken over by Spain’s CaixaBank.
  - Improved market sentiment led to sharp narrowing in sovereign debt spreads since mid-March.
- Remaining challenges:
  - Low asset quality, weak profitability, and limited capital buffers persist.
  - Non-performing loans (NPLs) declined by 0.3 percentage points in 2016 to 17.2 percent of total loans under the European Banking Authority definition, with weakness concentrated in the corporate sector.
  - Reduced operational costs have not offset low interest margins and higher loan loss impairments.
- Policy recommendations and needed actions:
  - Ambitious efforts to strengthen bank balance sheets to improve financial intermediation and raise potential growth.
  - Recent capital increases should be accompanied by comprehensive cleanup of balance sheets and reduction in corporate debt.
  - Implement credible and time-bound plans to write-off, restructure, or sell non-performing assets across banks.
  - Support efforts via the NPL enhanced coordination platform being developed by banks with authorities’ support.
  - Strengthen banks' business models and profitability, including further cost-cutting.
  - Implement the new provisioning standards and build additional buffers.

### Structural reforms and raising potential growth
- Investment:
  - Recent investment growth has been partly financed through internal corporate funding.
  - Investment levels need to increase substantially to raise medium-term growth potential.
- Labor market and competitiveness:
  - Need for a more flexible labor market where wage increases align with productivity.
  - Aim to take advantage of higher-skilled entrants while safeguarding competitiveness.
- Business environment bottlenecks to address:
  - Inefficient judicial processes.
  - Complexity of regulations governing enterprise operations.
- Structural reform focus:
  - Boost investment and productivity through reforms addressing the above bottlenecks.

### Selected Economic Indicators (Year-on-year percent change, unless otherwise indicated)
- Projections: 2016 | 2017 | 2018
- Real GDP: 1.4 | 2.5 | 2.0
- Private consumption: 2.3 | 2.2 | 1.8
- Public consumption: 0.5 | 0.6
- Gross fixed capital formation: 0.1 | 6.9 | 5.7
- Exports: 4.4 | 7.6 | 5.2
- Imports: 4.5 | 7.3 | 5.1
- Contribution to growth (Percentage points):
  - Total domestic demand: 1.5 | 2.6
  - Foreign balance: -0.1
- Resource utilization:
  - Employment: 1.2 | 1.6 | 0.9
  - Unemployment rate (Percent): 11.1 | 9.7 | 9.0
- Prices:
  - GDP deflator: 1.7
  - Consumer prices (Harmonized index)
- Money and credit (End of period, percent change):
  - Private sector credit: -3.7 | -0.5
  - Broad money: -0.4 | 4.3 | 3.2
- Fiscal indicators (Percent of GDP):
  - General government balance: -2.0 | -1.5 | -1.4
  - Primary government balance: 2.7
  - Structural primary balance (Percent of potential GDP): 3.0
  - General government debt: 130.4 | 125.8 | 122.6
- Current account balance (Percent of GDP): 0.8
- Nominal GDP (Billions of euros): 184.9 | 193.8 | 201.1

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

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## References

- [Portugal and the IMF](http://www.imf.org/external/country/PRT/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2017/06/29/mcs6292017-portugal-staff-concluding-statement-of-the-2017-article-iv-mission_