## IMF Executive Board Concludes 2018 Article IV Consultation with Portugal

_IMF News, September 12, 2018_

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## Bibliographic details
- Published: September 12, 2018

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### Overview
- Executive Board concluded the Article IV consultation with Portugal on September 7, 2018.
- Following robust growth in 2017 driven by investment and exports, activity is expected to moderate in 2018.
- Unemployment continues to fall on the back of sustained employment growth; the output gap is estimated to turn positive in 2018.
- Rising energy prices have pushed up consumer prices, while core inflation remains subdued.
- Strong import growth (linked to investment) has largely been offset by robust exports, particularly tourism, leaving the current account largely unchanged in 2017.
- Headline fiscal deficit deteriorated in 2017 owing to one-off bank recapitalization costs; primary structural balance is estimated to have improved by 0.4 percent of GDP reflecting strict budget execution.
- Sovereign funding costs declined significantly since early 2017 but saw volatility in May and June 2018 owing to spillovers from political uncertainty in Italy.
- Credit growth continues to lag the recovery as banks repair balance sheets; rising capital ratios, falling rates of non-performing loans, and lower impairments improved bank resilience in 2017, with further improvement expected in 2018.
- No significant acceleration in credit growth is expected; the economy should continue deleveraging its external balance sheet.

### Executive Board assessment and risks
- Directors welcomed Portugal’s strong economic performance driven by investment and exports and the job-rich recovery that has led to falling unemployment and broad-based employment creation.
- Directors noted increased external risks from a slowdown in trading partners’ growth and financial-market spillovers.
- Directors encouraged sustaining policy and reform momentum to ensure resilience to shocks, reduce vulnerabilities, and facilitate convergence toward the average income level of the European Union.
- Directors emphasized that current favorable conditions provide an opportunity to frontload planned fiscal consolidation to avoid pro-cyclical adjustment and build policy space for contingent spending needs.

### Fiscal policy and public debt
- Directors recommended focusing lasting consolidation on restraining current expenditure, including via reforms to public employment and pensions.
- Efforts should be made to improve budget monitoring and control, especially in the health-care sector.
- Directors welcomed the authorities’ commitment to reducing public debt and bringing it back to more sustainable levels.
- On constant policies, the ratio of public debt to GDP should steadily decline in the coming years.

### Banking sector and financial stability
- Directors welcomed improved banking sector resilience with higher capital and increased profitability.
- While progress has been made in reducing the stock of non-performing loans (NPLs), further steps are needed to bring down the level of NPLs.
- To prevent new vulnerabilities, Directors encouraged continued focus on preserving credit standards, monitoring mortgage markets, and employing macro-prudential measures where necessary.

### Structural reforms and growth
- Directors emphasized the need to boost potential growth to reduce balance sheet risks and converge to average EU levels of productivity and income.
- They noted that improving educational attainment can offset the impact on growth of an ageing population, but recommended further structural reforms to foster investment and allow high-skilled workers to meet their potential.
- Specific areas highlighted for additional gains:
  - Removing unnecessary regulatory barriers.
  - Lowering energy prices.
  - Better coupling wages to productivity.
  - Further improving the debt enforcement and insolvency regime.
- Directors also noted the need to avoid reemergence of external imbalances as a byproduct of increased investment and encouraged policies to boost private saving and increase incentives to finance projects through non-debt-creating flows.

### Selected economic indicators (Year-on-year percent change, unless otherwise indicated)
- Real GDP: 2017 = 2.7; 2018 = 2.3; 2019 = 1.8
- Private consumption: 2017 = 1.9; 2018 = 1.6; 2019 = (not provided for 2019 in source table — see table)
- Public consumption: 2017 = -0.2; 2018 = 1.0; 2019 = (not provided for 2019 in source table — see table)
- Gross fixed capital formation: 2017 = 9.2; 2018 = 7.6; 2019 = 6.3
- Exports: 2017 = 7.9; 2018 = 6.2; 2019 = 4.7
- Imports: 2017 = 6.8; 2018 = 5.5; 2019 = (not provided for 2019 in source table — see table)
- Contribution to growth (Percentage points)
  - Total domestic demand: 2017 = 2.9; 2018 = 2.4; 2019 = (not provided for 2019 in source table — see table)
  - Foreign balance: 2017 = -0.4; 2018 = -0.5; 2019 = (not provided for 2019 in source table — see table)
- Resource utilization
  - Employment: 2017 = 3.3; 2018 = 1.2; 2019 = (not provided for 2019 in source table — see table)
  - Unemployment rate (Percent): 2017 = 8.9; 2018 = 7.3; 2019 = 6.7
- Prices
  - GDP deflator: 2017 = 1.4; 2018 = (not provided for 2018 in source table — see table)
  - Consumer prices (Harmonized index): 2017 = 1.7; 2018 = (not provided for 2018 in source table — see table)
- Money and credit (End of period, percent change)
  - Bank credit to non-financial private sector: 2017 = -3.1; 2018 = 0.1; 2019 = 0.8
  - Broad money: 2017 = 7.5; 2018 = 3.4; 2019 = (not provided for 2019 in source table — see table)
- Fiscal indicators (Percent of GDP)
  - General government balance: 2017 = -3.0; 2018 = -0.7; 2019 = -0.3
  - Primary government balance: 2017 = 0.9; 2018 = 2.8; 2019 = 3.1
  - Structural primary balance (Percent of potential GDP): 2017 = 3.0; 2018 = (not provided for 2018 in source table — see table)
  - General government debt: 2017 = 125.7; 2018 = 120.8; 2019 = 117.2
- Current account balance (Percent of GDP): 2017 = 0.5; 2018 = 0.2; 2019 = -0.1
- Nominal GDP (Billions of euros): 2017 = 193.1; 2018 = 200.6; 2019 = 207.5

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

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## References

- [https://www.imf.org/-/media/images/imf/bios/imfboard.jpg](https://www.imf.org/-/media/images/imf/bios/imfboard.jpg)
- [The Executive Board](https://www.imf.org/external/np/sec/memdir/eds.aspx)
- [PRESS CENTER](http://presscenter.imf.org/)
- [http://www.imf.org/external/np/sec/misc/qualifiers.htm.](http://www.imf.org/external/np/sec/misc/qualifiers.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2018/09/12/pr18345-portugal-imf-executive-board-concludes-2018-article-iv-consultation_