## Lessons from Portugal’s Recovery

_IMF News, March 25, 2019_

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**Canonical URL:** [Lessons from Portugal’s Recovery](https://www.imf.org/en/news/articles/2019/03/25/sp-032519-lessons-from-portugal-recovery)

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## Bibliographic details
- Published: March 25, 2019

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### Keynote overview
- Keynote Speech by First Deputy Managing Director David Lipton at the conference "Portugal: Reform and Growth within the Euro Area", Lisbon, Portugal.
- Emphasis on political cohesion and ownership of reforms by successive Portuguese governments and the Portuguese people as central to the recovery.
- Main themes addressed: global slowdown and uncertainty; preparedness for the next downturn; EU institutional reforms and remaining gaps; Portugal’s recovery achievements, vulnerabilities, and reform priorities.

### Growing risks and uncertainties
- Global growth has slowed, including in Europe; trade tensions continue to undermine confidence.
- Financial markets react quickly to perceptions of vulnerability; political divisions have been heightened by rising inequality, economic divergence within the EU, migrant and refugee flows, and Brexit.
- The post-World War II consensus on multilateral solutions appears to be fragmenting.
- Key warning: the tools used to confront the Global Financial Crisis may not be as available or potent next time—monetary policy space likely more constrained; fiscal resources may be limited; political resistance to bailouts may be greater.
- Policy implication: all countries need to renew commitment to reforms that support current growth and strengthen long-term potential.

### Preparedness for the next downturn
- Anticipation that a downturn (garden variety recession or worse) lies ahead; countries must be prepared to sustain growth, prevent systemic shocks, and react effectively.
- Europe must address policy shortcomings that could exacerbate a future downturn.

### Strengthened EU architecture (progress and gaps)
- Progress noted:
  - The ESM provides firepower to support countries in need of financing.
  - The Single Supervisory Mechanism has bolstered bank surveillance.
  - The Single Resolution Mechanism has enhanced credibility of bank resolution and reduced likelihood of taxpayer-funded bailouts.
  - Agreement on establishing a common backstop for the Single Resolution Fund reached after long deliberations.
- Remaining gaps and vulnerabilities:
  - Bank supervision remains too fragmented; banking union lacks a common deposit insurance scheme.
  - Capital markets are fragmented along national lines, limiting cross-border risk sharing.
  - A fiscal-stabilization capacity at the center is needed to respond to macroeconomic shocks and improve the fiscal-monetary policy mix; in its absence the euro area is over-reliant on monetary policy and crisis response burdens fall unevenly on individual countries.
- Conditionality: greater risk sharing must be paired with risk reduction via strong regulation and supervision to avoid moral hazard.

### Global challenges
- U.S. fiscal consolidation is necessary; U.S.-China trade tensions pose the largest risk to global stability.
- Beijing should continue shift toward high-quality growth and support sustainable globalization.
- Emerging markets must face up to external shocks and volatile capital flows.
- Unresolved issues (e.g., Brexit) contribute to uncertainty.
- Countries with glaring vulnerabilities (notably Italy) should act now or risk severe damage in a serious recession.
- Some countries (notably Germany) have fiscal space to increase spending and can support others.

### Portugal’s progress: achievements and key statistics
- Unemployment:
  - Peaked at 16 percent in 2013.
  - Now at 7 percent, its lowest level since 2004.
  - Sharp decline in long-term unemployment and impressive reduction in youth unemployment (not far above the EU average).
- Sovereign borrowing costs:
  - Yields on Portugal’s bonds were in double-digit territory during 2011-2012.
  - The yield on the 10-year bond is currently around 1.3 percent.
- Fiscal position:
  - Overall fiscal deficit in 2010 was about 11 percent of GDP.
  - The government is targeting a small deficit this year.
  - The primary balance is expected to hit its highest level since 1992.
  - Public debt was about 120 percent of GDP last year, the third highest in the euro area, and unlikely to fall below 100 percent until 2025.
- External sector and activity:
  - Exports and tourism have boomed.
  - The current account has been nearly balanced for the last several years after a long period of very large external deficits.
- Financial sector and private sector leverage:
  - Non-financial corporate debt is about 140 percent of GDP.
  - Household debt is about 75 percent of GDP.
  - Non-performing loans (NPLs) declined to about 11 percent in the third quarter of 2018 from above 17 percent in 2015, but remain high; bank profitability continues to be low.

### Challenges to sustain and strengthen the recovery
- High public debt (about 120 percent of GDP) requires continued debt reduction to restore fiscal space useful in a downturn.
- High private sector leverage (non-financial corporate debt about 140 percent of GDP; households about 75 percent of GDP) increases vulnerability.
- Banking system still vulnerable despite progress; NPLs remain around 11 percent (Q3 2018) and profitability is low.
- Need to lift productivity to improve long-term growth prospects while repairing balance sheets.

### Lifting productivity and labor market dynamics
- Recent growth has been above estimated potential, reflecting recovery momentum and a favorable external environment; the core challenge is improving longer-term growth prospects through higher productivity.
- Labor market:
  - Employment gains notable, many new jobs are permanent.
  - Concern: too many new jobs are minimum wage.
  - Economy’s increased export orientation places a premium on a flexible workforce with advanced skills; education levels among young Portuguese are much higher than earlier generations.
- Product and business environment:
  - Portugal’s product market needs reforms; the business sector must adapt to artificial intelligence, robotics, and e-commerce.
  - Decline in NPLs is freeing capital that can be reallocated to 21st century needs, but NPL ratios remain high.
  - The government can facilitate transformation by focusing on reforms and ensuring regulations do not discourage dynamic and innovative activities.

### Role of Europe and policy implications
- Portugal’s top five export markets are in the EU, led by Spain, France and Germany; higher growth in those partners supports Portugal’s transformation.
- Political consensus and cooperation were central to Portugal’s recovery; conflict and unilateral action heighten vulnerabilities and hamper high-quality growth.
- The path forward for the EU lies in a combination of cooperation and reforms—Portugal achieved this amid crisis; Europe can pursue the same without a crisis.

*IMF Communications Department, March 25, 2019*

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## References

- [David Lipton](http://www.imf.org/external/np/omd/bios/dl.htm)
- [Germany and the IMF](http://www.imf.org/external/country/DEU/index.htm)
- [Portugal and the IMF](http://www.imf.org/external/country/PRT/index.htm)
- [Speeches](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/2019/03/25/sp-032519-lessons-from-portugal-recovery_