## Portugal: Staff Concluding Statement of the 2022 Article IV Mission

_IMF News, May 16, 2022_

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**Canonical URL:** [Portugal: Staff Concluding Statement of the 2022 Article IV Mission](https://www.imf.org/en/news/articles/2022/05/13/mcs051622-portugal-mission-concluding-statement-2022-article-iv)

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## Bibliographic details
- Published: May 16, 2022

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### Mission and context
- Mission led by Rupa Duttagupta conducted discussions during October 21-November 4, 2021 (virtual) and May 9-13, 2022 (in-person).
- Portuguese economy gained ground in 2021 after a deep pandemic-induced recession; economy was harder hit than the euro area (EA) due to relevance of tourism.
- Strong vaccination drive allowed early lifting of activity restrictions and supported the recovery through early 2022.
- New risks from the war in Ukraine: spillovers through higher commodity prices, greater supply bottlenecks, weaker confidence, softer external demand, and tighter financial conditions.

### Economic outlook and risks
- Growth projections:
  - "about 4.5 percent in 2022 and 2 percent in 2023."
  - "Over the medium term, growth is projected to moderate to below 2 percent"
  - "output still remaining some 2 percent below its pre-pandemic trend by 2027."
- Revisions:
  - "This represents a cumulative downgrade of about one percentage point relative to pre-war."
- Drivers:
  - Growth expected to be led by private consumption, NGEU-backed public investment, and exports; tourism reaching its pre-pandemic level in 2023.
- Inflation:
  - "Inflation is projected to rise to 6 percent in 2022 and start receding in 2023 on the back of declining energy and food prices."
- Downside risks (tilted to the downside):
  - Exceptional uncertainty surrounding the war and potentially new virus waves.
  - Tighter financial conditions could hurt growth and the fiscal position.
  - Effects of the end of loan moratoria have not yet fully materialized and could expose higher insolvencies, lowering investment and bank capital.
  - Slower use of NGEU funds.
  - Public debt will remain high despite projected decline.
  - Rising real estate prices constitute an added vulnerability.
- Upside scenarios:
  - Continuation of strong tourism recovery.
  - Further bounce-back from pent-up demand supported by high vaccination rates.
  - Higher payoffs from NGEU investments.

### Policy priorities (overview)
- Balance short-term urgencies (high energy prices and war impacts) with:
  - Smooth transition to private-led growth.
  - Rebuilding fiscal space.
  - Advancing reforms for a more resilient economy.
- Medium-term emphasis:
  - Structural reforms (including in the context of the Recovery and Resilience Plan, RRP).
  - Sustained public investment.
  - Fiscal consolidation within a medium-term plan to raise growth potential and accelerate income convergence to the EA.

### Fiscal policy
- Near term:
  - Unwinding of COVID-19 measures while maintaining a broadly supportive fiscal policy in 2022 is appropriate.
  - Excluding exceptional COVID-19 measures, "a projected fiscal deficit of 2.4 percent of GDP is appropriately accommodative."
  - Authorities have recently taken measures to mitigate the impact of high energy prices.
  - NGEU grant-financed spending provides additional support.
  - "Some 2 percent of GDP of the 2020–21 fiscal measures are expected to be permanent."
  - Recommendation: further support should be sufficiently targeted and temporary; broad-based price measures and tax cuts should preferably be replaced with more targeted and temporary support for vulnerable households and viable firms.
  - Fiscal policy should be nimble to provide targeted contingency measures under severe downside risks and ready to achieve more ambitious fiscal savings if the economy surprises to the upside.
- From 2023 (medium term):
  - "A gradual fiscal adjustment will be needed to rebuild fiscal space, address ageing-related spending pressures, raise public investment, and reduce debt-related risks."
  - Early announcements of specific fiscal reforms and effective implementation of the Budgetary Framework Law (BFL) would bolster credibility.
  - Recent amendments to the BFL to strengthen the budgetary process and improve integration of the annual budget with the medium-term budgetary framework are welcome.
- Recommended growth-friendly fiscal adjustment focus areas:
  - Tax reforms:
    - Greater efficiency, elimination of distortions, broadening the tax base.
    - Strengthen tax policy and tax expenditure analysis.
    - Streamline and constrain proliferation of tax incentives.
    - Revisit reduced VAT rates.
    - Strengthen less distortionary instruments, such as property and environmental taxes.
  - Rationalizing current spending:
    - Bolster pension sustainability.
    - Strengthen financial management in the national health service.
    - Improve financial sustainability and governance in state-owned enterprises.
    - Better target social benefits.
    - Contain the public wage bill via a comprehensive review of public employment and compensation structures.
  - Maintaining strong growth-enhancing public investment:
    - Public investment has fallen below EU peers over the last decade.
    - NGEU funds can help reverse this trend with scaled up R&D, digital and climate transitions.
    - Efficient and transparent planning, budgeting, implementation, and oversight are key.
    - "Stronger fiscal efforts during 2023–26 will enable maintaining public investment beyond the RRP."

### Corporate and financial policies
- Corporate sector solvency:
  - Support measures estimated to have saved "some one-third of jobs and 20 percent of NFC output."
  - Pandemic-induced solvency needs estimated to have risen by "some 2¼ percent of GDP," with accommodation and food services and transport most impacted.
  - Additional vulnerabilities from the war, cost-push pressures, supply chain disruptions, and higher interest rates could increase insolvency risk.
- Policy recommendations for corporate sector:
  - Resilience and Capitalization Fund (managed by Banco Português de Fomento, BPF) expected to support debt reduction and recapitalization of viable corporates.
  - Prompt implementation of targeted viability-based solvency support leveraging banking sector technical expertise for NFC viability assessments.
  - Clearly define the role of the BPF to ensure accountability and avoid market distortions.
  - Establish and announce a short-term deadline for the suspension of the duty to file for insolvency to allow normalization of insolvency and restructuring system.
  - Swift liquidation of non-viable enterprises, complemented with targeted support for the vulnerable and active labor market policies for displaced workers.
  - Consider simplifying and strengthening Portuguese restructuring and insolvency law; establish clear guidelines for participation of public creditors in procedures; streamline liquidation procedures by addressing bottlenecks in verification of claims and sale of assets.
  - Continue strengthening insolvency statistics for better analysis.
- Banking sector and macro-financial risks:
  - Close monitoring of banks’ credit quality remains essential.
  - Impact of end of moratoria and housing market risks are sources of uncertainty.
  - Prudential authorities actively monitoring credit quality; materialization of credit risk has not been as significant as expected early in the pandemic.
  - NPL reduction strategies are progressing, though a few banks have not completed adjustment processes.
  - Ongoing efforts for timely identification, reporting of credit risk, loan classification, and provisioning need to continue.
  - Monitor risks from rising real estate prices.
  - Once recovery is well established, Banco de Portugal could consider introducing a positive rated countercyclical capital buffer or a sectoral systemic risk buffer against macro-financial risks from banks’ real-estate exposures.
  - Rebuilding capital buffers should proceed gradually; dividend distributions and share buybacks should be cautious until uncertainties on capital needs are better assessed.

### Structural policies
- Recovery and Resilience Plan (RRP) as an opportunity to transform the economy to be more resilient, dynamic, and green.
- Labor market and skills:
  - Advance reforms to raise skill levels and increase competitiveness.
  - Address skill gap and labor market duality to unlock growth.
  - RRP includes targets and reforms to improve quality of education and training, provide lifelong learning for low-skilled adults, reduce digital skill gaps, and raise employability.
  - Need to address labor duality due to differences between permanent and temporary contracts.
  - Active labor market policies (planned in the RRP and the 2022 Budget), higher flexibility of permanent contracts, and improved protection of temporary workers would help reduce contract differences.
- Climate and energy:
  - Portugal has high share of electricity from renewables; carbon tax introduced in 2015; last coal-fired power plant phased out in 2021.
  - Authorities plan to invest "3 percent of GDP by 2030" to support climate-related research and innovation.
  - Achieving RRP milestones for sustainable mobility, energy efficiency, renewables, decarbonization and the bioeconomy requires accelerated implementation of the Roadmap for Carbon Neutrality 2050 and the National Energy and Climate Plan.
  - Priority measures: promote use of biofuels and hydrogen in transport, accelerate renovation of buildings.
  - Consider further adjustment of the carbon price combined with measures to offset impact on the most vulnerable households.
  - Given exposure to extreme weather events, raise investment in risk prevention, preparedness, and climate adaptation.

### Closing
- Mission thanks interlocutors in Portugal—the government agencies, Banco de Portugal, the private sector, and civil society—and the European Central Bank for sharing their time and knowledge.

*Portugal: Staff Concluding Statement of the 2022 Article IV Mission (May 16, 2022).*

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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/2022/05/13/mcs051622-portugal-mission-concluding-statement-2022-article-iv_