## Portugal Staff Concluding Statement of the 2023 Article IV Mission

_IMF News, May 9, 2023_

## Source details

**Canonical URL:** [Portugal Staff Concluding Statement of the 2023 Article IV Mission](https://www.imf.org/en/news/articles/2023/05/08/cs050823-portugal-2023-article-iv-mission)

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## Bibliographic details
- Published: May 9, 2023

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### Recent Developments and Outlook
- An IMF mission conducted discussions for the 2023 Article IV consultation with Portugal during April 26-May 5, 2023.
- 2022 performance and early-2023 momentum:
  - Output surpassed its pre-pandemic level in early-2022.
  - Growth in 2022: 6.7 percent (Portugal) versus 3.5 percent (euro area).
  - Growth drivers: rebounding tourism and private consumption (policy support, labor market strength, pent-up demand).
  - Q1 2023 growth: 2.5 percent (year-on-year).
- Inflation and financial conditions:
  - Headline inflation averaged 8.1 percent in 2022.
  - Headline inflation in April 2023: 6.8 percent.
  - Inflation initially driven by global energy and food prices, amplified by spillovers from Russia’s war in Ukraine.
  - High share of variable interest rate loans means monetary tightening has translated into significantly higher borrowing costs.
  - Strong house price growth has dampened housing affordability.
- Projections:
  - Real GDP growth is expected to average 2.6 percent in 2023.
  - Inflation is expected to recede to 5.6 percent in 2023.
  - Growth projected to stabilize to around 2 percent over the medium term.
  - Core inflation is projected to be stickier due to a tight labor market and elevated profit margins.
- Risks to the outlook:
  - Downside: greater-than-expected tightening of financial conditions; sharper global or regional slowdown; greater volatility in commodity prices; banks tightening lending standards; potential sharp correction in housing prices—these could raise systemic risk and crimp domestic demand.
  - Upside: faster tourism momentum and sustained labor market resilience.
  - Medium-term risks: global fragmentation or slower use of Next Generation EU (NGEU) funds could hamper growth potential.
  - Inflation upside risks: higher-for-longer energy prices and nominal wage pressures.

### Fiscal Policy
- 2022 fiscal outcomes:
  - Fiscal measures in 2022: 2 percent of GDP (support to households and energy-intensive firms and tax reduction on energy-related products).
  - Despite measures, the fiscal deficit sharply narrowed due to revenue overperformance.
  - Public debt-to-GDP ratio declined faster than the euro area and fell below its pre-pandemic level.
- 2023 fiscal stance and near-term guidance:
  - Fiscal policy needs to remain non-expansionary to preserve fiscal space and support monetary policy, while being nimble if shocks materialize.
  - Additional fiscal support for 2023: around 2 percent of GDP (public wage and pension increases, temporary VAT exemption on essential items, and housing support measures).
  - Receding energy prices provide an opportunity to phase out broad-based measures and target support to vulnerable households.
  - If growth weakens appreciably, automatic stabilizers should be fully deployed; conversely fiscal overperformance must be saved.
  - Further fiscal support should be reserved only for severe downside scenarios and designed to be temporary, non-price-distortionary, and well targeted.
- Medium-term priorities:
  - Sustain strong fiscal effort to rebuild fiscal space and mitigate public debt risks.
  - Fiscal consolidation combined with strong medium-term growth is key to steady public debt reduction, while continuing public investment even after the end of NGEU funds.
- Recommended revenue and expenditure measures:
  - Tax reforms: eliminate distortions, roll back reduced VAT rates, rationalize tax expenditures, modernize tax system including digitalizing tax administration, and strengthen property taxes.
  - Use falling energy prices as a window for a timely increase in carbon taxes.
  - Expenditure: increase the share of public investment—including by implementing the NGEU-financed Recovery and Resilience Plan—over current spending, reversing recent trends.
  - Main expenditure priorities: improving pension sustainability; containing upward creep in the public wage bill; strengthening the financial position and efficiency of the National Health Service (NHS); further improving targeting of social spending.
  - Structural fiscal reforms: improve public sector efficiency, governance, and fiscal sustainability of state-owned enterprises (SOEs); fully implement the 2015 Budgetary Framework Law to strengthen the medium-term budgetary framework.

### Financial and Macroprudential Policies
- Banking sector condition:
  - Banks’ tier 1 capital ratios (CET1) are comfortably above minimum requirements, though below euro area average and edging down slightly in 2022 amid dividend distributions and some valuation losses.
  - Liquidity buffers remain high.
  - Nonperforming loan ratios have declined.
  - Profitability has risen with strong interest income.
  - Spillovers from recent global financial stress have been limited.
- Macroprudential framework and vulnerabilities:
  - Introduction and tightening of macroprudential measures by Banco de Portugal since 2018 have helped strengthen underwriting standards.
  - Rising cost of living is stretching household finances and could weigh on debt servicing capacity; asset quality deterioration could materialize with a lag.
  - Housing market assessed as overvalued following years of strong house price growth.
- Policy recommendations:
  - Continue prudent risk management, close monitoring of banking vulnerabilities, vigilance on credit quality, interest rate risk, and liquidity management.
  - Improve capital headroom and contingency planning; caution in capital distributions, especially if buffers weaken under stressed conditions.
  - Consider a further gradual macroprudential policy tightening to contain systemic risks from housing market vulnerabilities—e.g., gradually phasing in a sectoral systemic risk capital buffer, provided procyclical effects are avoided.
  - Flexibly adjust macroprudential policies if downside macro-financial risks begin to materialize.
  - Over the medium term, consider a positive neutral counter-cyclical capital buffer (CCyB) to further support financial stability.
- Housing supply and private debt resolution:
  - Policies to support housing supply are recommended to ease housing affordability strains; measures to increase supply of residential and rental property—supplemented by public investment for social housing under the National Recovery and Resilience Plan—are key.
  - The anticipated termination of the Golden Visa program is not expected to significantly impact housing prices.
  - Strengthen private debt resolution: continue streamlining judiciary processes and strengthening out-of-court procedures; reinstate the duty to file for bankruptcy (suspended during the COVID pandemic) to improve resource allocation.

### Structural Policies
- National Recovery and Resilience Plan (NRRP) implementation:
  - Timely implementation would support transition to a more productive, resilient, and green economy.
  - NRRP expected to boost productivity by increasing R&D and public spending to support small and medium enterprises, catalyze digital transformation, promote digital skills, modernize education, support renewable energy, and revamp active labor market policies.
  - Effective completion would help spur private investment.
- Labor market reforms:
  - Address long-standing labor market issues to boost labor productivity and external competitiveness.
  - Reduce duality in the labor market to increase efficiency and enhance equality.
  - The Decent Work Agenda: aims to promote job stability by reducing the maximum number of renewals for temporary employment contracts.
  - Make permanent contracts more flexible to reduce duality while preserving efficiency.
  - Strengthen and better target the social safety net to limit adverse distributional effects.
- Climate and energy policy:
  - Reinstating and increasing the carbon tax—suspended during the energy crisis—would help meet carbon neutrality targets as planned.
  - Portugal’s share of renewable energy is among the highest in the euro area.
  - A gradual increase in the carbon tax, combined with scaling up green investment and targeted support for the vulnerable, would help realize Portugal’s target of carbon neutrality by 2045.

*Portugal Staff Concluding Statement of the 2023 Article IV Mission (May 9, 2023).*

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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/2023/05/08/cs050823-portugal-2023-article-iv-mission_