Press Release: IMF Executive Board Concludes Third Post-Program Monitoring with Portugal

Press Release No. 16/147

April 1, 2016

On March 30, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the third post-program monitoring1 with Portugal.

Highly accommodative macroeconomic conditions have generated only modest growth in the presence of remaining structural impediments. In 2015, low interest rates, a weak euro, and low oil prices—noted in earlier staff reports—remained largely in place, allowing growth to reach 1.5 percent. As the consumption-driven recovery is losing momentum, however, GDP is projected to expand by only 1.4 percent this year and to moderate to 1.2 percent over the medium term.

Portugal appears to have missed the 2015 fiscal deficit target, and is expected to remain in the EU’s Excessive Deficit Procedure. Staff estimates a full-year deficit of 4.4 percent of GDP, compared to the budget target of 2.7 percent, implying a loosening of 0.5 percent of GDP in the structural primary terms. The deficit exceeded the budget plan despite larger-than-expected savings on interest and social expenditures (reflecting the fall in unemployment), as revenues fell well short of the authorities’ ambitious targets.

The banking system is hobbled by low profitability and poor asset quality, and required public support as recently as December 2015. At the same time, Portugal’s stock of corporate debt remains one of the highest in the EU, thereby precluding the allocation of credit to new productive sectors of the economy. On the structural side, the policy changes—already implemented or under consideration—imply at least a partial reversal of structural measures introduced during the Fund-supported program.

Executive Board Assessment2

Executive Directors welcomed the successful stabilization of Portugal’s economy under the Fund-supported program which has paved the way for the ongoing recovery and a decline in unemployment. They noted, however, that significant challenges remain, particularly those arising from the high level of public and corporate debt, unresolved structural impediments, the need to raise the underlying growth potential, and from the uncertain global environment. Directors encouraged the authorities to build on the progress made thus far and to continue to pursue prudent policies and reforms to secure sustainability of public finances, maintain market confidence, address financial sector vulnerabilities, and boost competitiveness and potential growth.

Directors welcomed the authorities’ commitment to fiscal and debt sustainability and encouraged them to follow through with the adjustment process while supporting recovery. To guard against fiscal risks and to maintain market confidence, they highlighted the importance of developing contingency plans to ensure that the 2016 budget targets are met, rationalizing public spending to contain pressures from public wages and pensions, and maintaining fiscal buffers.

Directors noted that while Portugal’s banking system has made progress, further efforts are needed to strengthen bank balance sheets. They encouraged the authorities to build on past measures to improve bank profitability, asset quality, and governance. Maintaining confidence in the financial sector will require vigilance, a build-up of fiscal buffers, and greater transparency with regard to financial sector operations. Directors recommended a more comprehensive strategy to address nonperforming loans along with an ambitious approach to corporate debt workouts, noting that the debt overhang holds back the economy’s growth potential.

Directors emphasized that continued progress on structural reforms is critical to enhance medium-term growth prospects, employment, and income. They encouraged the authorities to keep making progress on labor market and public administration reforms, and avoid any perception of reversal of recent and complex reforms so as to maintain investor confidence and boost the economy’s growth potential.

Portugal: Selected Economic Indicators, 2014–17

(Year-on-year percent change, unless otherwise indicated) Est. Projections 2014 2015 2016 2017 Real GDP 0.9 1.5 1.4 1.3 Private consumption 2.2 2.6 1.5 1.3 Public consumption -0.5 0.8 0.0 0.5 Gross fixed capital formation 2.8 3.7 3.0 2.5 Exports 3.9 5.1 4.2 4.3 Imports 7.2 7.3 4.0 4.5 Contribution to growth (Percentage points) Total domestic demand 2.2 2.5 1.5 1.4 Foreign balance -1.3 -1.0 0.0 -0.2 Resource utilization Employment 1.6 1.1 1.0 0.5 Unemployment rate (Percent) 13.9 12.4 11.6 11.1 Prices GDP deflator 1.0 1.9 1.5 1.4 Consumer prices (Harmonized index) -0.2 0.5 0.7 1.2 Money and credit (End of period, percent change) Private sector credit -8.0 -4.1 0.3 0.6 Broad money -0.9 3.9 2.4 2.2 Fiscal indicators (Percent of GDP) General government balance1 -7.2 -4.4 -2.9 -2.9 Primary government balance -2.3 0.3 1.7 1.6 Structural primary balance (Percent of potential GDP) 3.5 3.0 2.5 2.0 General government debt 130.2 128.8 127.9 127.3 Current account balance (Percent of GDP) 0.1 0.5 0.9 0.4 Nominal GDP (Billions of euros) 173.4 179.4 184.6 189.6 Sources: Bank of Portugal; Ministry of Finance; National Statistics Office (INE); Eurostat; and IMF staff projections. 1In 2014, one-off measures from SOE and banking sector support operations, CIT credit, and the upfront costs of mutual agreements amounted to 3.7 percent of GDP. In 2015, fiscal cost from the resolution of Banif amounted to 1.2 percent of GDP.

Portugal: Selected Economic Indicators, 2014–17

(Year-on-year percent change, unless otherwise indicated) Est. Projections 2014 2015 2016 2017 Real GDP 0.9 1.5 1.4 1.3 Private consumption 2.2 2.6 1.5 1.3 Public consumption -0.5 0.8 0.0 0.5 Gross fixed capital formation 2.8 3.7 3.0 2.5 Exports 3.9 5.1 4.2 4.3 Imports 7.2 7.3 4.0 4.5 Contribution to growth (Percentage points) Total domestic demand 2.2 2.5 1.5 1.4 Foreign balance -1.3 -1.0 0.0 -0.2 Resource utilization Employment 1.6 1.1 1.0 0.5 Unemployment rate (Percent) 13.9 12.4 11.6 11.1 Prices GDP deflator 1.0 1.9 1.5 1.4 Consumer prices (Harmonized index) -0.2 0.5 0.7 1.2 Money and credit (End of period, percent change) Private sector credit -8.0 -4.1 0.3 0.6 Broad money -0.9 3.9 2.4 2.2 Fiscal indicators (Percent of GDP) General government balance1 -7.2 -4.4 -2.9 -2.9 Primary government balance -2.3 0.3 1.7 1.6 Structural primary balance (Percent of potential GDP) 3.5 3.0 2.5 2.0 General government debt 130.2 128.8 127.9 127.3 Current account balance (Percent of GDP) 0.1 0.5 0.9 0.4 Nominal GDP (Billions of euros) 173.4 179.4 184.6 189.6 Sources: Bank of Portugal; Ministry of Finance; National Statistics Office (INE); Eurostat; and IMF staff projections. 1In 2014, one-off measures from SOE and banking sector support operations, CIT credit, and the upfront costs of mutual agreements amounted to 3.7 percent of GDP. In 2015, fiscal cost from the resolution of Banif amounted to 1.2 percent of GDP. 1 The central objective of PPM is to provide for closer monitoring of the policies of members that have substantial Fund credit outstanding following the expiration of their arrangements. Under PPM, members undertake more frequent formal consultation with the Fund than is the case under surveillance, with a particular focus on macroeconomic and structural policies that have a bearing on external viability. 2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.





