Portugal: Staff Report for the 2003 Article IV Consultation

Portugal achieved progress in containing the fiscal deficit, strengthening financial sector resilience, and structural reforms. Executive Directors commended the efforts to contain the fiscal deficit in line with the requirements of the Stability and Growth Pact. They encouraged the authorities to implement the recommendations of the fiscal Report on the Observance of Standards and Codes (ROSC) and to move toward comprehensive multiyear budget targets. They underscored that a sustainable economic recovery hinges on strengthening competitiveness and on coping with the effects of euro appreciation.


Portugal achieved progress in containing the fiscal deficit, strengthening financial sector resilience, and structural reforms. Executive Directors commended the efforts to contain the fiscal deficit in line with the requirements of the Stability and Growth Pact. They encouraged the authorities to implement the recommendations of the fiscal Report on the Observance of Standards and Codes (ROSC) and to move toward comprehensive multiyear budget targets. They underscored that a sustainable economic recovery hinges on strengthening competitiveness and on coping with the effects of euro appreciation.

I. Report on the Discussions

A. Adjustment to Past Excesses: Structural and Cyclical Impediments to Growth

1. A euro-entry related boom faltered by mid-2002, and Portugal recorded the largest real GDP decline among advanced economies in 2003 (Table 1; and Figure 1). The diagnosis of recent economic developments was broadly Shared: during the Second half of the 1990s, strong domestic demand growth was fueled by euro-entry-related declines in interest rates and probably also overly optimistic expectations of the growth-benefits from monetary union. This was accompanied by an accumulation of large imbalances—rapidly rising household indebtedness, which underpinned a consumption and construction boom; and a very high external current account deficit. With some private sector entities becoming overleveraged, domestic demand collapsed in 2002/03. Moreover, fiscal consolidation had failed to advance during the boom years, and Was, Within the strictures of the Stability and Growth Pact (SGP), tightened in parallel with falling private sector demand in 2002 (Table 2). In addition, Portugal’s trade pattern made it particularly susceptible to the slowdown in Europe. Against this background, employment declined in 2003 and the unemployment rate increased from 4½ percent in the first half of 2002 to over 6½ percent.

Table 1.

Portugal: Selected Economic Indicators, 1997–2004 1/

(Changes in percent, except as otherwise indicated)

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Sources: Bank of Portugal; Ministry of Finance; National Statistics Office (INE); and Fund staff estimates and projections.

Unless otherwise noted, 2003 and 2004 data are staff estimates or projections.

Asset sales, including UMTS receipts, the transfer of the postal pension fund and securitization are netted out for purposes of calculating structural balances.

End-of-period data.

Excludes the currency in circulation held by nonbank private sector.

Includes securitized loans. 2001 onwards it is also corrected for loan write-offs and reclassifications.

As of November 2003.

As of December 2003.

Data refer to new deposits for 1997–2002 and to the stock of outstanding deposits thereafter. Before 2003 deposit rate with 91-180 day maturity is reported.

Data refer to new loans for 1997–2002 and to the stock of outstanding loans thereafter. Before 2003 lending rate with 91-180 day maturity is reported.

Figure 1.
Figure 1.

Portugal: Comparison of Selected Economic Indicators, 1993–2003 1/

(In percent)

Citation: IMF Staff Country Reports 2004, 080; 10.5089/9781451832167.002.A001

Sources: Eurostat; and IMF, World Economic Outlook.1/ Shaded areas show staff projections.2/ Data from 1995 onwards.3/ Based on the harmonized index of consumer prices.
Table 2.

Portugal: General Government Accounts, 1997–2004

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Sources: Ministry of Finance; and Fund staff estimates.

The transfer of the postal pension fund in 2003 and securitization in 2003-04 are added to the asset sales.

Structural balances are calculated using the staff’s estimates of potential output. Asset sales, including UMTS receipts, the transfer of the postal pension fund and securitization are netted out for purposes of calculating structural balances.

Selected Indicators for Portugal and the Euro Area, 2002–04

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Sources: IMF, International Financial Statistics; World Economic Outlook (September 2003) for euro area; and Fund staff estimates and projections for Portugal.

For Portugal, includes capital transfers.

For 2003, data refer to October for Portugal; and November for euro area.

For Portugal, excludes asset sales.


Portugal: Household Indebtedness and Enterprise Leverage Ratios, 1996-2002

(In percent)

Citation: IMF Staff Country Reports 2004, 080; 10.5089/9781451832167.002.A001

1/ In percent of disposable income.2/ Debt-lo-equity ratio, nonfinancial corporations.

2. Following a drop in real GDP in 2003, the authorities and staff expected a gradual recovery in 2004, but with growth remaining below potential and contingent on a strengthening of external demand. In 2003, real GDP declined by an estimated 1 percent, as a large drop in domestic demand was only partly cushioned by a positive foreign sector contribution. For 2004, the authorities expected the following factors to continue to restrain domestic demand:

  • Balance sheet adjustments: with household indebtedness high by international standards, further adjustments are likely to constrain consumers. Staff also saw the possibility that investment would be held back by the earlier, relatively large increase in leverage ratios (as explored in more detail in the accompanying Selected Issues paper).

  • Fiscal consolidation: the 2004 budget targets a broadly unchanged headline deficit, which would result in a significant decline of the structural deficit (see below).

At the same time, the economy was seen as benefiting from low interest rates—with ex post real interest rates (due to higher inflation) below the euro-area average (Figure 2)—and from the projected global recovery. In all, the authorities expected real GDP growth of around ¾–1 percent in 2004, broadly in line with other forecasts, including staff’s.

Figure 2.
Figure 2.

Portugal: Monetary Conditions Index and Real Interest Rates, 1995-2003

Citation: IMF Staff Country Reports 2004, 080; 10.5089/9781451832167.002.A001

Sources: Bank of Portugal; National Statistics Office (INE); and Fund staff estimates.1/ The index is the weighted average of real short-term interest rates and real exchange rates (based on unit labor costs).

3. It was agreed, however, that a recovery was subject to downside risks. While confidence indicators (after reaching historical lows) and tradable goods data (for exports and industrial production) have strengthened, concrete signs of a broad-based upswing remained few. In particular, real GDP growth was still negative in the third quarter of 2003 (the latest available data).1 Moreover, there was a consensus that balance sheet adjustment could be more pronounced than envisaged, while external downside risks related to the strength of the projected recovery in Europe and a possible further euro appreciation. At the same, growth could surprise on the upside, should the recovery in world demand gain additional momentum and domestic investment rebound more strongly, in the face of possible capacity constraints (following a drop of investment by almost 15 percentage points during 2002–03).


Portugal: Confidence Indicators, 2000-04

Citation: IMF Staff Country Reports 2004, 080; 10.5089/9781451832167.002.A001

Source: WEFA Intline.

4. There was some debate regarding the extent to which weakened competitiveness and external indebtedness could undermine future growth prospects:

  • Competitiveness has deteriorated considerably in recent years, as labor cost and price increases exceeded the euro-area average (see text figure). However, Portugal’s relatively weak cyclical position seemed to finally narrow the differentials (Figures 34): consumer price inflation declined to close to the euro-area average by end-2003; and contract wage increases moderated in 2003, although they remained above those in the euro area. Even so, and with the euro appreciating, the (consumer-price-based) real effective exchange rate rose by over 4 percent year-on-year through October 2003. For 2004, the authorities expected some further wage moderation, as the full extent of the recession had now become apparent to the social partners.

  • The external current account deficit has narrowed markedly, from 8½ percent of GDP (including capital transfers) in 2001 to an estimated 3¼ percent of GDP in 2003. The decline reflected mainly falling imports—and, to a lesser extent, rising exports, net services, and EU transfers (Table 3). Longer-term bank borrowing remained the major financing source of the current account deficit.

  • While declining, external borrowing needs remained sizable, adding to already high net external indebtedness (45 percent of GDP in 2002). This left the economy exposed to potential vulnerabilities, even if these have changed in the context of monetary union and with an external debt that is largely denominated in euros (see Appendix III).

Figure 3.
Figure 3.

Portugal: External Sector Developments and Exchange Rates, 1995–2003 1/

Citation: IMF Staff Country Reports 2004, 080; 10.5089/9781451832167.002.A001

Source: IMF, Information Notice System and World Economic Outlook; and Fund staff projections.1/ Negative number indicates an increase.
Figure 4.
Figure 4.

Portugal; Labor Market Conditions and Price Developments, 1995–2003

(In percent)

Citation: IMF Staff Country Reports 2004, 080; 10.5089/9781451832167.002.A001

Sources: Bank of Portugal; National Statistics Office (INE); and EUROSTAT.1/ Change in methodology starting in 1998.2/ Proportion of total unemployed who have been unemployed for a year or more.3/ Proportion of those 15–24 years of age who are unemployed.4/ Three-month moving average weighted by the number of workers covered in each month.
Table 3.

Portugal: Balance of Payments, 1997–2003

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Sources: Bank of Portugal; and Fund staff calculations.

End-of-period data.


Cumulated Change in Real Effective

Exchange Rate (ULC), 1997-2002

Citation: IMF Staff Country Reports 2004, 080; 10.5089/9781451832167.002.A001

Source: Eurostat.

5. The authorities expressed some concern for future growth prospects should competitiveness weaken further—while staff saw a strengthening of competitiveness as necessary for robust medium-term growth. Staff’s concern related to several factors: the effects of recent declines in competitiveness had not become fully visible (with the risks further aggravated by the euro appreciation subsequent to the discussions in Lisbon); recent gains in market shares were likely secured amid falling profit margins in the export sector and may thus not be sustainable; the external current account deficit, while narrowing, remained sizable at a time when the output gap in Portugal was larger than in partner countries, temporarily narrowing the deficit; in terms of saving-investment balances, a fall in investment was the main factor behind the recent current account deficit adjustments (Figure 3, which could be at risk once investment rebounds; and, over time, expected increases in euro-area interest rates (and thus in external debt service payments), competition from EU accession countries, and eventually a decline in EU structural funds were all likely to weigh on the external accounts. Still, Bank of Portugal officials thought that balance sheet adjustments (following the earlier rapid rise in indebtedness) would be the dominating driving force, provided that a further erosion of competitiveness could be prevented. In this regard, there was agreement between staff and the authorities on the pivotal role of wage restraint. Labor union representatives stressed also the role of improving competitiveness through steps to raise productivity (see below).

B. Fiscal Policy

Recent developments

6. Fiscal consolidation advanced considerably since 2001. After exceeding 4 percent of GDP in 2001, the general government deficit fell to 2¾ percent of GDP in 2002, and both the staff’s and the authorities’ latest estimates for the 2003 deficit were just below 3 percent.2 The decline in the deficit since 2001 reflected mainly: (i) an increase in the standard VAT rate in mid-2002; (ii) cuts in capital expenditures in 2002; (iii) steps to contain the public sector wage bill; and (iv) recourse to extensive one-off measures. The deficit reduction came despite sharply deteriorating economic conditions and related revenue shortfalls—although staff noted that the revenue underperformance vis-á-vis the budget had also reflected overly optimistic assumptions in the original budget as well as possible weaknesses in tax administration. Efforts to keep spending within budgetary limits were largely successful in 2003, and the steady upward trend in public spending ratios was arrested after 2001 (see text chart above).


Portugal: General Government Primary Expenditure, 1995-2003

(Excluding asset sales; in percent of potential GDP)

Citation: IMF Staff Country Reports 2004, 080; 10.5089/9781451832167.002.A001

7. However, deficit reduction has relied extensively on one-off measures—notwithstanding progress in instituting some expenditure measures that should yield considerable savings over time. One-off measures that reduce the Maastricht-based fiscal deficit have included asset sales, a general tax amnesty in 2002, and the takeover of the postal pension fund as well as securitization of tax and social security arrears in 2003.3 The authorities noted that these measures had prevented a more pronounced increase in the public debt and helped Portugal meet its obligations under the SGP—and while the authorities viewed recent actions at the euro-area level as undermining the effectiveness of the Pact’s rules, they still considered these rules as appropriate for Portugal from a domestic perspective. With respect to one-off measures, staff agreed that some could play a useful role during times of weak domestic demand, as they typically had smaller near-term growth effects. But it also stressed that their sheer magnitude (an estimated 2½ percent of GDP in 2003) implied that the fiscal consolidation task was far from complete, a view fully shared by the authorities. Indeed, staff’s estimates suggested that, excluding one-off measures, the structural fiscal deficit had not declined in 2003 (see text table). The authorities noted, however, that this view did not Capture some of the progress achieved on the expenditures side. Staff agreed that important savings—for example, from reducing public employment in 20034 or ending the mortgage subsidy scheme in 2002—would only accrue over time, a feature not captured in these structural deficit estimates.

Portugal: General Government Developments, 2001-03

(In percent of GDP)

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In percent of staff’s estimate of potential GDP.

In 2003, the transfer of the postal pension find and securitization are added to the asset sales.

Securing fiscal sustainability and the authorities’ consolidation strategy

8. The authorities agreed that further fiscal consolidation was imperative to secure fiscal solvency. With the structural deficit large and aging-related spending set to increase substantially, further steps are needed to prevent a significant rise in the public debt-to-GDP ratio; indeed, in the absence of such steps, this ratio would exceed 100 percent by 2030 (see text box below). The authorities also argued that reducing the fiscal deficit had an important role to play in reducing the external current account deficit (and thus the economy’s reliance on foreign saving).

Securing Fiscal Solvency

Challenges to secure fiscal solvency relate in part to presently high fiscal deficits, but also to aging-related spending pressures. Staff projections—incorporating the authorities’ aging-related spending projections and macroeconomic assumptions; a constant non-aging-related structural primary balance at its 2003 level; and a real interest rate of no 3 percent—suggest that the public debt-to-GDP ratio (presently around 60 percent) would exceed 100 percent by 2030, with further increases thereafter. Moreover, these debt dynamics are based on assumptions for economic growth and productivity that are relatively optimistic by historical standards (important shorter-term risks, including for growth, are discussed in Appendix III). These projections and associated risks clearly illustrate the urgency for addressing both the current deficits as well as aging-related spending pressures.


Portugal: Long-Term Aging-Related Fiscal Projections, 2000-50

(In percent of GDP)

Citation: IMF Staff Country Reports 2004, 080; 10.5089/9781451832167.002.A001

Sources: Portuguese authorities; and Fund staff calculations.

9. Against this background, the Stability Program (SP) targets a steady, gradual reduction of the structural fiscal deficit—and staff emphasized also the need for a clear strategy to phase out one-off measures. The SP envisages a reduction of the structural fiscal deficit by ½ percentage point of GDP per annum during 2004-07, reaching a small structural surplus in the latter year. The staff welcomed the general strategy, but noted that the required measures (and their initial negative fiscal demand effects)5 were considerably larger, since they would also have to replace the one-off measures. The minister noted that given their magnitude in 2003 and current economic weakness, recourse to one-off measures would likely be necessary for some time, and efforts were underway to identify potential revenue sources in this area, including from asset sales. Nevertheless, it was agreed that durable expenditure savings would have to replace the one-off measures over time—and the authorities were considering staff’s suggestion of providing a clear timetable for phasing out all one-off measures, preferably in the context of multiyear expenditure targets and by the end of the current legislature (in 2006), with the precise timing depending in part on the strength of the economic recovery. Concerning fiscal stabilizers, the authorities agreed that they had a role to play along the structural deficit reduction path—but expressed resolve to intervene with offsetting measures, should the play of stabilizers jeopardize the SGP’s 3 percent of GDP deficit limit.

10. The 2004 budget targets are broadly consistent with the fiscal consolidation strategy outlined above, but staff thought that insufficient measures were in place to secure these targets. The budget envisaged a reduction of the overall structural deficit of 0.6 percent of GDP—notwithstanding (i) a reduction in the corporate income tax rate from 30 percent to 25 percent (estimated by the authorities to cost 0.1 percent of GDP in 2004 and 0.3 percent in 2005), and (ii) a decline in one-off measures by about 1½ percentage points to 1 percent of GDP (mainly from asset sales). Staff, however, estimated that the 2004 deficit target would be exceeded by some 2 percent of GDP, absent further measures: the 2003 revenue base (net of securitization) was well below the assumptions underlying the 2004 budget, and some risk related also to spending on wages and by local governments. The authorities did not disagree with the need for additional measures—although of a smaller magnitude than envisaged by the staff—and indicated that they would secure those, as needed, to meet the deficit target.

Portugal: Fiscal Outlook, 2003-04

(In percent of GDP)

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In percent of staff’s estimate of potential GDP.

The transfer of the postal pension fund in 2003 and securitization in 2003 and 2004 are added to the asset sales.

Expenditure and tax reform

11. The updated Stability Program places a decline in the public expenditure ratio at the center of the authorities’ fiscal policy strategy (Table 4). The expenditure-to-GDP ratio is to fall by 3½ percentage points of GDP during 2004-07, with public consumption to decline by more than 2 percentage points. This would create room to achieve both the fiscal consolidation targets and a reduction of the tax-to-GDP ratio by almost 1 percentage point.

Table 4.

Portugal: Stability and Growth Program and An Illustrative Medium-Term Staff Scenario, 2003-07

(In percent of GDP, unless otherwise indicated)

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Sources: Ministry of Finance, “Stability and Growth Program: Update for 2004-07” (December 2003); and Fund staff estimates and projections.

This illustrative scenario is based on an unchanged policy stance (i.e., a constant structural primary balance, including asset sales) from 2005 onwards.

12. The mission welcomed the targeted expenditure restraint, and discussions focused on selected areas where progress would be essential to secure these objectives. While some steps have been taken, there was a consensus that the main tasks still lay ahead if the expenditure targets are to be met.

13. Containing Portugal’s exceptionally high public sector wage bill was the main focus of the government’s expenditure-reduction strategy. Following a protracted rise (in relation to GDP) in earlier years (see text table), the government introduced several measures to contain wage expenditures during 2002/03. These included a hiring freeze (although with exemptions covering education, health, and security services); a suspension of career reclassifications; steps to facilitate internal job mobility, which would help reduce external recruitment; and, for 2003, a partial wage freeze (wage increases were zero for monthly wages above €1,000 and 1.5 percent for lower wages). As a result, the 2003 wage bill was kept below budget targets—and the estimated number of civil servants declined, reflecting also a surge in retirements. The government intended to maintain the hiring freeze in 2004 and to limit strictly wage increases, which were still under discussion with the unions. In addition, draft laws envisaged far-reaching public administration reforms, including steps to strengthen the role of performance-based incentives (especially at the managerial level) and to facilitate outsourcing. These steps generally went in the direction of earlier staff recommendations, but the authorities agreed that their effectiveness depended critically on the (still pending) implementation measures.

General Government Wage Bill

(In percent of GDP)

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Source: European Commission.

14. The discussion also covered savings in other spending areas. For 2004, the authorities aimed in general for a reduction in operating expenditures by 10 percent. On health care, expenditure savings were to arise from efficiency gains following the corporatization of 31 hospitals in 2003, which provided these entities with greater autonomy and performance-based incentives; and from changes in pharmaceutical reimbursements that encouraged greater use of generics. On education, tight spending caps relied on closing small schools and improving cost recovery at the tertiary level. In light of the experience in other countries, staff also saw room for savings from expanding centralized, electronic procurement, and the authorities planned to utilize this room. Finally, the Stability Program envisaged a gradual decline in public investment (in relation to GDP) from relatively high levels—as EU transfers were expected to fall off and the room for public-private partnerships would be fully exploited.

15. The mission underscored that reforms of aging-related spending would be critical to secure fiscal sustainability—but little progress was likely in this area in the near term. Aging-related spending pressures are broadly comparable to those in other EU countries; staff cautioned, however, that, for Portugal, the projected costs (in relation to GDP) benefited from an envisaged sharp increase in productivity growth (as discussed in the Selected Issues papers). The authorities noted that recent reforms had addressed large disparities between the generosity of public and private sector pensions (although older civil servants remained grandfathered under the previous rules), but other steps (including higher accrual rates of low wage earners) offset potential savings. The staff called for early progress, possibly with a combination of reforms, including an increase in retirement ages mirroring increases in life expectancy, a cut in effective indexation, and a reduction of the large tax exemptions for retirees. The authorities stressed, however, that their efforts were focused on reducing the fiscal deficit in coming years, and that opening up a politically costly dispute over pensions could prove counterproductive. This was especially the case since the need for reform was, after the earlier steps, not widely recognized among the social partners; moreover, ongoing fiscal consolidation efforts had already solicited considerable public opposition.

Public Pension Expenditures

(In percent of GDP)

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Sources: EU (2001); and Rodrigues (2002).

16. Implementing recommendations of a recent fiscal Review of Standards and Codes (ROSC) could facilitate the efficient achievement of fiscal objectives. The authorities welcomed the review’s findings and were considering several proposals, including for strengthening budget preparations, introducing a binding multiyear framework (with some progress already underway) and risk analysis, and improving the information system (covering also arrears and guarantees). The needs were highlighted by continued difficulties to monitor and control spending at the local government level; by again rising arrears of health services; and by the accumulation of large state liabilities to public-private partnerships in the past.

17. Turning to tax policy, the government viewed tax reductions as important for raising long-term growth, and focused on tax administration to preserve the revenue base. The main objective was to establish a competitive corporate tax environment, not least in view of tax levels (and reform plans) in some EU accession countries. The corporate income tax rate would be cut to 20 percent in 2006, following its reduction to 25 percent in 2004. Staff agreed that tax reductions could entail some growth benefits—especially with the revenue burden now close to the (high) euro-area average (Figure 5). However, it cautioned that the benefits depended on durable expenditure cuts—commensurate to safeguard also the fiscal consolidation targets. While it was not clear that these conditions were in place in 2004, the authorities noted that the initial revenue impact of the corporate tax reductions would be limited (as discussed above). Steps to reform local property taxation were also underway. On tax administration, staff raised concerns about the apparent underperformance of several taxes vis-á-vis their base. The authorities aimed to address these issues, including with expanded cross checking.

Figure 5.
Figure 5.

Portugal: International Comparisons of Fiscal Trends, 1995–2003 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2004, 080; 10.5089/9781451832167.002.A001

Sources: IMF, World Economic Outlook; and Fund staff estimates.1/ Shaded area show staff projections.

C. Financial Sector Issues

18. Private sector loan growth has continued to decline, but still outpaced income growth in 2003. Private sector credit growth fell from about 10 percent at end—2002 to 6½ percent in November 2003. Levels of bank credit to enterprises remained essentially unchanged since the spring of 2003, but mortgage lending continued to rise at double digit rates. Overall, the private sector credit-to-GDP ratio—already among the highest in the EU (see text chart)—continued to increase, with the impact on current debt service contained by the fall in interest rates. Deposit growth continued to lag the growth in credit. The gap was financed primarily with medium- and long-term debt securities and also with loan securitization, and the banks’ regulatory liquidity ratio increased.


Portugal: Credit Growth, 2001-2003 1/

(Nonseasonally adjusted; year-on-year growth rate; in percent)

Citation: IMF Staff Country Reports 2004, 080; 10.5089/9781451832167.002.A001

1/ Data adjusted for securitizations, reclassifications, and write-offs.

Portugal: Private Sector Credit, 1998-2002

(In percent of GDP)

Citation: IMF Staff Country Reports 2004, 080; 10.5089/9781451832167.002.A001

19. The weakening economy has led to some increase in the regulatory nonperforming loans (NPLs) measure and specific provisions, but recorded profits of financial institutions held up quite well (Tables 5-6). While still near historical lows, the NPL ratio has increased gradually, notwithstanding significant loan write-offs. New rules entailed a welcome acceleration of specific provisions—covered to some extent by reallocations from general provisions, which were reduced as part of the overall reform of the provisioning system, cushioning the impact on profitability.6 Profitability of financial institutions also benefited from the rebound in equity markets as well as from rising banking commissions and cost containment, while banks’ capital adequacy ratios remained stable in 2003. At the end of 2002, all insurance companies and pension funds met regulatory requirements, although some had required additional capital injections; aggregate data on insurance sector solvency ratios for 2003 were not yet available, but large companies reported improvements.

Table 5.

Portugal: Indicators of External and Financial Vulnerability, 1997–2003 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Bank of Portugal; Ministry of Finance; IMF, Balance of Payments Yearbook database; and Fund staff estimates.

The interpretation of some indicators is affected by the introduction of monetary union in 1999.

Reserves and foreign liabilities refer to the Bank of Portugal, both before and after EMU. Statistical break in 1999.

Ratio of reserves to M2 until 1998, and harmonized M3 1999 onwards.

Banks only.

External debt concept for euro-area members.

Portuguese escudos per U.S. dollar until 1998, euro per U.S. dollar thereafter. The irrevocable PTE/euro consversion rate is 200.482.

Share of loans in non-euro currencies.

Share of deposits in non euro area currencies.

Real estate defined as the sum of total credit by monetary financial institutions to individuals for housing and to nonfinancial. corporations for construction; private credit defined as total domestic credit excluding the general government.

Capital over risk-weighted liabilities. Consolidated data for the banking system.

Table 6.

Portugal: Financial Soundness Indicators for the Bank and Nonbank Sectors, 1999-2003

(In percent, unless otherwise indicated)

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Sources: Bank for International Settlements; Bank of Portugal; Institute of Insurance and Pensions; and IMF calculations.

Data are for consolidated accounts of financial groups comprising at least one deposit taking institutions (excluding those with head offices in the Madeira off-shore center and carrying out activities predominantly with nonresidents).

Included in the “tore set” of FSIs.

Loans to resident nonfinancial sector.

Loans to resident nonmonetary sector in FX as a share of total loans.

NPLs are defined as interest and principal overdue more than 30 days.

2003 returns are annualized.

Net income is before deduction of minority interest.

Noninterest expense including depreciation.

Rates on outstanding amounts (12-month average). Rates before 2002 estimated from new loans.

Liquid assets defined as cash, interbank assets (including in central banks), and government securities.

Interbank liabilities include liabilities with central banks.

Of resident nonmonetary sector. Excludes shares.

The fall in the solvency ratio during 2000-2001 was due to a change in the calculation of required capital.

Estimates for 2003.

Average annual rate of change.