Portugal: Selected Issues
Author: International Monetary Fund. European Dept.
Publication Date:
12 Sep 2018
eISBN:
9781484375969
Language:
English
Keywords:
ISCR; CR; Portugal; capital stock; debt; current account deterioration; goods trade balance; goods export; adjustment in the current account balance; period of a current account deterioration; Current account balance; Trade balance; Export performance; potential GDP
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Selected Issues

Abstract

Selected Issues

Portugal’s Large Current Account Adjustment1

A. Introduction

1. From 2008 through 2013, Portugal underwent a very large current account adjustment from a deficit of 12 percent of GDP to a surplus of 1½. This followed an extended period of large and widening current account deficits starting in the mid-1990s, during which the Net International Investment Position (NIIP) deteriorated substantially. Between 2013 and 2017, the current account has stayed slightly positive. The deterioration of the Net International Investment Position (NIIP) stopped and even started to reverse, although liabilities still exceed assets by more than 100 percent of GDP in 2017.

uA05fig01

Current Account and Net International Investment Position

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Source: Haver Analytics.

2. This paper sets out to assess this large current account adjustment using three different approaches:

  • i. Describing the main characteristics of the current account adjustment during and after the Global Financial Crisis (GFC) from several perspectives (for example, changes in cost competitiveness, export market shares, and the saving-investment balance).

  • ii. Comparing the widening and subsequent adjustment of the current account deficit to other episodes of large current account adjustments, by applying a simple event study methodology.

  • iii. Using the results from the IMF’s External Balance Assessment (EBA) approach to attribute the changes in the current account to various fundamental and policy factors, to get a sense of how sustainable the adjustment will be.

3. The paper is organized in line with these three elements of analysis of the current account adjustment. The next section will describe the adjustment from different angles and section C discusses the event study. Section D will present the results from the EBA analysis and Section E concludes.

B. The Current Account Adjustment

4. The widening of the current account deficit from the mid-1990s was driven by a rapid decline in the goods trade balance. The current account went from near balance in 1995 to a deficit of about 11 percent only five years later in 2000, when the goods trade deficit reached 13 percent of GDP. Domestic demand played a role, as suggested by the fact that real GDP growth averaged about 4 percent during 1996–2000; after 2000 the economy went into a recession, and the current account improved substantially. Then, as the economy recovered, the current account and trade balances widened again. In addition, contributing to the widening and sustained deficit in the goods and services balance were external trade shocks such as increased competition from Asia and Central and Eastern Europe.2 The deterioration of the current account also coincided with an acceleration in the growth of credit to households and non-financial corporations. Credit to the private sector as a share of GDP went from being below the euro area average in 1995, to being much higher just a few years later.3

uA05fig02

Current Account and Net Components

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: Haver Analytics; and IMF staff calculations.

5. The adjustment in the current account balance that started in 2008 was led by trade. The goods and services balances, and the primary and secondary income balances all improved. However, it was trade in goods and services that accounted for the lion share in the overall improvement. By 2017, the goods trade balance had improved by about 5 percentage points of GDP and the services balance by about 4 percentage points.

uA05fig03

Current Account and Net Components

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: Haver Analytics; and IMF staff calculations.
uA05fig04

Goods and Services Trade, 2007–2017

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: Haver Analytics; and IMF staff calculations.

6. The rapid strengthening of the trade balance occurred as import growth fell and export growth held up. Exports of goods and services continued to steadily grow as a share of GDP, increasing by about 12 percentage points of GDP from 2008 through 2017—that is, growing by about 4½ percent on average per year. Imports, on the other hand, saw significant deceleration and even compression, in particular during 2010–2013, when the most substantial improvement in the trade and current account balance took place. Imports of goods and services as a share of GDP only returned to their pre-crisis level in 2017.

uA05fig05

Export and Import Growth

(Percent)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: Haver Analytics; and IMF staff calculations.

7. Export growth has been strong after the crisis, with especially strong services exports led by a booming tourist sector. The initial shock as the global financial crisis (GFC) took hold caused a sharp drop in goods exports, but was followed by a strong rebound as the crisis ebbed. Services exports have outperformed goods exports. A vibrant tourism industry, accounting for about half of all services exports, and 18 percent of total exports, has delivered very fast export growth. 4 Goods exports growth has also been quite strong, in particularly in 2017, and it has been broad based, except for fuels.

uA05fig06

Export Growth

(Percent)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: Haver Analytics; and IMF staff calculations.
uA05fig07

Exports by Broad Economic Categories

(Nominal percent change)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: Haver; and IMF staff calculations.

8. Import compression was led by goods, as services imports account for a relatively modest share of total imports (18 percent). The import compression was the strongest for goods related to capital investment, and transport equipment. As the economy has rebounded, this is also where imports growth has been the strongest, which reflects a pickup in investment, and also that vehicle plant production is accelerating.

uA05fig08

Imports by Broad Economic Categories

(Nominal percent change)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: Haver; and IMF staff calculations.

9. As the GFC unfolded, Portugal experienced a marked depreciation of the real effective exchange rate (REER), which has partially reversed in recent years. The depreciation was more pronounced in the unit labor cost (ULC) based REER, which, after having undergone a steady appreciation starting in the early 2000, declined by about 13 percent, and is currently still well below its pre-crisis level. The depreciation of the CPI-based REER was more moderate, at about 8½ percent, with this indicator staying well above the level before the current account widening commenced in the mid-1990s. With the recent appreciation, it is not much below levels in the years immediately before the GFC.

uA05fig09

Real Effective Exchange Rate (REER)

(2010 = 100)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Source: International Financial Statistics.

10. The improvement in the trade balance exhibits a striking co-movement with the REER depreciation; nevertheless, caution is warranted in discussing causality, and non-cost factors need to be considered as well. As displayed in the charts below, the very rapid strengthening of the trade balance coincides very closely with the depreciation of the ULC based REER (both for goods and service, and for goods alone). A similar, but not as close co-movement can be observed between the CPI based REER and the trade balance. However, more recently the ULC based REER has tended to appreciate somewhat without a corresponding deterioration in the overall trade balance. This can largely be explained by a continued boom in tourism—in fact, the goods trade balance has now started to deteriorate in line with the REER appreciation. A similar pattern can be seen for exports, where the services export momentum continues very strongly, while goods exports show some dampening. Although the cause and effect are inherently difficult to judge, preserving cost competitiveness will likely be important for the trade balance and current account to avoid erosion. At the same time, non-cost competitiveness was an important contributor to the improvement in the trade balance,5 helping explain why export growth has been strong recently despite increasing ULCs. A positive sign going forward is also that the terms of trade have improved significantly in the last several years, after dipping in the years following the GFC.

uA05fig10

Balance of Goods and Services and ULC Based REER

(Euro millions)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Source: Haver Analytics.
uA05fig11

Goods Trade Balance and ULC Based REER

(Euro millions)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Source: Haver Analytics.
uA05fig12

Terms of Trade

(2010= 100)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Source: World Economic Outlook.
uA05fig13

Exports and ULC

(2008=100)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: Haver Analytics; Eurostat; and IMF staff calculations.

11. Market share developments have been positive on balance. The share of Portugal’s goods exports in global goods exports was declining for an extended period, reaching a low during the euro crisis. However, as the economy stabilized, Portugal’s share in global goods exports started to rise. Also, Portugal’s real exports have been growing faster than real import demand in trading partners ,weighted by their share in total exports since 2009, in contrast to the previous period.6 The most significant acceleration in relative export growth occurred at the same time as the largest adjustment of the trade and current account balances took place. This applies to both goods and services, with a slight difference in that the export growth advantage relative to import demand for goods went down in 2017, while for overall exports there was no major change in the trend. It is not possible to judge whether this shift will continue as the ULC based REER has appreciated somewhat, but it is an interesting difference between goods and service exports.

uA05fig14

Share of World Exports

(Percent)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Source: IMF Direction of Trade Database.
uA05fig15

Real Export Growth and Demand

(Export minus counter part demand growth, percent)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: Haver Analytics; and IMF staff calculations.
uA05fig16

Real Export Growth and Demand, and REER

(Export minus counter part demand growth, percent)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: IMF, WEO, IFS, and Staff calculations

12. From a macroeconomic balance perspective, lower investment and higher business saving were both important drivers of the current account adjustment. Comparing the situation in the period before the GFC (2004–2008) to the one after the euro crisis (2014–2017), investment, as a share of GDP, dropped by more than 7½ percentage points, of which almost six percentage points were private investment. At the same time business saving increased by about 4½ percentage points of GDP. These movements reflect a substantially increased economic and financial uncertainty, lower labor costs, and lower access to credit to finance operations and investments. Household saving, in contrast, declined by almost 1½ percentage points of GDP. General government saving went up by less than ½ percentage points of GDP after recovering from a sharp drop in 2009, although the modest improvement masks a stronger underlying fiscal effort. Since investments in Portugal as a share of GDP are low and will likely need to increase to support medium- and long-term economic growth, saving would need to increase to avoid excessive recourse to foreign financing and for the current account not to turn into a significant deficit.

uA05fig17

Saving-Investment Balance Change Average 2004–08 to 2014–2017

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: Haver Analytics; and IMF staff calculations.
uA05fig18

Saving-Investment Balance

(Percent of GDP inverse of investment)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: Haver Analytics; and IMF staff calculations.

C. Portugal in Event Study of Episodes of Large Current Account Adjustments

Even Study Construction

13. To assess Portugal’s current count adjustment, it is interesting to compare it with similar episodes in other countries. To this end an event study was conducted. As a first step, other episodes of large current account adjustments were identified. The criteria were:

  • i. The adjustment in the current account was at least 5 percentage points of GDP.

  • ii. The adjustment started from a deficit of at least 5 percent of GDP.

  • iii. This deficit was a local minimum for +/- 5 years.

The precise criteria were set to get a reasonable number of events in the last 30 years, while still only considering relatively large adjustments of sizeable current account deficits.7 This resulted in 20 events selected from the history of 45 advanced and higher income emerging market economies.8

Variables Used in the Event Study

article image

14. Then, using annual data, a set of macro-financial variables were collected for each event (see Table). The data collected span five years before the adjustment started and nine years after. The reason for choosing nine years following the turning point was to roughly match the duration so far of adjustment in Portugal (i.e., through 2017). The median and quartile ranges were then calculated for the variables during the events and displayed in charts as discussed below.9 In parallel, the corresponding series for Portugal 2003–2017 are displayed for comparison. Not all series are shown and discussed, but a selection was made based on where some interesting observations could be made.

Results

15. A few broad conclusions emerge from the comparison of the adjustment in Portugal with other episodes of large adjustments:

  • The pattern of the current account balance was similar, although in Portugal the deterioration in the run-up to the adjustment was less pronounced. In both Portugal and during other events, export as a share of GDP has been increasing during the adjustment; but swings in import were generally stronger in other countries than they were in Portugal.

  • Portugal experienced less of an economic boom before the adjustment started than the median comparator, including modest growth and rising unemployment, while its growth had a bigger initial dip as adjustment started. More recently, though, growth in Portugal has picked up and employment growth has been strong, even if labor productivity has been declining, unlike in the median event.

  • A positive sign going forward is that Portugal’s terms of trade have improved in the last several years, following a steady decline already before the adjustment started, while for the other countries the terms of trade have no clear trends.

  • REER developments have been similar in Portugal and other events, although the depreciation was stronger than average in Portugal.

  • Changes in credit to the economy have been more dramatic in Portugal compared to the other countries. In particular, the drop coinciding with the current account adjustment was larger.

  • In other countries, the increase in credit in the run-up to the adjustment coincided with an increase in private investment, which was not seen in Portugal. Both Portugal and other event countries have seen some recovery in investment following the adjustment, even if the level remains comparatively low in Portugal.

  • Private saving increased in Portugal as in other events, but are still low in Portugal and has declined somewhat more recently, unlike in the median event.

16. The current account deterioration was generally faster in the comparator countries in the years before adjustment. On average the current account deficit widened by 8 percent of GDP in the five years prior to the turning point, to about 12 percent of GDP, while in Portugal it widened five percent also to around 12 percent of GDP. The median event shows a quite rapid adjustment the first 3–4 years, until the current account balance was close to 0, which is a pattern similar to Portugal, although the start in the latter was somewhat slower (or delayed). It may also be noted that while Portugal’s current account balance has been quite flat after the initial adjustment, in other episodes it has on average remained on a slightly improving trend. Looking at export and import, the main drivers of the current account, Portugal’s growth in export as a share of GDP has been quite similar to the median event, with a fairly steady increase since the adjustments started, even if the increase for the whole sample period has been smaller. There is more of a difference displayed for imports, where in other event countries there was generally a much stronger increase before the adjustment started, and also a more pronounced drop and rebound pattern thereafter. In Portugal, movements in imports look more moderate, with some uptick most recently.

uA05fig19

Current Account

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: WEO, WDI, and IMF staff calculations.
uA05fig20

Export

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: WEO, WDI, and IMF staff calculations.
uA05fig21

Import

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: WEO, WDI, and IMF staff calculations.

17. Interestingly, while real GDP growth was muted in Portugal in the run-up to the adjustment, in the comparator episodes countries tended to experience stronger growth with significant output gaps. Growth in Portugal in 2003–2008 averaged only 1 percent even though the output gap closed and turned positive. Then, subsequently, the dip in real GDP growth was much deeper than in the median adjustment episode, though the lower quartile fell even lower. Overall, growth has disappointed in Portugal relative to comparator episodes, and, except in 2017, growth was lower than in its trade weighted counterparty countries. Productivity developments have also been somewhat concerning for Portugal. While the adjustment episodes coincided with a turnaround from declining to rising productivity growth, Portugal has seen, if anything, declining labor productivity in the last few years. This raises some questions about the sustainability of higher real GDP growth and continued competitiveness.

uA05fig22

GDP Growth

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: WEO, WDI, and IMF staff calculations.

18. Portugal also saw larger variations in unemployment than comparators did during the adjustment episodes. In other episodes unemployment was on a downward path before the turning point, and nine years later it was back close to the previous low-point. This contrasts with Portugal, where unemployment was increasing already before the turning point, and then shot up further following the crisis, before starting to decline while remining well above previous levels. However, it should be emphasized that employment growth has been rebounding and strong in the last few years in Portugal.

uA05fig23

Unemployment Rate

(Percent)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: WEO, WDI, and IMF staff calculations.

19. The depreciation in the ULC-based REER was sharper in Portugal’s adjustment, but developments vary widely across countries, especially in the post-adjustment period. In the period before the adjustment, the REER appreciated both in Portugal and other countries, which was followed by a period of depreciation coinciding with the adjustment phase. However, in Portugal, this was more pronounced with a sharp and quick depreciation. Notably, in the period after most of the adjustment took place, the trend in the REER varies considerably among comparator countries. In some cases, the depreciation continues, while in other there is an appreciating rebound, as in Portugal.10 As noted before, terms-of trade developments are a positive factor for Portugal. The event sample shows no distinct pattern, while Portugal has seen a terms-of-trade improvement in the last several years, after a steady decline before the adjustment.

uA05fig24

REER

(2010=100; ULC based)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: WEO, WDI, and IMF staff calculations.
uA05fig25

Terms of Trade

(2005= 100)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: WEO, WDI, and IMF staff calculations.

20. Changes in credit to the economy have been more pronounced in Portugal than in the other episodes. In both Portugal and other countries, credit to GDP was on an upward trend before the current account adjustment started, which then was followed by a contraction. This was similar in Portugal, but both the increase before, and especially the drop during the crisis and adjustment was much larger. Furthermore, in Portugal, the decline continues, despite being well below pre-crisis levels, while in the median country, credit started to increase again in the eighth year. Compared to 2008, credit to GDP is down by 47 percent of GDP, while the median decline was about 12½ percent. These differences should be in part related to Portugal’s banking system being deeper than those of most comparator countries.

uA05fig26

Credit to the Private Sector

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: WEO, WDI, and IMF staff calculations.

21. In other episodes, the increase in credit prior to the adjustment coincided with an increase in private investment, while in Portugal there was no such boom in investment. As credit was growing, private investment, as a share of GDP, was essentially flat in Portugal in 2003– 2008, (and on downward trends since 1998). In contrast, the median country saw an increase of about 3½ percentage points of GDP during the same period. This boom in investment was subsequently followed by a substantial drop as the current account adjusted, and this was similar in Portugal, though the drop was somewhat smaller. Both Portugal and other event countries has seen some recent recovery in investment of similar magnitude. Nevertheless, since the current adjustment started, private investment ratios are down by about 5½ percentage points for the median comparator and by about 4½ in percentage points in Portugal. It may be noted that private investment in Portugal is still low compared to other countries.

uA05fig27

Private Investment

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: WEO, WDI, and IMF staff calculations.

22. In both Portugal and other sample countries, overall saving was down before and moved up during adjustment, but at a lower level in Portugal, which recently has seen declining private saving. In Portugal, private saving decreased by 5½ percentage points of GDP in the five years before the trough of the current account (more steeply than in the median event), and had strong rebound during the adjustment. But as the economy and the current account stabilized, private saving started to trend down again around year T+5, that is, earlier than in other adjustment episodes. This is different from the other countries, and so private saving in Portugal is now farther from the median than it was at the T- 5 year. Public saving, on the other hand looks favorable for Portugal in relative terms. There is a clear improvement compared to the pre-adjustment period, while in other countries public saving is still lower than at T-5.11 To some extent this reflects necessity as public debt in Portugal is substantially higher, with a large increase after the crisis started and the current account adjustment began, and so continued public saving is needed.

uA05fig28

Private Saving

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: WEO, WDI, and IMF staff calculations.
uA05fig29

Public Saving

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: WEO, WDI, and IMF staff calculations.
uA05fig30

Public Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: WEO, WDI, and IMF staff calculations.

D. Fundamental and Policy Drivers of the Current Account

23. Another way to look at the widening and adjustment of the current account is to econometrically identify some of its underlying drivers. The results would in principle have important implications. If the adjustment was mostly due to large negative output or credit gaps, imbalances could potentially start to build again as the economy normalizes. If, instead, the adjustment reflects more permanent changes, a more balanced and favorable evolution of the current account could be expected.

24. The results presented here are based on the IMF’s annual multi-country External Balance Assessment (EBA) of current accounts and exchange rates.12 The EBA, which is a major part of the IMF’s annual External Sector Report (ESR), aims to assess the influence of policy variables (including “policy gaps”) and other fundamentals on the external current account, as an aid in the assessment of possible gaps between the actual current account and that which would be expected on the basis of a country’s fundamentals and desirable policy settings. The EBA is now a standard model for analyzing current account balances and “gaps,” and the basic model with various modifications has often been applied outside the ESR, as in Cheung, Furceri and Rusticelli (2010), Tressel and Wang (2014), and Moral-Benito and Viani (2017). The EBA methodology has been modified twice since the first version in 2013, and the results here are from the methodology used in the IMF’s 2018 ESR, which also includes a technical background note explaining the latest revisions to the methodology.

uA05fig31

Actual and EBA Model Fitted Current Account

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Source: IMF staff calculations.

  • The model can explain less than 40 percent of the large widening of the current account in the pre-adjustment period, while the fit for the more recent period is better, explaining almost 2/3 of the adjustment The model predictions suggest Portugal should have a stronger current account than it actually had for most of the last two decades, including the most recent years. Still, the broader contour of the developments is captured by the model, which has been fitted to a larger set of countries, and a decomposition between various key fundamental and policy factors should provide some insights.

  • Variables that are closely related to the state of demand include the output gap, the commodity terms of trade, and the credit gap (the difference between observed private sector credit-to-GDP ratio and its trend). The cyclically adjusted fiscal balance is also of interest in its role in explaining current account variations as a key policy variable. Other factors include financial risk, productivity per worker, net financial assets of the economy, demographics, oil and gas trade balance, growth forecast, governance and institutional quality, public health spending, reserves, and reserve currency status—many of which are slow moving or even permanent

  • The output and credit gap contributed about half of the explained part of widening of the current account through 2000, each with about the same importance. In the period after that, but before the current account adjustment started, the current account balance did not have a clear longer-term trend, and other factors account for most of the variation in the fitted current account This is consistent with the initial widening coinciding with a real GDP growth acceleration and increasing private sector credit as discussed above.

  • Turning to the more recent period, the output gap, the commodity terms of trade, and especially credit gap have been important for the current account adjustment, accounting for about 70 percent of the variation of the fitted current account. The change in the credit gap accounts for as much 57 percent of the explained adjustment in the current account. There has also been a role for fiscal policy contributing to the widening around the time of the global financial crisis, and to the adjustment in the post crisis period.13

  • One must be careful in drawing strong conclusions, including about cause and effect, but these results are clearly consistent with a view that the evolution of credit has played a central role in the changes in the current account balance. At the same time, it must be noted that it is not at all a given that it should now be expected for credit growth to forcefully bounce back and substantially widen the current account as the credit gap closes from below, so to speak. The credit gap is simply a measure of the deviation from past trends, which includes a period of rapid credit growth when imbalances were built. Portugal has since been in a significant deleveraging phase, and the improvement in public and private balance sheets could to a large extent be permanent provided prudent macro and financial policies continue to be in place. This would contribute to preserving a large part of the gains in the current account of the post crisis period.

uA05fig32

Current Account Deficit Widening, 1995–2008

(Percent)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Source: IMF.
uA05fig33

Current Account Adjustment, 2008–2017

(Percent)

Citation: IMF Staff Country Reports 2018, 274; 10.5089/9781484375969.002.A005

Sources: IMF.

E. Conclusions

25. Portugal has gone through a remarkable current account adjustment, turning a double-digit deficit into a surplus in just a few years. The adjustment was quite dramatic, occurring in the context of a global economic crisis, forcing Portugal to make large and quick adjustments of built-up macro-financial imbalances. The question is then to what extent these adjustments can be expected to be lasting, with Portugal’s external current account staying near balance or in surplus, or if a period of a current account deterioration may start

  • There are several positive factors, including that the current account has stayed positive, even as the economy is recovering and gaining momentum; terms of trade improvements; strong real export growth exceeding import demand in partners countries during the recovery; a thriving tourism industry growing very rapidly; a recent rise in investments; and much strengthened public savings. And deleveraging should be expected to continue, at least in the public sector. The recovery of demand and credit growth projected by staff is likely in the coming years to reduce or eliminate the current account surplus, but it is difficult to see these factors causing a major reversal in the current account balance.

  • There are also challenges and potential concerns, including a still highly negative NIIP requiring sustained current account surpluses. The adjustment appears to have been supported, to some extent, by a significant REER depreciation, and cost competitiveness gains need to be preserved; private saving is low and has declined recently; investment is still low in an international context, and as credit growth has been declining, it will be important to make sure that gains in deleveraging will be sustained and that the expected recovery in credit is balanced and productive.

In sum, the adjustment in the current account seems to be structural in many ways, but for the improvement to last, structural, fiscal, and financial policies need to be strong to support saving, moderate credit growth with financial stability, and competitiveness.

References

  • See João Amador, Sónia Cabral, and Luca David Opromolla, 2009, A Portrait of Portuguese International Trade, in The Portuguese Economy in the Context of Economic, Financial and Monetary Integration, Economics and Research Department Banco de Portugal.

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  • Banco de Portugal, 2016, “Portuguese International Traders: Some Facts About Age, Prices and Markets,” Economic Bulletin, October 2016, Banco de Portugal.

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  • Banco de Portugal, 2018, “Recent Developments in the Market Share of Portuguese Exports,” Box 3, Economic Bulletin, June 2018, Banco de Portugal.

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  • Cheung, C., D. Furceri, and E. Rusticelli, 2010, “Structural and Cyclical Factors Behind Current-Account Balances,” OECD Working Paper 31.

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  • IMF, 2000, “Portugal: 2000 Article IV Consultation – Staff Report,” IMF Staff Country Report No. 00/15.

  • Moral-Benito, E., and F. Viani, 2017, “An Anatomy of the Spanish Current Account Adjustment: The Role of Permanent and Transitory Factors,” Documentos de Trabajo N.º 1737 Banco de Espana, Madrid, 2017.

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  • Tressel, T. and S. Wang, 2014, “Rebalancing in the Euro Area and Cyclicality of Current Account Adjustment,” IMF WP 14/130.

1

Prepared by Erik Lundback.

2

See Banco de Portugal (2016) and Amador, Cabral, and Opromolla (2009).

3

See IMF (2000), the 2000 Portugal IMF Article IV Consultation Staff Report, and IMF Staff Country Report No. 00/15.

4

The share of tourism in all services exports is calculated as the share of Travel exports in the balance pf payments data.

6

Based on World Economic Outlook data. Import demand calculated as averages of percent changes of data for individual trading partners weighted by their share in total exports or imports, as applicable, of reporting country. The relative importance of trading partners reflects trade in goods only; complete information on bilateral trade in services is not generally available. Banco de Portugal (2018) also documents increasing goods and services market shares since 2009 using somewhat different data.

7

The period for identifying events was limited to 30 years owing to data availability considerations.

8

The countries in the event study are: Australia, Austria, Belgium, Bulgaria, Canada, Chile, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hong Kong SAR, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Malaysia, Malta, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Russia, Singapore, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Taiwan, Turkey, United Kingdom, United States, and Uruguay.

9

The comparator events were also split into sub-groups and when looking only at euro area countries the conclusions remains broadly the same.

10

Developments were similar for the CPI based REER, but less distinct.

11

The same applies to the general government budget balance.

12

See the 2013 IMF Working Paper, WP/13/272 The External Balance Assess (EBA) Methodology.

13

The previous EBA model gives qualitatively similar results, with a lower but still significant contribution from credit during the adjustment period.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Portugal: Selected Issues
Author: International Monetary Fund. European Dept.
Volume/Issue:
Volume 2018: Issue 274
Publisher:
International Monetary Fund
ISBN:
9781484375969
ISSN:
1934-7685
Pages:
93
DOI:
https://doi.org/10.5089/9781484375969.002

Current Account and Net International Investment Position

(Percent of GDP)

Current Account and Net Components

(Percent of GDP)

Current Account and Net Components

(Percent of GDP)

Goods and Services Trade, 2007–2017

(Percent of GDP)

Export and Import Growth

(Percent)

Export Growth

(Percent)

Exports by Broad Economic Categories

(Nominal percent change)

Imports by Broad Economic Categories

(Nominal percent change)

Real Effective Exchange Rate (REER)

(2010 = 100)

Balance of Goods and Services and ULC Based REER

(Euro millions)

Goods Trade Balance and ULC Based REER

(Euro millions)

Terms of Trade

(2010= 100)

Exports and ULC

(2008=100)

Share of World Exports

(Percent)

Real Export Growth and Demand

(Export minus counter part demand growth, percent)

Real Export Growth and Demand, and REER

(Export minus counter part demand growth, percent)

Saving-Investment Balance Change Average 2004–08 to 2014–2017

(Percent of GDP)

Saving-Investment Balance

(Percent of GDP inverse of investment)

Current Account

(Percent of GDP)

Export

(Percent of GDP)

Import

(Percent of GDP)

GDP Growth

(Year-on-year percent change)

Unemployment Rate

(Percent)

REER

(2010=100; ULC based)

Terms of Trade

(2005= 100)

Credit to the Private Sector

(Percent of GDP)

Private Investment

(Percent of GDP)

Private Saving

(Percent of GDP)

Public Saving

(Percent of GDP)

Public Debt

(Percent of GDP)

Actual and EBA Model Fitted Current Account

(Percent of GDP)

Current Account Deficit Widening, 1995–2008

(Percent)

Current Account Adjustment, 2008–2017

(Percent)