Abstract
IMF Country Report No. 22/203
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IMF Country Report No. 22/203
PORTUGAL
2022 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR PORTUGAL
June 2022
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2022 Article IV consultation with Portugal, the following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its June 23 consideration of the staff report that concluded the Article IV consultation with Portugal.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on June 23, 2022, following discussions that ended on May 13, 2022, with the officials of Portugal on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on June 7, 2022.
An Informational Annex prepared by the IMF staff.
A Statement by the Executive Director for Portugal.
The documents listed below have been or will be separately released.
Selected Issues
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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© 2022 International Monetary Fund
Press Release
PR22/244
IMF Executive Board Concludes 2022 Article IV Consultation with Portugal
FOR IMMEDIATE RELEASE
Washington, DC – June 30, 2022: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Portugal on Friday, June 23, 2022.
Growth in 2021 rebounded to 4.9 percent, driven by private consumption, investment, exports of goods, and gradually recovering tourism. The unemployment rate dropped to pre-pandemic levels on account of rising employment and participation rates. While growth strengthened in early 2022, the war in Ukraine is expected to dampen the recovery for the rest of the year through a significant deterioration in external demand, higher commodity prices, longer-lasting supply-side disruptions, lower confidence and tighter financial conditions. Growth in 2022 is projected to average 5.8 percent and 1.9 percent in 2023. Inflation has accelerated on the back of higher commodity prices and is projected to average 6.1 percent in 2022, before receding to 3.5 in 2023. The current account deficit is set to widen in 2022, before narrowing over the medium term as exports and tourism strengthen.
Despite the accommodative fiscal stance in 2021, the headline fiscal deficit dropped to 2.8 percent of GDP, reflecting buoyant tax revenues and some capital underspending. In 2022, the fiscal deficit is expected to narrow to 2.2 percent of GDP, reflecting the recovery and unwinding of remaining temporary Covid-19 economic support measures. On this basis, fiscal policy will remain suitably accommodative with measures to mitigate impacts of high energy prices and grant-financed investment supporting the recovery. Public debt is projected to steadily decline to below 100 percent of GDP over the medium term.
The corporate sector has withstood recent shocks well so far, although solvency gaps are estimated at more than 2 percent of GDP. Credit quality deterioration after the end of the relatively extensive loan moratoria has yet to fully materialize. Bank capital, profitability, and asset quality have steadily improved in 2021 but remain below EA averages. A few legacy domestic banks are still to complete their restructuring process. As in rest of EA, residential real estate prices have risen sharply, though attendant risks appear contained.
Executive Board Assessment2
Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities’ comprehensive policy response to the pandemic, including their successful vaccination campaign, which has supported the recovery. Noting that important downside risks remain, including the spillovers from the war in Ukraine and the protracted effects of the pandemic, Directors underscored the need to strike the right balance between supporting the recovery and rebuilding fiscal buffers and continuing with structural reforms that bolster stronger, more resilient, and private sector-led growth.
Directors agreed that near-term fiscal policy should remain accommodative and better targeted. In particular, the broad-based measures implemented in response to the energy shock should be kept temporary and preferably replaced with more targeted support. While emphasizing that fiscal policy should remain flexible this year, Directors also recommended greater savings should fiscal outcomes overperform. Recognizing the need to rebuild fiscal space for future shocks, address long-term ageing pressures, and mitigate public debt risks, Directors encouraged the authorities to pursue a gradual and growth-friendly fiscal consolidation starting from 2023. In particular, they called for reducing tax expenditures, enhancing pension sustainability, and strengthening public financial management.
Directors welcomed that the banking system has weathered the crisis well thus far and agreed that risks should be carefully monitored. They encouraged close vigilance of banks’ asset quality and further strengthening banks’ capital buffers. Directors also encouraged the authorities to continue monitoring risks from rising house prices. They welcomed the strengthening of corporate debt restructuring frameworks and called for further improvements in the insolvency regime. Directors recommended prompt private-led recapitalization of viable firms to mitigate corporate debt overhang risks, smooth resource reallocation, and limit scarring.
Directors welcomed the authorities’ comprehensive structural reform and investment agenda anchored in the National Recovery and Resilience Plan (NRRP). They emphasized the need for efficient implementation and oversight to maintain strong investment absorption capacity and maintain the reform momentum. Directors underscored the potential of the NRRP to raise skill levels, digitalization, productivity, and living standards durably, and called for complementary reforms to address labor market duality and reduce youth unemployment. They commended the authorities’ ambitious targets and policies to address climate change challenges. Directors saw merit in considering further increasing the carbon price—once the energy crisis subsides—while protecting the most vulnerable households.
Portugal: Selected Economic Indicators, 2020–23
(Year-on-year percent change, unless otherwise indicated)
Portugal: Selected Economic Indicators, 2020–23
(Year-on-year percent change, unless otherwise indicated)
| Projections | ||||||
|---|---|---|---|---|---|---|
| 2020 | 2021 | 2022 | 2023 | |||
| Real GDP | -8.4 | 4.9 | 5.8 | 1.9 | ||
| Private consumption | -7.1 | 4.5 | 3.4 | 2.0 | ||
| Public consumption | 0.4 | 4.1 | 1.3 | 1.2 | ||
| Gross fixed capital formation | -2.7 | 6.5 | 5.9 | 1.3 | ||
| Exports | -18.6 | 13.1 | 7.2 | 2.5 | ||
| Imports | -12.1 | 13.1 | 1.7 | 2.0 | ||
| Contribution to growth (Percentage points) | ||||||
| Total domestic demand | -5.5 | 5.2 | 3.5 | 1.7 | ||
| Foreign balance | -2.9 | -0.3 | 2.2 | 0.2 | ||
| Resource utilization | ||||||
| Employment | -1.8 | 1.9 | 1.2 | 0.8 | ||
| Unemployment rate (Percent) | 7.1 | 6.6 | 6.5 | 6.4 | ||
| Prices | ||||||
| GDP deflator | 1.9 | 0.7 | 6.0 | 3.1 | ||
| Consumer prices (Harmonized index) | -0.1 | 0.9 | 6.1 | 3.5 | ||
| Fiscal indicators (Percent of GDP) | ||||||
| General government balance | -5.8 | -2.8 | -2.2 | -1.0 | ||
| Primary government balance | -3.1 | -0.5 | -0.1 | 1.0 | ||
| Structural primary balance (Percent of potential GDP) | 1.7 | 1.6 | 1.2 | 1.2 | ||
| General government debt | 135.2 | 127.4 | 115.8 | 110.7 | ||
| Current account balance (Percent of GDP) | -1.1 | -1.1 | -1.3 | -0.5 | ||
| Nominal GDP (Billions of euros) | 200.1 | 211.3 | 237.1 | 249.3 | ||
Portugal: Selected Economic Indicators, 2020–23
(Year-on-year percent change, unless otherwise indicated)
| Projections | ||||||
|---|---|---|---|---|---|---|
| 2020 | 2021 | 2022 | 2023 | |||
| Real GDP | -8.4 | 4.9 | 5.8 | 1.9 | ||
| Private consumption | -7.1 | 4.5 | 3.4 | 2.0 | ||
| Public consumption | 0.4 | 4.1 | 1.3 | 1.2 | ||
| Gross fixed capital formation | -2.7 | 6.5 | 5.9 | 1.3 | ||
| Exports | -18.6 | 13.1 | 7.2 | 2.5 | ||
| Imports | -12.1 | 13.1 | 1.7 | 2.0 | ||
| Contribution to growth (Percentage points) | ||||||
| Total domestic demand | -5.5 | 5.2 | 3.5 | 1.7 | ||
| Foreign balance | -2.9 | -0.3 | 2.2 | 0.2 | ||
| Resource utilization | ||||||
| Employment | -1.8 | 1.9 | 1.2 | 0.8 | ||
| Unemployment rate (Percent) | 7.1 | 6.6 | 6.5 | 6.4 | ||
| Prices | ||||||
| GDP deflator | 1.9 | 0.7 | 6.0 | 3.1 | ||
| Consumer prices (Harmonized index) | -0.1 | 0.9 | 6.1 | 3.5 | ||
| Fiscal indicators (Percent of GDP) | ||||||
| General government balance | -5.8 | -2.8 | -2.2 | -1.0 | ||
| Primary government balance | -3.1 | -0.5 | -0.1 | 1.0 | ||
| Structural primary balance (Percent of potential GDP) | 1.7 | 1.6 | 1.2 | 1.2 | ||
| General government debt | 135.2 | 127.4 | 115.8 | 110.7 | ||
| Current account balance (Percent of GDP) | -1.1 | -1.1 | -1.3 | -0.5 | ||
| Nominal GDP (Billions of euros) | 200.1 | 211.3 | 237.1 | 249.3 | ||
Title page
PORTUGAL
STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION
June 7, 2022
KEY ISSUES
Context: After a deeper pandemic-induced recession than the rest of the euro area in 2020, the Portuguese economy gained ground in 2021, and growth strengthened further in 2022:Q1. Employment reached pre-pandemic levels in 2021:H2 and GDP in 2022:Q1. Nonetheless output is expected to remain below pre-pandemic trend over the medium term. While growth in 2022:Q1 was supported by a strong bounce back in tourism and domestic demand, the recovery for the rest of the year is expected to be hampered by the war in Ukraine despite limited direct linkages with Russia and Ukraine, due to higher commodity prices, supply-side disruptions, and weaker confidence and external demand. The outlook is clouded by uncertainty relating to the war, new virus waves, and the ultimate effect of the pandemic on corporate, bank, and public sector balance sheets. While declining and with improved composition, public debt would remain high.
• Policy Recommendations: Policies need to balance short-term urgencies with a smooth transition to private-led growth, rebuilding fiscal space and advancing reforms for stronger growth and a more resilient economy.
• Fiscal Policy: The 2022 budget remains suitably accommodative, excluding the appropriate unwinding of Covid-19 measures. Broad-based measures in response to the energy price shock must be kept temporary and preferably replaced with more targeted measures to mitigate the impact on vulnerable households. Fiscal policy needs to be flexible for further support under severe adverse scenarios or more savings under fiscal overperformance. Starting from 2023, a growth-friendly fiscal consolidation, centered on reducing tax expenditures, achieving pension sustainability, and stronger financial management, would help rebuild fiscal room for much-needed investment after NGEU funds end and address ageing and health spending pressures while maintaining a firmly declining public debt path.
• Financial Policy: The Resilience and Capitalization Fund should be promptly mobilized for viability-based solvency support for the non-financial corporate sector (NFC). Priorities include heightened monitoring of banks’ credit quality, adequate provisioning, and gradually strengthening capital buffers. Risks from rising house prices should be closely monitored.
• Structural Policies: A timely implementation of the National Recovery and Resilience Plan (NRRP) through efficient and transparent planning and budgeting, organization and oversight of the investments and reforms, coupled with reforms to reduce labor market duality and strengthen insolvency regimes would limit scarring, raise living standards, and build a more dynamic economy.
Approved By
Laura Papi (EUR) and Eugenio Cerutti (SPR)
Discussions were held during October 21 to November 4, 2021 (virtual), and during May 9–13, 2022 (in-person). The mission team comprised Ms. Rupa Duttagupta (head), Mr. Kamil Dybczak, Ms. Magali Pinat, Mr. Andre Oliveira Santos, and Mr. Volodymyr Tulin (all EUR), and Mr. Antonio Pancorbo (MCM). Ms. Ana Rita Mateus (OED) joined some of the mission meetings, Mr. Domenico Fanizza (OED) joined the concluding meetings. Mr. Boyang Sun, Ms. Ritzy Dumo, and Ms. Erika Paola Espinoza (EUR) supported the mission from headquarters. The mission met with key interlocuters in Portugal—government agencies, Banco de Portugal, the private sector, and civil society—and the European Central Bank.
Contents
CONTEXT
RECENT DEVELOPMENTS
OUTLOOK AND RISKS
POLICY DISCUSSIONS
A. Fiscal Policy
B. Corporate and Financial Policies
C. Structural Reforms
STAFF APPRAISAL
FIGURES
1. Covid-19 Developments, March 2020-May 2022
2. Exposure to Spillovers from the War in Ukraine
3. Private Sector Leverage and Credit, 2008–2021
4. Covid-19 Pandemic and its Economic Impact, 2020–2021
5. Labor Market Indicators, 2017–2021
6. Inflation Developments, 2020–2022
7. Fiscal Sector Indicators
8. Bank Loans Under Moratoria
9. External Sector Indicators
TABLES
1. Selected Economic Indicators
2a. General Government Accounts (Billions of euros)
2b. General Government Accounts (Percent of GDP)
3a. Balance of Payments (Billions of euros)
3b. Balance of Payments (Percent of GDP, unless otherwise noted)
4. Selected Financial Indicators of the Banking System
ANNEXES
I. Status of Past Article IV Recommendations
II. Key Policy Measures in Response to Covid-19, 2020–2021
III. Residential Housing and Mortgage Market Development
IV. External Sector Assessment, 2021
V The National Recovery and Resilience Plan (NRRP)
VI. Risk Assessment Matrix
VII. Public Debt Sustainability Analysis (DSA)
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
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.
