Press Release No. 17/349

IMF Executive Board Concludes 2017 Article IV Consultation with Portugal

September 15, 2017

On September 13, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Portugal.

Portugal has made notable progress over the past year in reducing uncertainty over near-term risks. The exit from the Excessive Deficit Procedure this year, together with a marked improvement in stability and confidence in the banking system, have helped bolster investor confidence and contributed to a sharp narrowing in sovereign debt spreads since mid-March.

The near-term growth outlook has also improved considerably as the ongoing recovery continues to gain momentum, with a pickup in exports and investment alongside the continued growth in private consumption. Tourism remains a key driver of growth, but has also been accompanied by a broad-based pickup in exports of goods in recent quarters, while domestic confidence indicators have strengthened significantly and employment continues to rise.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They welcomed the authorities’ progress in reducing uncertainty over near term risks. Strong efforts to contain spending and meet last year’s headline fiscal deficit target allowed Portugal to exit the EU Excessive Deficit Procedure in 2017, while stability and confidence in the banking system have improved following successful efforts to raise capital. The recovery has also gained momentum, with a pickup in exports and investment alongside continued growth in private consumption, as well as a rise in employment. Nonetheless, the elevated public debt in the context of a modest medium term growth outlook leaves Portugal vulnerable to shocks. Directors encouraged the authorities to take advantage of the current benign macroeconomic conditions to further improve financial sector resilience, ensure durable fiscal consolidation, and raise potential growth.

Directors welcomed the improvement in financial sector stability after recent capital augmentations. However, they cautioned that the large stock of NPLs could limit banks’ ability to finance productive investment. They called for comprehensive efforts to strengthen bank balance sheets by removing impediments to NPL resolution and boosting internal capital generation to maintain appropriate buffers, including in view of upcoming regulatory hurdles.

Directors commended the authorities’ strong efforts to reduce the headline fiscal deficit in 2016, and noted that this year’s headline target also appears well within reach. They emphasized the importance of keeping public debt on a firmly downward trajectory over the medium term, and encouraged the authorities to take advantage of the favorable cyclical conditions to make progress on more ambitious structural fiscal consolidation. They recommended focusing on durable expenditure reform to improve the efficiency of public spending while protecting public investment.

Directors emphasized that raising Portugal’s productivity and growth potential remains central to reducing the vulnerabilities that weigh on the medium term outlook. Addressing impediments to higher investment is key in this regard. Directors highlighted the need to focus on issues that affect investors’ perceptions of the business environment, including reducing rigidities in the labor market, improving the efficiency of judicial processes, and enhancing the predictability of the regulatory environment. In this context, they welcomed the focus of the authorities’ National Reform Program on developing human capital and fostering innovation.