The Portuguese economy has rebounded strongly from the adverse impact of the global financial crisis that began in 2008. What is your perspective regarding Portugal´s transition from recession, austerity, early exit from the EU/IMF bailout, and return to growth?
The Portuguese economy started recovering during 2013, reflecting a gradual recovery of domestic demand and strong export growth, on the back of an improving external and financial environment. The composition of growth has contributed to a correction of fundamental macroeconomic imbalances, including an improvement in the external and fiscal accounts. One remarkable characteristic during the adjustment period and the ongoing recovery has been the behavior of exports. Portuguese exporters have been gaining market share in external markets since 2008. A notable dimension of the Portuguese export performance has been the services sector, especially tourism. Exports' share of GDP increased from around 30% in 2008 to close to 45% in 2017, which signals an important restructuring of the economy. The economic recovery has also been supported by strong investment growth, in particular business investment. On the contrary, public and housing investment has lagged behind. The dynamism of business investment has been driven by favorable developments in overall demand, the need to rebuild capital stock after the strong reduction in investment during the crisis years, and favorable financing conditions. Increasing investment will strengthen growth in productivity and output. The capital per worker ratio in the Portuguese economy was severely affected during the recessive period and remains at low levels, limiting the incorporation of new technologies into the productive process and thus inhibiting productivity gains. The recovery in the labor market in recent years has been job-rich. Nonetheless, employment levels have not recovered to those observed prior to the international financial crisis. The unemployment rate initiated a downward trend in 2014 and reached 8.9% in 2017 (from 16.2% in 2013). Another key feature of the recovery is that the economy has been able to maintain a surplus in the current and capital account and also in the goods and services account. These developments have contributed to a gradual improvement in the international investment position, which is still negative. The Portuguese economy underwent a strong and unprecedented fiscal consolidation process. The general government deficit stands currently at a historically low level. Public debt as a percentage of GDP has also initiated a downward trajectory but remains high and considerably above the euro area average. This reinforces the importance of meeting the commitments under European fiscal rules. Moreover, the reduction in the indebtedness ratios of firms and households, together with positive developments in the banking system, have made the Portuguese economy more resilient to shocks.
In recent years the Portuguese banking sector overcame a number of challenges. What are some of the most important measures the Bank of Portugal took to help the country return to greater macroeconomic stability?
In 2010, the bank initiated a comprehensive strategy to address the challenges faced by the banking sector. This strategy was broadened in the context of the 2011-14 EU/IMF Economic Adjustment Program. Our most immediate concerns were to ensure banks' access to liquidity and the reinforcement of their capital ratios. At the same time, banking supervision became much more intrusive and forward-looking and the regulatory environment was significantly strengthened. The country's full participation in the banking union, and particularly in the Single Supervisory and Resolution Mechanisms, can be seen as a natural corollary of this much more demanding strategy that we have consistently been following since mid-2010. Major progress has been achieved over the past eight years. Portuguese banks are now increasingly robust, as evident by stronger liquidity and capital positions, reinforced shareholder structures in major banks, and improvements in asset quality. The banking system recognized over EUR33 billion of credit impairments while the biggest banks raised over EUR20 billion of equity. Regarding asset quality, while economic growth has certainly been beneficial, the ongoing comprehensive strategy to reduce NPLs is also bearing fruit. NPLs have decreased more than EUR13 billion since the peak in June 2016. Equally important, deposits have been quite resilient, showing that depositor confidence has been preserved. Also, banks have continued to fulfil their role in financing the economy.
What is the Bank of Portugal doing to encourage banks to further strengthen their balance sheets, improve overall asset quality and liquidity, and reduce the level of non-performing loans?
While developments in the banking sector have been encouraging, banks' adjustment efforts will have to continue. The ongoing challenges are four-fold: improve profitability, review the existing business models, reinforce governance models, and embed technological advances in retail banking. Improving profitability is a priority. Amid still-low interest rates, further progress on cost reduction is needed. This is even more pressing in view of the stricter regulatory requirements and the digitization trend. Moreover, banks need to continue to deliver on the targets agreed in their NPL reduction plans. The sustainability of banks' business models, risk management controls, and internal governance processes are key to guarantee the soundness of the banking system. These elements are closely monitored and challenged by the Single Supervisory Mechanism and the Bank of Portugal.
What steps is the Bank of Portugal taking in order to help offset the eventual phasing out of the European Central Bank´s asset purchasing program?
The Portuguese economy is better prepared than before to withstand external shocks, reflecting considerable progress in the deleveraging process. There has been a steady decline in households' and corporations' indebtedness ratios in recent years. In case of households, debt as a percentage of disposable income reached 105% in 2017, down from 130% on average between period 2008 and 2012. In case of corporations, the debt ratio stood at around 100 % of GDP in 2017 (compared to a maximum of 127% in 2012). The public debt ratio also declined in 2017, to 125.7% of GDP. The international investment position has also been improving, but still amounted to a net debtor position of 106% of GDP in 2017. In spite of the progress made, the indebtedness levels of the different institutional sectors remain high, continuing to represent a vulnerability of the Portuguese economy, in particular, regarding interest rate developments. Thus, the need to continue reducing the leverage ratios of the Portuguese economy remains a priority.
What are your expectations for the performance of the Portuguese economy during 2019 and some of the top priorities during the next two years?
The Portuguese economy is expected to continue on an expansionary path over the 2018-2020 period, although at a decelerating pace, mirroring a deceleration in external demand- and supply-side constraints, associated with structural obstacles to higher potential growth. The progressive maturing of the expansion process is also expected in the euro area. After an increase of 2.7% in 2017, Portuguese GDP is expected to grow by 2.3% in 2018, 1.9% in 2019, and 1.7% in 2020. These developments reflect the solid performance of exports, robust gross fixed capital formation, and moderate private consumption growth, which should be similar to GDP growth. Compared to 2008, real output is estimated to be 5% higher in 2020. The current cyclical phase should be used to make progress in addressing remaining macroeconomic imbalances and structural obstacles, helping increase the long-term growth of the Portuguese economy, and the convergence to European income levels. The temporary nature of the current broad set of unconventional monetary policy measures in the euro area and the persistence of downside risks to medium-term growth projections—in particular, those related to increased protectionism tensions and political uncertainty at world level—highlight the importance and urgency of structural progress in these various dimensions.