FISCAL HEALTH CHECK
Having emerged from a debilitating crisis, the Portuguese economy, though still susceptible to externalities, is being shored up internally to grow at sustainable rates.
Back in April of 2018, Portugal submitted its 2018 Stability Programme for the 2018-2022 period. The country remains subject to the preventive mechanism of the EU's Stability and Growth Pact (SGP). With this cautionary position, it aims to keep the economy on an even keel and meet the Medium-Term Budgetary Objective (MTO) of the European Commission (EC). MTOs, which function as a check on fiscal health, acknowledge a member country's need to ensure sustainable debt levels, giving governments sufficient leeway to adjust to prevailing conditions while setting a margin against breaking the bloc's fiscal rules.
Because of runaway public spending, budget deficits have long plagued the Iberian nation, which had a debt ratio of 129.9% of GDP in 2016. That year Lisbon undertook remedial efforts that by 2020 could meet EU stipulations, and a fiscal surplus of 0.7% is forecast for that year. The structural balance, forecast at 0.7% of GDP for 2018, is expected to have a surplus for 2020 and hit 0.2% in the parliamentary election year of 2019. In short, the government wants the political term to end with a bang, on virtually a zero deficit level. The public debt goal for 2018 is 122% of GDP (a downward revision of the government's original forecast of 123.5%) and 118% for 2019. The official forecast for public debt in 2022, the end of the forecast period, is 102% of GDP.
Measured EC appraisal
The EC has cautiously recognized “fiscal improvement." GDP grew 2.8% in 2017 to USD217.6 billion. The EC forecasts growth of 2.2%, 1.8%, and 1.7% for 2018, 2019, and 2020, respectively. Yet the Stability Programme sets real GDP growth at 2.3% per year for 2018-2020, with a slight dip to 2.1% in 2022. Its take on the 2018 Stability Programme, which it issued in May, observed that in 2017, Portugal had seen an improvement in its structural balance of 0.9% of GDP, in compliance with the MTO. However, in cautionary tones it noted that the pace of growth in government spending, net of discretionary revenue measures and one-offs, had overshot, resulting in a negative deviation of 0.5% of GDP in the base fiscal position. In general terms, the EC sees the potential for deviation from set targets in both 2018 and 2019.
Transmitting the right signals
On November 29, 2018 Portugal revealed plans to repay its outstanding debt to the IMF in 2018, having begun repayments in 2015. Post-crisis, it had secured a financial rescue package from a troika including the Fund and the EU. Of the EUR78-billion package, EUR26.3 billion was from the IMF. According to the Portuguese Treasury and Debt Management Agency (IGCP), as of the end of October, EUR4.7 billion was outstanding, some 17%. The sooner the debt is repaid, the sooner Portugal frees itself of its Post-Program Monitoring status, a solid indicator for would-be investors and capital markets. Meanwhile, its public debt maturity profile remains key to shaping international perceptions.
Meanwhile, the deceleration in GDP reflects a loss of momentum in exports and investment, though the job market has continued to improve, with unemployment falling from 7.9% in December 2017 to 6.6% in September 2018, driven by broad-based employment growth.
Recommendations
That being said, banks should still ensure buffers against potential economic headwinds in light of recent rising demand for property and higher prices. Continuing ongoing efforts to strengthen the legal and institutional framework for debt enforcement and insolvency are necessary to support a more productive allocation of economic resources. Keeping labor markets flexible is important for Portugal's ability to process adverse shocks, and maintaining competitiveness requires wage growth consistent with developments in productivity.
External balance worsens
The external balance has deteriorated somewhat since the start of the year, influenced by weaker-than-expected exports of goods and a slowdown in tourism. Oil prices have also adversely affected terms of trade and thus the nominal trade balance. Imports are set to continue outperforming exports, resulting in some deterioration in the current account balance. Larger dividend payments to foreign shareholders put additional pressure on the current account, while the projected increase in absorption of EU structural funds and lower interest costs for domestic borrowers are having a positive impact.
FISCAL HEALTH CHECK
TABLE OF CONTENTS
Focus: Community of Portuguese Language Speaking Countries
Making an Impact
Established in 1996, the Community of Portuguese Language Speaking Countries (CPLP) is a mechanism geared at linking and sharing the experience of Lusophone countries. Besides Portugal, this includes Brazil, Portugal, Cape Verde, Angola, Mozambique, Guinea-Bissau, and São Tomé and Príncipe.
read articleFocus
Don’t Mind the Disruption
Having won the 2017 Eurovision Song Contest, Lisbon hosted the 2018 event. The relevance? Well, the contest began back in 1956 as a showcase not only of song, but of then-nascent live television broadcast technology. Today, Portugal is on the cutting edge of new technological developments.
read articleInterview
João Pedro Soeiro de Matos Fernandes , Minister , Environment and Energy Transition
The Ministry for the Environment and Energy Transition is focusing on decarbonizing the economy, valuing the territory and its habitats, and striving for a more circular use of the country's resources.
read articleInterview
António Braz Costa , General Manager, Portuguese Technological Centre for the Textile & Clothing Industries (CITEVE)
CITEVE has transformed the industry by promoting value addition, adopting the latest technologies, and ensuring the highest standards of environmental sustainability.
read articleFocus: New airport
Right Time to Seize Missed Opportunities
Portugal has seen its air traffic figures increase by as much as 80% in the last five years. As a result, its transportation infrastructure, and Lisbon's airport in particular, cannot cope with the rising numbers. A new airport project that will turn a military base into a commercial airport is now under discussion to bring much-needed relief to air traffic.
read articleInterview
Germano de Sousa , President, Grupo Germano de Sousa
Grupo Germano de Sousa's success can best be summed up by its understanding that science and medicine only really progress when technological development is combined with a deeper respect for human values and professional ethics.
read articleInterview
Isabel Capeloa Gil , Rector, Universidade Católica
Having pioneered the introduction of multiple subject areas to Portugal's tertiary education scene, Universidade Católica is aspiring to establish the country's first private medical school and introduce cutting-edge digital transformation.
read articleInterview
Carlos Guillén Gestoso , President, Escola Universitária de Ciências Empresariais, Saúde, Tecnologias e Engenharia & President, Atlantica University
Atlantica University differentiates through its company-university model and an MBA program in partnership with the University of California, Berkley, among other initiatives, to produce practical theoreticians.
read articleFocus: Public teaching staff
An Age-old Problem
Over a decade of austerity measures combined with an ageing population have seen the average age of the Portuguese public teaching staff progressively climb to one of the highest in the OECD. With frozen salaries, an extended retirement age, and precarious working conditions, today the sector faces one of its biggest challenge yet.
read articleInterview
Pedro Queiroz , General Manager, Federation of the Portuguese Agri-Food Industry (FIPA)
Portugal's economic recovery has seen its F&B sector emerge with annual turnovers of EUR16 billion, thanks to FIPA's undeterred focus on stable policies, excellent nutrition standards, and sustainability.
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