FISCAL HEALTH CHECK

Portugal 2019 | ECONOMY | FOCUS: STABILITY PROGRAM

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.