Publication - Portugal : Fifth Post Program Monitoring Discussions-Press Release; Staff Report; and Statement by the Executive Director for Portugal
EXECUTIVE SUMMARY
Portugal has benefited from market financing on relatively favorable terms since the end of their arrangement under the Fund’s Extended Fund Facility in 2014. The return to financial markets reflected the successful stabilization of Portugal’s economy under the program, and has been supported by the ECB’s accommodative monetary stance since early 2015.
This has facilitated a steady improvement in the profile of public debt and enabled the authorities to make early repurchases to the Fund of €12.9 billion, more than 40 percent of the amount drawn during the arrangement.
After a sluggish first half, the economy evidenced a welcome upturn in growth in the third quarter of 2016 driven by net exports. Despite the positive quarter, Portugal’s medium-term outlook remains impaired by high levels of corporate debt and persistent structural bottlenecks. The revised 2016 fiscal target appears within reach, but prospective public outlays for CGD’s recapitalization weighed on public debt at end-2016.
The modest growth outlook, high public and private indebtedness and weaknesses in the banking system are mutually reinforcing. As banks continue to struggle with a large stock of non-performing loans (NPLs), low profitability, and high operating costs, they are unable to provide adequate lending for new investment. Weaker growth, in turn, makes it more difficult for banks to address NPLs and improve profitability, while hampering fiscal consolidation efforts.
Portugal’s public debt dynamics remain fragile and leave it vulnerable to a change in financing conditions. While Portugal’s capacity to repay the Fund is expected to be adequate under the baseline of a gradual reduction in monetary accommodation, the less benign financing environment accentuates the risk of faster upward pressure on borrowing costs should negative surprises materialize.
Ambitious efforts to improve financial sector resilience, ensure durable fiscal consolidation and raise potential growth are needed to reduce domestic risks. The interlinkages between a modest growth outlook, large annual financing needs, and a challenged banking system leave Portugal vulnerable to a range of shocks that could trigger a change in sentiment and elevate borrowing costs.
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