IMF 10th review: Mixed signals

Summary: In its 10th review, referring to the December 2013 visit to Portugal, the IMF acknowledges the improvement in the short-term outlook (that improved even further since December) and the Government’s commitment to pursuing fiscal restraint. However, the IMF staff also reiterates that there are significant downside risks on both these fronts, as private indebtedness remains high and  Constitutional Court Rulings have made it harder to consolidate public finances from the expenditure side.

Advancing fiscal consolidation: The IMF is concerned that the programme to reduce arrears is not being implemented fully or as quickly as desired, as some hospitals and municipalities continue to accumulate arrears. PPPs renegotiations is apparently ongoing. Debt is seen peaking at around 129.5% of GDP in 2014, but that includes the Governments’ accumulated cash deposits. Excluding deposits debt to GDP should peak around 120% of GDP. This remains a very high level of debt, which means that the path to more sustainability depends crucially on maintaining fiscal consolidation and improving further competitiveness after the current programme ends.

Financial sector: The situation of the banking sector has improved, but the IMF is concerned that the corporate debt overhang has not been satisfactorily resolved, which in turn could affect banks. The IMF recommends creating incentives to use restructuring tools to orderly reduce corporate debt. The debt overhang is one important reason for the continued deterioration in investment. In 2013, it is estimated that investment was not enough to even replace existing capital.

Boosting competitiveness: The IMF indicates that there has been a visible improvement in employment flexibility,  that the reform of the judicial system is ongoing and that several measures to improve product market competition have been implemented. However, the competitiveness gains have rested mostly on shedding labour force, leading to an unsustainably high  level of unemployment. The reduction in excessive rents in network industries needs to be pursued at a faster pace to improve competitiveness.

Overall, though much progress has been made so far, it is clear that that further reform will be necessary after the current programme ends. In that respect it would be positive to sign a precautionary programme or to reach a broad political agreement to proceed with the necessary fiscal adjustment and product market reforms.