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IMF Wants “More Resilient” Financial System in Portugal

15 September 2017

Clearing up banks’ balance sheets is crucial for the country to be able to face potential medium-term shocks, the IMF states in its annual report

Portugal has made “remarkable progress” over the past year, reducing risks and short-term uncertainty, according to the International Monetary Fund. The institution led by Christine Lagarde once again praised the country, highlighting the “considerable improvement” in the economy’s growth prospects, as the recovery is gaining momentum, sustained by an increase in exports and investment, but also in private consumption, and considers the deficit target (1.5% of GDP) “is perfectly within reach.” But the institution still made some recommendations: the government must take advantage of current macroeconomic conditions to “further increase resilience in the financial sector” to ensure “durable fiscal consolidation” and to increase growth potential.

These are recommendations contained in the IMF’s annual review of the Portuguese economy, under the so-called Article 4, which highlights the “enormous effort” to rein in expenditures, with the consequent removal of the excessive deficit procedure, as well as the increase of “stability and confidence” in the financial system, through recapitalization.

On the acceleration of economic activity, the report says that household consumption continues to “surpass the growth in disposable income”, causing the savings rate to fall below 4% in the first quarter of the year. Tourism is one of the “main drivers of growth”, but it has been supported by exports, which have accelerated in recent quarters thanks to a recovering eurozone.

Investment is also growing, says the IMF, although backed by the tourism sector, with construction recovering after a prolonged decline. House prices have increased by 15% in cumulative terms over the past two years and have already “exceeded the previous peak” before the crisis in 2010. The reduction of wages in recent years has created conditions for companies to recover some gains, leading to an increase in investment in machinery and equipment. However, IMF economists fear that the investment capacity will be limited, given the wage pressure over several quarters, which saw in increase of an average of 1.7% in the last year. The availability of bank financing remains low, further limiting capacity, especially for companies.

Once again, Lagarde’s team insists on the urgency of cleaning Portuguese banks’ balance sheets. Despite recent bank capitalisation efforts, the IMF underlines that the total capital of the financial system “seems still low.”

Original Story: Dinheiro Vivo – Ilídia Pinto

Translation: Richard Turner