The International Monetary Fund (IMF) forecasts growth of 2.6% for the Portuguese economy this year and a stabilization around 2% in the medium term, pointing to an inflation rate of 5.6% in 2023.
In the report of the IMF mission to Portugal under Article IV, released this Tuesday, the institution states that, after the growth of the Portuguese economy by 6.7% in 2022, “significantly higher” than the 3, 5% of zone euro, “real GDP growth [Produto Interno Bruto] is expected to slow for the rest of the year to an average of 2.6% in 2023 and inflation to fall to 5.6%.”
On April 11, the IMF in its update of global economic forecasts had pointed to GDP growth of 1% for the Portuguese economy this year, predicting inflation to reach 5.7%. The government predicts a growth of 1.8% in 2023.
“High inflation and more restrictive financial conditions are weakening the economy,” the IMF said, believing that “higher costs of living should hurt growth in domestic demand and lower growth in the world and the eurozone should slow down growth in exports.” should weaken”. to “growth to stabilize around 2% in the medium term”.
As energy prices fall, the institution expects inflation to continue to fall, but points out that underlying inflation – which excludes food and energy – should be “more sustainable due to labor market rigidity and high profit margins”. .
In this regard, the IMF recommends that fiscal policy this year remains “non-expansive, to preserve budgetary room for maneuver and support monetary policy”, but at the same time “flexible, in case shocks happen”.
As the fall in energy prices “presented an opportunity to lift more comprehensive measures and provide support to the most vulnerable households”, the institution argues that if growth “weakens significantly, automatic stabilizers should be fully applied”, noting that the use of “additional fiscal measures”.
“Additional fiscal support should only be reserved for severe adverse scenarios and should be temporary, without price distortion and well targeted,” he said.
Noting that “the recent and successive adverse shocks demonstrate the need to create fiscal margins in good times and increase fiscal resilience in the face of potential risks,” the IMF points to “fiscal consolidation, combined with strong medium-term growth “, as “central elements for a sustainable reduction of public debt and the maintenance, at the same time, of public investment, even after the end of the Next Generation EU funds”.
Therefore, the IMF mission recommends that the government invest in “measures to sustainably increase revenue performance and improve the composition and efficiency of expenditure”.
“Tax reforms should aim at eliminating distortions, reversing low VAT rates and rationalizing tax expenditures. Modernizing the tax system, including digitalisation of the tax administration, would improve tax efficiency. Higher wealth taxes would increase revenues and reduce the pressure on house prices. The reduction in energy prices leaves open the possibility of an increase in taxes on carbon,” he concludes.
The IMF also calls for an “increase in the share of government investment – namely in the implementation of the recovery and resilience plan – in current expenditure, thus reversing recent trends”.
As “key priorities” he highlights the sustainability of pensions, controlling wage growth in the public sector, strengthening the financial situation and efficiency of the National Health Service (SNS) and additional improvements towards social support.
“Structural fiscal reforms to improve public sector efficiency, governance and fiscal sustainability of public enterprises should continue. The full implementation of the 2015 fiscal framework law will strengthen the medium-term budgetary framework,” he added .
IMF proposes capital reserve in banks to face risks in real estate sector
The International Monetary Fund (IMF) proposed this Tuesday to create a capital reserve to strengthen the resilience of Portuguese banks in the face of “macro-financial risks from exposure to the real estate sector”.
In order to strengthen the resilience of the banking sector in the face of macro-financial risks of exposure to the real estate sector, the Portuguese authorities could consider gradually introducing a sectoral capital reserve for systemic risk, provided that procyclical effects are avoided. the report of the IMF mission to Portugal under Article IV, released this Tuesday.
Despite the “continuous improvement of national banks’ balance sheets”, their liquidity reserves remain “high” and bad debts have fallen, the institution warns that “this trend can be reversed in adverse scenarios”. maintain prudent risk management practices and keep a close eye on banks’ vulnerabilities”.
“Banks’ capital ratios (CET1) are well above minimum requirements, although below the Eurozone average and slightly below 2022, due to dividend payments and some losses in valuations,” he says.
However, he warns: “The increase in the cost of living is putting pressure on household budgets and may erode the ability to service debt, which requires continued monitoring as asset quality deterioration may occur with some lag. “.
In this context, the IMF mission understands that “a gradual tightening of macroprudential policies would help contain systemic risks arising from real estate market vulnerabilities”, as this is “overvalued, after years of strong house price increases”. , and that “persistent imbalances in this market would further increase systemic risks”.
For the International Monetary Fund, therefore, maintaining prudent risk management practices and close monitoring of banks’ vulnerabilities are “critical given the current economic and financial uncertainties”.
“Banks and regulators must remain vigilant in the areas of credit quality, interest rate risk and liquidity management. Prudential policies should ensure that banks continue to strengthen their capital levels and forecast contingencies,” he argues, also advising “caution in the distribution of capital.” . .
Still on the real estate front, the IMF points out that policies to support housing supply “would help to alleviate current housing access pressures” as the early end of the Golden Visa program “does not significant impact on house prices.
“Measures to increase the supply of housing and rental properties – complemented by public investment in social housing under the Recovery and Resilience Plan – are essential to reduce real estate market imbalances and improve price accessibility,” he said.
Also recommended by the IMF is the continued strengthening of the private debt resolution regime: “Further simplification of judicial procedures and focus on out-of-court procedures should continue. The duty to declare bankruptcy — which has been suspended during the covid-19 pandemic — need to be restored so that resources are better allocated to more productive uses,” he says.
PRR: Reforms would have more impact if labor issues are resolved – IMF
The reforms envisaged in the Recovery and Resilience Plan (PRR) would have an additional impact if long-standing labor problems were resolved that would enable productivity gains and external competitiveness, the International Monetary Fund (IMF) believes.
In the report of the IMF Article IV mission to Portugal, released this Tuesday, the institution emphasizes that “the timely implementation of the ambitious recovery and resilience plan will support the transition to a more productive, resilient and green economy” , hoping that the PRR “increases productivity by encouraging R&D [investigação e desenvolvimento] and public investment in support of small and medium-sized enterprises”.
At the same time, he emphasizes, the PRR “also includes reforms to catalyze the digital transition of private companies and the public sector, promote digital skills in the labor market, modernize the education system, support renewable energy sources and stimulate private investment”.
However, the IMF emphasizes that “these reforms would be further strengthened if long-standing problems in the labor market were addressed, to increase labor productivity and external competitiveness”, stating that “reducing labor market inequality would increase its efficiency “. and would increase equality”.
“The Decent Work Agenda aims to promote job stability by reducing the maximum renewals of temporary contracts. At the same time, making permanent contracts more flexible would help reduce inequality and maintain efficiency,” he added.
At the same time “a social support network stronger and better targeted would help to mitigate adverse distributive effects”.
On the other hand, the IMF argues that “restoring and increasing the carbon tax – frozen during the energy crisis – would help achieve carbon neutrality targets”.
“Portugal’s share of renewable energy is among the highest in the Eurozone. A gradual increase in carbon tax, combined with more green investments and targeted support for [setores] vulnerable, would help to reach Portugal’s ambitious target of carbon neutrality by 2045,” he claims.
Source: DN
