World Economy

Portugal Economic Recovery Slowing

Portugal Economic Recovery SlowingPortugal Economic Recovery Slowing

While Portugal is recovering after the crisis, its economy continues to suffer from meager growth, weak investment and competitiveness challenges. Its banking sector holds too many nonperforming loans and public debt remains high, IMF reported.

At the end of a review of the state of the country’s economy, IMF mission chief Subir Lall talked on three particular recommendations of the team:

State finances: “With low growth and low investment but high sovereign debt, what Portugal needs at this point is a cumulative fiscal consolidation of 1% of GDP over two years.

“This would offset the fiscal loosening of 2015 and what the IMF staff projects for this year. With this proposed adjustment, we are confident that debt would finally get on a steady downward path, making Portugal more resilient to possible shocks. It would also allow for more fiscal flexibility in the future.”

Structural reforms: “Labor markets are a key area for reform. That unemployment has declined since the peak of the crisis is certainly very welcome news. But it is still high, especially among the youth. Portugal has to readjust its labor market, which is currently characterized by a combination of onerous and rigid permanent contracts and flexible but precarious temporary contracts.”

Banking sector: “Banks are still struggling with the legacy problem of high nonperforming loans, mainly among small and medium-sized enterprises. This issue is clearly linked to growth. When growth is sluggish, dealing with nonperforming loans takes longer. And because of bad debts, many companies are not in a position to invest because banks are reluctant to lend more to them or to new firms. This perpetuates a vicious cycle of high nonperforming loans, excessive leverage, and low growth.

“We think banks have to deal with the problem decisively, get rid of their legacy loans, and allow for new lending to new companies and new sectors that will be the engines of growth in the future.

“Banks need to create room on their balance sheets to be able to write off nonperforming assets. Banks also need to cut costs to improve profitability, and some have been making concerted efforts. The branch network, for instance, is probably too big in some cases than is needed to serve the financial service needs of the Portuguese population.”