COMMISSION STAFF WORKING DOCUMENT In-Depth Review for Portugal in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK Economic policy coordination in 2021: overcoming COVID-19, supporting the recovery and modernising our economy
Date: 2021-06-02
Institutions: European Commission, Secretariat-General
Subjects: EU employment policy, European Semester, Portugal, coronavirus disease, economic recovery, epidemic, fiscal policy, investment policy, macroeconomics, structural adjustment

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 2.6.2021  SWD(2021) 410 final  COMMISSION STAFF WORKING DOCUMENT In-Depth Review for Portugal       in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances  Accompanying the COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK  Economic policy coordination in 2021: overcoming COVID-19, supporting the recovery and modernising our economy {COM(2021) 500 final} - {SWD(2021) 401 final} - {SWD(2021) 402 final} - {SWD(2021) 403 final} - {SWD(2021) 404 final} - {SWD(2021) 405 final} - {SWD(2021) 406 final} - {SWD(2021) 407 final} - {SWD(2021) 408 final} - {SWD(2021) 409 final} - {SWD(2021) 411 final} - {SWD(2021) 412 final}  
 
 
CONTENTS 

Executive summary 

1.  Assessment of Macroeconomic Imbalances 

2.  Thematic Issue: External Balance 

3.  Thematic Issue: Private Debt 

LIST OF TABLES 

Table 1.1: 

Assessment of Macroeconomic Imbalances Matrix - Portugal 

Table 1.2: 

Selected economic and financial indicators, Portugal 

Table 2.1: 

Sensitivity analysis current account balance and net international investment position 

Table 2.1: 

Selected external sector indicators, Portugal 

Table 3.1: 

Non-financial corporations debt indicators, Portugal 

Table 3.2: 

Household debt indicators, Portugal 

LIST OF GRAPHS 

Graph 2.1: 

Thematic Graphs: External balance 

Graph 3.1: 

Thematic Graphs: Non-financal corporate debt 

Graph 3.2: 

Thematic Graphs: Household debt 

1 

2 

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7 

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EXECUTIVE SUMMARY 

The  2021  Alert  Mechanism  Report  concluded  that  an  in-depth  review  should  be  undertaken  for 
Portugal  to  examine  further  the  persistence  of  imbalances  or  their  unwinding.  In  February  2020, 
under  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic  Imbalances  Procedure,  the 
Commission  identified  “macroeconomic  imbalances”  in  Portugal.  These  imbalances  related  to  high  net 
external  liabilities, private  sector and government debt as  well as a  high  share of non-performing loans 
(NPLs) in a context of low productivity growth. The analysis shows that these vulnerabilities remain. It 
should be noted that the context of the assessment of vulnerabilities in this year’s in-depth review (IDR) 
for  Portugal  is  markedly  different  from  last  year.  Also,  the  evolution  of  the  COVID-19  pandemic,  the 
strength of the recovery, and possible structural implications of the crisis are all still surrounded by high 
uncertainty, requiring caution in the assessment. In general, policy action over the past year focused on 
cushioning  the  impact  of  the  COVID-19  shock  and  facilitating  the  recovery.  This  has  added  to 
indebtedness  but  should  support  adjustment  in  the  medium-term.  Looking  forward,  the  Recovery  and 
Resilience Plan provides an opportunity to address imbalances, investment and reforms needs.  

Main observations and findings of this IDR analysis are: 

  This IDR is informed by the 2021 spring forecast, which expects a recovery in economic activity 
in Portugal with the easing of the COVID-19 crisis. After the steep drop of 7.6% in 2020, real GDP 
is  projected  to  increase  by  3.9%  this  year  and  5.1%  next  year,  allowing  the  economy  to  recover  its 
pre-pandemic level by the end of 2022.  

  The external position remains weak. The current account balance deteriorated from a small surplus 
in 2019 to a deficit of 1.2% of GDP in 2020 and is set to improve only marginally by 2022. As of the 
end of 2020, the NIIP stood at -105.4% of GDP, deviating significantly from the estimated prudential 
and fundamentals-explained thresholds. Non-defaultable instruments accounted  for about half of the 
NIIP, composed mostly of foreign direct investments (FDI), which partly offset the risks of outflows 
related to abrupt changes in the  external  market environment.  Over the  medium term, the country’s 
external position is expected to benefit from the grants assigned to Portugal under the EU’s Recovery 
and Resilience Facility (RRF). 

  Private indebtedness rose in 2020 due  mainly to  GDP  contraction. After a steady decline in the 
period of  2012-2019,  the  private  debt  ratio  increased  substantially  to  around  160%  as  of  the  end  of 
2020  due  mainly  to  the  contraction  in  GDP.  On  the  positive  side,  both  households’  and  corporates’ 
deposits  increased,  providing  the  private  sector  with  a  liquidity  buffer  to  face  potential  financial 
problems. As the recovery takes hold, private indebtedness is set to return on a downward path. 

  Public debt is high and increased in 2020 due to the combined effect of the economic contraction 
and  the  measures  to  address  the  COVID-19  pandemic  and  support  the  economy.  The  public 
debt-to-GDP ratio increased from 116.8% in 2019  to 133.6% in 2020 after several years of a steady 
decline. Nevertheless, continuous efforts in the past to smoothen the redemption profile of public debt, 
extend  the  debt  maturity,  and  contain  interest  expenditure,  have  mitigated  vulnerabilities.  Public 
indebtedness  is  projected  to  resume  its  downward  path  as  of  2021,  but  it  will  take  several  years  to 
return to its pre-crisis level. 

  Productivity  indicators  encountered  significant  volatility  during  the  COVID-19  pandemic. 
Productivity in terms of output per employee dropped dramatically in 2020 as GDP contracted much 
faster than employment. On the other hand, productivity in terms of output per hour worked improved. 
Similar developments  took place  in the  main trading partners and in relative  terms labour costs and 
competitiveness indicators do not cause immediate concerns. The expected economic recovery is set 
to  improve  the  country’s  productivity  as  GDP  is  forecast  to  grow  faster  than  employment  in  2021-
2022. Potential growth is also projected to rebound and to reach or even exceed its pre-crisis level in 
2022 due mainly to the expected increase in the investment ratio. Policy efforts to boost productivity 
remain essential for improving Portugal’s competitiveness and potential growth and to accelerate the 
pace of external rebalancing. 

1 

 
1.  ASSESSMENT OF MACROECONOMIC IMBALANCES 

Introduction 

In  February  2020,  over  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic 
Imbalances Procedure, the Commission identified “macroeconomic imbalances” in Portugal. These 
imbalances related in particular to high net external liabilities, private sector and government debt as well 
as a high share of non-performing loans (NPLs) in a context of low productivity growth. The 2021 Alert 
Mechanism  Report  published  in  November  2020  concluded  that  a  new  in-depth  review  should  be 
undertaken for Portugal with a view to assess the persistence or unwinding of imbalances. 

The  context  of  the  assessment  of  vulnerabilities  this  year  is  markedly  different  from  last  year's 
IDRs, which took place before the COVID-19 pandemic. The evolution of the pandemic, the strength 
of the recovery, and possible structural implications of the  crisis are still surrounded by high uncertainty 
requiring caution in the assessment. Policy action over the past year focused on cushioning the impact of 
the COVID-19 shock and on facilitating the recovery. While this supports adjustment in the medium-term 
through  stronger  fundamentals,  it  also  has  added  to  indebtedness.  Follow-up  to  country-specific 
recommendations  from  2019  and  2020,  including  those  that  are  MIP-relevant,  is  taking  place  in  the 
context of the assessment of the Recovery and Resilience Plans (RRPs). The analysis of policies in the 
present  report  was  finalised  before  the  formal  submission  of  RRPs  and  does  not  draw  on  information 
included  in  RRPs.  It  is  therefore  without  prejudice  to  the  Commission’s  assessment  of  RRPs,  which  is 
ongoing at the time of publication of this report. 

The assessment follows a similar structure  as the IDRs that were included in Country Reports in 
recent  annual  cycles.  This  chapter  presents  the  main  findings  for  the  assessment  of  imbalances,  also 
summarised in the MIP assessment matrix. The assessment is backed by selected thematic chapters that 
look  more  at  length  at  the  external  position  and  private  debt  developments.  Spill-overs  and  systemic 
cross-border  implications  of  imbalances  are  also  taken  into  account.  In  addition,  also  assessments  of 
structural issues made in previous IDRs and in the context of fiscal assessments are considered if relevant. 

Macroeconomic context 

Following a decline by 7.6% in 2020, the Portuguese economy is projected to rebound by 3.9% in 
2021  and  5.1%  in  2022.  The  economy  is  set  to  return  to  its  pre-crisis  level  in  the  middle  of  2022, 
although  the  country’s  large  hospitality  sector  is  not  projected  to  fully  recover  before  the  end  of  2022. 
The  economic  recovery  is  projected  to  gradually  narrow  the  output  gap  to  a  slightly  negative  value  in 
2022, and potential growth is set to move back to its pre-pandemic level. Unemployment is also projected 
to return to its pre-pandemic level of around 6.5% in 2022. Inflation is forecast to pick up gradually from 
-0.1% in 2020 to 0.9% in 2021 and 1.1% in 2022. After posting a deficit of 1.2% of GDP in 2020, due 
mainly to a steep drop in travel receipts, the current account is projected to improve somewhat in 2021 
and 2022 but to remain on a negative territory. The economic recovery is also set to resume the positive 
downward trend in the country’s debt ratios, both in the private and public sectors, but they are expected 
to remain above their pre-pandemic levels by the end of 2022. 

Domestic demand, helped by the implementation of the Recovery and Resilience Plan, is the main 
driver behind the projected recovery in Portugal. The gradual relaxation of mobility restrictions and 
the  ongoing  vaccination  campaign  are  set  to  push  up  private  consumption  as  forced  and  precautionary 
savings should gradually subside after a steep rise in the household savings’ rate to 12.8% in 2020. The 
forecast also factors in the expected deployment of the Recovery and Resilience Plan leading to a strong 
increase  in  investments,  particularly  in  2022.  In  the  external  sector,  both  exports  and  imports  are 
projected to rise at high rates over the forecast period with an overall positive net contribution to growth. 
However,  risks  remain  tilted  to  the  downside  due  to  Portugal’s  high  reliance  on  foreign  tourism  where 
uncertainty on the recovery path remains high.  

2 

 
1. Assessment of Macroeconomic Imbalances 

Imbalances and their gravity 

Portugal´s  net  international  investment  position  (NIIP)  remains  well  beyond  the  estimated 
prudential  benchmark.  As  of  the  end  of  2019,  the  NIIP  stood  at  -100.5%  of  GDP,  deviating 
significantly from the estimated prudential and fundamentals-explained thresholds of  -52% and -20% of 
GDP, respectively. Non-defaultable instruments accounted for around half of the NIIP, composed mostly 
of foreign direct investments (FDI), which partly offset the risks of outflows related to abrupt changes in 
the external market environment. Nearly 60% of the NIIP stems from government debt, whose structure 
and market performance has substantially improved over the past years. 

Private debt is facing multiple challenges. Consolidated private debt is estimated at 148.8% of GDP as 
of the end of 2019. Compared to the peak in 2012, the ratio was much closer to the indicative headline 
threshold  of  133%.  Yet,  the  deviation  is  still  large  judged  by  country  specific  indicators.  The  ratios  of 
corporate and household debt stood at 85.2% and 63.6% respectively. Both were significantly beyond the 
estimated  country-specific  prudential  and  fundamentals-based  benchmarks (1).  For  corporates,  these 
benchmarks  were  estimated  at  63%  and  60%,  respectively,  and  for  households  at  40%  and  35%.  The 
legacy of non-performing loans remained an additional weakness in the debt structure, particularly in the 
corporate sector, but improvements in the functioning of the  secondary market for bad assets somewhat 
mitigated  the  risks.  As  regards  households,  the  high  level  of  indebtedness  was  accompanied  by  a 
relatively low saving rate observed before the outbreak of the COVID-19 pandemic. 

The  public  debt-to-GDP  ratio  was  on  a  steady  downward  path  in  the  period  2017-2019,  but 
remained high, well above the benchmark of 60%. The public debt-to-GDP ratio declined to 116.8% 
in  2019,  supported  by  a  solid  primary  surplus,  a  favourable  denominator  effect  and  decreasing  interest 
expenditure. However, the size of previously contracted public contingent liabilities  – in particular those 
related  to past  bank  support  measures –  remained  non-negligible.  The  latest  debt  sustainability  analysis 
confirms that the country faces high risk in the medium-term. (2) At the same time, Portugal’s public debt 
management strategy contributed to mitigating vulnerabilities by preserving a substantial cash buffer and 
smoothening  the  debt  redemption  profile,  including  through  early  repayments  of  financial  assistance 
loans. (3) Market financing conditions remained favourable – backed by a series of rating upgrades – with 
interest rates hovering around historically low levels and spreads decreasing vis-à-vis European peers. 

Low productivity weighs on Portugal’s income convergence. Portugal’s economy grew faster than the 
EU average in the period 2017-2019 along with a small improvement in the country’s labour productivity 
vis-à-vis the EU average. In 2019, the country’s income gap vis-à-vis the EU average was estimated at 
about  20%,  measured  in  purchasing  power  standards  per  capita.  Despite  the  improvement  over  three 
consecutive years, the gap was still worse than 10 years earlier. Negative factors weighing on Portugal’s 
productivity  include  the  low,  albeit  improving,  stock  of  labour  skills  and  capital  accumulation. 
Productivity appears also restrained by the specialisation in low value added sectors and the large share of 
small firms. Portugal’s share  of high technology products in exports  was estimated at only  4% in 2018 
and was the lowest in the EU, complementing the structural restraints to productivity. 

Evolution, prospects and policy responses 

The external adjustment is temporarily reversed by the COVID-19 pandemic. After several years of 
steady  improvement,  the  steep  economic  contraction  driven  by  the  outbreak  of  the  pandemic  in  early 
2020 worsened the NIIP from -100.5% of GDP at the end of 2019 to preliminary estimated -105.4% as of 
the end of 2020. However, in absolute terms the NIIP improved by EUR 1.9 billion in 2020 despite the 
large  deterioration  in  tourism  inflows.  The  impact  from  net  external  flows  was  still  negative  but  net 
external liabilities benefited from significant valuation effects. The latter were largely due to the increase 

(1)  Fundamentals-based benchmarks are derived from regressions capturing the main determinants of credit growth and taking into 
account  a  given  initial  stock  of  debt.  Prudential  thresholds  represent  the  debt  threshold  beyond  which  the  probability  of  a 
banking crisis is relatively high, minimising the probability of missed crisis and that of false alerts. Methodologies are described 
in European Commission (2017) and updates to the methodology have been subsequently proposed in European Commission 
(2018). 

(2)  See  Article  126(3)  report  (June  2021)  and  PPS  report  (June  2021).  The  Debt  Sustainability  Monitor  2020  contains  detailed 

methodological explanations. 

(3)  The  financial  assistance  loans  to  the  International  Monetary  Fund  were  fully  repaid  by  the  end  of  2018  and  an  early  first 

repayment of EUR 2 billion to the European Financial Stability Facility was also carried out in October 2019. 

3 

                                                           
1. Assessment of Macroeconomic Imbalances 

in the monetary gold value and the decrease in domestic stock prices, which reduced the FDI-part of the 
NIIP  as  well  as  liabilities  related  to  portfolio  holdings  of  domestic  stocks  by  non-residents.  With  the 
expected  economic  recovery,  the  valuation  effects  have  the  potential  to  reverse,  while  the  NIIP  ratio 
would  benefit  from  the  expected  gradual  recovery  in  tourism  and  GDP.  Nevertheless,  the  current 
projections on the external flows point to a substantial slowdown in the pace of adjustment relative to the 
pre-pandemic  trajectory,  as  foreign  tourism  is  projected  to  face  long-term  constraints  with  a  lasting 
impact  on  Portugal’s  large  share  of  tourism-related  exports,  particularly  in  the  context  of  the  country’s 
large  dependence  in  the  aviation  sector.  The  current  account  moved  from  a  small  surplus  in  2019  to  a 
deficit of 1.2% of GDP in 2020. 

The NIIP ratio is set to resume its positive trajectory. With the expected economic recovery in 2021-
2022 and the projected slight improvement in the current account, the NIIP ratio to GDP is set to resume 
its positive trend. Over the medium term, the country’s external position is also expected to benefit from 
the  grants  assigned  to  Portugal  under  the  EU’s  Recovery  and  Resilience  Facility.  Grants  under  the 
Recovery and Resilience Facility are estimated to reach around 6% of the country’s annual GDP in 2021-
2026. On the other hand, the positive valuation effects seen in 2020 have the potential to reverse in the 
following  years that could limit slightly the  favourable impact from the favourable projections on GDP 
and the balance of payments. 

In  2020,  the  policy  efforts  mostly  focussed  on  temporary  measures  to  address  the  impact  of  the 
pandemic. These included the strengthening of the resources in the short term of the health system, a set 
of  measures to preserve employment (compensations to those affected by temporary layoffs, exemption 
of social contributions etc.) and support to companies (direct liquidity support, guarantees, tax deferrals, 
moratoria  etc.).  The  government  response  also  included  measures  to  strengthen  institutional  resilience 
(such as measures to ensure the functioning of the justice system remotely).  

Some measures have also been taken to address macro-economic imbalances. In the area of business 
environment,  the  authorities  launched  the  Programa  Internacionalizar  2030,  an  instrument  which 
establishes the priorities for the internationalization of the economy in the medium term (with a focus on 
exports  and  FDI),  and  a  National  Promotional  Bank  (Banco  Português  de  Fomento)  was  established, 
aimed at addressing market failures and structural challenges of the low capitalisation of the Portuguese 
economy.  In  the  area  of  justice,  targeted  measures  designed  to  introduce  further  improvements  in 
disposition  of  bad  assets  continue  to  be  implemented,  including  rapid  reaction  teams  to  deal  with  case 
backlogs and the establishment of specialized chambers. 

Private indebtedness increased in 2020 due mainly to the contraction in GDP. After reaching a peak 
of 210.6% of GDP at the end of 2012,  the ratio of consolidated private  debt to GDP had been steadily 
decreasing to 148.8% of GDP by the end of 2019, correcting a substantial part of the deviation from the 
indicative  threshold  of  133%.  However,  the  outbreak  of  the  COVID-19  pandemic  in  early  2020 
temporarily  broke  the  favourable  trend,  as  the  ratio  is  estimated  to  have  increased  by  around  12 
percentage points last year due mainly to the contraction in GDP. On the positive side, both households’ 
and  corporates’  deposits  increased  providing  the  private  sector  with  a  liquidity  buffer  to  face  potential 
financial problems. However, these dynamics in aggregate  terms  might be hiding  solvency problems in 
individual firms, particularly those in sectors severely hit by the pandemic. Nevertheless, the outlook for 
the  private  debt  ratio  appears  favourable,  driven  mainly  by  the  positive  denominator  impact  of  the 
economic growth projected for 2021 and 2022.  

The banking sector remains resilient but challenges lie ahead. The Portuguese banking system is more 
resilient  now  than  at  the  outset  of  the  global  financial  crisis  a  decade  ago,  but  there  are  also  new 
vulnerabilities. The banking system’s Core Equity Tier 1 (CET1) capital ratio stood at 14.6% in Q2-2020. 
While this is below the European average, it comes after a steady increase in capital ratios, most recently 
also reflecting the impact of state guarantees, which reduced risk weighted assets and retained earnings. 
At  the  crisis’  onset,  supervisors  relaxed  several  capital  requirements  allowing  banks  to  manage  their 
equity  in  a  flexible  way  during  the  pandemic.  Furthermore,  policy  measures  such  as  loan  moratoria 
softened the initial impact of the pandemic on the financial system and contributed to a further decrease in 
NPLs.  As  of  September  2020,  the  NPL  ratio  dropped  to  5.3%  relative  to  6.2%  at  the  end  of  2019. 
However, the ultimate economic impact of the pandemic on NPLs will only become visible with a delay, 
in particular once moratoria expire.  

4 

1. Assessment of Macroeconomic Imbalances 

The steady decrease of the public debt-to-GDP ratio came to a halt in 2020. In view of the COVID-
19 crisis, the primary deficit – reflecting the operation of automatic stabilisers and fiscal policy support – 
and  the  unfavourable  snowball  effect  – whereby  the  negative  denominator  effect  stemming  from  the 
contraction in GDP added to the interest burden – drove the public debt-to-GDP ratio upwards to a peak 
of 133.6% in 2020. At the same time, the substantial increase of the cash buffer by 4.7% of GDP (to 8.5% 
of GDP), according to data of the Treasury, was also underlying the increase of the public debt-to-GDP 
ratio in 2020. Looking ahead, the public debt-to-GDP ratio is projected to resume a downward path over 
the forecast horizon, declining to 127.2% in 2021 and to 122.3% in 2022, as the economic recovery gains 
momentum  and  the  crisis  mitigation  measures  are  gradually  phased  out.  In  addition,  Portugal  has 
continued to deploy efforts to reduce interest expenditure and contain annual peaks in the debt redemption 
profile. The supplementary financing needs triggered by the  crisis response have also been eased by the 
assistance  provided  under  the  European  instrument  for  Support  to  mitigate  Unemployment  Risks  in  an 
Emergency (SURE), especially in relation to the sudden and severe increase in public spending on short-
time  work  schemes  and  similar  measures,  as  well  as  health-related  measures  related  to  the  COVID-19 
outbreak. 

Labour productivity moves sideways during the pandemic. While employment proved more resilient 
to  the  economic  shock  than  expected,  helped  by  government  support  schemes,  productivity  in  terms  of 
per capita output dropped dramatically in 2020 as GDP contracted much faster than employment. On the 
other hand, productivity in terms of output per hour worked improved as furloughs and reduced worktime 
during  lockdowns  reduced  substantially  the  total  number  of  hours  worked.  Similar  developments  took 
place in the main trading partners and in relative terms labour costs and competitiveness indicators do not 
cause  immediate  concerns.  Total  factor  productivity  remained  relatively  stable  but  the  steep  drop  in 
equipment investment, from an already low pre-crisis base, is posing further challenges to the country’s 
medium-term outlook on productivity and competitiveness. Despite this drop, total investment remained 
the  most  resilient  expenditure  component  of  GDP  due  to  the  strong  performance  of  the  construction 
sector.  Therefore,  Portugal’s  capital  formation  faced  a  significantly  smaller  contraction  during  the 
pandemic  relative  to  trading  partners.  The  expected  economic  recovery  is  set  to  improve  the  country’s 
productivity as GDP is forecast to grow  faster than employment in 2021-2022. Potential growth is also 
projected to recover to its pre-crisis level until 2022. This is mainly due  to the expected increase in the 
investment ratio as a result of the financing envisaged under the Recovery and Resilience Facility (RRF). 
Total factor productivity is projected to have  a broadly stable contribution to potential  growth over the 
forecast  period.  Nevertheless,  policy  efforts  for  boosting  productivity,  particularly  labour  skills,  remain 
essential  for  improving  Portugal’s  competitiveness  and  potential  growth  and  to  accelerate  the  pace  of 
external rebalancing. 

House  price  growth  moderates.  Against  the  backdrop  of  the  adverse  economic  shock  in  2020,  the 
growth in real house prices moderated to 7.4% in 2020, slowing from 8.6% in 2019. The calculations for 
2019  show  that  prices  were  already  above  the  long-term  average  and  the  valuation  gap  widened. 
However,  the  price  to  income  gap  was  only  slightly  positive.  The  economic  shock  also  affected  rental 
prices,  which  decreased  during  the  initial  period  of  mobility  restrictions.  More  substantial  corrections 
were observed in areas with strong tourism activities. This correction in rents had a favourable impact on 
housing affordability,  which  had deteriorated substantially in the previous  years. However, on  full-year 
basis rental prices also retained a positive growth rate of 2.6% in 2020, slowing from 3.2% in 2019. In the 
light of low mortgage loans and increasing deposits, house prices are expected to grow at a relatively high 
rate in the medium term but the expected slow recovery in tourism will likely offset part of the demand, 
particularly for housing properties with potential for commercialised tourism-related services. Overall, the 
increase in house prices continues to be seen as a correction from previously low levels of valuation and 
is currently not considered an imbalance, but warrants close monitoring. 

Overall assessment 

After significant progress in reducing its imbalances in previous years,  debt ratios increased with 
the economic contraction triggered by the COVID-19 pandemic. Despite this progress, the country’s 
indebtedness had remained well beyond benchmarks and the outbreak of the crisis has further worsened 
the  country’s position, primarily through the  GDP decline  of 7.6% in 2020. The overall negative effect 
was more pronounced for public debt where the drop in tax revenues and additional spending in support 
of jobs and incomes entailed larger financing needs. The ratios of private debt and external liabilities were 

5 

1. Assessment of Macroeconomic Imbalances 

affected mostly through the denominator effect of GDP. With the expected economic recovery, Portugal’s 
debt ratios are set to move back on a downward path but for some indicators, particularly public debt, it 
will take several years to return to the pre-crisis level. The country’s large exposure to foreign tourism is 
weighing negatively on the external sector but the expected RRF grants would support the NIIP position 
in the medium term. 

Policy  measures  re-focused  towards  recovery  challenges.  Overall,  progress  has  been  made  to  focus 
economic  policy  related  to  investment  in  the  area  of  clean  and  efficient  production  and  use  of  energy, 
while progress has been more limited in the area of research and innovation and for transport. In the area 
of education, incremental steps are made  to increase digital education and training for all,  while efforts 
are  being  taken  to  improve  the  digitalisation  of  businesses.  However,  there  is  still  available  scope  to 
improve  the  quality  of  public  finances,  by  prioritising  growth-enhancing  spending,  strengthening 
expenditure control and efficiency, as well as addressing vulnerabilities in the financial sustainability of 
the National Health Service and state-owned enterprises. Weaknesses in the business environment persist, 
in  particular  related  to  regulatory  restrictions  in  regulated  professions  and  to  sector-specific  regulatory 
and administrative burden for firms. Despite progress, in the area of justice, Portugal remains among the 
EU  countries  with  the  lengthiest  administrative  and  tax  proceedings  and  displaying  one  of  the  highest 
rates of pending administrative cases. Time lags are still very high and continue to impact negatively the 
secondary market for non-performing loans. 

6 

Table 1.1: 

Assessment of Macroeconomic Imbalances Matrix - Portugal 

1. Assessment of Macroeconomic Imbalances 

Table (continued) 

(Continued on the next page) 

7 

   Gravity of the challenge Evolution and prospects Policy response Imbalances (unsustainable trends, vulnerabilities and associated risks) External balance The net international investment position (NIIP) stood at -100.5% of GDP at the end of 2019, standing well beyond the prudential threshold of -52%. However, risks are partly offset by the fact that nearly half of the NIIP is composed of non-defaultable instruments and the lower risk-premium assigned to Portugal over the past years. The current account was slightly positive in 2019 and broadly in line with the CA norm but well beyond the estimated surplus of 1.6% of GDP per year that is required to reach the country specific prudential NIIP benchmark over a 10-year period. This points out to further adjustment needs in order to reduce risks to the economy. Portugal’s NIIP improved from its lowest level of -123.8% of GDP at the end of 2014 to -100.5% at the end of 2019. However, the shock caused by COVID-19 brought a deterioration to -105.4% by the end of 2020 but the positive trend is expected to resume in 2021 helped by the gradual recovery in tourism. In the medium term, the NIIP is also expected to benefit from the RRF grants earmarked to Portugal. The current account balance deteriorated from a small surplus in 2019 to -1.2% of GDP in 2020 and is set improve only marginally by 2022.  Unit labour costs are increasing at a rate similar to Portugal’s main trading partners. While the market shares of exports have recently increased, their medium-term growth is predicted to deteriorate in the light of the expected protracted recovery in tourism. Progress has been made over the past years with tackling rigidities in product and labour markets. However, further measures to boost productivity and improve competitiveness remain essential to achieve a more significant improvement in the external balance. There is a risk that the impact of COVID-19 and the measures taken to protect jobs and incomes could further push up unit labour costs, slowing the export-led recovery. Such developments are expected in the main trading partners as well. However, Portugal may be more vulnerable due to its high exposure to foreign tourism where demand constraints are expected in the short- to medium-term forecast period. It is therefore essential to find the right balance of policy measures to ensure income growth on the one hand and competitiveness on the other. Private debt High private-sector debt is still weighing negatively on investment and growth.  Private debt is estimated at 149% of GDP at the end of 2019, which is still significantly above the estimated country-specific fundamentals and prudential benchmarks, for both households and non-financial corporations. The high stock of non-performing loans remains a challenge. While it has been declining, the NPLs ratio remains high. Consolidated private debt fell from a peak of 211% of GDP at end-2012 to 149% at end-2019 but the ratio deteriorated substantially in 2020 due mainly to the drop in GDP. The outlook however remains favourable. The process of deleveraging is set to continue, mainly reflecting nominal growth in GDP amid a broadly stable stock of credit. Both the corporate and household sectors are expected to contribute to the deleveraging process. NPLs continued to decline in 2020 despite the economic challenges lined to the pandemic. However, the high level of NPLs still poses a risk to financial stability and impedes the effective allocation of credits. The magnitude of these risks will only become clear once the moratoria expire.  A three-pillar strategy designed to reduce non-performing loans is being implemented since 2017. The strategy includes specific reduction targets, which the banks with the largest non-performing loans ratios are to meet.  Debt moratoria have been introduced since March 2020 in response to the economic shock brought by the COVID-19 pandemic. The moratoria are estimated to have covered over 20% of the loans are set to expire in September 2021. This is posing policy challenges for the phase-out of the moratoria when NPL stocks may rise.  Public debt  The public debt-to-GDP ratio declined to 116.8% at the end of 2019. The high public debt-to-GDP ratio makes Portugal particularly vulnerable to changes in economic and financing conditions, which translate into high debt sustainability risks in the medium term. After hovering around 130% between 2014 and 2016, the public debt-to-GDP ratio was steadily decreasing afterwards up until the COVID-19 outbreak in 2020, having bottomed at 116.8% at the end of 2019. After the surge to 133.6% in 2020, the public debt-to-GDP ratio is projected to start decreasing again as of 2021. Meanwhile, the general government Key fiscal-structural reforms could have been implemented more decisively to strengthen Portugal’s fiscal sustainability even further. Some measures were taken in past years in the areas of tax reforms, tax compliance, expenditure control, pensions, healthcare, state-owned enterprises and public administration. However, policy gaps persist, notably related to the  
      
 
 
 
1. Assessment of Macroeconomic Imbalances 

Source: European Commission Services 

8 

  balance moved from a small surplus in 2019 to a deficit of 5.7% of GDP in 2020. The deficit is projected to start decreasing as of 2021. Without additional growth-friendly fiscal consolidation compared with the Commission’s no-policy-change baseline scenario, the public debt-to-GDP ratio would still remain significantly above the Treaty reference value of 60% by 2031. long-delayed implementation of the 2015 Budgetary Framework Law, which would be instrumental to improve the quality of public finances and contain structural upward pressures on public expenditure. In addition, more substantial progress is needed to strengthen the sustainability and resilience of the National Health Service and enhance the financial performance of state-owned enterprises. Productivity Low productivity growth hinders competitiveness and potential growth. This limits the prospects for resuming private and public deleveraging from the debt levels further hiked by the crisis, a more sustainable and inclusive growth, and progress in income convergence.  Labour productivity has improved marginally from 2017 until 2019 due to the decline in labour market slack and a slowdown in employment growth. However, productivity in terms of per capital output dropped dramatically in 2020 as GDP contracted much faster than employment. Productivity remains impaired by low investment levels, skill gaps, rigidities in product and labour markets, and weaknesses in the business environment and the judiciary. There are a number of measures designed to help raise productivity and competitiveness, including policies in the areas of research and innovation, competition in services, and transport infrastructure. Other measures that could help to boost productivity and external competitiveness have to do with the business environment, and the efficiency of the justice system.     Main takeaways  Despite the progress achieved in the past years, prior to the COVID-19 pandemic, the Portuguese economy continues to be marked by a large stock of external, public and private debt, as well as by a high share of non-performing loans. In addition, productivity growth is low, hampering the deleveraging process. While the current account balance helped improve the net international investment position (NIIP) up to 2018, it turned negative in 2019 and is expected to deteriorate further.  Both private and public debt has declined by the end of 2019, mostly as a result of nominal GDP growth. Although the situation reversed abruptly in 2020 with the outbreak of COVID-19, the expected economic recovery as of 2021 is set to turn the debt ratios back on a declining track even if from elevated levels. Despite the projected downward path, the public debt-to-GDP ratio is set to remain at a very high level and weighs on the stock of external liabilities. Portugal’s NIIP remains a significant source of vulnerability, as the recent reversal of the current account risks bringing adjustment to a standstill. On the other hand, the structure of external liabilities improved in recent years due to a shift from debt to foreign direct investment and a lower risk profile of domestic debtors. The high stock of NPLs also remains a key weakness. The  adjustment is advancing, despite the COVID-19 shock, but the real impact of the crisis on the credit quality and NPLs will become clear once the moratoria on loan repayments expire.  Policy progress has been made to focus economic policy on repairing the damages caused by the COVID-19 crisis. In the area of education, incremental steps are being taken in order to increase digital education and training for all, while efforts are being taken to improve the digitalisation of businesses. At the same time, decisive policy action is needed to strengthen the sustainability and resilience of the National Health Service, mitigate vulnerabilities in some state-owned enterprises, and improve the quality and composition of public finances. Weaknesses in the business environment persist, in particular related to regulatory restrictions in regulated professions and to sector-specific regulatory and administrative burden for firms. Despite progress, in the area of justice, Portugal remains among the EU countries with the lengthiest administrative and tax proceedings and displaying one of the highest rates of pending administrative cases. Time lags are still very high and continue to impact negatively the secondary market for non-performing loans.        
 
 
Table 1.2: 

Selected economic and financial indicators, Portugal 

1. Assessment of Macroeconomic Imbalances 

(1) NIIP excluding direct investment and portfolio equity shares 
(2) domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
(3) The tax-to-GDP indicator includes imputed social contributions and hence differs from the tax-to-GDP indicator used in the 
section on taxation 
(4) Defined as the income tax on gross wage earnings plus the employee's social security contributions less universal cash 
benefits, expressed as a percentage of gross wage earnings 
Source: Eurostat and ECB as of 2021-05-05, where available; European Commission for forecast figures (Spring forecast 2021) 

9 

2004-072008-122013-182019202020212022Real GDP (y-o-y)1.7-1.41.02.5-7.63.95.1Potential growth (y-o-y)1.0-0.40.41.80.91.81.3Private consumption (y-o-y)2.0-1.61.82.6-5.94.03.8Public consumption (y-o-y)1.4-1.1-0.30.70.42.01.7Gross fixed capital formation (y-o-y)0.6-7.73.85.4-1.94.66.9Exports of goods and services (y-o-y)5.61.55.83.9-18.610.38.9Imports of goods and services (y-o-y) 5.7-2.66.44.7-12.09.56.0Contribution to GDP growth:Domestic demand (y-o-y)1.8-2.81.02.7-4.13.84.1Inventories (y-o-y)0.3-0.10.10.1-0.60.00.0Net exports (y-o-y)-0.41.5-0.1-0.3-2.90.11.0Contribution to potential GDP growth:Total Labour (hours) (y-o-y)-0.3-1.20.20.90.30.90.3Capital accumulation (y-o-y)0.80.3-0.10.1-0.10.10.2Total factor productivity (y-o-y)0.40.50.30.90.70.90.8Output gap-0.1-1.2-1.13.5-5.6-3.3-0.2Unemployment rate7.611.411.76.56.96.86.5GDP deflator (y-o-y)3.00.61.71.72.41.41.5Harmonised index of consumer prices (HICP, y-o-y)2.51.90.50.3-0.10.91.1Nominal compensation per employee (y-o-y)3.30.41.33.52.92.82.8Labour productivity (real, person employed, y-o-y)1.80.60.31.7-5.9..Unit labour costs (ULC, whole economy, y-o-y)1.4-0.21.11.89.3-0.1-1.0Real unit labour costs (y-o-y)-1.5-0.8-0.60.06.8-1.5-2.5Real effective exchange rate (ULC, y-o-y)0.0-2.00.5-1.3...Real effective exchange rate (HICP, y-o-y)0.4-0.80.0-1.80.9-0.2-0.6Net savings rate of households (net saving as percentage of net disposable income)1.81.5-1.1-2.14.1..Private credit flow, consolidated (% of GDP)13.84.4-1.42.34.2..Private sector debt, consolidated (% of GDP)173.6203.4177.5149.5161.2..of which household debt, consolidated (% of GDP)81.590.675.863.768.3..of which non-financial corporate debt, consolidated (% of GDP)92.1112.8101.685.892.9..Gross non-performing debt (% of total debt instruments and total loans and advances) (2)1.24.110.04.9...Corporations, net lending (+) or net borrowing (-) (% of GDP)-4.5-1.73.1-0.6-0.13.23.7Corporations, gross operating surplus (% of GDP)19.820.921.821.319.522.622.9Households, net lending (+) or net borrowing (-) (% of GDP)1.33.02.61.55.92.10.8Deflated house price index (y-o-y)-1.6-2.96.98.67.4..Residential investment (% of GDP)5.73.72.73.23.5..Current account balance (% of GDP), balance of payments-9.4-8.00.90.4-1.2-0.6-0.1Trade balance (% of GDP), balance of payments-7.8-5.41.20.7-1.8..Terms of trade of goods and services (y-o-y)-0.10.00.20.61.7-0.80.2Capital account balance (% of GDP)1.41.51.20.81.3..Net international investment position (% of GDP)-77.1-107.8-115.2-100.5-105.4..NENDI - NIIP excluding non-defaultable instruments (% of GDP) (1)-44.3-71.3-67.4-47.0-47.1..IIP liabilities excluding non-defaultable instruments (% of GDP) (1)175.7213.4192.5170.7181.8..Export performance vs. advanced countries (% change over 5 years)6.6-3.52.86.74.3..Export market share, goods and services (y-o-y)-2.4-3.72.00.8-9.42.23.4Net FDI flows (% of GDP)0.6-2.4-3.5-3.6-1.7..General government balance (% of GDP)-4.8-7.8-3.90.1-5.7-4.7-3.4Structural budget balance (% of GDP)..-1.8-1.2-2.0-3.2-3.2General government gross debt (% of GDP)71.4101.4128.0116.8133.6127.2122.3Tax-to-GDP ratio (%) (3)34.434.336.936.737.136.135.5Tax rate for a single person earning the average wage (%) (4)22.422.327.227.327.4..Tax rate for a single person earning 50% of the average wage (%) (4)13.911.511.011.011.0..forecast 
    
 
2.  THEMATIC ISSUE: EXTERNAL BALANCE 

Situation entering the COVID-19 crisis 

Portugal’s external position had undergone a significant adjustment for several years prior to the COVID-
19  pandemic.  The  current-account  deficits  in  the  tune  of  about  10%  of  GDP  until  2010  had  started  to 
decline driven by a sharp contraction of aggregate demand (Graph 2.1(a)), i.e. gradual improvements in 
government’s and corporates’ net borrowing position (Graph 2.1(b)). From 2013 the current account had 
moved  to  a  small  surplus  that  was  maintained  until  2019.  The  capital  account  surplus  contributed  to 
economy’s positive net lending (Table 2.2).While the balance of trade with goods had moved sideways 
over  the  past  years,  the  strong  growth  in  Portugal’s  tourism  sector  played  a  key  role  in  the  external 
adjustment  (Graph  2.1(c)).  Net  inflows  from  foreign  tourism  increased  from  2.6%  of  GDP  in  2010  to 
6.1% of GDP in 2019. Accordingly, the  net international investment position (NIIP) improved from its 
lowest level of -123.8% at the end of 2014 to -100.5% of GDP as of the end of 2019. The structure of the 
NIIP had also improved in the light of increased share of non-defaultable instruments, primarily FDI, and 
improved  parameters  of  the  public  debt  accounting  for  a  large  proportion  of  the  net  stock  of  external 
liabilities (Graphs 2.1(e) and 2.1(f)). Nevertheless, as of the end of 2019, the NIIP stood well beyond the 
estimated  prudential  and  fundamentally-explained  thresholds  of  -52%  and  -20%  of  GDP  (Table  2.2), 
respectively,  and  remained  one  of  the  most  negative  in  the  EU.  The  current  account  balance  was 
significantly better than the estimated value required to stabilise the NIIP but at the same time well below 
the value required to reach the prudential NIIP target over a 10-year period. 

Current account developments and outlook 

The  outbreak  of  the  COVID-19  pandemic  in  early  2020  strongly  impacted  the  country’s  trade 
flows. The shock was particularly damaging for the tourism sector, whose negative impact on the current 
account was only partly offset by other items, as the country’s output was more significantly affected than 
aggregate demand (Graph 2.1(a)).  While the government’s net lending deteriorated substantially related 
to  fiscal  support  measures,  its  impact  on  the  total  economy’s  net  lending  was  mainly  cushioned  by 
increased saving surplus of the household sector (Graph 2.1(b)). Overall, the current account moved to a 
deficit of 1.2% of GDP in 2020 with abrupt sideway movements in most of its components. The surplus 
in trade with services contracted from 8.3% of GDP in 2019 to 4.2% in 2020, reflecting the huge drop in 
travel  receipts.  In  net  terms,  travel  receipts  declined  by  EUR  5.0  billion  (2.5%  of  GDP)  in  2020  and  a 
further drop of EUR 1.9 billion (0.9% of GDP) was recorded in net transport receipts where most of the 
impact  was  driven  by  the  drop  in  airline  passengers.  Reduced  deficits  in  trade  with  goods  and  primary 
income  offset  about  60%  of  the  negative  impact  from  the  balance  of  services  while  the  balance  in 
secondary  income,  including  migrant  remittances,  remained  broadly  stable.  The  balance  of  goods 
benefited  from  the  positive  terms  of  trade,  due  to  the  drop  in  crude  oil  prices,  and  the  steep  decline  in 
imports  of  investment  goods.  The  breakdown  of  trade  with  goods  by  main  categories  shows  that  the 
balance  in  consumer  goods  also  improved  although  much  less  than  the  one  for  investment  goods.  The 
improvement in the net primary income was largely due to lower dividend payments to non-residents. 

Productivity dropped substantially in 2020 in terms of output per employee. Helped by government 
measures in support of jobs and incomes, employment dropped at a much lesser pace than GDP in 2020, 
bringing the productivity in terms of output per employee  down by around 6%.  However, a substantial 
drop  in  hours  worked,  reflecting  the  large  impact  of  furloughs  and  reduced  workload  during  the 
lockdowns, moved productivity upwards by around 1.5% in terms of output per hour worked. At the same 
time, unit labour costs increased substantially by 9.3% in 2020, accelerating from 1.8% in the previous 
year.  While  these  changes  were  technically  unfavourable  for  the  country’s  competitiveness,  the  figures 
mirror a similar temporary shock across all main trading partners of Portugal. Therefore, in relative terms 
Portugal’s competiveness was not significantly affected. The trade figures show that the country’s export 
market share in goods relative to the demand in the main trading partners improved marginally in 2020. 
This share, however, deteriorated significantly for exports of services where the country’s large exposure 
to tourism brought an asymmetric correction relative to trading partners with lower exposure to tourism. 

10 

 
2. Thematic Issue: External Balance 

As regards the main factors of production, Portugal’s capital base was less affected in comparison with its 
trading partners. Investment, excluding inventories, dropped by only 1.9% in 2020 due to the resilience of 
the  construction  sector,  which  retained  an  upward  trend  during  the  COVID-19  pandemic.  Total  factor 
productivity  is  also  estimated  to  have  remained  stable.  Nevertheless,  the  steep  drop  in  equipment 
investment,  from  an  already  low  pre-crisis  base,  was  not  supportive  to  structural  improvements  in 
Portugal’s exports. As of 2018, the share of high technology products in Portugal’s exports remained the 
lowest in the EU at 4%. 

The  current  account  is  projected  to  improve  slightly  in  the  short  run  despite  scarring  effects  in 
tourism.  With  the  expected  gradual  recovery  in  tourism,  the  current-account  balance  is  projected  to 
improve slightly in 2021-2022 though it is likely to remain in a small deficit and slightly worse than the 
estimated current account explained by fundamentals (Table 2.2). This is due to the expectations that the 
tourism sector is facing scarring effects, both on the supply and demand side, and would not be able to 
reach  its  pre-pandemic  level  before  the  end  of  2022.  Nevertheless,  the  current  account  is  projected  to 
remain significantly better than the estimated balance of -4.4% needed to stabilise the NIIP at the current 
level  (table  2.1).  On  the  other  hand,  the  projections  also  show  that  the  current  account  would  be  well 
below  the  surplus  of  1.9%  of  GDP  needed  to  reach  in  10  years  the  estimated  NIIP  country  specific 
prudential benchmark of around -50% of GDP. 

NIIP developments and outlook 

Net external liabilities declined in absolute terms in 2020 but their ratio to GDP worsened. Despite 
the deterioration in the current account, the overall balance in the current and capital accounts remained 
slightly  positive  and  together  with  positive  valuation  effects  contributed  to  a  small  improvement  in  the 
NIIP position in absolute terms. However, against the backdrop of the significant economic contraction, 
the ratio of the NIIP to GDP deteriorated from -100.5% at the end of 2019 to  -105.4% as of the end of 
2020. On the account of positive price valuations, the NIIP benefited from the market fluctuations in the 
monetary gold value and the decrease in domestic stock prices, which reduced the FDI-part of the NIIP as 
well  as  liabilities  related  to  portfolio  holdings  of  domestic  stocks.  The  net  inflow  of  FDI  meanwhile 
dropped  significantly  in  2020  (Graph  2.1(d))  against  the  backdrop  of  unprecedented  global  market 
destructions and uncertainties. Nevertheless, the share of non-defaultable instruments, composed mostly 
of FDI, is estimated to have remained relatively stable at around 50% of the NIIP. 

The  current  account  is  expected  to  improve  somewhat  in  the  short  term,  driven  by  a  gradual 
recovery in tourism, but is nevertheless set to remain on a negative territory. On the other hand, the 
country’s  external  position,  and  particularly  the  capital  account,  is  expected  benefit  from  the  grants 
expected  to  be  disbursed  under  the  Recovery  and  Resilience  Facility  in  the  period  of  2021-2026  that 
would help reduce the net stock of external liabilities. Overall, the current projections on the combined 
impact of the current and capital accounts suggests that the NIIP would improve marginally in absolute 
terms  (until  2022)  and  the  ratio  to  GDP  would  be  also  benefiting  from  the  expected  economic  growth. 
Nevertheless, the expected current account balance is estimated well below the value required to reach the 
prudential NIIP target over a 10-year period although it is still significantly better than the value required 
to stabilise the NIIP at the current level (Table 2.1). 

Table 2.1: 

Sensitivity analysis current account balance and net international investment position 

(1) The table above shows the annual average current account balance required to reach a certain NIIP by 2030, based on 
different assumptions for GDP growth, assuming no NIIP valuation effects and a stable capital account set at its median 
forecast over 2020-22 (1.3% of GDP). See also European Commission, 2015, 'Refining methodology for NIIP-based current 
account benchmarks', LIME Working Group 17 June 2015. 
Source: European Commission calculations 

11 

Low nominal GDP growth (2% avg 2021-30)Baseline scenario (3% avg 2021-30)High nominal GDP growth (4% avg 2021-30)NIIP stabilisation-3.4-4.4-5.4NIIP at -70% of GDP0.5-0.4-1.2NIIP at -50% of GDP2.61.91.1NIIP at -35% of GDP4.33.62.9 
 
 
 
 
Table 2.1: 

Selected external sector indicators, Portugal 

2. Thematic Issue: External Balance 

(1) Abbreviations: NA=National Accounts, BoP=Balance of Payments, CA=Current Account, NENDI= NIIP excluding non-
defaultable instruments, VA= Value Added, TB= Trade Balance.  
(1) Flow data refer to national account concept, unless indicated otherwise.  
(3) The average CA needed in order to stabilise the NIIP is based on T+10 Ecfin projections.  
(4) The CA explained by fundamentals refers to the expected CA given the level of its fundamentals with respect to world 
average.  
(5) The CA or TB needed either to halve the distance to fund. NIIP benchmark, or to reach the prud. NIIP benchmark in 10Y, 
whichever is higher. Based on T+10 Ecfin projections. 
(6) In case private-sector FDI is not available, total economy FDI is displayed.  
(7) VA imports as % of aggregate demand describes the % of aggregate demand that  is sourced from foreign value added.  
(8) More information on benchmark indicators methodology can be found on B1 intranet. 
Sources: (a) Eurostat, (b) Ameco, (c) European Commission calculations, (d) WIOD database. 

12 

2003-072008-122013-172018201920202021f2022fFlows (1)Source:CA balance as % of GDP, NA(b)-8.9-7.80.5|0.30.2-1.1-0.8-0.4CA balance as % of GDP, BoP(a)-8.8-8.00.9|0.60.4-1.2-0.9-0.5Cyclically adj. CA balance as % of GDP (2)(c)-9.6-7.70.2|1.21.6-0.9-1.1-0.3CA req. to stabilize NIIP above -35% (3)(c)-0.50.60.0|0.1-0.2-0.3-0.8-0.8CA explained by fundamentals (CA norm) (4)(c)-1.8-1.0-0.3|0.00.10.20.10.3Required CA for specific NIIP target (5)(c)0.12.42.7|2.11.61.51.11.3Trade bal. G&S, % of GDP, NA(b)-7.7-5.80.8|0.50.4-2.0-2.1-1.0Required TB for specific NIIP target (5)(c)1.04.81.3|0.80.60.60.70.7StocksNENDI as % of GDP(a)-41-71-70|-55-47-47of which: net portfolio debt(a)-4-18-9|012of which: net mutual fund shares(a)459|101314of which: net other investment(a)-47-65-79|-76-70-74NIIP as % of GDP(a)-74-108-117|-106-100-105-101-94Prudential NIIP/NENDI benchmark(c)-53-52-50|-52-52-50-51-52Fundamentally expl. NIIP benchmark (NIIP norm)(c)-15-19-23|-20-20-21-18-17Gen. Government NIIP(a)-42-57-77|-59-58-64Private Sector NIIP(a)-14-20-36|-44-48-53of which: Net FDI (6)(a)-10-16-28|-32-34-38MFI (excl CB) NIIP(a)-43-31-8|-9-7-2Oth. financials NIIP(a)1536|71315Central bank NIIP(a)10-3-2|-20-2of which: Reserves(a)5810|111012of which: Target2(a)-26-36|-40-36-40Value-added trade and capital accountVA imports % of agg. demand (7)(d)292930|Capital account bal. as % of GDP, NA(b)1.51.41.2|1.00.81.21.31.5Indicators in % of potential GDPCA balance as % of potential GDP, NA(b,c)-8.9-7.80.5|0.30.2-1.0-0.8-0.4CA balance as % of potential GDP, BoP(a,c)-8.8-8.00.9|0.60.4-1.1-0.9-0.5Cyclically adj. CA balance as % of potential GDP (c)-9.6-7.60.2|1.21.6-0.8-1.0-0.3Trade bal. G&S, as % of potential GDP, NA(b,c)-7.7-5.70.8|0.50.4-1.9-2.0-1.0NENDI as % of potential GDP(a,c)-41-70-69|-57-49-44NIIP as % of potential GDP(a,c)-74-106-114|-109-104-99-97-94Capital account bal. as % of potential GDP, NA(b,c)1.51.41.2|1.00.81.11.31.5 
   
 
 
Graph 2.1: 

Thematic Graphs: External balance 

2. Thematic Issue: External Balance 

Source: European Commission Services 

13 

-15-10-5051008091011121314151617181920*21*22*% of GDP(b) Net lending/borrowing by sectorHouseholds and NPISHGeneral governmentCorporationsTotal economySource: Ameco-140-120-100-80-60-40-2002013Q113Q314Q114Q315Q115Q316Q116Q317Q117Q318Q118Q319Q119Q320Q120Q3% of GDP(f) Decomposition of NIIP by sectorGeneral governmentPrivate sectorMFI (excl central bank)Central bank (incl reserves)Net int'l investment position (NIIP)Target2 balancesSource: Eurostat-20-15-10-505101506070809101112131415161718192021*22*% of GDP(c) Current Account DecompositionCapital accountSecondary income balancePrimary income balance  Trade balance - services  Trade balance - goodsTrade balanceCurrent account balance (CA)Net lending/borrowing (CA+KA)Source: Eurostat,AMECO, ECFIN calculations. Note: forecast period uses the NA-based figures adjusted for statistical discrepancies (between NA and BoP data) observed in the last available year of data. Services balance includes travel for the forecast period-20-15-10-50510152002030405060708091011121314151617181920'% of GDP(d) Current Account FinancingDirect investment (net)Portfolio investment, equity and inv. fund shares (net)Portfolio investment, debt securities (net)Other investment (net)Official reserves (net)Financial derivatives and ESO (net)Net errors and omissionsCurrent account balanceNet lending/borrowing (CA+KA)Source: Eurostat1601651701751801851901952002052100809101112131415161718192021*22*Constant 2015 EUR mn(a) Demand, Output and Trade BalanceTrade balanceAgg. demandOutput (GDP)Source: Ameco-150-100-50050030405060708091011121314151617181920% of GDP(e) Decomposition of NIIP by instrumentReserve assetsNet portfolio investment, equity and investment fund shares/unitsNet portfolio investment, debt securitiesOther investment (net)Net direct investmentNet financial derivatives and employee stock optionsNet Int'l investment position (NIIP)NENDI (NIIP excluding non-defaultable instruments)Source:Eurostat  
3.  THEMATIC ISSUE: PRIVATE DEBT 

Situation entering the COVID-19 crisis 

Portugal  faced  the  outbreak  of  the  COVID-19  pandemic  in  early  2020  with  high  but  steadily  declining 
private debt ratios (Table 3.1). Consolidated private debt reached 149% of GDP as of the end of 2019 and 
the  deviation  from  the  indicative  threshold  of  133%  had  been  substantially  reduced  from  the  peak  of 
210.6% of GDP at the end of 2012. However, private indebtedness continued to exceed significantly the 
estimated  country  specific  benchmarks  (Graph  3.1(b)). The  ratios  of  non-financial  corporations  (NFCs) 
and household debt stood at 85.2% and 63.6% respectively. Both were significantly beyond the estimated 
country-specific  prudential  and  fundamentals-based  benchmarks (4).  For  NFCs,  these  benchmarks  were 
estimated  at  63%  and  60%,  respectively,  and  for  households  at  40%  and  35%.  The  legacy  of  non-
performing loans remains an additional vulnerability, particularly in the non-financial corporate sector, as 
it hampers the ability of the financial sector to extend further credit.  

Developments and outlook  

The economic contraction in 2020 increased the private debt ratio by around 12 percentage points 
due  mainly  to  the  GDP  denominator  effect.    On  the  positive  side,  both  households’  and  corporates’ 
deposits  increased,  providing  the  private  sector  with  a  liquidity  buffer  to  face  potential  financial 
problems. However, these dynamics in aggregate terms might be hiding solvency problems in individual 
firms, particularly those in sectors severely hit by the COVID-19 pandemic. Nevertheless, the outlook for 
the  private  debt  ratio  appears  favourable,  driven  mainly  by  the  positive  denominator  impact  of  the 
economic growth projected for 2021 and 2022. 

The NPL ratio continued to decline, albeit at a slower pace. In Q3 2020, the NPL ratio narrowed by 
0.2  pps.,  to  5.3%,  reflecting  a  decline  in  NPLs  (-4.9%)  which  exceeded  that  of  total  loans  in  the 
denominator  (1.0%).  The  NPL  ratio  of  NFCs  stood  at  10.6%  (-0.6  pps.)  and  the  one  of  households  at 
3.5% (0.2 pps.). The decline in both ratios resulted  from a decrease in the numerator (NPLs). However, 
when  the  credit  moratoria  expire,  there  may  be  a  sharp  increase  in  NPLs  and  institutions  will  have  to 
adapt to more demanding NPL sales market conditions, reflecting the effect of the COVID-19 crisis on 
the value of assets and recovery processes. 

Corporate debt 

Non-financial  corporate  indebtedness  increased  in  2020,  breaking  the  downward  trend  observed 
since  2013.  NFCs’  indebtedness  ratio  increased  by  7.0  pps.  between  December  2019  and  September 
2020,  reaching  92.4%  of  GDP.  Both,  the  increase  in  NFCs’  total  debt  and  the  drop  of  nominal  GDP 
contributed to this change, with the increase in corporate debt mainly due to a respite on loan repayments. 
High  corporate  indebtedness  is  a  vulnerability  that  may  result  in  pressures  on  corporate  solvency.  The 
increase  in liquidity and  maturities resulting  from  the  State-guaranteed loans,  the  low  interest rates and 
the extension of credit moratoria have so far mitigated default and insolvencies. Notwithstanding efforts 
made to avoid a wave of insolvencies, corporate bankruptcies are forecast to increase in 2021. The issue 
of  lengthy  judicial  proceedings  (both  civil  as  well  as  bankruptcy  or  corporate  recovery  cases)  often 
dominated  by  cases  lasting  over  5  years,  the  lack  of  specialised  judges  in  various  courts  and  levels  of 
judicial  proceedings  still  remains  and  needs  to  be  addressed.  To  this  end,  the  Portuguese  authorities 
established in mid-2020 the extraordinary procedure PEVE (Processo Extraordinário de Viabilização  de 
Empresas).  PEVE  aims  for  a  simple,  fast-track  court  ratification  of  a  restructuring  agreement  reached 

(4)  Fundamentals-based benchmarks are derived from regressions capturing the main determinants of credit growth and taking into 
account  a  given  initial  stock  of  debt.  Prudential  thresholds  represent  the  debt  threshold  beyond  which  the  probability  of  a 
banking crisis is relatively high, minimising the probability of missed crisis and that of false alerts. Methodologies are described 
in European Commission (2017) and updates to the methodology have been subsequently proposed in European Commission 
(2018).  

14 

 
                                                           
 
3. Thematic Issue: Private Debt 

extra  judicially  between  a  company  and  its  creditors.  PEVE  was  implemented  to  enable  companies  to 
respond more efficiently to the COVID-19 pandemic and is planned to last until end-2021. 

The share of credit under moratoria and new government-guaranteed loans in total NFCs’ loans is 
significant. At the end of September 2020, 32% of NFCs’ stock of loans (EUR 24.4 billion) were under 
moratoria, a share significantly higher than the EU aggregate (around 9% in June 2020 – latest available 
data).  Furthermore,  around  40%  of  new  loans  taken  out  by  NFCs  between  March  and  September  2020 
were associated with State-guaranteed loans. SMEs made more use of State-guaranteed loans than large 
enterprises  (44%  vs.  17%  of  total  new  loans).  Up  to  September  2020  the  State  guarantee  covered 
approximately  15%  of  the  total  stock  of  loans  to  NFCs.  According  to  BdP’s  Bank  Lending  Survey  of 
October 2020, demand by firms for loans was mainly driven by financial needs related to inventories and 
working capital.  

There are some signs of an increase in the risks associated with loans to NFCs. The State-guaranteed 
loans allowed firms to obtain liquidity at more favourable interest rates (1.2% for State-guaranteed loans 
against 2.4% for loans with no government-backing) and with longer maturity (grace periods of up to 18 
months and maximum maturity of 6 years). The large weight of new state-guaranteed loans taken out with 
maximum  maturity,  which  accounted  for  approximately  one-third  of  all  new  loans  to  firms  over  this 
period, allows for a protracted loan repayment profile, which is key to the resilience of firms, in particular 
for  SMEs  and  firms  from  sectors  of  activity  most  affected  by  the  COVID-19  pandemic.  However,  the 
NPL  ratio’s  downtrend  noticeably  slowed  down  in  the  second  half  of  2020  (Graph  3.1(d))  and  stage  2 
loans augmented from 9.4% of total loans to 10.6% during 2020. 

The  effect  of  the  COVID-19  pandemic  is  visible  across  all  indicators  related  to  corporate 
performance.  Compared  to  the  end  of  2019,  the  cost  of  debt  for  NFCs  (interest  expenses/obtained 
funding) remained stable as interest rates stayed very low (Graph 3.1(f)), but the interest coverage ratio 
(EBITDA/interest  expenses)  decreased.  Therefore,  overall  firm’s  debt  service  burden  increased.  The 
stock of corporate deposits also increased during the COVID-19 pandemic, helped by the moratoria and 
the  state  wage  support  schemes,  which  indirectly  helped  reduce  corporate  expenses.  Nevertheless, 
profitability decreased across all sectors except electricity, gas and water, with transportation and storage 
and  services  posting  the  most  significant  drop.  On  the  positive  side,  the  rebalancing  of  the  financial 
structure of Portuguese firms continued in 2020, favouring equity to the detriment of debt (Graph 3.1(c)). 
The  capital  ratio  (equity/total  assets)  of  private  corporations  stood  at  39.8%  in  Q3  2020,  reaching  the 
highest level ever recorded and resulting in a lower financial leverage for the Portuguese enterprises. 

Household debt 

Households’  high  indebtedness  level  remains  an  important  vulnerability.  Despite  the  significant 
improvement observed since 2012, the households’ indebtedness level was still high before the outbreak 
of the COVID-19 pandemic (63.4% of GDP at the end of 2019, Table 3.2), with a significant part of the 
decline in the debt ratio achieved through cyclical GDP growth. The outbreak worsened the situation and 
households’ debt levels increased by 3.5 pps (to 66.9% at the end of Q3 2020: Graph 3.2(a)). Portuguese 
households  remain  vulnerable  to  unexpected  adverse  shocks  affecting  their  income  (according  to 
Eurostat’s  EU-SILC,  in  2019  33%  of  households  reported  that  they  are  unable  to  cover  unexpected 
financial expenses) and credit moratoria are relevant for their immediate financial sustainability. 

Credit moratoria have temporarily reduced households' liquidity problems. In September 2020, 17% 
of the stock of loans to households was under moratoria, one of the highest ratios in the EU (6.2% EU 
aggregate  in  June  –  latest  available  data,  Graph  3.2(d)).  The  percentage  of  loans  under  moratoria  was 
similar for housing loans and personal credits (approx. 19%) and lower for car loans (approx. 6%). These 
moratoria  have  been  active  since  March  2020  and  most  of  them  are  set  to  expire  in  September  2021. 
According to Banco de Portugal (BdP), a survey of seven of the largest banking institutions revealed that 
less than half of the households that were granted loan moratoria had experienced a fall in their income at 
the time of their application. This showed that a significant proportion of the households that applied for 
credit moratoria did so for precautionary reasons while overall the households’ liquidity looked sound in 
the light of the increased saving rate and resilient employment and income rates. 

15 

3. Thematic Issue: Private Debt 

The gross household saving rate  increased significantly in 2020. The household saving rate  stood at 
11.7% of disposable income in Q3 2020 (Graph 3.2(e)), up by 4.3 pps. compared to the end of 2019 (in 
Q2  2020  the  gross  household  saving  rate  had  reached  18.9%,  the  highest  value  ever  recorded).  The 
increase in the rate was driven by reduced consumption associated with mobility restrictions that limited 
part  of  households'  normal  spending  and  by  the  high  uncertainty  that  boosted  precautionary  savings. 
However, despite an increase in the stock of households’ deposits, the flow of new deposits from private 
individuals recorded a rather negative growth rate in 2020 (22.6% y-o-y cumulative). 

Table 3.1: 

Non-financial corporations debt indicators, Portugal 

(f) European Commission forecast 
(1) Benchmarks for flows (% of GDP) are estimated on the basis of non-consolidated flows.  
(2) Gross non-performing bank loans and advances to Households and non profit institutions serving households (% of total 
gross bank loans and advances to Households and non profit institutions serving households).  
(3) Gross non-performing bank loans and advances to Non-financial corporations (% of total gross bank loans and advances 
to Non-financial corporations).  
(4) Quarterly data is annualized. 
Source: (a) Eurostat, (b) Ameco, (c) European Commission calculations, (d) ECB. 

Table 3.2: 

Household debt indicators, Portugal 

 (f) European Commission forecast 
(1) Benchmarks for flows (% of GDP) are estimated on the basis of non-consolidated flows.  
(2) Gross non-performing bank loans and advances to Households and non profit institutions serving households (% of total 
gross bank loans and advances to Households and non profit institutions serving households).  
(3)  Quarterly data is annualized. 
Source: (a) Eurostat, (b) Ameco, (c) European Commission calculations, (d) ECB. 

16 

2003-072008-122013-17201920202021f|20Q220Q320Q4SourceStocksDebt, consolidated (% of GDP)(a,d)921131018693|919293Debt, consolidated (% of potential GDP)(a,b,d)91111998988|908988Prudential threshold (% of GDP)(1)(c)564953636162|Fundamental benchmark (% of GDP)(1)(c)586466606563|Debt, consolidated (% of gross operating surplus)(a,b,d)464540458402476|443460476Interest paid (% of gross operating surplus) (3)(a,b)12.717.011.98.59.1|8.18.4Debt, consolidated (% of gross financial assets)(a,d)101109988887|Domestic  loans in forex (% dom. Loans)(d)1.10.50.80.80.6|0.70.60.6FlowsCredit flows (transactions, % of GDP) (2)(a)5.84.4-0.11.63.10.9|10.9-0.8-1.0Benchmark for flows (% of GDP)(1)(c)|Investment (% of value added)(b)25.722.820.824.624.422.8|Savings (% of value added)(b)17.718.423.221.820.625.7|p.m. Banks NFC NPLs (% of NFC loans)(2)(d)25.812.3|2003-072008-122013-17201920202021f|20Q220Q320Q4SourceStocksDebt, consolidated (% of GDP)(a,d)8091756468|666768Debt, consolidated (% of potential GDP)(a,b,d)7990746665|656565Prudential threshold (% of GDP)(1)(c)383235403939|Fundamental benchmark (% of GDP)(1)(c)394341353937|Debt (% of gross disposable income)(a,b,d)1121251079393|929393Interest paid (% of gross disposable income) (3)(a,b)3.43.51.30.40.3|0.30.3Debt (% of gross financial assets)(a,d)41.344.035.531.530.7|30.830.730.4Share of variable rate loans for house purchase (%)(d)98.397.478.472.866.5|Domestic  loans in forex (% of dom. loans)(d)0.10.10.10.10.0|FlowsCredit flows (transactions, % of GDP) (4)(a)6.80.0-1.30.71.10.3|0.11.72.0Benchmark for flows (% of GDP)(c)2.80.8-0.20.30.50.6|Savings rate (% gross disposable income)(b)9.99.37.27.112.89.3|Investment rate (% gross disposable income)(b)9.46.34.95.95.96.3|p.m. Bank HH NPLs (% of HH loans)(2)(d)8.0| 
 
 
    
 
 
 
  
 
 
Graph 3.1: 

Thematic Graphs: Non-financal corporate debt 

3. Thematic Issue: Private Debt 

Source: European Commission Services 

17 

020406080100120140030507091113151719% of GDP(b) Non financial corporations debt and benchmarksNFC debt, consolidated,  % of GDPFundamentals-based benchmark, % of GDPPrudential benchmark, % of GDPSource: Calculations based on Eurostat and ECB0510152025303517Q117Q217Q317Q418Q118Q218Q318Q419Q119Q219Q319Q420Q120Q220Q3(d) Non financial corporations non performing loans% of NFCs loans and advancesSource:Non performing loans and advances, ECB 020406080100120140040608101214161820*Ratios of debt to equity, GDP and total financial assets (%)(c) Non financial corporate debt in relation to equity and financial assetsDebt / GDPDebt / equityDebt / financial assetsSource: Eurostat05101520253035404550% of GDP(e) Sectoral composition of non financial corporations bank loans (NACE rev.2)A - agricultureB - miningC - manufacturingDE - electricity, gasF - constructionG - tradeHJ - transp. inform. com.I - accommodationL - real estateMN - prof. adm. activitiesremaining activitiesSource: ECB and Ameco0123456782007-062007-122008-062008-122009-062009-122010-062010-122011-062011-122012-062012-122013-062013-122014-062014-122015-062015-122016-062016-122017-062017-122018-062018-122019-062019-122020-062020-12Cost of borrowing -ECB index(f) Non financial corporations cost of borrowingCost of borrowing for corporations - PTCost of borrowing for corporations - Euro AreaSource: ECB MIR0501001500506070809101112131415161718192021*% of GDP(a) Non financialcorporations debt liablities by creditorForeign loan liabilities:  FDI loans & unalloc  Foreign arms-length loans:   of which other arms-length   of which RoEA bank loansUnallocated loansDebt security liabilities:   foreign bond holders   domestic bond holdersDomestic loans from gov't & HHDomestic loans from other fin.Domestic loans from banksDebt assets, F2-F4 ex FDI debtDebt assets incl FDI debtGross debt liabilities (cons.,Estat)Source: Calculations based on Eurostat and ECB   
 
Graph 3.2: 

Thematic Graphs: Household debt 

3. Thematic Issue: Private Debt 

Source: European Commission Services 

18 

0102030405060708090100% of GDP(a) Household debt liabilities by creditorLong-term bank loansshort-term bank loansloans by OFIsOther domestic debt liab.Foreigntotal consolidatedSource: Calculations based on Eurostat and ECB01020304050607080901009899000102030405060708091011121314151617181920% of GDP(b) Household debt and benchmarksHousehold debt, %GDPFundamentals-based benchmark, household debtPrudential benchmark, household debtSource: Eurostat and European Commission012345678917Q117Q217Q317Q418Q118Q218Q318Q419Q119Q219Q319Q420Q120Q220Q3(c) Households non-performing loans% of household loans and advancesSource: Non-performing loans and advances, ECB consolidated banking data.-6-5-4-3-2-101234051015202504060810121416182022'y-o-y                  % change%(d) Household saving rateGross household saving rate Euro Area 19 (lhs)Gross household saving rate Portugal (lhs)Real adj. gross disposable income Portugal (y-o-y %) (rhs)Source: Eurostat020406080100120140160180-50510152006Q207Q208Q209Q210Q211Q212Q213Q214Q215Q216Q217Q218Q219Q220Q22015=100Rate of change y-o-y (%)(f) House prices and mortgage credit growthMFI loans for house purchase (y-o-y growth rate)Real House Price Index (2015=100), right axisNominal House Price Index (2015=100), right axisSource: ECB Bank Lending Survey01020304050607006070809101112131415161718192021*% of GDP(e) Bank loans to households by typeLoans for house purchaseLoans for consumptionLoans for house purchase, EALoans for consumption, EASource: ECB BSI