COMMISSION STAFF WORKING DOCUMENT In-depth review for Portugal Accompanying the document 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 2023 European Semester – Spring Package
Date: 2023-05-24
Institutions: European Commission, Secretariat-General
Subjects: European Semester, Portugal, economic policy, energy policy, fiscal policy, indebtedness, investment, macroeconomics, property market, tourism

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 24.5.2023  SWD(2023) 641 final  COMMISSION STAFF WORKING DOCUMENT In-depth review for Portugal Accompanying the document 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 2023 European Semester – Spring Package {COM(2023) 600 final} - {SWD(2023) 628 final} - {SWD(2023) 629 final} - {SWD(2023) 630 final} - {SWD(2023) 631 final} - {SWD(2023) 632 final} - {SWD(2023) 633 final} - {SWD(2023) 634 final} - {SWD(2023) 635 final} - {SWD(2023) 636 final} - {SWD(2023) 637 final} - {SWD(2023) 638 final} - {SWD(2023) 639 final} - {SWD(2023) 640 final} - {SWD(2023) 642 final} - {SWD(2023) 643 final} - {SWD(2023) 644 final}  
 
 
Portugal 

In-Depth Review 2023 

 
 
 
 
 
 
 
 
 
 
 
On  the  basis  of  this  in-depth  review  for  Portugal  undertaken  under 
Regulation  (EU)  No  1176/2011  on  the  prevention  and  correction  of 
macroeconomic  imbalances,  the  Commission  has  considered  in  its 
Communication “European Semester – 2023 Spring Package” (COM(2023) 
600 final) that: 

Portugal  continues  to  experience  imbalances.  Vulnerabilities  related  to  high 
private,  government  and  external  debt  are  receding  but  remain  present.  After  a 
temporary  interruption  due  to  the  outbreak  of  the  pandemic,  private  sector  and 
government debt ratios returned  to declining paths in 2021 and are expected  to 
continue declining, favoured by economic growth While  they are now below pre-
pandemic  levels,  they  remain  at  still  elevated  levels.  The  clearly  negative  NIIP 
improved  too, both before  and  after  the  pandemic, and  external  indebtedness  is 
projected  to  further  recede,  supported  by  continued  economic  growth  despite 
some slowdown in 2023. The small current account deficit worsened marginally in 
2022 reflecting higher energy prices but that deterioration was mitigated by the 
further  marked  recovery  in  exports,  especially  of  tourism.  Going  forward,  the 
assumed  continued  easing  of  energy  prices  and  a  further  increase  in  tourism 
exports,  as  well  as  ongoing  policies  in  support  of  energy  efficiency  and 
renewables,  are  projected  to  balance  the  current  account  and  to  further  support 
adjustment in the NIIP. House prices have grown strongly for several years, while 
non-performing  loans  continued  to  decline  from  already  moderate  levels.  The 
main  risks  to the  further narrowing  of  vulnerabilities  relate  to  the  impact  of the 
tightening  of  financial  conditions  and  to  an  uncertain  external  environment,  and 
their potential  impact  on economic  growth.  Policy  progress  has  been  favourable, 
with  a  particular  focus  on  the  RRP,  and  continuing  implementing the  RRP  should 
deliver further improvements. 

 
 
 
 
 
 
 
 
 
CONTENTS 

1.  Introduction 

2.  Assessment of macroeconomic vulnerabilities 

3.  Thematic chapter: External sustainability 

LIST OF TABLES 

Table 2.1: 
Table 2.2: 
Table 3.1: 

Selected economic and financial indicators (Part 1), Portugal 
Selected economic and financial indicators (Part 2), Portugal 
Selected external indicators, Portugal 

LIST OF GRAPHS 

Graph 2.1:  Selected graphs, Portugal 

Graph 2.2:  Components of gross fixed capital formation deflator growth and consumer price inflation 

Graph 3.1:  Current account, tourism and energy balance, Portugal 

Graph 3.2:  NIIP projections 

Graph 3.3:  Selected graphs, Portugal 

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19 

 
 
 
 
 
 
 
1. 

INTRODUCTION 

In  2022,  over  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic 
Imbalance  Procedure  (MIP),  the  Commission  identified  “macroeconomic  imbalances”  in 
Portugal. (1)  These  imbalances  were  related  to  high  private,  government  and  external  debt  in  a 
context of low productivity growth. The 2023 Alert Mechanism Report published in November 2022 
concluded  that  an  in-depth  review  (IDR)  should  be  undertaken  also  this  year  for  Portugal  with  a 
view to assess the persistence or unwinding of imbalances. (2) The AMR concluded that in Portugal, 
concerns related to household and non-financial corporate, government and external debt-to-GDP 
ratios  remained,  although  debt  ratios  resumed  their  declining  path  after  the  COVID-19  crisis. 
Nominal  house  price  growth  was  accelerating,  and  signs  of  overvaluation  of  house  prices  had 
emerged. Risks associated with financial and public sector feedback loops remained. 

Despite the difficult macroeconomic context, the Portuguese economy remains resilient, 
helped by a strong rebound in tourism. Portugal’s GDP growth picked up from 5.5% in 2021 to 
6.7%  in  2022. (3)  However,  after  a peak in  the  first quarter  of  2022,  growth  slowed  down in  the 
following  quarters  as  Russia’s  war  of  aggression  against  Ukraine  further  disrupted  global  supply 
chains.  Portugal’s  growth  picked  up  again  in  early  2023  but  in  full-year  terms  is  expected  to 
moderate to 2.4% in 2023 and 1.8% in 2024. The steep rise in global energy and food prices as 
well  as  country  specific  factors  related  to  the  severe  drought  until  September  2022  pushed  up 
headline  inflation  in  Portugal  from  0.9%  in  2021  to  8.1%  in  2022.  Inflation  is  projected  to 
gradually  moderate  in  2023-2024,  helped  by  the  assumed  correction  in  energy  prices  over  the 
period. The observed recovery in the country’s water reservoirs is also expected to positively affect 
domestic energy and food markets. The current account is projected to improve over the forecast 
period supporting a further positive adjustment in the NIIP. The main risks to Portugal’s economic 
outlook refer to the uncertain global environment and rising interest rates. 

This  in-depth  review  presents  the  main  findings  of  the  assessment  of  macroeconomic 
vulnerabilities  for  Portugal.  The  assessment  is  backed  by  a  thematic  section  on  external 
sustainability.  Vulnerabilities  related  to  housing  and  external  balances  in  Portugal  are  also 
discussed in horizontal thematic notes that were already published. (4) The MIP assessment matrix 
is published in the 2023 Country Report for Portugal. (5) 

(1)  European Commission (2022), European Semester Spring Package 2022, COM(2022) 600 final. 

(2)  European Commission (2022), Alert Mechanism Report 2023, COM (2022) 381 final. 

(3)  European Commission (2023), European Economic Forecast: Spring 2023, Institutional Paper 200. 

(4)  European Commission (2023), Housing Market Developments: Thematic Note to Support In-Depth Reviews, European 
Economy: Institutional Papers, 197. European Commission (2023), External Sustainability Analysis: Thematic Note to 
Support In-Depth Reviews, European Economy: Institutional Papers, 196.  

(5)  European Commission (2023), Country Report Portugal 2023, SWD(2023) 622 final. 

4 

 
 
                                                 
 
2.  ASSESSMENT OF MACROECONOMIC 
VULNERABILITIES 

Gravity, evolution and prospects  

On  5  April  2023  the  Commission  presented  a  horizontal  thematic  note  on  external 
balances,  which  also  covered  Portugal.  It  showed  that  Portugal  experienced  only  a 
comparatively  mild  worsening  in  external  flows  over  recent  years,  reaching  a  moderate  current 
account deficit. The deterioration in the trade balance related to energy price increases since mid-
2021  has  been  to  a  large  extent  offset  by  the  recovery  in  the  travel  balance  and  in  real  terms 
exports have grown faster than imports since the start of 2022.  

The  current  account  temporarily  worsened  in  2022  due  to  price  effects,  while  net 
exports improved in real terms. The current account deficit widened from 0.8% of GDP in 2021 
to 1.3% in 2022, driven by exceptionally high prices of energy imports. In real terms, exports grew 
much faster than imports mainly due to the strong recovery in tourism, which moved close to its 
pre-pandemic  level  in  2022  after  a  steep  contraction  in  2020  and  a  partial  recovery  in  2021. 
Calculations  eliminating  the  price  effects  in  foreign  trade,  based  on  a  simulation  with  terms  of 
trade equal  to zero, show that the current account would have posted a surplus of 0.3% of GDP 
that is close to the estimated country specific norm. 

Portugal’s  negative  net  international  investment  position  (NIIP)  improved  substantially 
both  over  time  and  since  the  pandemic,  but  remains  significant.  After  a  temporary 
deterioration in 2020, driven by the negative impact of COVID-19, the NIIP improved markedly for 
a second year in a row from -104.6% of GDP at the end of 2020 to -95.0% at the end of 2021 and 
to  -83.9%  at  the  end  of  2022.  A  substantial  part  of  this  improvement  resulted  from  the  strong 
rebound in nominal GDP growth and favourable valuation changes while the overall net flow in the 
current  and  capital  accounts  had  a  slightly  negative  impact  on  the  NIIP.  Over  time,  the  NIIP  has 
strengthened by 40 percentage points of GDP, from -123.8% of GDP in 2014. 

Going forward, the NIIP is projected to retain a sound pace of improvement. According to 
the Commission 2023 spring forecast, which incorporates the observed correction in energy prices 
after their peak in 2022, the current account is projected to improve substantially in 2023-2024 
and the overall net flows in the current and capital accounts are set to turn positive. The NIIP to 
GDP  ratio  also  benefits  from  continuously  strong  nominal  GDP  growth,  despite  the  expected 
slowdown in real growth. In addition, the current and capital accounts, and consequently the NIIP, 
continue  to  benefit  from  the  stream  of  Recovery  and  Resilience  Plan  (RRP)  grants  until  2026, 
estimated at around 6% of the country’s 2022 GDP. Overall, the NIIP share in GDP is expected to 
improve to around -71% of GDP by the end of 2024 and to move above the country’s estimated 
prudential  threshold  of  -55%  over  a  period  of  10  years  (see  section  3).  Risks  to  the  country’s 
external  position  are  further  mitigated  by  the  favourable  NIIP  structure,  as  non-defaultable 
instruments account for around 60% of  net liabilities and are composed mostly of foreign direct 
investments  (FDI).  As  of  end-2021,  NENDI  (NIIP  net  of  non-defaultable  instruments)  in  Portugal 
stood at -36.1% of GDP and further improved to -29.4% at the end of 2022. 

5 

 
 
2. 

Assessment of macroeconomic vulnerabilities 

Productivity in 2022 returned above its pre-pandemic level. Labour productivity, defined as 
real  GDP  per  employee,  improved  in  2021-2022  following  a  drop  reflecting  the  pandemic-driven 
contraction  in  tourism  in  2020.  The  economy  expanded  much  faster  than  employment  with 
significant  productivity  gains  recorded  in  tourism  and  manufacturing.  In  addition,  exports  rose 
faster than Portugal’s export markets, resulting in an increase in the export market share in volume 
terms by 2.8% in 2021 and 11.9% in 2022. In cumulative terms, Portugal’s exports outperformed 
the growth in markets since the last pre-pandemic year of 2019 and productivity in terms of real 
GDP per employee in 2022 was also higher than in 2019. Unit labour costs increased by 1.5% in 
2022. The contribution of total  factor productivity  to potential  growth improved to 1.5% in 2022 
and is projected to remain close to this level over the forecast period. Meanwhile, potential growth 
is projected to improve to 2.0% in 2023 and 2.1% in 2024, exceeding the euro area average and 
performing better  than before  the  pandemic,  also  helped by the  projected positive impact  of  the 
RRP. 

Private indebtedness continued to decline (Graph 2.1a). Following a one-off increase in 2020 
due to the pandemic driven economic contraction, the share of private debt in GDP has continued 
its downward adjustment. Helped mainly by the strong nominal growth in GDP, the debt ratio fell 
from 157% at the end of 2021 to 143% at the end of 2022. The ratio thus moved below its pre-
pandemic  level  of  149%  at  the  end  of  2019  and  well  below  the  peak  of  211%  in  2012.  Both 
corporates and households contributed to the decrease in the overall private sector indebtedness in 
2022 but the ratios remained beyond the estimated country-specific prudential and fundamentals-
based  benchmarks (6).  For  corporates,  these  benchmarks  were  estimated  at  65%  and  59%, 
respectively, and for households at 41% and 30% (Graph 2.1c and 2.1d). Vulnerabilities in the debt 
structure, particularly in the corporate sector, declined in 2022 as risks related to the phase-out of 
state-support  measures  imposed  during  the  pandemic  did  not  materialise  and  the  ratio  of  NPLs 
continued to decline. In addition, households’ and corporates’ deposits increased faster than loans 
in 2022, continuing the tendency from the previous two years and providing the private sector with 
a  liquidity  buffer.  With  the  projected  growth  in  nominal  GDP  in  2023-2024  and  the  recent 
moderation  in  net  lending,  the  private  debt  ratio  is  set  to  decline  substantially  towards  the 
country’s prudential threshold.  

The  banking  sector  proved  resilient  over  2022,  as  profitability  increased  and  non-
performing  loans  continued  to  decline  amid  high  uncertainty.  The  financial  position  of 
Portuguese  banks  did  not  face  major  setbacks  from  the  phase-out  of  most  pandemic  support 
programmes.  Asset  quality  remained  sound  despite  the  negative  impact  of  the  energy  crisis  and 
high inflation while risky loans declined over 2022, with Stage 2 loans decreasing from 11.6% to 
10.3%  and  Stage  3  loans  dropping  from  3.7%  to  3%.  Banks  continued  reducing  NPLs  on  their 
balance  sheets,  thanks  to  NPL  sales  and  write-offs,  supported  also  by  low  insolvency  rates.  This 
lowered the NPL ratio to 3.2% at the end of 2022, down from 3.6% at end-2021 and well below 
pre-pandemic levels (6.1% at end-2019). The NPL coverage ratio remained stable at 54%, even as 
banks  released  some  of the  impairments  booked during  the pandemic.  In  parallel,  profit margins 
increased  substantially,  pushed  up  by  higher  key  ECB  interest  rates  and  low  deposit  costs,  which 
boosted  banks’  net  interest  income.  This  allowed  banks  to  record  their  highest  return  on  equity 
since the great financial crisis, i.e., 8.8% in 2022. Despite these positive developments, the financial 
sector  continues  to  face  uncertainty,  as  higher  interest  rates  are  increasing  the  pressure  on  the 
debt-servicing capacity of some borrowers. 

(6)  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). 

6 

                                                 
 
2. 

Assessment of macroeconomic vulnerabilities 

On  5  April  2023  the  Commission  presented  a  horizontal  thematic  note  on  housing 
market developments, which also covers Portugal. It shows that house prices have increased 
substantially  over  the  past  decade  but  overall  there  are  no  major  financial  stability  concerns  in 
Portugal thanks to appropriate and sufficient macroprudential policies as assessed by the European 
Systemic Risk Board (ESRB, 2022, see also Box 1). In nominal terms, house prices had been growing 
at  around  13%  in  the  first  three  quarters  of  2022 relative to  a  year  earlier, but the  growth  rate 
softened  to  11.3%  in  the  last  quarter  of  the  year  (graph  2.1e).  In  full-year  terms,  house  price 
growth picked up from 9.4% in 2021 to 12.6% in 2022. However, the deflated house price index, 
adjusted by the private consumption deflator, slowed downed from 7.9% in 2021 to 5.9% in 2022. 
Accordingly, the valuation gap, estimated at 19.9% in 2021, widened to 24.2% in 2022. As of June 
2022, outstanding mortgage loans accounted for 24.9% of Portuguese banks’ total assets, staying 
on  a  declining  trend  (Graph  2.1f).  Feedback  loops  between  new  mortgages  and  increasing  house 
prices did not appear to be significant, as the share of mortgages among the value of new house 
transactions remained moderate, at 52% in March 2022, also thanks to the prudent loan-to-value 
ratios  applied  by  banks.  Furthermore,  the  increase  in  mortgage  lending  remained  below  the 
corresponding increases in GDP, house prices and household deposits. 

7 

 
2. 

Assessment of macroeconomic vulnerabilities 

Box 1: House price developments in Portugal 

Over the last decade, house prices in Portugal have doubled in nominal terms with the 
last  three  years,  2020  to  2022,  witnessing  an  increase  of  around  34%.  These  increases 
came  after  a  fall  in  house  prices  of  around  13%  between  2008  and  2013,  reflecting  the  global 
financial crisis and the sovereign debt crisis in Portugal. With the resumption of economic growth, 
house prices started to rise and house price growth has exceeded income growth since 2015, with 
a marked acceleration since the pandemic. As a result, the house price-to-income ratio is now 50% 
higher than a decade ago and is considerably above the peak it had reached before the onset of 
the  global  financial  crisis.  House  prices  are  estimated  to  be  overvalued  by  more  than  20%.  The 
recent increases were driven by a combination of low interest rates, construction supply constraints 
during the pandemic and rising construction costs. House price indices in popular tourism areas also 
reflect  the  increasing  use  of  residential  property  for  commercial  purposes,  helped  by  the  rapid 
expansion of online short-term rental platforms, while foreign investors have also been active. 

Housing affordability has deteriorated over time, with the price-to-income ratio having 
increased  substantially.  The  number  of  years  of  income  needed  to  buy  a  100m2  apartment 
increased to 9.1 in 2022. However, the high share of home ownership mitigates related risks and 
households  report  a  relatively  low  share  of  housing  cost  burden.  Furthermore,  significant  foreign 
investments in  properties have  affected  specific market  segments that  have very  limited links  to 
the  disposable  income  of  domestic  households  and  the  domestic  banking  system.  Portugal  has 
managed to gradually decrease the initially high level of household debt. The home ownership rate 
is  high,  with  a  moderate share  of  owners  with  a  mortgage.  Most  of  these  mortgages  are  with  a 
variable interest rate, which increases risks in a context of rising interest rates (Graph 2.1b).  

The borrower-based macroprudential measures in Portugal, introduced in July 2018, set 
a number of important conditions on mortgage lending which affect housing prices. Such 
measures include limits to the loan-to-value (LTV) ratios (90% for own and permanent residence, 
80% for other cases) and limits to the debt-service to income ratio (DSTI), capped at 50% for at 
least 85% of banks’ mortgages. Moreover, a stress indicator for mortgages with variable rates was 
introduced.  Limits  to  the  duration  of  mortgages  aim  at  reducing  the  average  maturity  of  new 
agreements to 30 years. Overall, in February 2022 the European Systemic Risk Board (ESRB) found 
no major financial stability concerns related to house prices in Portugal thanks to the appropriate 
and sufficient macroprudential policies. 

House price growth is expected to moderate going forward, as interest rates are on the 
rise.  Certain  supply  constraints  will  continue  to  exist  and  reduce  the  scope  for  a  substantial 
reduction  in  house  prices  in  a  context  of  strong  property  demand  by  foreign  investors.  The 
borrowing capacity of most households is set to decrease somewhat due to high house prices, high 
mortgage  rates  and  a  deterioration  of  real  incomes  in  2022,  with  high  inflation  also  putting 
pressure on households’ abilities to meet their mortgage payments. House prices are projected to 
continue  growing,  but  at  a  lower  rate,  with  a  marked  reduction  of  housing  prices  being  unlikely. 
Wages  are  projected  to  rise  faster  than  house  prices  in  2023-2024,  supporting  housing 
affordability. 

8 

 
 
 
 
2. 

Assessment of macroeconomic vulnerabilities 

Portugal’s  public  debt-to-GDP  ratio  further  decreased  in  2022,  while  remaining  above 
100%. After reaching a peak of 134.9% in 2020, the Portuguese public debt-to-GDP ratio resumed 
its  downward  path  contracting  to  125.4%  in  2021  and  113.9%  in  2022,  already  below  pre-
pandemic  levels.  This  decrease  mostly  reflects  the  favourable  nominal  growth-interest  rate 
differential. While real GDP growth in 2022 was strong, the public debt-to-GDP ratio benefited in 
particular from the higher inflation and therefore higher GDP deflator. At the same time, interest 
expenditure  decreased  in  2022.  This  was  coupled  with  a  debt-reducing  primary  balance  effect, 
reflecting  the  improvement  in  the  general  government  deficit  in  2022  to  0.4%  of  GDP,  starting 
from  2.9%  of  GDP  in  2021.  The  public  debt-to-GDP  is  projected  to  further  decline  in  2023  and 
2024, to 106.2% and 103.1%, respectively.  

Public  debt-to-GDP  ratio  remains  vulnerable  to  a  worsening  of  economic  and  financing 
conditions.  According  to  the  Commission’s  assessment  Portugal  faces  high  fiscal  sustainability 
risks over the medium term and low ones over the long term, mostly due to the projected adverse 
demographic trends driving up ageing-related costs. In the long-term, fiscal sustainability risks are 
expected  to  ameliorate  and  are  classified  as  low (7).  Different  country-specific  factors  mitigate 
these risks, including Portugal’s comfortable cash buffer, the maturity structure of its debt, mostly 
with fixed rates, the stable financing sources, the debt’s currency denomination as well as the debt 
management strategy targeting the smoothing of the debt redemption profile. Several factors add 
certain  risks,  such  as  the  size  of  contingent  liabilities  linked  to  publicly  guaranteed  credit  lines, 
ongoing processes on public-private partnerships (PPPs) financial rebalancing requests and upward 
pressure on current expenditure, particularly on public wages and social benefits. 

Assessment of MIP relevant policies 

in  all  areas  of 

implementing  policies 

its  macroeconomic 
Portugal  continued 
vulnerabilities,  with  a  focus  on  policy  commitments  set  under  the  country’s  RRP.  The 
Commission’s  positive  assessment  of  Portugal’s  second  payment  request  acknowledges  the 
continuation of the reform momentum in key policy areas such as the digital transition, including 
training  and  upskilling,  reforms  and  investments  related  to  health  and  social  policies,  the  green 
transition  and  climate  adaptation  such  as  bioeconomy,  sustainable  transport  and  forest 
management and support of companies through the use of financial instruments. Reform progress 
under  the  first  RRP  payment  already  included,  among  others,  important  measures  in  support  of 
industrial decarbonisation and production of renewable hydrogen. The external balance is expected 
to continue benefitting from RRP measures going forward. In July 2022, Portugal also inaugurated 
a  880MW  pump  storage  facility  that  is  set  to  substantially  improve  the  utilisation  of  renewable 
energy and to reduce import needs in peak consumption periods with an overall positive impact on 
the  external  trade  balance.  Policy  actions  related  to  energy  efficiency,  the  green  transition  and 
decarbonisation  are  expected  to  continue  playing  a  significant  role  in  reducing  the  country’s  net 
energy imports, which were the major factor behind Portugal’s negative trade balance in 2022. 

Several  policy  measures  were  taken  in  support  of  Portugal’s  export  base  and 
productivity.  Specific  actions,  which  are  being  implemented,  refer  to  the  digital  transformation 
and business environment with the entry into force of the review of training content in the field of 
digital  skills  and  the  legislation  for  the  creation  of  digital  signatures.  Furthermore,  authorities 
launched  the  digital  academy  and  employment  programmes  with  the  aim  to  increase  the  digital 
skills of employees and managers with a particular focus on enterprises in the industry, commerce, 

(7)  See the DSA in the Commission Country Report 2023 for the latest risk classification and Debt Sustainability Report 2022 

(April 2023) for methodological details. 

9 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

services,  tourism  and  agriculture  sectors.  Investments  are  expected  to  contribute  to  the 
development  of  lifelong  vocational  skills  and  training  practices  and  to  improve  the  ability  of 
companies  to  face  challenges  and  seize  the  opportunities  brought  by  technology.  In  the  area  of 
bioeconomy, authorities approved projects for the development of new products, technologies and 
processes.  This  investment  will  provide  financial  support  for  integrating  bio-based  resources  in 
traditional  sectors  of the Portuguese  economy  such  as  textile  and  clothing,  footwear  and  natural 
resin.  The  aforementioned  measures,  many  of  which  are  in  the  process  of  implementation,  are 
expected  to  improve  Portugal’s  potential  growth  and  consequently  to  support  the  financial 
deleveraging. 

Portugal  introduced  new  measures  for  boosting  liquidity  and  capital  to  companies, 
supporting  private  investment  and  productivity.  The  state-owned  promotional  bank,  Banco 
Português de Fomento (BPF), was set up in 2020. Since then, the bank issued a wide range of funds 
and guarantee lines to support companies in vulnerable sectors, as well as to address the issue of 
undercapitalisation  of  the  Portuguese  corporate  sector.  The  Portuguese  RRP  includes  a  EUR  250 
million recapitalisation of BPF as well as of two funds, managed by BPF, to provide over EUR 1.43 
billion  of  equity  and  quasi-equity  support  to  companies.  These  funds  were  set  up  in  2021  and 
issued first financing to the eligible companies in 2022. These measures support the development 
of  equity  markets  in  Portugal,  promote  better  management  of  non-financial  corporations  and 
indirectly mitigate risks of insolvencies following the expiration of most pandemic-related support 
schemes.  

Measures  were  taken  to  prevent  developments  in  house  prices  that  pose  risks  to  the 
banking  sector.  In  particular,  the  central  bank  adopted  a  macroprudential  recommendation, 
lowering as of 2023 the average maturity for mortgage-backed loans to 30 years. This came on 
top  of  existing  macroprudential  measures  that,  as  of  Q2-2022,  have  been  successful  in  bringing 
down the maximum loan-to-value ratio of new mortgages to 90% and the median loan-to-value 
ratio of outstanding mortgages to 51%. 

The government approved a draft programme targeting the Portuguese housing market 
(Programa  Mais  Habitação)  in  February  2023,  with  a  draft  Law  proposal  pending 
discussion  and  approval  in  the  Portuguese  Parliament.  This  programme  includes  measures 
such  as  the  elimination  of  the  residence-by-investment  scheme,  also  known  as  Golden  Visa,  a 
simplification  of  licensing  processes,  and  fiscal  incentives  aimed  at  boosting  housing  supply.  An 
income  support  for  rents  and  a  relief  for  the  interest  payments  arising  from  housing  loans  was 
already introduced in March 2023 (8), with an estimated budgetary cost of 0.2% of GDP in 2023. 
These  measures  could  contribute  to  alleviate  immediate  payment  difficulties  of  households.  The 
draft  programme  comes  on  top  of  restrictions  to  the  Golden  Visa  scheme  introduced  already  in 
2022  with  the  aim  of  reducing  demand  for  real  estate,  particularly  in  areas  with  the  highest 
property price increases.  As  a  result,  real  estate  investments  in  the  cities  of  Lisbon  and  Porto  as 
well as in popular coastal areas are not eligible for residence-by-investment permits anymore.  

The  full  implementation  of  planned  fiscal-structural  reforms  are  key  to  strengthen 
Portugal’s  medium-term  fiscal  sustainability.  The  full  and  effective  implementation  of  the 
2015  Budgetary  Framework  Law,  subject  to  recurrent  delays,  would  provide  for  a  stronger 
budgetary framework, which is instrumental to improve the quality and composition of Portugal’s 
public  finances.  Reforms  under  the  RRP  are  targeted  at  spending  efficiency  and  appropriate 
budgeting,  including  through  spending  reviews  and  the  development  of  programme  budgeting. 

(8)  While the relief for interest payments is set to expire in 2023, the income support for rents is to be in force until December 
2028. Decree-Law No 20-B/2023 of 22 March published in the Portuguese Official Journal (‘Diário da República’), No 
58/2023, first supplement, first series of 22 March 2023, pages 32-40. 

10 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

Vulnerabilities  persist  in  the  financial  sustainability  of  the  National  Health  Services  and  in  some 
state-owned  enterprises,  but  relevant  steps  have  been  undertaken  to  enhance  their  governance, 
transparency and efficiency. New management contract templates entered into force for the public 
management  of  state-owned  enterprises  in December  2021  and  national  health  services  in  June 
2022.  On the other hand, Portugal has made limited progress in improving the effectiveness of the 
tax and social protection systems where there is scope to simplify both frameworks, to strengthen 
the  efficiency  of  their  respective  administrations,  and  to  reduce  the  associated  administrative 
burden.  

Conclusion 

In  Portugal,  vulnerabilities  related  to  the  high  level  of  public,  private  and  external 
indebtedness, which continue to recede. After a temporary interruption due to the outbreak of 
COVID-19  in  2020,  Portugal  returned  on  a  steady  path  of  adjusting  its  macroeconomic 
vulnerabilities amid high uncertainty in the global environment. Both public and private debt ratios 
improved  substantially  in  2021  and  2022  to  levels  below  those  in  the  pre-pandemic  period,  but 
remain substantial ad need to correct futher. According to the Commission’s assessment, Portugal’s 
fiscal sustainability risks are considered high over the medium term and low in the long term. The 
ratio  of  the  country’s  NIIP  relative  to  GDP  improved  substantially,  helped  by  strong  economic 
growth. A substantial part of the NIIP is composed of non-defaultable debt instruments and NPLs 
continued  to  decline.  Productivity  also 
in  tourism  and 
manufacturing.  Going  forward,  the  country’s  indebtedness  is  projected  to  continue  its  favourable 
trajectory  supported  by  economic  growth.  Although  real  GDP  growth  is  forecast  to  weaken 
temporarily in 2023, nominal GDP is still expected to continue to rise at a relatively high rate due to 
the projected high GDP deflator. In the external sector, the assumed correction in energy prices and 
a further increase in foreign tourism revenues are set to balance the current account and to further 
support  the  strong  pace  of  adjustment  in  the  NIIP  position.  Further  on,  the  country’s  external 
position and overall economic outlook are set  to continue to benefit from RRP grants until  2026, 
and  the  NIIP  is  set  to  further  correct.  The  main  risks  relate  to  unwinding  of  macroeconomic 
vulnerabilities  refer  to  the  uncertain  external  environment  and  its  potential  impact  on  Portugal’s 
economic growth. 

improved  with  substantial  gains 

Policy  progress  in  response  to  the  identified  vulnerabilities  has  been  made,  with  a 
particular  focus  on  the  ongoing  RRP  implementation.  The  ongoing  implementation  of 
Portugal’s  RRP  is  expected  to  continue  having  a  significant  impact  on  the  country’s  energy 
efficiency,  production  of  renewables  and  its  export  potential  that  will  ultimately  support  the 
country’s  external  position.  The  ongoing  RRP  implementation  is  also  expected  to  support  the 
country’s productivity through investments in digital technologies and skills as well as liquidity and 
capitalisation of vulnerable firms. The authorities also took steps in 2022 to address issues related 
to  housing  affordability  resulting  from  the  continuous  growth  in  house  prices.  The  full 
implementation of planned fiscal-structural reforms are key to strengthen Portugal’s medium-term 
fiscal sustainability. Portugal has made limited progress in improving the effectiveness of the tax 
and social protection systems.  

Based on the findings in this in-depth review, the Communication “European Semester – 
2023  Spring  Package”   sets  out  the  Commission’s  assessment  as  to  the  existence  of 
imbalances or excessive imbalances in Portugal, in line with Regulation 1176/2011. (9) 

(9)  European Commission (2023), European Semester Spring Package 2022, COM(2023) 600 final. 

11 

                                                 
Graph 2.1: Selected graphs, Portugal 

2. 

Assessment of macroeconomic vulnerabilities 

Source: European Commission services 

12 

-50510150810121416182022Q4% of value added and GDIb) Interest burden, household and Non-financial corporationsInterest payments / gross disposable income, HouseholdsInterest payments / gross disposable income, Households, EA19Interest payments / value added, Non-financial CorporationsInterest payments / value added, Non-Financial Corporations, EA19020406080100000204060810121416182022% of GDPc) Fundamental-based and prudential benchmarks and HH DebtHousehold debt, %GDPFundamentals-based benchmark, household debtPrudential benchmark, household debt38394041424344454647484901234567818Q419Q420Q421Q422Q4% GDPf) Bank loans to households for house purchasePure new loansRenegotiationTotalOutstanding amount (rhs)050100150200250-6-4-2024681008Q409Q410Q411Q412Q413Q414Q415Q416Q417Q418Q419Q420Q421Q422Q42015=100Rate of change y-o-y (%)e) House price and mortgage growthMFI loans for house purchase (y-o-y growth rate)Real House Price Index (2015=100), right axisNominal House Price Index (2015=100), right axis020406080100120140050709111315171921% of GDPd) Fundamental-based and prudential benchmarks and NFC debtNFC debt, consolidated,  % of GDPFundamentals-based benchmark, % of GDPPrudential benchmark, % of GDP01002003004000910111213141516171819202122% of GDPa) Decomposition of debt, consolidatedGovernmentHouseholdNon financial corporationsPrivate sector  
2. 

Assessment of macroeconomic vulnerabilities 

Box 2: Inflation exposures and cross-border pass-through 

This  box  sheds  light  on  the  sources  of  inflation  in  Portugal  and  its  spill-overs  with  EU 
partners.  The  period  since  2021  has  been  characterized  by  pandemic  aftershocks  and  global 
supply  chain  disruptions  compounding  global  inflationary  pressures  and  a  surge  in  commodity 
prices  triggered  by  Russia’s  war  of  aggression  against  Ukraine.  As  a  result,  inflation  in  Portugal 
surged to unprecedented levels. In response, wages and profits also picked up across the EU, which 
further  added  to  price  pressures  in  Portugal.  With  input-output  data,  domestic  inflation  can  be 
decomposed  into  the  contributions  from  key  cost  factors.  Taking  into  account  some  data 
limitations, the framework can be  used to attribute consumer and investment price changes to i) 
extra-EU import price changes, which include both directly imported inflation and inflation passed 
through from EU partners import costs ii) domestic unit labour cost changes iii) domestic unit profit 
changes, including indirect taxation changes and iv) rest-of-EU value added price changes. (10) 

Data  suggests  that  inflation  in  Portugal  increased  strongly  on  account  of  imported 
inflation in 2022, whereas the importance of domestic drivers is expected to increase in 
2023.  In  2022,  as  shown  in  Graph  2.2,  energy  prices  were  a  key  inflationary  factor.  In  addition, 
prices of non-energy imports from outside the EU also contributed to the acceleration of consumer 
and  investment  inflation.  Inflation  spill-overs  from  other  EU  countries  as  well  as  domestic  value 
added  inflation  contributed  mildly.  Subsiding  energy  imports  inflation  is  set  to  ease  domestic 
inflation considerably in 2023 and 2024. By contrast, prices of non-energy imports are expected to 
sustain consumer and investment inflation this year. In addition, domestic value added inflation is 
set to increase its contribution to both consumer and investment inflation. Both unit profits and unit 
labour  cost  are  expected  to  increase  at  a  higher  pace  compared  to  2022.  Spill-overs  from  value 
added inflation in other EU partners is also set to increase investment inflation somewhat in 2023. 

Graph 2.2: Components of gross fixed capital formation deflator growth and consumer price 
inflation 

Source: European Commission services 

(10) The graphs below are based on national accounts data and the Commission’s Spring 2023 forecast, combined with 

Eurostat input-output data. HICP is taken as the measure of the price of private consumption, including non-residents. 
Changes in import prices and value-added deflators are assumed to affect demand prices with a delay of 5 months for 
both, consumption and investment inflation. For further methodological details, see explanations in the 2023 in-depth 
review for Czechia, p. 16. 

13 

-4-20246810161718192021222324% change (year-on-year)PT: contribution to domestic GFCF deflator growth-4-20246810161718192021222324% change (year-on-year)PT: contribution to domestic CPI deflator growthDomestic ULCUnit profits (&taxes)RoEU value added deflatorEnergy imports from Extra-EUOther imports from Extra-EURoEU import cost passthr.ResidualDeflator growth YoY 
 
  
  
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

Table 2.1: Selected economic and financial indicators (Part 1), Portugal 

(e) estimate based on ECB quarterly data 
(1) Potential output is the highest level of production that an economy can reach without generating inflationary 
pressures. The methodology to compute the potential output is based on K. Havik, K. Mc Morrow, F. Orlandi, C. Planas, R. 
Raciborski, W. Roeger, A. Rossi, A. Thum-Thysen, V. Vandermeulen, The Production Function Methodology for Calculating 
Potential Growth Rates & Output Gaps, COM, European Economy, Economic Papers 535, November 2014. 
(2) Deviation of actual output from potential output as % of potential GDP. 
(3) Current accounts in line with fundamentals ("current account norms") are derived from reduced-form regressions 
capturing the main determinants of the saving-investment balance, including fundamental determinants, policy factors 
and global financial conditions. See L. Coutinho et al. (2018), "Methodologies for the assessment of current account 
benchmarks", European Economy, Discussion Paper 86/2018, for details.  
(4) This benchmark is defined as the average current account required to halve the gap between the NIIP and the 
indicative MIP benchmark of -35% of GDP over the next ten years, or to stabilise the NIIP at the current level if it is 
already above the indicative MIP benchmark. Calculations make use of Commission’s T+10 projections. 
(5) NENDI is a subset of the NIIP that abstracts from its pure equity-related components, i.e. foreign direct investment 
(FDI) equity and equity shares, and from intracompany cross-border FDI debt, and represents the NIIP excluding 
instruments that cannot be subject to default. 
(6) 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. 
Methodology to compute the fundamentals-based and the prudential benchmarks based on Bricongne, J. C., Coutinho, L., 
Turrini, A., Zeugner, S. (2019), “Is Private Debt Excessive?”, Open Economies Review, 1- 42. 
Source: Source: Eurostat and ECB as of 2023-04-28, where available; European Commission for forecast figures (Spring 
forecast 2023) 

14 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Real GDP 1.1-1.41.72.7-8.35.56.72.41.8Potential growth  (1)1.0-0.40.61.71.32.01.82.02.1Contribution to GDP growth:Domestic demand 1.0-2.81.73.4-4.95.54.61.41.9Inventories 0.1-0.10.1-0.3-0.50.30.00.00.0Net exports -0.11.5-0.2-0.4-3.0-0.22.01.0-0.2Contribution to potential GDP growth (1):Total Labour (hours) -0.3-1.10.30.40.20.50.20.50.6Capital accumulation 0.90.3-0.20.1-0.10.10.10.10.2Total factor productivity 0.40.40.51.21.11.41.51.41.3Output gap (2)-1.2-1.7-1.33.1-6.6-3.41.31.71.3Unemployment rate8.612.612.16.77.06.66.06.56.3Harmonised index of consumer prices (HICP)2.71.90.70.3-0.10.98.15.12.7GDP deflator 3.10.62.01.72.01.54.45.82.3External positionCurrent account balance (% of GDP), balance of payments-8.8-8.00.80.4-1.0-0.8-1.31.11.0Trade balance (% of GDP), balance of payments-7.5-5.41.30.8-1.9-2.6-2.1..Primary income balance (% of GDP)-1.9-3.2-2.2-2.4-1.4-0.8-1.5..Secondary income balance (% of GDP)0.70.61.72.02.32.62.2..Current account explained by fundamentals (CA norm, % of GDP) (3)-1.5-0.9-0.3-0.2-0.1-0.2-0.2-0.1-0.1Required current account to stabilise NIIP above -35% of GDP over 20Y (% of GDP) (4)-0.50.6-1.0-0.8-1.4-1.1-0.6-0.4-0.4Capital account balance (% of GDP)1.51.51.20.91.01.70.9..Net international investment position (% of GDP)-73.7-107.8-115.0-100.0-104.6-95.0-83.9..NENDI - NIIP excluding non-defaultable instruments (% of GDP) (5)-41.3-71.3-67.7-46.7-46.7-36.5-29.4..Net FDI flows (% of GDP)0.3-2.4-2.9-3.6-2.5-3.4-2.0..CompetitivenessUnit labour costs (ULC, whole economy)1.8-0.20.82.88.70.61.53.71.7Nominal compensation per employee 3.30.41.54.81.54.16.15.72.9Labour productivity (real, hours worked)1.41.10.21.50.32.43.61.00.5Real effective exchange rate (ULC)0.1-1.9-0.40.63.80.3-1.6-1.5-1.5Real effective exchange rate (HICP)1.4-0.50.0-1.70.2-1.7-1.4..Export performance vs. advanced countries (% change over 5 years)5.2-3.33.76.5-1.0-0.8...Private sector debtPrivate sector debt, consolidated (% of GDP)171.2203.4176.4149.5163.7157.0142.7..Household debt, consolidated (% of GDP)79.590.675.563.569.166.461.5..Household  debt, fundamental benchmark (% of GDP) (6)12.117.727.931.032.631.231.1..Household  debt, prudential threshold (% of GDP) (6)39.139.237.233.633.631.929.7..Non-financial corporate debt, consolidated (% of GDP)91.7112.8100.986.094.690.681.1..Corporate debt, fundamental benchmark (% of GDP) (6)40.440.147.050.453.353.355.4..Corporate debt, prudential threshold (% of GDP) (6)52.953.755.548.650.648.545.6..Private credit flow, consolidated (% of GDP) 12.64.4-1.42.64.44.12.8..Corporations, net lending (+) or net borrowing (-) (% of GDP)-4.0-1.72.8-0.90.40.4-0.71.21.2Households, net lending (+) or net borrowing (-) (% of GDP)1.63.02.51.85.23.40.51.00.7Net savings rate of households (% of net disposable income)2.61.5-1.2-2.22.1-0.6-5.4..forecast 
 
      
 
 
 
Table 2.2: Selected economic and financial indicators (Part 2), Portugal 

2. 

Assessment of macroeconomic vulnerabilities 

(7) Unweighted average of price-to-income, price-to-rent and model valuation gaps. The model valuation gap is 
estimated in a cointegration framework using a system of five fundamental variables; total population, real housing 
stock, real disposable income per capita, real long-term interest rate and price deflator of final consumption expenditure, 
based on Philiponnet, N., Turrini, A. (2017), "Assessing House Price Developments in the EU," European Economy - 
Discussion Papers 2015 - 048, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission. 
Price-to-income and price-to-rent gaps are measured as the deviation to the long term average (from 1995 to the latest 
available year). 
(8) Price-to-income overvaluation gap measured as the deviation to the long term average (from 1995 to the latest 
available year). 
(9) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches.  
Source: Source: Eurostat and ECB as of 2023-04-28, where available; European Commission for forecast figures (Spring 
forecast 2023) 

15 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Housing marketHouse price index, nominal1.5-1.75.310.08.89.412.6..House price index, deflated-1.8-2.94.29.08.17.95.9..Overvaluation gap (%) (7)-1.5-2.6-9.26.513.819.924.2..Price-to-income overvaluation gap  (%) (8)-1.5-9.2-10.24.114.720.926.2..Residential investment (% of GDP)5.83.72.73.23.43.84.0..Government debtGeneral government balance (% of GDP)-5.0-7.8-3.70.1-5.8-2.9-0.4-0.1-0.1General government gross debt (% of GDP)69.9101.4129.1116.6134.9125.4113.9106.2103.1Banking sectorReturn on equity (%)13.80.3-5.22.0-1.74.2...Common Equity Tier 1 ratio6.78.112.214.715.514.9...Gross non-performing debt (% of total debt instruments and total loans and advances) (9)1.24.111.54.93.93.0...Gross non-performing loans (% of gross loans) (9)..14.86.14.93.63.2..Cost of borrowing for corporations (%)5.15.63.42.22.02.04.4..Cost of borrowing for households for house purchase (%)4.03.62.21.10.80.83.3..forecast 
      
 
 
3.  THEMATIC CHAPTER: EXTERNAL SUSTAINABILITY 

On  5  April  2023  the  Commission  presented  a  horizontal  thematic  note  on  external 
balances,  which  also  covers  Portugal.  The  note  covers  information  available  until  the  third 
quarter  of  2022  and  forwarding-looking  perspectives  based  on  the  Commission  2022  autumn 
forecast. This thematic chapter aims at updating the analysis with full-year data for 2022 and with 
a forward-looking perspective based on the Commission 2023 spring forecast. It also expands the 
country’s  coverage  in  the horizontal  note  by more  detailed  analysis  of  the impact  of  energy  and 
tourism  on  Portugal’s current  account  balance  in  2022  and  the  role  of these two  sectors  for the 
overall external balance performance over the forecast period. 

Prior  to  the  start  of  the  COVID-19  pandemic  in  early  2020,  Portugal  had  achieved  a 
significant adjustment in the current account, moving from very large deficits until 2011 
to  small  surpluses  in  the  period  of  2013-2019  (graph  3.1).  The  current  account  however 
reversed  to  a  small  deficit  of  1.0%  of  GDP  in  2020  due  to  the  pandemic-driven  shock  to  the 
country’s large tourism sector (graph  3.3d). In the same year, net travel receipts in the Portugal’s 
balance  of  payments  contracted  to  2.5%  of  GDP  relative  to  6.1%  in  the  previous  year.  This 
coincided  with  a  temporary  loss  in  export  market  shares  (graph  3.3c)  and  an  appreciation  in  the 
real effective exchange rate based on unit labour costs (graph 3.3b). With the gradual relaxation of 
travel restrictions, the tourism sector started to recover. The current account moved slightly up to -
0.8% of GDP in 2021 but then it worsened again to -1.3% in 2022. This raised concerns about the 
sustainability of Portugal’s external flows in the context of the uncertain global environment.  

A closer look at the factors behind the deterioration in the current account show that it 
has been driven by temporary factors. In 2021, these were still related to the remaining travel 
restrictions  as  net travel  receipts  recovered  only  slightly to  3%  of  GDP.  In  addition,  the  country’s 
balance  was  adversely  affected  by  price  effects  as  the  terms  of  trade  deteriorated  by  1.2%.  In 
2022, tourism revenues recovered substantially in real terms and in nominal terms they exceeded 
the pre-pandemic level, as net travel receipts reached an all-time high of 6.5% of GDP. However, 
the country’s overall trade balance faced a very substantial negative price impact during the year, 
particularly from energy commodities, leading to an overall deterioration in the terms of trade of 
3.3%.  Calculations  show  that  when  eliminating  the  price  effects,  that  is  under  a  simulation  with 
neutral terms of trade,  the current account would  have posted a surplus of 0.3% of GDP. This is 
also illustrated by the positive trade dynamics in real terms where exports of goods and services 
grew  faster  than  imports  with  an  overall  net  contribution  of  two  percentage  points  to  the  GDP 
growth of 6.7% in 2022. 

16 

 
 
 
Graph 3.1: Current account, tourism and energy balance, Portugal 

3. 

Thematic chapter: External sustainability 

Source: Ameco, Comext, Eurostat, European Commission calculations 

In addition to the negative price effects in 2022, Portugal’s trade balance was adversely 
affected  by  the  severe  drought  in  Portugal  until  September  2022,  leading  to 
exceptionally low hydropower generation (graph 3.3a). The share of hydropower in Portugal’s 
total  power generation fell  to 15% in 2022 from 23% in the previous year and in volume terms 
was  37%  below  the  long-term  annual  average.  This  increased  the  country’s  needs  for  electricity 
imports  and  raised  the  use  of  natural  gas  imports  for  power  generation  at  times  when  both 
electricity and gas prices were at record  highs. According to data of Portugal's electricity and gas 
operator  REN,  electricity  import  volumes  increased  two-fold  in  2022  and  11-fold  relative  to  the 
annual  average  for  the  previous  five  years.  Taking  into  account  the  spot  prices  of  electricity  and 
gas, the unfavourable hydro balance was responsible for at least half of the overall current account 
deficit in 2022. Overall, the aggregate impact of the drought and the price hikes across all energy 
imports widened Portugal’s energy trade deficit to around 5% in 2022 relative to 2.7% in 2021 and 
an annual average of 2.3% in 2017-2021. 

Going  forward,  several  factors  are  expected  to  play  a  favourable  role  for  Portugal’s 
current  account.  The  downward  price  correction  of  energy  commodities,  particularly  for  natural 
gas and electricity, is projected to improve significantly the terms of trade for Portugal in 2023. In 
addition,  significant  rainfalls  since  late  2022  raised  the  level  of  the  country’s  hydro  reservoirs 
above the long-term average rates. Consequently, Portugal’s net imports of electricity declined by 
55% (y-o-y) in the first quarter of 2023 and gas imports for electricity production declined by 39% 
for the same period. Portugal also inaugurated in 2022 a new hydro pumped storage facility with a 
power  generation  capacity  of  880MW  that  will  improve  the  capacity  of  the  system  operator  to 
cover  demand  peaks  by  utilising  domestic  renewable  energy  from  excess  production  periods, 
leading  to  lower  import  demand.  Finally,  the  tourism  indicators  for  2023  also  look  favourable. 
According to the Commission 2023 spring forecast, the current account is expected to move to a 
surplus of 1.0% of GDP in 2023 and 0.8% in 2024. In the medium and long term, Portugal also has 
good prospects to reduce its energy trade deficit, which has been a major source of vulnerability 
for the overall current account balance in 2022. Ongoing projects in the area of energy efficiency, 
renewables  and  industrial  decarbonisation,  including  RRP  financed  initiatives,  are  expected  to 
further improve the country’s external position. 

Despite  the  current  account  deficit  in  2022,  Portugal’s  net  international  investment 
position  (NIIP)  improved  substantially  for  a  second  year  in  a  row  (graph  3.3e).  The  NIIP 
share in GDP increased from -104.6% of GDP at the of 2020 to -95.0% at the end of 2021 and -
83.9%  at  the  end  of  2022.  A  substantial  part  of  this  improvement  resulted  from  the  strong 
rebound in GDP and favourable valuation changes (graph 3.3f). The overall net flow in the current 

17 

-15-10-50510152015161718192021222223*24*% of GDPGoods, fcastServices, fcastGoods excl energyEnergy balanceServices excl travelTravel balancePrimary inc. bal.Second. inc. bal.Current accountNet lending/borrowing       
3. 

Thematic chapter: External sustainability 

and capital accounts was slightly negative. As compared to the historical low of -123.8% of GDP in 
2014,  the  NIIP  improvement  accounts  for  more  than  half  of  the  deviation  from  the  estimated 
country-specific prudential threshold of 50%. 

The NIIP is projected to continue improving at a sound pace (graph 3.2). Under the baseline 
assumptions, the NIIP is estimated to move comfortably within the prudential threshold over a ten-
year period to around -45% in 2032. Risks to the country’s external position are further mitigated 
by  the  favourable  NIIP  structure,  as  non-defaultable  instruments  account  for  around  60%  of  net 
liabilities  and  are  composed  mostly  of  foreign  direct  investments  (FDI).  As  of  end-2021,  NENDI 
(NIIP net of non-defaultable instruments) in Portugal stood at -36% of GDP, and improved further 
to -29% of GDP in 2022. 

Graph 3.2: NIIP projections 

(1) Scenario 1 (optimistic): assumes slightly higher GDP growth in 2025 (+1 pp) and trade balance in 2025 and beyond 
(+1 pp) than in the baseline. Scenario 2 (pessimistic): same as Scenario 1 but with an opposite sign. 
Source: European Commission services 

18 

-100-90-80-70-60-50-40-30-202122232425*26*27*28*29*30*31*32*% of GDPScenario 1Scenario 2Baseline  
 
3. 

Thematic chapter: External sustainability 

Graph 3.3: Selected graphs, Portugal 

Source: European Commission services 

19 

-15-10-505100607080910111213141516171819202122*23*24*% of GDPd) Net lending/borrowing by sectorHouseholds and NPISHGeneral governmentCorporationsTotal economy-15-10-505101504050607080910111213141516171819202122% GDPa) Trade balanceServicesGoods, except energy productsEnergy productsTotal606570758085909510010511005060708091011121314151617181920212223*24*2005=100c) Export market share, goods and servicesPTESFRIT-150-5050050607080910111213141516171819202122% of GDPe) Decomposition of NIIPReserve 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)-20-15-10-50510152013Q414Q415Q416Q417Q418Q419Q420Q421Q422Q4Change in pp. of GDP (y-o-y)f) Decomposition of rate of change of NIIPValuation changesNet transaction effect (rest FA bal.)Investment income effectNominal growth effectChange in NIIP (y-o-y)8085909510010511011503Q204Q205Q206Q207Q208Q209Q210Q211Q212Q213Q214Q215Q216Q217Q218Q219Q220Q221Q222Q22004=100b) REER based on ULCEA19ESFRITPT 
     
3. 

Thematic chapter: External sustainability 

Table 3.1: Selected external indicators, Portugal 

(f) European Commission forecast. (1) 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). (2)  Quarterly data is annualized. 
Sources: (a) Eurostat, (b) Ameco, (c) European Commission calculations, (d) ECB. 

20 

2003-072008-122013-1720192020202120222023f2024fFlows (1)Source:CA balance as % of GDP, NA(b)-9.4-7.80.50.1-1.2-0.8-1.51.00.8CA balance as % of GDP, BoP(a)-9.4-8.00.90.4-1.0-0.8-1.31.11.0Cyclically adj. CA balance as % of GDP (2)(c)-10.6-7.90.31.2-1.8-1.9-0.42.51.9CA req. to stabilize NIIP above -35% of GDP over 20Y (3)(c)-0.30.6-1.0-0.8-1.4-1.1-0.6-0.4-0.4CA explained by fundamentals (CA norm) (4),(8)(c)-1.4-0.9-0.4-0.2-0.1-0.2-0.2-0.1-0.1Required CA for specific NIIP target (5)(c)0.42.31.40.60.10.40.91.11.1Trade bal. G&S, % of GDP, NA(b)-8.0-5.80.80.5-2.1-2.9-2.50.10.0Required TB for specific NIIP target (5)(c)2.20.6-0.4-0.8-0.40.00.10.0StocksNENDI as % of GDP(a)-44-71-70-47-47-36-29of which: net portfolio debt(a)-4-18-91258of which: net mutual fund shares(a)45913151813of which: net other investment(a)-49-65-79-70-75-73-64NIIP as % of GDP(a)-77-108-117-100-105-95-84-77-72Prudential NIIP/NENDI benchmark (8)(c)-53-52-51-54-52-52-55-55-56Fundamentally expl. NIIP benchmark (NIIP norm) (8)(c)-13-16-21-19-20-19-19-17-16Gen. Government NIIP(a)-43-57-77-58-64-53-43Private Sector NIIP(a)-15-20-36-47-52-55-53of which: Net FDI (6)(a)-11-16-28-34-37-40-38MFI (excl CB) NIIP(a)-43-31-8-7-200Oth. financials NIIP(a)153613161813Central bank NIIP(a)10-3-20-2-6-1of which: Reserves(a)581010121313of which: Target2(a)-26-36-36-40-37-29Value-added trade and capital accountVA imports % of agg. demand (7)(d)292930Capital account bal. as % of GDP, NA(b)1.41.41.20.91.01.70.91.01.0Indicators in % of potential GDP0.00.00.00.00.00.0CA balance as % of potential GDP, NA(b,c)-9.3-7.70.50.1-1.1-0.8-1.51.00.8CA balance as % of potential GDP, BoP(a,c)-9.3-7.90.90.4-1.0-0.7-1.41.21.0Cyclically adj. CA balance as % of potential GDP (c)-10.5-7.90.31.3-1.7-1.9-0.42.52.0Trade bal. G&S, as % of potential GDP, NA(b,c)-7.9-5.70.80.5-2.0-2.8-2.60.10.0NENDI as % of potential GDP(a,c)-44-70-69-48-44-35-30NIIP as % of potential GDP(a,c)-76-106-114-103-98-92-85-78-73Capital account bal. as % of potential GDP, NA(b,c)1.31.41.20.90.91.70.91.01.0