CFP updates the no policy-change macroeconomic and fiscal scenarios until 2024

The Portuguese Public Finance Council today updates the economic and fiscal outlook published last June in a no-policy change scenario. This scenario does not yet include the Recovery Plan for Europe 2021-2027, agreed at the European Council on July 21^st 2020, and whose measures are not yet defined, constituting an upward risk to these projections.

The CFP macroeconomic scenario anticipates a 9.3% real Gross Domestic Product (GDP) contraction for 2020, 1.8 p.p. greater than predicted in the June baseline scenario. This revision is mainly due to the contribution of net exports. The drop of exports in volume in 2020 was revised to 22.5%, 1.9 p.p. higher when compared to the previous forecast.

In  2021 and 2022, real GDP growth is projected to recover to 4.8% and 2.8%, respectively, supported by private consumption and investment dynamics. Exports should also contribute significantly to the economic recovery, although a loss of market share is considered in 2021 and a full recovery of the tourism sector should only occur by 2022.

For the labour market, the unemployment rate is estimated to climb to 10.0% of the labour force, in 2020, and to decrease to 8.8% and 7.8% in 2021 and 2022, respectively.

For the fiscal scenario, the CFP estimates a 7.2% of GDP budget deficit in 2020, 0.8 p.p. more than expected in June. This review reflects mainly the incorporation of financial support for air carriers, TAP and SATA, and the annual impact update of exceptional measures to respond to the crisis. Despite the estimated recovery after 2020, the budget imbalance will remain at least until 2024 with a 2.7% of GDP projected deficit.

The scenario points to a significant increase in the  debt-to-GDP ratio in 2020 to 137.6% (+19.9 p.p. compared to 2019), returning from 2021 to the downward trajectory in which it was, and should reach 130.1% of GDP in 2024, not recovering, however, to the pre-pandemic levels.

Despite the nominal increase in public debt, the CFP does not foresee a significant increase in financing costs or interest charges, given the historically low levels of secondary market interest rates, which are assumed to persist over the projection time horizon.

This exercise contains downside macroeconomic and fiscal risks, in particular:

• The adverse impacts that the COVID-19 proliferation and the possible containment measures will have in industrial production, international supply chains, the tourism sector and consumer and business confidence levels;
• The deterioration of financing conditions and financial instability that could result from the substantial increase in debt at global level; 
• The high level of Portuguese households and firms indebtedness, which can lead to an increase in nonperforming loans and to the deterioration of banks' balance sheets;
• Possible State guarantees activation granted under some pandemic response measures;
• Impact of additional support to the financial sector and public sector entities (TAP and SATA or others);
• Failure to comply with measures to relax tax and contributory obligations;
• The realization of additional budgetary pressures on the stricter components of public expenditure (expenditure on social benefits and employees’ costs);
• Increase in the capital market current financing costs;
• Assumed contingent liabilities (e.g. guarantees).

The CFP reiterates that national and European public resources should be used judiciously, efficiently and transparently, and that there should be timely and comprehensive public disclosure of the implementation of all support instruments.

Date of last update: 17/09/2020