Why has Portugal changed its growth expectations?

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The Portuguese Public Finance Council (Conselho das Finanças Públicas, CFP) has updated its forecast on the economic growth of the nation for 2021 and onwards. Growth is now expected to increase to 4.7% for 2021 and 5.1% for 2022.

Previously, the CFP predicted economic growth to be at 3.3% in 2021 and 4.9% in 2022. This is good news for Portugal after the country suffered a 7.6% contraction in 2020. The changes were published in the CFP’s 2021-2025 Economic and Budget Outlook.

The CFP released its revised figures with a no-policy-change assumption. It listed a few key factors as the main catalysts behind the upward revision:

  • The recently approved Recovery and Resilience Plan (RRP).
  • Developments in the economy from the 2nd quarter of 2021.
  • The easing of restrictions on economic activity, combined with a highly vaccinated population.

The new forecasts for 2021 differ slightly from other institutions. The Bank of Portugal (Banco de Portugal) is the only institution with a more optimistic figure than the CPF’s, predicting 4.8% growth.

The Portuguese Government anticipates a 4% rise, while the International Monetary Fund and the European Commission predict 3.9%. The Organization for Economic Cooperation and Development is the most pessimistic figure, at 3.7%.

What did the CFP say in its report?

The 2021-2025 Economic and Budget Outlook expects the 2019 level of wealth destroyed by the pandemic to have recovered by 2022. The positive attitude is backed by figures relating to an improving economy.

The report estimates Portugal’s budgetary imbalance will continue to reduce on a yearly basis. The deficit is expected to decrease from 4.2% of GDP in 2021 to 1.6% of GDP come 2023. From this point, the CFP predicts the reduction will stabilise over the next two years, dropping to 1.4% of GDP in 2024 and 1.3% in 2025.

Additionally, the debt ratio is expected to fall over the next few years, hitting 114.1% of GDP by 2025. The pace of the decline is anticipated to move more quickly over the first two years.

While the unemployment rate is expected to rise to 7.3% in 2021, the CFP predicts this will stabilise to around 6.4% in 2025.

The Recovery and Resilience Plan (RRP)

The Portuguese Recovery and Resilience Plan (RRP) was created within the EU’s Recovery and Resilience Facility (the Facility) framework.

The EU created the Facility to support its member states as they recover from the Covid-19 pandemic. The Facility offers loans and grants to aid investment and reform in EU nations.

The RRP was the first recovery plan to receive endorsement from the EU Commission in June 2021. It targets three key areas:

  • Economic and social resilience.
  • Climate-related investment and reform projects.
  • Digital transition.

The RRP is expected to be allocated a total of €13.9 billion in grants and €2.7 billion in loans from the EU. It will use its loans and grants to fund 83 crucial investments and 37 reform measures. The investment will be spread across a variety of fields. These include housing, health services, business aid, sustainable mobility, transport infrastructure, hydrogen, renewables and others.


The plan in action

Portugal will receive its first injection of funds once the RRP has the Council of the EU’s approval. This is anticipated to be around €2.2 billion in pre-financing – roughly 13% of the total. To secure the rest of the funds, the Portuguese Government will have to meet certain targets set out by the EU.

Although it’s still awaiting official confirmation, Portugal has taken the first steps in its plans for the distribution of funds. It intends to focus the initial investment on the education sector.


What does this mean for the private sector?

Portugal plans to support the private sector by using the Portuguese National Promotional Bank (Banco Português de Fomento, BPF) to inject capital into economically viable companies. The BPF will also address undercapitalization where companies have limited access to alternative finances.

The BPF was established in 2020 with the intention of supporting small and medium-sized enterprises (SMEs), mid-cap corporates and large companies. Support will be given by the BPF to companies deemed crucial to the Portuguese economy. This will be determined by equity and funding operations.

The BPF is expected to receive roughly €1.6 billion from the RRP to invest in Portuguese companies. It expects to do this through direct funding, acquiring debt or quasi-equity instruments.

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