Portugal's Growth Outlook Is Constrained by High Debt, IMF Says

Prime Minister Antonio Costa must continue efforts to improve Portugal’s finances and deal with the high level of debt that’s restricting economic growth, the International Monetary Fund said.

In a statement published Thursday on Portugal’s progress since exiting its bailout, the IMF said unemployment has fallen and the country has “regained the confidence of foreign investors.”

“However, growth prospects remain constrained by high levels of indebtedness and structural bottlenecks,” it said. “High public debt leaves little scope for relaxation of the fiscal stance.”

Less than three months in the job, Costa is planning to undo some of the measures introduced during Portugal’s bailout from the IMF and the European Union. He aims to reverse state salary cuts and bolster family incomes, easing austerity measures faster than the previous administration proposed.

The IMF said Costa’s 2016 draft budget plan “implies a loosening of the fiscal stance.” It estimates the budget deficit will be 3.2 percent of gross domestic product this year, far higher than the 1.8 percent projected in the 2015 stability program.

The government said last month that the 2016 shortfall will be 2.6 percent, narrower than a previous target of 2.8 percent and 2015’s 3 percent. It forecasts the debt-to-GDP ratio will fall to 126 percent at the end of 2016. The government last year had to carry out a 2.26 billion-euro ($2.5 billion) injection into lender Banif SA.

“The banking system’s balance sheets need to be strengthened to avoid further negative surprises and protect taxpayers,” the IMF said. “A more ambitious approach to corporate debt workouts is needed.”

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