"House prices continue to increase, but there is still no significant overvaluation," according to the latest IMF report, released on Thursday.
The International Monetary Fund report stresses that house price increases largely have been driven by non-residents buying property in Portugal, but agrees with the European Central Bank's assessment in May, that there were, "incipient signs of overvaluation in the residential market."
Earlier in September, the European Commission rejected the existence of any imbalances in Portugal's house prices. Standard & Poor's forecast for 2018 is a 9.5% rise in property prices.(HERE)
Today's report, published as part of the IMF's annual visits to all member states, warns that market instability and growing global financial constraints can make Treasury loan applications more expensive and affect businesses, households and banks.
The IMF also warns that, "a significant reduction in growth in the Eurozone or a shift to protectionism on a global scale, could have an impact on Portugal."
"While growth prospects remain positive in the short term, the external risks of slowing growth in trading partners and the repercussions of financial markets have increased," the report said.
The IMF also fears that the Portuguese government may become overly optimistic, "As the expansion continues, there is a risk that legislators and other stakeholders may have overconfidence, leading to policy overruns and the erosion of past reforms."
This overconfidence will be hard to avoid in the run up to the 2019 general election.
The IMF said that Portugal’s government needs to implement reforms that will allow the country to withstand shocks and reduce vulnerabilities – the time could not be better, as "Favourable economic conditions are an opportunity to anticipate the fiscal consolidation that is planned."
This effort should focus on cutting current expenditure (through changes in public administration and the pension system), budgetary control (with special focus on the health sector) and policies favoring investment and skilled labour.
There is also the "removal of unnecessary regulatory barriers, lowering energy prices and better linking of wages to productivity," with the IMF praising the government's commitment to reducing public debt and the "strong improvement" in fiscal consolidation, which can be attributed to “vigorous economic growth, control of budget implementation and reduction of interest costs of debt.”
The IMF states that Portuguese banks, now with more capital and profits, have improved stability, confidence and resistance to shocks. However, the IMF warns that there is still a long way to go to reduce bad credit.
Like the government and the European Commission, the IMF now foresees a growth of 2.3% for Portugal this year.
The Fund, led by Christine Lagarde, improved the forecast for Portugal in April, from 2.2% to 2.4%, but now has dropped it.
In relation to 2019, the IMF forecast remains at 1.8%, marginally more pessimistic than the European Commission’s 2% and the Government’s 2.3%.
