LISBON: Slow-growing Portugal faces mounting economic challenges and its financial system remains fragile, leaving little room for Lisbon to slow down the pace of balancing its budget, the OECD warned Monday.
A minority Socialist government that came to power at the end of 2015 with the backing of the Communists and far-left Left Bloc has set out to reverse some of the austerity measures imposed as part of a 2011-14 international bailout.
It has raised the minimum wage and the lowest retirement pensions, cut crisis-time tax surcharges and
reintroduced four public holidays in an effort to return more income to workers and boost demand.
In an economic survey on Portugal, the Paris-based Organisation for Economic Co-Operation predicted growth would remain sluggish as private consumption will lose steam since job creation remains weak as world trade weakens.
It expects the economy to expand by 1.2 percent this year, the same as in 2016, and by 1.3 percent in 2018, a more pessimistic view than recent government estimates.
“Growth has been slow and faces renewed headwinds, posing difficult policy choices, especially for fiscal policy,” the OECD said in its report.
“Putting off fiscal consolidation to support growth implies risks as fiscal sustainability remains weak.”
The OECD predicts exports will grow less than in previous years, partly due to dampened demand from China and oil-rich Angola, a former Portuguese African colony whose economy is reeling because of the collapse in global crude prices.
Portugal’s banking sector, which underwent two bank rescues in 2014 and 2015, remains fragile and corporate debt is high, limiting credit growth, it added.
At the end of 2015, non-performing loans accounted for 11.9 percent of total bank lending, one of the highest rates in Europe.
Portugal’s borrowing costs have surged as investors have renewed concerns about the southern European nation’s outlook and finances as the European Central Bank begins to reduce the amount of stimulus it injects into the eurozone economy.
The country’s public deficit shot up into the double digits during the global economic crisis, and despite an international bailout it had difficulty bringing it back down to 4.4 percent in 2015.
The 2016 deficit “will not be higher than 2.3 percent” of economic output, back under the EU limit of 3.0 percent, Prime Minister Antonio Costa said last month.