Portugal will have a deficit of 7.1% in 2020, says the IMF

The International Monetary Fund (IMF) predicts that Portugal will turn the first fiscal surplus in its democratic history into one of the largest deficits recorded in the same period. However, “normalcy” is expected to return in 2021 with the deficit returning to below 3%.

According to forecasts by the Fiscal Monitor, which was released this Wednesday, Portugal’s government budget will drop from 0.2% of GDP in 2019 to -7.1% in 2020. Despite being one of the highest deficits in democracy, this figure falls short compared to the deficit recorded in 2010 (-7.4%).

The projections for this year are based on the State Budget for 2020, “adjusted to reflect the macroeconomic scenario of the IMF team,” explains the Fund, noting that the projections for 2021 are on invariant policies, i.e., they only take into account measures already legislated.

The deterioration of the fiscal balance by 7.3 percentage points is expected to be one of the most significant in public accounts, reflecting the size and nature of the economic impact of the pandemic. Even so, the deficit forecast for Portugal is below the average for the Euro Zone (-7.5%) and for other countries such as Spain, France, Greece or Italy. However, it is above countries such as Germany (-5.5%) or the Netherlands (-6.2%).

The IMF also forecasts that the primary balance, which excludes debt service, will move from a surplus of 3.1% in 2019 to a deficit of 4% in 2020. Given that the deterioration of the primary balance is similar in size to the fiscal balance, it is possible to conclude that the Fund does not expect Portugal to pay much more in debt interest in 2020, even with the expected higher public debt issuance and possible turmoil in the bond markets.

According to the calculations of the institution led by Kristalina Georgieva, the deterioration of the public accounts in Portugal will come, as expected, from the significant increase in the weight of public expenditure on GDP – which will rise from 43.1% to 49.9% in a single year – while public revenue is expected to evolve in line with the fall in GDP (estimated at 8% by the IMF) by decreasing from 43.3% to 42.9%.

In 2021, in the expectation that this year’s one-off measures will not be repeated even without a vaccine, the IMF expects the deficit to fall significantly to 1.9% of GDP, which is already below 3%, the limit imposed by European rules (even if these are suspended for the time being). The recovery of 5% of GDP and the fall in the unemployment rate to 8.7% forecast by the IMF contribute to this improvement in public accounts.