Costs, liquidity and pressures. 5 key points about the Stability Program

The “2020 Stability Programme comes at one of the most critical moments for Portuguese society in recent decades”. It is with this phrase that the government begins a document that normally focuses more on the economy, but this year it focuses on health. It was postponed twice, but it arrived on Thursday and, although it does not have forecasts, it leaves clues about the potential impact of the pandemic on the Portuguese economy and public finances.

No forecast, but a warning: each month of confinement takes 6.5% of GDP

The government has chosen not to make forecasts because of the uncertainty. Nevertheless, the Stability Program gives an idea of the economic impact of the pandemic in Portugal: as the Minister of Finance, Mário Centeno, had said in an interview with TVI, the annual GDP shrinks by 6.5% for each month of confinement.

“It is estimated that on average every 30 working days of containment generates a negative impact on annual GDP growth of 6.5 percentage points,” reads the document, clarifying that “this estimate should be interpreted as the estimate of the most severe impact of the period of containment, corresponding to the period of the state of emergency. Given that the state of emergency lasted for one and a half months, it is possible to say, based on this estimate, that the Portuguese GDP has already been hit by 9.75%.

According to the analysis of the Ministry of Finance, about half of this impact is explained by sectors of trade and tourism, such as restaurants and accommodation, followed by manufacturing and extractive industries. However, the final impact in 2020 will depend very much on the capacity of the economy to recover, and the evolution of the pandemic. In the words of the government: “The speed with which the economy will recover from this sharp downturn will determine the overall impact on the annual rate of change in GDP in 2020, but which is not yet reflected in this estimate.”

Where will the pressure for the deficit come from?

Although the Ministry of Finance is not putting forward an estimate of the budget deficit for 2020, it is already well aware of where the pressures on the public coffers will come from in the coming months. “The pressure on the NHS, as well as the operation of automatic stabilisers and the packages of measures to support citizens and businesses, will have a strong impact on the budget balance, either through a high increase in public expenditure or a significant drop in tax and contributory revenue,” summarises the Stability Programme. Thus, there are five key points of this pressure on the deficit:

• Direct impact on public expenditure resulting from increased demand for health services and epidemiological containment measures (public safety, among others);
• Direct impact on public expenditure, resulting from the measures to increase transfers from the State to households and companies to maintain income, and on tax and contributory revenue through the reduction of tax and contributory obligations decided in this context;
• Additional impact on public expenditure of a possible increase in the cost of financing associated with instability in financial markets;
• Impact of automatic stabilisers, on expenditure and tax and contributory revenue resulting from the economic crisis, following the pandemic;
• Direct impact on public expenditure of the economic recovery measures and their financing.

If the first two impacts are expected to be temporary, the last two impacts mentioned in this list will “certainly last for a long time, probably beyond this year,” the government anticipates.

How was the economy before and after the pandemic

The government has noted the fact that the Portuguese economy was (re)accelerating in late 2019 and early 2020, before the pandemic hit the national territory.

In the outlook for 2020, a year for which growth of 1.9% was expected, the Ministry of Finance is cautious: “The time lag in the availability of statistical information makes it difficult to assess the effects on economic activity of the outbreak and the containment measures, with a change in the dynamics observed in the first two months of the year being expected, with a strong negative impact on consumption, investment and external trade”.

Even so, “data on confidence indicators already reflects the effect of the pandemic, with a strong reduction in most indicators from February onwards, a trend that became more marked in March”. “Consequently, the economic climate indicator declined in the first quarter, but still reflecting only a partial effect of the pandemic,” describes the Stability Programme, referring to indicators already reported such as the weekly survey of the National Statistics Institute (INE) and the Bank of Portugal, the SIBS data on physical and online payments, the GEP data on lay-off and unemployment, among other leading indicators.

Each month of the pandemic costs 0.9% of the public coffers

The government estimates that the state will spend 0.9% of GDP (from 2019) per month on the pandemic this year, including one-off measures, which amounts to just over 1.9 billion euros. This is the direct impact and, therefore, does not include the indirect impacts of the pandemic on the budget balance.

This estimate includes at least two expenses that will be unique and therefore should not be repeated every month: the purchase of equipment for intensive care units, such as ventilators, to the value of 60 million euros and extraordinary support for the resumption of business activity, which is paid to companies when they finish the lay-off, to the value of 508 million euros. These are equivalent to around 0.3% of GDP, the remainder being monthly (but for a period yet to be determined) and costing 0.6% of GDP.

However, the annual cost will depend crucially on the duration of the measures, mainly the lay-off. 564 million per month on this employment support, but it is uncertain for how long this simplified scheme will be in force with significant uptake by companies.

Liquidity injection into companies and families reaches 11.8% of GDP

In addition to monthly budgetary spending on the pandemic, the state is also providing guarantees and allowing for tax deferrals to inject liquidity at a time when the economy (almost) came to a standstill. In all, this liquidity injection could reach 11.8% of GDP (in 2019), which is equivalent to 25.1 billion euros.

This is the size of the “oxygen balloon” for businesses and households to cope with the pandemic without going into liquidity shortfalls or even bankruptcy until the economy recovers. Moratoriums in housing credit (2.3 billion) and corporate credit (9 billion) will have the biggest impact on liquidity in the economy with a total of 11.35 billion (5.35% of GDP).

This will be followed by the postponement of taxes that will have to be paid in the future. 7.8 billion in taxes (3.71% of GDP) such as personal income tax (IRS), Corporation Tax (IRC), Single Social Tax (TSU) and VAT.