Moody’s: Recovery and Resilience Plan will boost Portugal’s economy by 2022

According to Moody’s, the Recovery and Resilience Plan (RRP) that Portugal delivered to the European Commission will boost the country’s economic growth. However, the agency warns that this boost is expected to occur only in 2022, and alerts that the long-term impact will depend on the implementation of structural reforms.

“The programme’s full implementation could strengthen Portugal’s potential growth, which would in turn support its fiscal strength over the medium term,” Moody’s said in a report released this Wednesday. Portugal submitted the RRP in mid-April with a total of €16.6 billion, of which €13.9 billion are non-repayable grants.

António Costa’s government expects that these funds will help improve the primary balance by 0.3 percentage points per year between 2021 and 2025. Moody’s recalls that Portugal had primary surpluses before the pandemic crisis and therefore expects that, together with prudent fiscal policy, stronger growth may accelerate the reduction of the debt burden.

“However, such a scenario would depend on the government’s ability to channel very large amounts in a limited period toward productive investment while delivering on its reform agenda,” the US agency explains. “Provided there are no further delays, the EC could approve recovery plans by the end of July 2021 and disburse first instalments by September. As a result, we expect only very gradual implementation this year, before an acceleration in 2022 and 2023.”

Portugal’s absorption rate of EU funds is “relatively strong,” with 62% of EU structural funds for the 2014-20 period spent at the end of last year, against the 27-nation bloc average of 55%. This reality gives confidence to the rating agency regarding Portugal’s absorption capacity, especially as “a decade of low public investment is likely to have generated a significant backlog of projects.”

Additionally, around 80% of public investment in Portugal is covered by EU funds as opposed to 25.7% in the Euro Zone, which, according to Moody’s, also suggests that the government is limited by the State Budget and not by the projects’ availability. The RRP focuses on 37 reforms and 83 investment projects, and the government will create a Mission Structure to help coordinate the actions of the different stakeholders and ensure the control and auditing of resources.

“The plan is credit positive because it will provide a significant boost to Portugal’s low public investment levels and address some of the country’s credit challenges, including human capital shortfalls, low innovation and institutional inefficiencies,” Moody’s said.

After a GDP contraction of 7.6% in 2020, the agency projects a 4% recovery in economic activity, limited by the remaining setbacks due to the pandemic and despite the increased availability of vaccines. From 2022 onwards, the country’s expansion will “strengthen markedly” with the allocation of EU funds to public investment.