The November 2014 issue of the Financial Stability Report was released by Banco de Portugal today. The following conclusions can be drawn:
In spite of the significant progress made under the Economic and Financial Assistance Programme (EFAP), especially in terms of fiscal consolidation, deleveraging of the non-financial private sector, financial system supervision and the solvency of credit institutions, vulnerabilities remain in the Portuguese economy, that require the continuation and, in some areas, the deepening of the adjustment process. These vulnerabilities include low potential growth of the national economy and high indebtedness levels in the private and public sectors. One of the greatest challenges now is to ensure economic growth – allocating investment to sectors with high productivity levels and sustainable demand – while at the same time promoting deleveraging in the various sectors of the Portuguese economy.
The adjustment under the EFAP, however, was heterogeneous among the various resident sectors. Among households, the adjustment was notable: in spite of declining disposable income, the savings rate has increased significantly and indebtedness has declined. Non-financial corporations have reduced their indebtedness levels more slowly, and therefore a significant number of corporations are still excessively leveraged. In this context, it is essential to define a coherent and comprehensive strategy promoting the capitalisation of these corporations, which is crucial so that investment, economic growth and deleveraging can be mutually compatible. As regards the public sector, despite the unprecedented fiscal consolidation in recent years, the levels of public debt allow no easing of the adjustment effort.
The Portuguese banking sector’s liquidity and solvency situation have improved significantly and the adjustment in the other sectors of the economy has resulted in the deleveraging of the credit institutions. The recovery of profitability continues to be one of the main challenges in the sector. When defining their business models, institutions must take into account a macroeconomic context involving low potential growth and declining interest rates, and avoid excessive risk-taking and excessive concentration levels in certain activities or markets. They must also consider increasing competition due to the creation of the Banking Union, and the impact – in terms of financing costs and volume – of the new regulatory requirements.
The reversal of that search-for-yield behaviour associated with financial risk taking observed in the current context may have adverse consequences for financial stability, particularly on the financing costs and increasing value of financial assets held by the economic agents. Against this background, the deepening of the adjustment process of the Portuguese economy is crucial for maintaining the country’s external credibility and for limiting the rise in financing costs of the different resident sectors of the economy.
The high exposure of financial institutions to real-estate assets represents a risk that must be monitored. Despite the recovery signs in the real-estate market and evidence pointing to the alignment of residential property prices with some fundamental determinants, a decline in prices is not to be excluded, with an impact on the banks’ balance sheets. This therefore warrants permanent monitoring of the credit institutions’ portfolios, through regular and far-reaching inspections and appropriate impairment registration.
The conduct of financial institutions must contribute to strengthening confidence in the system. For this purpose, it is necessary to create a range of incentives and to define organisational and intervention frameworks, inside and outside the financial institutions, favouring the alignment of individual and collective interests. In the current context it is also important to closely monitor the consequences resulting from the sudden decline in the solvency levels of Banco Espírito Santo which, in turn, resulted in the application of a resolution measure to this bank. Even though developments in a significant range of indicators show that the impact on financial markets was temporary, the situation must be monitored, ensuring the continued confidence of economic agents and the stability of the national financial system.
Lisbon, 12 November 2014
©Bank of Portugal
ISSN 1646-2246 (print)
ISSN 2182-0392 (online)
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