The accumulation of vulnerabilities over time in the economy in Portugal is increasing since 2015, but is still below the levels recorded before the economic and financial crisis. The picture is from the Bank of Portugal (BdP), which launched this Wednesday, a new indicator of domestic cyclical systemic risk (IRSD).
The IRSD intends, according to the regulator, to anticipate the accumulation of cyclical imbalances generated in the private non-financial sector of each country. In this sense, it analyzes the tendency of financial institutions to take excessive risks in favorable economic times or, on the other hand, to become risk averse in times of crisis and to read in advance the risks of a crisis.
The new BOP indicator, which takes into account five sub-indicators – credit developments, the potential for overvaluation of real estate prices, external imbalances and private sector debt service – concludes that the main determinants of risk intensification in Portugal are the current account deficit and bank credit, both in relation to GDP, between 1991 and 2018.
"In the short term, it is projected that this cyclical systemic risk indicator will maintain the recovery trajectory, but will remain at levels still below those recorded before the last economic and financial crisis," says the BOP in the June "Financial Stability Report" .
In the last quarter of 2018, the IRSD stood at -050, when ten years earlier – in the fourth quarter of 2008 – was at 1.01. According to the analysis of the BoP, the indicator of cyclical systemic risk in Portugal reached its all-time high in the first quarter of 2001, reaching 1.70 and the minimum in the first quarter of 2015 at -1.25.
The accumulation of risks in five phases
- Between 1995 and 2001: Portugal experienced an intensification of vulnerabilities following an increase in external and internal indebtedness. "This level of expenditure was essentially financed by bank loans and had a significant impact on the level of external and internal indebtedness of the country," explains the regulator;
- Between 2001 and 2003, the IRSD was reduced, due to a sharp fall in bank credit, "reflecting, on the one hand, the high levels of indebtedness reached and, on the other, factors explaining the demand for credit." There was also an adjustment of the current account deficit, with the deceleration of domestic demand, "which contributed positively to reducing the level of systemic risk";
- Between 2003 and 2009: in the pre-crisis period there was an intensification of vulnerabilities, the increase in bank credit and the current account deficit. "There was a strengthening of world economic activity, which in Portugal had a relatively strong contribution of domestic demand, implying a significant worsening of the current account deficit, due to the deterioration of the goods balance, and the indebtedness of the private sector not financial, "he said.
- Between 2009 and 2015: During the economic crisis, the IRSD experienced a "sharp correction" resulting from the unfavorable economic and financial environment, which was translated into the adjustment of previously generated imbalances. The Bop notes that at the peak of the recession, the reduction in domestic demand was reflected in a fall in imports of goods and services, which together with an increase in exports contributed to the balance of the current account in 2013. In parallel, the correction of high indebtedness achieved by companies and individuals translates into the reduction of credit to these sectors.
- From 2015 onwards, there has been a reversal of the indicator trajectory, which has increased again. The BOP explains that a period of recovery, but not expansion, began in 2015 after the crisis, which is complemented by a greater dynamism of domestic and foreign demand and "by improving economic and financial conditions" . However, it points out that the deleveraging process of the non-financial private sector continued from 2015 until 2018, but at a slower pace due to three factors: stabilization of banks' financing conditions, historically low interest rates and improvement confidence indicators and prospects for economic growth. The BOP notes that "housing prices started to contribute to the accumulation of vulnerabilities of a cyclical nature, but that even then, internal credit will not be the fundamental factor for its dynamics."