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Risks to the sustainability of the Portuguese public debt are high, but they have been receding in the recent years
Several international institutions use Debt Sustainability Analysis (DSA) frameworks for monitoring and analysing risks to the sustainability of public debt. The DSA developed by the Eurosystem for euro area countries comprises three blocks. The deterministic block is based on several scenarios for the evolution of public debt ratios over a 10-year horizon. It includes a benchmark and five adverse shock scenarios: i) historical, in which real GDP growth and the primary balance converge to past averages; ii) no-fiscal policy-change with ageing costs; iii) combined stress test, defined in line with the European Banking Authority stress test exercise; iv) interest rate shock; and v) structural shock, consisting on a negative shock to potential output. In the case of Portugal, the most adverse scenarios are the historical and the combined stress test (see chart). The Eurosystem’s DSA also includes a stochastic block, consisting on a large set of probabilistic scenarios for the evolution of the debt ratio, and a block of “other indicators”, aiming at covering additional risks, as well as relevant institutional dimensions.
The information included in each of the three blocks can be summarised in an overall sustainability risk score and classified in accordance with a colour scheme: green (contained risks), yellow (moderate risks), orange (high risks) and red (very high risks). Several plausible calibrations for deriving the overall risk score suggest that Portugal is currently classified in the orange category. When compared to results from previous years, the recent data point to improvements in several of the assessed sustainability dimensions.
For additional details, see Cláudia Braz and Maria Manuel Campos, “An analytical assessment of the risks to the sustainability of the Portuguese public debt”, Banco de Portugal Economic Studies, Vol. V (4), Banco de Portugal, October 2019.
Prepared by Cláudia Braz and Maria Manuel Campos. The analyses, opinions and findings expressed above are those of the authors and not necessarily those of Banco de Portugal or the Eurosystem.
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