Mario Centeno

Mário Centeno, governor of Portugal’s central bank and former finance minister, speaks to Peter Wise about the resilience of the Portuguese banking sector and the challenges ahead.

Q: How have Portugal’s banks coped during the coronavirus pandemic?

A: The Portuguese banking sector proved its resilience during the pandemic. The global regulatory and supervisory reforms initiated after the global financial crisis and the risk-reduction measures taken in the five years prior to the Covid-19 crisis helped strengthen its resilience. Liquidity is strong, operational efficiency and asset quality have improved and capital ratios are stable.

Risk reduction continued during and after the pandemic. The gross and net non-performing loan ratios of the sector’s overall credit portfolio continued along the downward trend that began in June 2016, reaching 3.6% and 1.7%, respectively, in December 2021. This represents impressive decreases of 14.3 percentage points (pp) and 8.5pp.

Q: What do you see as the sector’s main challenges?

A: Despite the positive developments, challenges remain, including the green transition and digital transformation. It is of the utmost importance that banks increase their investments in digitalisation, including strengthening their resilience to cyber security risks.

It is of the utmost importance that banks increase their investments in digitalisation, including strengthening their resilience to cyber security risks

The impact of the expected increase in interest rates will also require monitoring. We expect the net impact on Portuguese banks to be positive, as the economic recovery should contain credit risks. Net interest income will improve, given the significant percentage of credit with interest rates indexed to Euribor and the high proportion of non-interest-bearing deposits.

Direct exposure of the Portuguese banking sector to Russia and Ukraine is negligible. Second-order or indirect effects, however, merit some caution. Increased energy and raw material prices, together with supply chain constraints, could impact corporate credit quality.

Q: What policies are required to protect the economy from the global impact of the conflict?

A: Domestic and European economic policy responses are crucial to mitigate the shock. A swift implementation of Portugal’s Recovery and Resilience Facility projects is key. The magnitude of investments and the implementation deadlines for these are challenging. It is essential that the country proves its capacity to absorb the resources available and that these translate into a permanent increase in our productive capacity.

In a context where there is no direct impact on national debt, this is a unique opportunity to accelerate the country’s long-term growth rate — one that neither Portugal nor Europe can afford to miss.

The Portuguese economy faces important long-term challenges in terms of accelerating its convergence towards European income levels. But an upgrade in labour force skills has been paramount in increasing productivity. This process will bring further benefits, but it must be adapted to the economic challenges arising from the climate and digital transitions. We will be successful if we can match the improvement in skills with a growing demand for highly qualified workforces. 

Q: What is the right balance between rigour and stimulus for Portugal?

A: A high public debt-to-gross domestic product (GDP) ratio remains one of Portugal’s main vulnerabilities. In the absence of large adverse shocks, however, the ratio is set to decline. The same is true as long as the interest rate-growth differential remains favourable, as currently projected, and a solid underlying fiscal position is maintained. The latter requires any support to the economy arising from increased commodity prices or the Russian invasion of Ukraine to be timely, well targeted and temporary.

Our pre-Covid trajectory was virtuous. Portugal reduced its debt-to-GDP ratio by 17pp and achieved its first budgetary surplus in more than 45 years. Because of this, fiscal policy was able to provide adequate support to households and firms during the pandemic, while controlling the health emergency. The budget deficit deteriorated, but in 2021 it was already below 3% of GDP and is set to improve in the coming years. Portugal has overachieved its fiscal targets since 2016.

Looking forward, the ageing population will be a stress factor, while the effects of climate change and the fiscal impact of the measures required to address them will be key structural challenges.


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