Dear President Marcelo Rebelo de Sousa, President of the Assembly of the Republic, Eduardo Ferro Rodrigues, Prime Minister Antonio Costa, and distinguished members of the Council. Thank you very much for the opportunity to speak to this Conselho de Estado today. It’s an honor for me to be here.
Last October, before we held our Annual Meetings in Bali, Indonesia, I delivered a speech in Washington, warning about the growing risks to the global economy and the need for global international cooperation to manage these risks, step up reforms, and modernize the multilateral system. In that speech, I quoted an American poet who said the following:
“To reach a port, we must sail sometimes with the wind and sometimes against it—but we must sail, and not drift, nor lie at anchor.” To summarize, I said: We need to steer the boat, not drift!
Preparing my visit to your country, I thought again about that quote. Why? Because I believe Portugal knows a thing or two about steering ships through dangerous and unchartered waters. You have been doing precisely that over the last few years, with remarkable success.
We at the IMF are keenly aware of the resolve that allowed Portugal to steer out of its economic crisis. The 2011 program with Portugal was then the third largest in IMF history, measured as a percent of a country’s GDP—which points to the seriousness of the situation at that time.
The economic adjustment program was negotiated by one government, but a large part of it ended up being implemented by the following government. From our side of the table, so to speak, we saw a seamless transition. We saw in the Portuguese teams under both governments the same determination to find effective solutions. That sense of national unity at a time of crisis was key for the success of the program, and it is something that has stayed with us.
In the post-program period, largely under yet another government, we have witnessed again a commitment to sound macroeconomic policies, which has helped the economy on its recovery path.
Portugal and the Portuguese people deserve tremendous credit for their efforts. I am sure that you are proud of them. Just as I am proud of how the IMF was able to support Portugal ―as a steadfast partner and friend.
Portugal Has Made Great Progress
And so, after a decade of crisis and recovery, we can say that Portugal has made great strides:
Its real GDP is now back above the level it was before the crisis, and its unemployment rate is at a fifteen-year low, with the program-era labor reform facilitating strong job creation;
Its business climate is more attractive to investors. For example, in the mid-2000s it used to take almost a month to start a business. Now it takes less than five days;
Its economy has rebalanced to become more export-oriented, including a reinvigorated tourism sector, leading the external current account to move from chronic deficits of around 10 percent of GDP to balanced;
It has made impressive progress in cutting the fiscal deficit and reducing borrowing costs;
…and, let me add, it has repaid its obligations to the IMF, five years ahead of schedule―Muito obrigada!
My main message for you today is that Portugal will have to continue relying on its illustrious tradition, because the waters of the global economy are likely to become more treacherous. Vasco da Gama was “not afraid of the darkness”  , and as he explored the Indian Ocean, he knew the importance of pushing ahead even when the horizon was dark.
I would strongly recommend that you to do the same today. To steer, not drift. Risks in the rest of the world are increasing and will likely constitute the most significant source of instability for the Portuguese economy. So, you should build on recent success to strengthen your resilience further. Pursuing reforms today might be difficult, but these reforms will help during a storm.
Outlook for the Global Economy
While global growth in 2018 remained close to post-crisis highs, the
expansion is weakening and at a rate that is faster than expected. We are
not staring at a recession, but downside risks have clearly risen.
What are the challenges?
Rising trade tensions. Further escalation of trade barriers could subtract almost half a percent from global growth going forward, as supply chains get disrupted, and the environment for investment becomes more uncertain.
The rising level of global debt is a challenge. At $182 trillion as of end-2017, almost 60 percent higher than in 2007, it leaves governments, firms, and households more vulnerable to weaker and asynchronous growth as well as higher interest rates.
A slowdown in China. Although the transition to lower, more sustainable growth is welcome, there is a risk that the deceleration in China could be faster than expected. Even if new stimulus in China is effective, it is being targeted at relatively less import-intensive activities, so the rest of the world might still feel a deceleration.
Closer to home, growth in the Euro Area has also passed its peak. Our growth forecast for 2019 is 1.6 percent, a 0.3 percentage point reduction compared to the forecast in October. We will review that forecast in about one month, during our Spring Meetings in Washington.
Within the Euro Area the significant revisions are for Germany, where difficulties in the auto sector and lower external demand will weigh on growth in 2019, and for Italy, where sovereign and financial risks are adding headwinds to growth.
A disorderly Brexit could also have significant consequences. All likely Brexit outcomes will involve net costs for the UK economy. But the higher the impediments that arise in the new relationship with Europe, the higher the cost.
An agreement that minimizes uncertainty and trade barriers will best support growth. Conversely, leaving without a withdrawal agreement and a framework for the future relationship with the EU is the most significant near-term risk to the UK economy.
And to varying degrees, others in Europe will be affected too. Ireland, of course, and others such as the Netherlands, with a close relationship to the UK.
A disorderly Brexit would also hit Portugal. Important trade and tourism links could be disrupted, and a loss of financial market confidence outside your borders could lead to higher sovereign and bank interest rates, which would weigh on growth.
The Need for Global Cooperation
Maneuvering through the economic challenges ahead will require leaders to have a clear sense of direction and steady but decisive hands on the tiller. The current environment still offers the opportunity to advance policies and reforms and build buffers (fiscal and financial defenses) for sustainable, robust, and inclusive growth. But the moment may not last for long. Leaders need to take advantage of this moment.
Navigating the new economic environment requires increasing international cooperation, not less. Many of the challenges facing us today transcend national borders and require coordinated responses. This is true both of traditional policies regulating international transactions (trade and capital flow measures) and the new challenges of our changing economic landscape, including rising inequality, addressing the impacts of climate change, and the challenges and opportunities of fintech.
While the global frameworks that have served the world well are being questioned, the answer must be to fix the system, not abandon it. We need to launch a “new multilateralism” that is more inclusive, people-oriented, accountable and results-oriented.
Priorities for Europe
Closer to home, there is a need for European leaders to prepare their region and their domestic economies for riskier times.
Some countries in the Euro Area have not made sufficient progress in cutting deficits and placing their debts on a downward path. This, coupled with weaker growth, increases the risk that interest rates for countries and banks may spike, causing a further weakening of growth and job creation. These countries would do well to rebuild their fiscal defenses now, rather than wait until poorer growth worsens their debt ratios or until markets force them to act.
Other countries, by contrast, enjoy ample fiscal space. In those countries, subject to observing fiscal frameworks in place, we recommend selectively boosting productive spending targeted at raising potential growth. This would have positive spillovers on other European economies.
We also think there is a need to enhance risk-sharing—in both the public and private sectors—within the Euro Area. We believe this needs to be done while preserving appropriate incentives. Risk reduction at the national level is indeed necessary for carefully designed risk-sharing frameworks to be viable and effective.
To improve public sector risk-sharing, the Euro Area needs a meaningfully sized central fiscal capacity. There are many proposals on the table—including one from the IMF, which seeks to address the legitimate concerns of some member states about the risk of permanent transfers and moral hazard. Developing consensus in this area will take time, but discussions need to continue at both the technical and political levels.
The Euro Area also needs more cross-border private sector risk-sharing through the financial markets—in other words, a much deeper financial sector union. This means advancing the Capital Markets Union, to facilitate more cross-border investment diversification through traded financial instruments. It also means completing the Banking Union, where the biggest missing piece is common deposit insurance.
All those Euro Area reforms would strengthen the monetary union. Nevertheless, the fundamental responsibility for improving economic resilience will remain national. This brings me back to Portugal.
Priorities for Portugal
Portugal needs to step up its efforts today so that it is prepared for the future.
Further strengthening the underlying fiscal balance would help accelerate the pace of debt reduction and positively differentiate Portugal from other high-debt countries. Adjustment today could allow policy to be loosened later, when it might be needed.
Continue the repair of the banking system. There has been much progress restoring the banks’ balance sheets in the last few years; here our message is to keep pressing with this important work.
Structural reforms to boost saving, investment and productivity are essential to raise living standards while helping the economy deleverage, reducing existing vulnerabilities. Key steps include making the labor market work better, simplifying regulations, and improving the efficiency of judicial processes. These reforms can be targeted in a way that shield the poorest in society and reduce inequality. In fact, Portugal has a strong track record of undertaking reforms whilst protecting the most vulnerable.
Preparing for the future . We are undergoing a period of rapid technological change which will reshape the way we live and work. These changes cannot be ignored, and it is critical that Portugal is prepared. This involves building regulatory institutions that protect consumers without stifling competition; developing an education system that is geared for the needs of the future workforce; and building sound safety nets so that those displaced by technology are not left behind.
Portugal is well placed to benefit from this technological revolution. It has long been an outward-facing country and is successfully reorienting its economy towards technology and innovation:
Here in Portugal, for example, Google has created a service center for Europe, the Middle East and Africa, which I understand has been recently expanded from about 500 to 1300 employees.
And you have brought the Web Summit Conference, a world-class event, to your shores.
Technology and innovation is marked by disruptions of the established order. Well, here too, you have a long tradition.
Back in the late 15th century, Vasco da Gama was what we today would call a ‘disruptor’. He showed that there was an alternative route to India that avoided the Ottoman-controlled Silk Route, opening up vast new trade networks. A few years later, another Portuguese explorer, Pedro Alvares Cabral, tried to further disrupt that earlier disruption, and ended up in Brazil!
Portugal needs to continue in this tradition―preparing for difficult times ahead, whilst being nimble enough to grasp new opportunities when they arise.
I would like to close by quoting one of your greatest poets, Luis de Camões, and I’m going to try to do it in Portuguese, so bear with me and pardon me in advance: Impossibilidades não façais, Que quem quis sempre pôde. 
Thank you very much, and I am most happy to hear your views and comments.
 Vasco da Gama―the first European to reach India by sea, circumnavigating the Cape of Good Hope―famously said: “I am not afraid of the darkness. Real death is preferable to a life without living.”
 “Don’t make up impossibilities/Cause those who’ve wanted always achieved.”