Press release of the Banco de Portugal on the June 2021 issue of the Financial Stability Report

The COVID-19 pandemic has led to an economic crisis with repercussions on the financial situation. Support measures, put in place rapidly and in coordinated fashion, have prevented the crisis from spilling over to the financial sector.

However, the crisis has interrupted the Portuguese economy's adjustment process. The magnitude and persistence of the crisis, in tandem with the dilution over time and redistribution of the costs of the pandemic between the private and public sectors, have led to an increase in debt, particularly in general government and the sectors of activity most affected by the crisis.

In the banking sector, the timely recognition of credit risk has reduced the sector's profitability. Banks, which have also benefited from the enacted measures, maintain resilient liquidity and solvency indicators concurrently, whilst meeting the economy's borrowing requirements.

The main vulnerabilities and risks to financial stability stemming from this environment are the following:

• Risk of a correction in international financial markets, which may be amplified by the high leverage, the increased exposure to lower credit-quality assets and low liquidity in the euro area non-banking financial sector's portfolio.
• The withdrawal of support measures, amid high indebtedness and still depressed activity in a number of sectors, enhances credit risk materialisation.
• High general government debt and the increase in contingent liabilities are a vulnerability for the Portuguese economy.
• Correction in residential real estate market prices in Portugal, which may result from, inter alia, the potential contraction in demand for real estate by non-residents associated with a deterioration in international financing conditions.
• In the commercial real estate market, there may be a further drop in prices following that seen in 2020 for a number of segments (retail and hotels).
• Low profitability prospects in the banking sector and increase in the nexus with the public sector, through increased exposure to public debt and the granting of State-guaranteed loans.

When assessed on an integrated basis, the aforementioned vulnerabilities and risks reflect interdependencies among economic sectors which should be taken into account when outlining policies fostering financial stability.