Impact of public and private sector external debt on economic growth: the case of Portugal

Abstract

External debt may affect economic growth differently among countries. We assess the effect of the Portuguese external debt for the 1999–2019 period. Portugal had the highest net external debt among the founding members of the euro area. External debt was the main component of the international investment position. We split external debt between public and private sectors due to the different conditions that exist when accessing external funding. Additionally, we use quarterly data and estimate how external debt determined variations in the channels of transmission through which external debt may affect economic growth. Only some channels were significantly affected by external debt: the private and public external debt increased public investment, and private external debt damaged private investment. Therefore, external debt was not allocated to positively and significantly increase economic growth. Additionally, financial integration in the euro area and financial stress in Europe affected some channels of transmission. It would be advisable to reduce external debt through a positive current account, to assign external debt to tradable sectors that will obtain a higher return on investments, and to shift external funding from debt instruments to equity ones.