Portuguese Economy Recent Developments and Challenges Ahead

Transcription

1 Portuguese Economy Recent Developments and Challenges Ahead Carlos da Silva Costa Handouts

2 Portuguese Economy Recent Developments and Challenges Ahead I. The build-up of the crisis Outline II. The Economic Adjustment Programme III. Challenges ahead 2

3 Portuguese Economy Recent Developments and Challenges Ahead I. The build-up of the crisis 3

4 Interest rate; In percentage Growth of loas; In percentage I. The build-up of the crisis EMU enlarged the financing possibilities of domestic agents 24 Interest rate and loans to the private sector Indebtness of the non-financial private sector (% of GDP) Non-financial corporations Households Jan-95 Jan-97 Jan-99 Jan-1 Jan-3 Jan-5 Jan-7 Jan Money-market (3 months) Sources: ECB and Banco de Portugal. Loans to non-monetary private sector (annual growth rate, right axis) Sources: INE (Statistics Portugal) and Banco de Portugal. 4

5 I. The build-up of the crisis Unfavourable composition of expenditure (average rate of nominal growth) GDP Private Public p.m. EA12 GFCF Exports Imports consumption consumption GDP ,7 4,8 6,1 3,5 5,8 5,8 3, ,9 4,3 5,5 1, 5, 4,4 3, ,3 6,8 9,1 1,3 8, 9,7 4, , 4,5 4,5,7 6,4 4,9 4, ,7 1,4 3,3-4,3,1 -,2,5 Source: INE and AMECO. Portugal - Composition of Expenditure (current prices) 5

6 I. The build-up of the crisis Capital flows were mis-allocated, leading to the expansion of non-tradable sectors Loans to Non-Financial Corporations Million euro 8, 6, 4, 2,, Weight in GVA ; Change in p.p. 8-2, Non-Tradables Tradables -4, -6, Agriculture Industry Energy, water Construction Trade Accommodation and food Transportation; ICT Finance and real estate Other services Source: Banco de Portugal Source: Banco de Portugal 6

7 I. The build-up of the crisis Mis-allocation of capital led to a fall in productivity growth... and the wage policy did not take into account productivity growth 1,4 Trend TFP growth Compensation per employee and labour productivity Total economy Real rate of change (%) 1,2 3 1, Hodrick-Prescott 2,8 1,6,4-1,2 Labour productivity Compensation per employee -2, Source: Banco de Portugal. Sources: INE and Banco de Portugal. 7

8 In per cent 1996=1 I. The build-up of the crisis Lower productivity and wage pressures hurt competitiveness 8 Consumer Prices average rate of change Real Effective Exchange Rate (Deflated by Relative Unit Labour Costs) Goods Services PT GER ESP FR GRE IRL IT Source: INE Source: ECB and Banco de Portugal 8

9 I. The build-up of the crisis Thus, despite huge capital inflows, economic growth was very low 16 Gross Domestic Product 1999 = Ireland Spain Greece Germany Portugal Italy Source: AMECO 9

10 I. The build-up of the crisis Higher relative spending and lower relative output led to increasingly negative net foreign asset position External Accounts and International Investment Position % of GDP International Investment Position Current+Capital Account (rhs) Source: Banco de Portugal 1

11 I. The build-up of the crisis Imprudent fiscal policies led to unsustainable public finances Deficit and public debt As a percentage of GDP Net borrowing of Gen. Govern. Public debt - right axis % of GDP Change Total balance -3,1-3,6-1,2-9,8-6,7 Structural balance -4,3-6, ,2-8,9 Structural primary balance -1,4-3,2-8,2-1,3-8,9 Public debt 68,3 71,6 83,1 93,3 25 Source: INE and Banco de Portugal. Fiscal indicators Huge fiscal expansion in Source: Banco de Portugal Success in stabilising the economy was short-lived Not timely-targeted-temporary. Risk of refinancing underestimated 11

12 Jan-2 Jun-2 Nov-2 Abr-3 Set-3 Fev-4 Jul-4 Dez-4 Mai-5 Out-5 Mar-6 Ago-6 Jan-7 Jun-7 Nov-7 Abr-8 Set-8 Fev-9 Jul-9 Dez-9 Mai-1 Out-1 Mar-11 Ago-11 Jan-12 Jun-12 Nov-12 I. The build-up of the crisis Imbalances exposed in the context of the economic and financial crisis led to sudden deterioration of financing conditions Unsustainable public finances Over-indebtedness and excessive bank leverage Anemic economic growth and low productivity year Government bond yields Spread against Germany in basis points Austria Belgium France Netherlands Finland Italy Spain Ireland Portugal Greece Private capital flows, programme financing and Eurosystem financing Percentage of 27 GDP Private inflows* TARGET liabilities Programme financing 5 Cumulative Financial Balance * Include other components not considered in the breakdown (mainly information pertaining to securities and other loans not obtained under the programme). Sources : Banco de Portugal, Reuters 12

13 Portuguese Economy Recent Developments and challenges ahead II. The Economic Adjustment Program 13

14 II. The Economic Adjustment Program Addressing the challenges of the Portuguese economy Fiscal consolidation Putting fiscal policy on a sustainable path Structural transformation Implementing structural reforms to contribute to potential growth Economic Adjustment Program Deleveraging and financial stability Reduction of debt and financing needs of the economy In April 211: Portugal requested for financial assistance The Economic Adjustment Program protects Government financing from market pressures, allowing an orderly adjustment of imbalances and time to build up confidence and credibility. 14

15 II. The Economic Adjustment Program Seven regular reviews Financial package The Economic Adjustment Program covers the financing needs of the General Government from 211 to June % After 7th disbursement (Jan-Feb 213) (*) To be approved It comprises a financial package amounting to EUR 78 billion in loans, including EUR 12 billion for a Bank Solvency Support Facility The implementation of the Program is assessed quarterly. 19% (*) Issuance amount Source: IGCP, January

16 198Q1 1982Q1 1984Q1 1986Q1 1988Q1 199Q1 1992Q1 1994Q1 1996Q1 1998Q1 2Q1 22Q1 24Q1 26Q1 28Q1 21Q1 212Q1 II. The Economic Adjustment Program Strong export performance Market share of exports and real effective exchange rate (Index1991Q1=1) Trade balance In Euro millions Imports contribution Exports contribution Trade balance change Market share of exports 7 6 Real effective exchange rate Souces: AMECO, Banco de Portugal, INE 16

17 II. The Economic Adjustment Program Fast correction of external imbalances External balance of goods and services positive for the first time since 1953 (*) Current and capital account % GDP, annual data External balance of goods and services % GDP, annual data 5% 212,8% 5% % 212,1% % -5% -5% -1% -15% -1% -2% -15% % (*) 1953 is the earliest observation available Sources: Banco de Portugal, INE 17

18 MAIN FISCAL INDICATORS In percentage of GDP II. The Economic Adjustment Program Significant Fiscal Adjustment in the period Change Change Overall balance -9,8-4,4-6,4-2, 3,4 Temporary measures 1,7 3,9,6-3,4-1,2 Special factors (a) -2,8-1,2-1,,2 1,9 Overall balance excluding temporary and special factors -8,7-7,1-6, 1,1 2,7 Cyclical component 1,7,8-1,1-2, -2,8 Structural balance excluding special factors (b) -1,4-8, -4,9 3,1 5,6 Interest expenditure 2,8 4,1 4,4,3 1,6 Structural primary balance excluding special factors -7,6-3,9 -,5 3,4 7,2 Public debt 94, 18,3 123,6 15,3 29,6 Change in public debt (in p.p.) 1,3 14,3 15,3 - - Primary balance effect 7,,4 2, - - Interest expenditure effect - Impact of economic growth,7 5, 8,1 - - Deficit-debt adjustments 2,6 8,9 5,2 - - (a) Special factors are considered to be transactions that have an one-off effect on the general government deficit but that cannot be treated as temporary measures in conformity with the Eurosystem definition. (b) Structural values are adjusted for the impact of the economic cycle and temporary measures. The cyclical component and temporary measures are computed by Banco de Portugal according to the methodologies adopted by the Eurosystem. Sources: Banco de Portugal, INE 18

19 II. The Economic Adjustment Program... based on a significant reduction of public expenditure Millions 1 General Government expenditure Total expenditure Primary expenditure Primary current expenditure Primary current expenditure excluding unemployment subsidies Source: Banco de Portugal 19

20 Cumul.: 2-21 Cumul.: II. The Economic Adjustment Program Increase in public debt ratio in reflects significant deficit-debt adjustments Breakdown of the change in the public debt ratio Percentage points of nominal GDP 2 15 Impact of economic growth Interest expenditure effect Primary balance effect Deficit-debt adjustments Change in debt Source: Banco de Portugal 2

21 II. The Economic Adjustment Program Increasingly stable banking system Reinforcement of capital Convergence to a more sustainable funding structure in the medium term National Banking System 167 Loans-to-deposits ratio Percentage Core Tier 1 Ratio, Portuguese Banking System Percentage 7,8 8,1 8,7 9,6 11,2 11,5 1 Eight Largest Banks Q2 21 Q4 Q2 Q4 Q2 Q Q2 Q4 Q2 Q4 Q2 Q Source: Banco de Portugal 21

22 UBS Handelsbanken Swedbank CS SEB Danske Nordea KBC HSBC Commerzbank Lloyds ING BNP Sistema Bancário Português DBK Credit Agricole Erste Intesa SanPaolo Barclays Unicredit BBVA SocGen DnB NOR Sabadell Santander UBI RBS Bankinter Popular B Monte Paschi Sistema Bancário Português UBI Popular BBVA Erste Intesa SanPaolo HSBC Unicredit KBC Sabadell DnB NOR Santander Bankinter Swedbank Lloyds ING Commerzbank B Monte Paschi Handelsbanken CS RBS SEB BNP Danske Nordea UBS Barclays SocGen Credit Agricole DBK II. The Economic Adjustment Program Portuguese banking system Core Tier 1 ratio compares relatively favourable with other European banking institutions Core Tier 1 ratio Core Tier 1 capital vis-a-vis total assets 2,% 18,% 16,% 8,% 7,% 6,% 6,7% 14,% 12,% 1,% 8,% 6,% 11,5% 5,% 4,% 3,% 2,% 4,% 2,%,% 1,%,% Source: Banco de Portugal 22

23 II. The Economic Adjustment Program Banks' profitability has been affected by adverse macroeconomic conditions and deleveraging Portuguese banks profitability indicators Percentage 2, 15, 1, ROE (before taxes) ROA (before taxes) (RHS) 1,4 1,2 1,,8, , 137, ,4,2, -5, -,2 -,4-1, Q13 -,6 Source: Banco de Portugal 23

24 II. The Economic Adjustment Program Wide range of structural reforms were implemented Examples Labor Market Product Market Judicial system Increase in working days: up to 7 additional (3 vacation + 4 holidays) Reduction of restrictions to individual dismissal: based on performance Restrictions on automatic extension of collective agreements Reduction of severance payments to align with EU average (from 3 days to 12 days per year worked for new permanent contracts; for remaining contracts 18 days per year of service in the first 3 years of the contract and 12 days for subsequent years) Unemployment subsidy entitlement period reduced from a maximum of 38 months to 26 months Approval of measures aiming at reducing the costs with energy (partly eliminating the excessive profits in this sector) Improve rental market legislation (set transition periods for the convergence of rents and negotiation mechanisms between landlords and tenants) Liberalization of the energy and gas market Adoption of a law on arbitration to facilitate out-of-court settlement Approval of new Code of Civil Procedure, submitted to Parliament Adoption of a new Judiciary Map, submitted to Parliament Reduction of the backlogged cases Business environm ent New insolvency code and corporate recovery New Competition Law harmonized with the EU legal competition framework Liberalization of regulated professions access and exercise Reduction of firms administrative burden: licensing requirements and other legal formalities Adoption of the new Urban Lease, Renovation works and Urban Rehabilitation Laws 24

25 Jan-1 Feb-1 Mar-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Sep-1 Oct-1 Nov-1 Dec-1 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jan-1 Feb-1 Mar-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Sep-1 Oct-1 Nov-1 Dec-1 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 II. The Economic Adjustment Program Financing conditions of the Treasury improved significantly Treasury Bonds yields Percentage 9/1 May 21: Extraordinary ECOFIN meeting: approval of the support package for Greece 25 2y 5y 1y 5 May 211: Formal Announcement of Portuguese Program y 5y 1y 6 Sep 212: Announcement of ECB s OMT 23 Jan 213: Return to bond markets (5y debt issue) 7 May 213: 1y debt issue Source: Bloomberg 25

26 II. The Economic Adjustment Program Interest rates on banks loans to non-financial corporations still high Total credit to non-financial corporations has been on a declining trend (stabilizing more recently) Interest rates on MFI Loans ( 1y) to Non-Financial Corporations -New Businesses Percentage Greece Portugal Germany Spain France Ireland Italy Euro area 2, 15, 1, 5,, Total Credit to Non-Financial Corporations Annual percentage change Sociedades Non-financial não corporations financeiras (excluding (excl. construção, construction, promoção real estate imobiliária and retail) e comércio) Construção, Construction, promoção real estate imobiliária and retail e comércio 3 2-5, 1-1, 27Jan 28Jan 29Jan 21Jan 211Jan 212Jan 213Jan Dez Mar Jun Set Dez Mar Jun Set Dez Mar Jun Set Dez Mar Jun Set Dez Fev Source: Banco de Portugal, ECB 26

27 II. The Economic Adjustment Program adjustment has come at high social cost Real GDP growth projections 211 = 1 Unemployment rate Percentage May 211 7th review May 211 7th review Source: IMF 27

28 Portuguese Economy Recent Developments and challenges ahead III. Challenges ahead 28

29 II. Challenges Ahead Short-term challenges Short/Medium term challenges Medium/ Long term challenges Meet fiscal targets for 213 and 214 (taking into account Constitutional Court decision on 213 Budget Law) Continue the process of returning to the financial markets Resume economic and employment growth <= recover of investment <= recover of bank credit Maintain political and social support Guarantee a successful exit from the Financial Assistance Programme Ensure the sustainability of public and external debt Protection from exogenous excessive market volatility European mechanisms of intervention in sovereign bond markets Ensure the sustainability of the Portuguese economy in the context of the euro area Fiscal policy based on rules that ensure medium-term sustainability Income distribution policy based on rules that ensure the maintenance of competitiveness (based on actual increases in productivity) Institutional framework that promote investment in areas of high value added, allowing the full materialization of the growth potential European Framework needs to support the credibility of the adjustment Banking Union, Fiscal Union, Economic Union Political Union 29

30 Portuguese Economy Recent Developments and challenges ahead Background slides 3

31 II. The Economic Adjustment Program Economic prospects, in the context of strong headwinds from abroad... March 213 Initial Programme May GDP and expenditure components (volume, %) Private consumption -4, -5,6-3,8 -,4-4,3-4,4 -,8 1,2 Public consumption -3,8-4,4-2,4 1,5-6,8-4,8-1,7, GFCF -11,3-14,5-7,1 1,9-9,9-7,4 2,4 3,8 Exports of goods and services 7,5 3,3 2,2 4,3 6,2 6, 6,4 6,4 Imports of goods and services -5,3-6,9-2,9 2,7-5,3-3, 2, 3,7 GDP -1,6-3,2-2,3 1,1-2,2-1,8 1,2 2,5 Contribution to change in GDP (p.p.) Domestic demand -6,2-7, -4,2,4-6,3-5, -,4 1,4 Net exports 4,5 4, 1,9,7 4,1 3,2 1,6 1,1 Prices HICP 3,6 2,8,7 1, 3,4 2, 1,4 1,5 Labour market (*) Unemployment rate (%) 12,7 15,7 18,2 18,5 12,1 13,4 13,3 12, Employment growth (%) -1,5-4,2-3,9 -,5-1,5-1,1,4 1,1 External accounts (% of GDP) Current and capital account -5,2,8 3,6 4,8-8,1-5,8-3,2-2,5 Balance of goods and services -3,3,1 2,8 3,8-3,6-1,6 -,3,3 Fiscal Accounts (% of GDP) (*) General government deficit 4,4 4,9 5,5 4, 5,9 4,5 3, 2,3 Public debt 18,1 123, 122,4 123,7 16,4 112,2 115,3 115, (*) March 213 projections for the period are from the Ministry of Finance - 7th review Sources: Banco de Portugal, IMF and Ministry of Finance 31

32 II. The Economic Adjustment Program... led to an adjustment of the fiscal path General government deficit targets % GDP, Initial targets - May 211-1, -2, 5th review - September 212 7th review - March 213-2,3-1,9-3, -3, -2,5-2,5-4, -4,5-4, -5, -6, -5,9-5, -4,5-5,5-7, Source: Ministry of finance 32

33 II. The Economic Adjustment Program Fiscal Adjustment in European countries under stress Official projections for the budget balance Percentage of GDP -2 Portugal Ireland Italy Greece Spain Notes: In the case of Portugal, the outturn for the period is corrected for the impact of temporary measures and other special factors, according to Banco de Portugal estimates. The values for Ireland and Spain are corrected for the impact of measures related with the assistance to the financial sector Sources: Portugal Fiscal Strategy Document; Greece - Medium-term Fiscal Strategy ; Ireland - Update of the Stability Programme; 33 Spain - Biannual Budget Plan ; Italy - Update of the Stability Programme.

34 Spain Germany France Angola United Kingdom Netherlands USA Italy Belgium China Brazil Sweden Morocco Algeria Poland II. The Economic Adjustment Program Change in exports profile new markets 3, Country weights of Portuguese exports 25, 2, , 1, 5,, Source: INE 34

35 II. The Economic Adjustment Program Change in exports profile higher technological intensity Structure of exports by technology content in (in percentage) Structure of exports by technology in (in percentage) 6.2 High-technology products Medium-hightechnology prod Medium-lowtechnology products Low-technology products 29.1 Source: CEPII - Chelem database. Source: CEPII - Chelem database. 35

36 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 II. The Economic Adjustment Program Cyclical unemployment increased significantly Structural unemployment has been on an upward trend 2, Unemployment rate In percentage 18, 16, 14, Observed NAIRU 12, 1, 8, 6, Source: Banco de Portugal, INE 36