Portugal: economic adjustment and challenges ahead

Transcription

1 Portugal: economic adjustment and challenges ahead Carlos da Silva Costa Governor Madrid, November 10 th 2015 Forum Europa

2 Outline I. Adjustment of the Portuguese II. Lessons to be drawn III. Challenges ahead 2

3 Outline I. Adjustment of the Portuguese II. Lessons to be drawn III. Challenges ahead 3

4 I. Adjustment of the Portuguese What has caused the crisis? Imbalances In the context of. have led to: and ultimately to Private sector overindebtedness and excessive bank leverage Unsustainable public finances Anemic economic growth and low productivity Global Crisis Shift in the assessment of risk levels Concerns about the sustainability of public finances and the viability of banks Sudden stop In foreign private lending 4

5 I. Adjustment of the Portuguese The size and duration of an economic adjustment depend on: i) the size of the initial imbalances; ii) the amplifiers in the ; iii) how rapidly policy and the respond. 5

6 I. Adjustment of the Portuguese The size and duration of economic adjustment depend on: i) the size of the initial imbalances; ii) the amplifiers in the ; iii) how rapidly policy and the respond. 6

7 I. Adjustment of the Portuguese i) Initial imbalances Too much public and private debt, borrowed from abroad, mostly intermediated by the banks 400 Indebtness in % of GDP 0,0 External account in % of GDP (current account+ capital account) 350 Households -2, Non financial corporations General Government -4, , , , ,0 7 Source: Banco de Portugal

8 i) Initial imbalances Banks have focused on short-term results Loans to non-financial corporations ( millions) Non-Tradables Tradables I. Adjustment of the Portuguese - Overleveraged - Underestimation of credit risk - Concentration of credit in the nontradables sector (construction, retail) - Significant distribution of dividends ,5% 6151 Seven largest banking groups (EUR million) 35,2% Profits Dividends Payout ratio ,6% Source: Banco de Portugal 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Contribution non-performing loans in 2012 Non-financial corporations Increase in credit to firms with nonperforming de crédito loans das SNF com in Acréscimo incumprimento 2012 registado no final de 2012 Percentage % das empresas of com aumento firms de crédito with credit increase Nota: o gráfico totaliza 100% para cada série (1997 a 2012) Note: each series totals 100% in the chart.

9 I. Adjustment of the Portuguese i) Initial imbalances Debt has been mainly used to finance consumption and investment in non-tradable sectors Composition of expenditure (average rate of real growth) GDP Private consumption Public consumption GFCF Exports Imports EA GDP ,9 2,1 2,4 1,7 4,4 4,6 1, ,3 1,7 1,9-0,4 3,7 3,2 1, ,7 3,6 3,9 7,0 5,9 7,8 2, ,1 1,5 1,7-1,4 5,2 3,7 2, ,3 0,5 0,6-2,7-0,3 0,1-0,7 9 Sources: INE and AMECO

10 I. Adjustment of the Portuguese i) Initial imbalances Inefficient allocation of resources has pushed wages and costs upwards, harming competitiveness 6 Productivity and wages (total, real rate of change) 140 Effective exchange rate deflated by relative unit labor costs Portugal Spain Ireland Germany France Greece Produtividade Labour productivity do trabalho Remunerações Compensation por per trabalhador employee Sources: AMECO, Banco de Portugal and INE

11 I. Adjustment of the Portuguese i) Initial imbalances Thus, despite huge capital inflows, actual growth was very low and potential growth declined throughout the period Gross Domestic Product (real growth rate, 1999=100) Portugal Spain Germany France Ireland Greece Italy 4,0 3,0 2,0 1,0 0,0 Potential output growth 120-1, , HP BK CF CD CES 11 Sources: AMECO, Banco de Portugal and INE

12 I. Adjustment of the Portuguese The size and duration of economic adjustment depend on: i) the size of the initial imbalances; ii) the amplifiers in the ; iii) how rapidly policy and the respond. 12

13 I. Adjustment of the Portuguese ii) The amplifiers Close link between domestic banks and the sovereign fears about the solvency of the sovereign have raised fears about the solvency of the banks in a feedback cycle Outstanding amounts of monetary policy operations of Portuguese banks ( billions) In May 2010 the Portuguese banks financing from the ECB jumped 18 billion -20 MRO LTRO Deposit facility Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan Sources: Banco de Portugal and INE At a first stage access to capital markets by banks was replaced by Eurosystem funding and banks increased the public debt share in their portfolios. At a second stage, sovereign funding was ensured by official loans under the financial assistance programme. The programme included a facility dedicated to the capitalisation of the banking system.

14 I. Adjustment of the Portuguese ii) The amplifiers Distortions in the labour market have resulted in an overshoot of unemployment with further negative impact on domestic demand and hindering fiscal consolidation Unemployment rate and contribution by duration Long-term unemployment (more than 12 months) Unemployment (les than 12 months) Unemployment rate Increase in unemployment has exceeded what would be expected taking into account the drop in economic activity. This has in part reflected the transition to a more exportoriented. The labour shedding during the crisis was accelerated due to the high share of temporary workers Sources: Banco de Portugal and INE

15 I. Adjustment of the Portuguese The size and duration of economic adjustment depend on: i) the size of the initial imbalances; ii) the amplifiers in the ; iii) how rapidly policy and the respond. 15

16 I. Adjustment of the Portuguese iii) How rapidly policy and the have responded Sizeable adjustment of imbalances - Net lender position (improvement of around 12 p.p in the current and capital account between 2010 and 2014) - Weight of exports in GDP increased by 10 p.p. between 2010 and Current and capital account (% of GDP) Weight of exports in GDP percent (p) Goods and services account Secondary income account Primary income account Capital account (p) 16 Sources: Banco de Portugal and INE

17 I. Adjustment of the Portuguese iii) How rapidly policy and the have responded Sizeable adjustment of imbalances - Strong and unprecedented fiscal consolidation effort - A significant part of the increase in debt in the period was due to the reclassification of entities that were previously outside the general government and to the support to financial institutions 3,0 2,0 1,0 0,0-1,0-2,0-3,0-4,0-5,0-6,0 The composition of the fiscal adjustment Percentage points of GDP Contribution from revenue Contribution from expenditure Change in primary balance Sources: Banco de Portugal and INE Evolution of General Government Gross Debt Percent of GDP Note: Chart reproduced from the IMF Country Report No. 14/306, October 2014

18 I. Adjustment of the Portuguese iii) How rapidly policy and the have responded Restructuring of the - Reallocation of resources towards exports and more productive firms 130 Evolution of GDP composition (index: 2008Q1=100) 115 GVA and GVA per worker (index: 2008Q1=100) GDP Private consumption Public consumption GFCF Exports of goods and services 95 Gross Value Added Gross Value Added per worker Sources: Banco de Portugal and INE

19 iii) How rapidly policy and the have responded Strengthening of the banking system - Recognition of impairments (about 40 billion in the period) - Increased solvency and liquidity I. Adjustment of the Portuguese - Orderly deleveraging process, consistent with private sector deleveraging Core Tier 1 ratio (until 2013) and CET 1 ratio (2014) End of period Loan-to-deposits ratio (%) End of period 19 Source: Banco de Portugal

20 iii) How rapidly policy and the have responded Latest macroeconomic projections by Banco de Portugal - GDP growth slightly above the euro area in Gradual recovery of domestic demand and strong export dynamics - Sustained correction of macroeconomic imbalances Projection October 2015 (annual rate of change, per cent) Weights (p) Gross Domestic Product Private Consumption Public Consumption Gross Fixed Capital Formation Domestic Demand Exports Imports Current plus Capital Account (% of GDP) Trade Balance (% of GDP) Harmonized Index of Consumer Prices (HICP) I. Adjustment of the Portuguese 20 Note: (p) projected Sources: Sources: Banco de Portugal INE and and Banco INE de Portugal.

21 Outline I. Adjustment of the Portuguese II. Lessons to be drawn III. Challenges ahead 21

22 II. Lessons to be drawn First lesson An unsustainable economic policy has huge costs as it requires not only a cyclical adjustment but also a structural adjustment which is typically more painful and prolonged in time. Resources need to be reallocated from the nontradable to the tradable sector. Resources misallocation eventually leads to a significant waste of capital and to a rise in long-term unemployment. 22

23 II. Lessons to be drawn Second lesson In the decision making process, policy makers must consider future implications of the various options at the macro level and the micro level. Inconsistent policies generate inconsistent responses from economic agents, particularly in terms of investment, resulting in high (and often irreversible) costs to individuals, families and to society. 23

24 II. Lessons to be drawn Third lesson Past experience reveals that self-regulation and self-discipline of the financial markets do not work. This is particularly so in a context where incentives towards the short term predominate (credit volume is more important than credit quality; bonuses linked to the volume of credit; underprovisioning of credit risk; significant dividend distribution): Strengthen financial market regulation to reduce risks. Adopt a more intrusive, forward-looking and risk-focused micro-prudential supervision approach (create buffers to absorb losses in adverse situations). 24

25 II. Lessons to be drawn Fourth lesson From the point of view of a central bank that aims at safeguarding price stability and financial stability: Past experience reveals that disturbances to price and financial stability are the mirror of decisions taken by economic agents. Macro-prudential policy is crucial to prevent behaviours that at the aggregate level have the potential to inflict serious costs to the real in the future. 25

26 Outline I. Adjustment of the Portuguese II. Lessons to be drawn III. Challenges ahead 26

27 Nominal GDP growth rate III. Challenges ahead 1 Continue fiscal consolidation Fulfilling the Fiscal Compact ensures debt sustainability The quality of the policy measures is crucial to improve economic growth Fiscal balance required to reduce the debt ratio by 1/20 of the difference relative to the reference value Public debt ratio to GDP Overall balance 130% Primary balance 1,0% 2,2% 7,0% 1,5% 1,6% 6,4% 2,0% 1,0% 5,8% 2,5% 0,3% 5,1% 3,0% -0,3% 4,5% 3,5% -0,9% 3,9% 4,0% -1,5% 3,3% Note: The shaded cells indicate the different combinations of nominal GDP growth rate where the overall balance that fulfils the debt criterion is higher than the MTO. For a debt ratio of 130 per cent and per cent nominal GDP growth, we need to ensure balanced public accounts. 27 Source: Banco de Portugal

28 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 III. Challenges ahead 2 Continue private sector deleveraging Indebtedness levels remain above the euro area average They affect consumption and investment decisions of the most indebted agents Financial debt in Portugal: households and nonfinancial corporations (% GDP) 0 Households - Portugal Corporations (non-consolidated) - Portugal Corporations (consolidated) - Portugal 28 Source: Banco de Portugal

29 % III. Challenges ahead 3 Improve banking sector profitability Assess the viability and sustainability of Business Model Improve cost to income ratio Adapt business models to lower demand for credit, Banking Union and digital Improve Governance and Risk Management ROA & ROE Portuguese ranking system Value in the period H2014 1H Return on Equity (ROE) Return on Assets (ROA) - rhs Note: Return is measured by earnings before taxes and minority interests. 29 Source: Banco de Portugal

30 III. Challenges ahead 4 Improve long-run growth Allocate savings in line with the optimisation of returns Increase investment in physical and human capital Upgrade firms position in the value chain Improve the quality of management Strengthen attractiveness of the for FDI Improving the long-run growth of the Portuguese is also crucial to alleviate the costs of the ongoing adjustment of accumulated imbalances. 30

31 Forum Europa Thank you.