The EU/IMF adjustment programme for Portugal: Achievements and remaining challenges Martin Hallet European Commission Economic and Financial Affairs Resident Advisor in Portugal 20 June 2012
Outline 1.Background 2.Programme implementation 3.Progress on economic adjustment 4.Debt sustainability and financing 5.Outlook
Background More than one year ago, the Portuguese government requested international financial support EU, ECB and IMF ('Troika') agreed with the government on an adjustment programme of about EUR 78 billion over 3 years, subject to policy conditionality ('Memorandum of Understanding', MoU)
Underlying problems Globalisation, sluggish productivity growth and a deterioration of competitiveness Easy financing conditions facilitated the build-up of private and public debt Accumulation of macroeconomic imbalances: high current account deficits and an increasing stock of external debt Problems further exacerbated by global financial crisis and euro area crisis
Net lending (+) or net borrowing (-), % of GDP 6 4 2 0-2 -4-6 -8-10 -12-14 -16 forecast 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Net lending (+) or net borrowing (-); general government - ESA 1995 Net lending (+) or net borrowing (-); households and NPISH Net lending (+) or net borrowing (-); corporations Net lending (+) or net borrowing (-); total economy
EU/IMF adjustment programme for Portugal Comprehensive action on three fronts Ambitious fiscal consolidation strategy Strengthening financial sector Deep and frontloaded structural reforms Deficit-to-GDP ratio from 10% in 2009 to 3% by 2013 Debt-to-GDP ratio on a downward path as of 2013 Streamlined public finances and administration Gradual and orderly deleveraging Strengthened capitalisation of banks Reinforced bank supervision Labour market Education Product and services markets Network industries Framework conditions (competition, judiciary,..)
Outline 1.Background 2.Programme implementation 3.Progress on economic adjustment 4.Debt sustainability and financing 5.Outlook
General features Good programme compliance due to full commitment by the government and a broad political and social consensus Efficient organisational structures for programme implementation (MoF, BdP, ESAME) Four positive reviews Technical assistance (EC/IMF, Commission Support Group)
Compliance performance 100% 80% 60% 40% 20% 0% 1st review 2nd review 3rd review Observed Ongoing Not observed/delayed
Source: DEO Fiscal consolidation (% of GDP)
Medium-term strategy of fiscal consolidation Fiscal Strategy Document (DEO) as medium-term budgetary framework Treaty on Stability, Coordination and Governance ( golden rule ) Reinforced framework of economic governance in EU/EA ( 6-pack, 2-pack )
Fiscal-structural measures Revised budgetary framework law Arrears strategy Revenue administration reform Public administration reform State-owned enterprises, privatisation, publicprivate partnerships Regional and local government
EUR billion % of deposits Financial stability Financial deleveraging, stronger capital buffers, improved supervision Loans and Deposits, 2007-2015 300 160 250 200 140 150 100 120 50 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Loans Deposits Loan to deposit ratio (rhs) 100
Structural reforms Increasing the flexibility of the economy and its capacity to adjust smoothly (e.g. labour market, housing market) More efficient use of resources and incentives for more investment and innovation (e.g. competition framework, revised insolvency law, 'Responsible Industries System, judiciary reform) More fairness and a better sharing of the burden of adjustment (e.g. rents in the network industries as well as in services and regulated professions; labour market reform)
Outline 1.Background 2.Programme implementation 3.Progress on economic adjustment 4.Debt sustainability and financing 5.Outlook
General considerations To be successful, reforms need to be comprehensive and well synchronised Significant increase in competitiveness and potential for more growth and jobs to be expected Expected shift of production from non-tradable to tradable goods and services Difficult to foresee the exact size and timeline of the impact of the various measures Unavoidable short-term losses in growth and jobs
Current account deficit (% of GDP) Net borrowing of the economy from the rest of the world, quarterly, year-on-year Source: National Statistical Institute (INE) national accounts
Relative price and cost indicators of Portugal (1995=100)
Real GDP (% quarterly y-o-y) Source: National Statistical Institute (INE) national accounts
Outline 1.Background 2.Programme implementation 3.Progress on economic adjustment 4.Debt sustainability and financing 5.Outlook
Debt sustainability scenarios Different scenarios under variations of assumptions on real GDP growth and interest rates (debt as % of GDP)
Financing needs and sources
Maturing debt
Long-term financing (10 year-bonds, on 19 June 2012)
Outlook Significant progress in adjustment Four positive programme reviews Important policy challenges ahead: (1) macroeconomic environment (2) reform process (3) return to markets