for Portugal: Achievements and remaining challenges Martin Hallet - - PowerPoint PPT Presentation

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
• f 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

• 16
• 14
• 12
• 10
• 8
• 6
• 4
• 2

2 4 6 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 forecast

Net lending (+) or net borrowing (-), % of GDP

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 Gradual and orderly deleveraging Labour market Education Debt-to-GDP ratio on a downward path as of 2013 Strengthened capitalisation of banks Product and services markets Network industries Streamlined public finances and administration Reinforced bank supervision Framework conditions (competition, judiciary, ..)

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 Gradual and orderly deleveraging Labour market Education Debt-to-GDP ratio on a downward path as of 2013 Strengthened capitalisation of banks Product and services markets Network industries Streamlined public finances and administration Reinforced bank supervision Framework conditions (competition, judiciary, ..)

EU/IMF adjustment programme for Portugal

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

0% 20% 40% 60% 80% 100% 1st review 2nd review 3rd review Observed Ongoing Not observed/delayed

Fiscal consolidation

(% of GDP)

Source: DEO

• 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’)

Medium-term strategy of fiscal consolidation

Fiscal-structural measures

• Revised budgetary framework law
• Arrears strategy
• Revenue administration reform
• Public administration reform
• State-owned enterprises, privatisation, public-

private partnerships

• Regional and local government

Financial stability

Financial deleveraging, stronger capital buffers, improved supervision

Loans and Deposits, 2007-2015

50 100 150 200 250 300 2007 2008 2009 2010 2011 2012 2013 2014 2015 EUR billion 100 120 140 160 % of deposits Loans Deposits Loan to deposit ratio (rhs)

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
• f 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