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MINISTÉRIO DAS FINANÇAS 1

MINISTÉRIO DAS FINANÇAS

Vítor Gaspar

December 5, 2011

Portugal: Adjusting in

the Euro Area


1. The Economic and Financial Assistance Programme

2. Fiscal consolidation

3. Financial stability

4. Structural transformation

5. Conclusion: how will it work?

Outline


THE ECONOMIC AND FINANCIAL

ASSISTANCE PROGRAMME


TotalAlready

Disbursed1

Third Tranche

(to be

disbursed

before end

January 2012)

EFSM 26 14.1 2.7

EFSF 26 6.0 2.7

IMF 26 10.3 2.7

Total 78 30.4 8.0

In April 2011, an Adjustment Programme for Portugal was

agreed with the IMF, EC and ECB

The Economic and Financial

Adjustment Programme covers the

financing needs of General

Government for the period 2011 to

mid-2014.

It comprises a financial package

amounting to EUR 78 billion in

loans, including EUR 12 billion for

banking sector re-capitalization.

Each disbursement depends on the

technical mission’s quarterly

assessment about Portugal’s

performance on the

implementation of the Adjustment

Programme.

1 Net emissions

Source: IGCP – Portuguese Treasury and Government Debt Agency

After the 2nd Review, concluded on 16th

November, the programme implementation

is broadly on track

Financial package

EUR Billions


The 2011 budget deficit will be below the 5.9% of GDP limit.

Economic activity is estimated to contract by 1.6% in 2011 (against 2.2. forecast in the program) given a strong contraction in domestic demand and a strong export performance.

The 2012 budget has just been passed in Parliament with only about 10% of MPs voting against it.

The 2012 budget envisages an adjustment of more than 5 pp of GDP (more than 2/3 expenditure cuts).

The 2012 budget will achieve a primary surplus (of about 0.7 % of GDP).

The programme is mostly on track …


Objective

Putting fiscal policy on a sustainable path

– Debt-to-GDP ratio on a downward path from 2013 onwards.

– Mix of revenue-raising and expenditure-reducing measures, with priority

given to expenditure cuts

– Broad range of structural-fiscal measures

Stabilization of the financial sector

– Measures to address banking sector vulnerabilities and to reduce reliance

on Eurosystem financing

– Strengthen banks’ liquidity and solvency, including through higher capital

adequacy ratios and a solvency support fund

– Reinforcement of the supervisory and regulatory framework.

In-depth structural reforms to contribute to potential growth

– The Privatization Program is a flag ship in the agenda for structural

transformation

– It addresses decisively major obstacles to the proper functioning of an

open, market based economy in Portugal

The programme was designed to cope with the major

challenges of the Portuguese economy

Source: The Economic Adjustment Programme for Portugal

Fiscal

consolidation

Financial

stability

Structural

transformation

Pillar


0

10

20

30

40

50

60

70

80

90

100

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Net borrowing of Gen. Govern.Public debt - right axis

Large government deficits and increasing

public debtIncreasing external debt

Portuguese gross external debt

As a percentage of GDP

Portugal has accumulated imbalances that have been

exposed in the context of the economic and financial

crisis

Deficit and public debt


0

50

100

150

200

250

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Bank of PortugalSource: INE, Bank of Portugal and Ministry of Finance


0 200 400 600 800 1000 1200

Ireland

United Kingdom

Netherlands

Belgium

Portugal

Austria

France

Finland

Greece

Spain

United States

Several countries have large public debts… …as well as high level of external debt

Gross external debt in 2010


The Portuguese imbalances are not unique

Note: The external debt position of Ireland refers to 30 June 2010

Source: AMECO, Bank of Portugal and IMF

General government gross debt in 2010


Source: AMECO

0 50 100 150

Greece

Italy

United States

Belgium

Ireland

Portugal

United Kingdom

Germany

France

Austria

Malta


In the last adjustment programme (83-84), the

private sector had a rapid response

In 2009, the private sector started the

adjustment process (but …)

Borrowing Requirements by Institutional Sector


The private sector will be a key to the success of the

programme

GDP Growth rate

Percentage

-6

-4

-2

0

2

4

6

8

10

12

200

4

200

5

200

6

200

7

200

8

200

9

2010

Total economy Non-financial private sector

Financial sector General Government

-2,0

0,0

2,0

4,0

6,0

8,0

10,0

12,0

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

Private consumption( residents)

Public consumption GDP

Source: Bank of PortugalSource: Bank of Portugal


In 2010, Portugal started to reverse the debt accumulation

of the economy

Net Foreign Asset Position, Percentage of GDP

Source: Bank of Portugal

-120

-100

-80

-60

-40

-20

0

20

40

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

General Government

Financial Sector

Non-f inancial corporations and Households

Monetary Authorities

Net Foreign Assets Position


FISCAL CONSOLIDATION


The State Budget for 2012 represents a major step in the

fiscal consolidation process

Source: Ministry of Finance

In percentage of GDP

5,9

4,5

0,5

0,5

0,7

3,0

1,3

0,2

0,8

2,3

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

8,0

9,0

10,0

Deficit2011

Temporarymeasures

Interest Macroec.Scenario

AdjustmentEffort

Deficit2012

Initial forecast

Additional effort in

the State Budget

for 2012


The main fiscal adjustment is on the expenditure side


In percentage of GDP

1,4

3,5

0,8

0,60,2

0,5

1,7 5,3

0

1

2

3

4

5

6


General government balance will be

approaching equilibriumThe public debt will be decreasing

General government gross debt


In the end of the programme, public finances will be on a

sustainable path

General Government


Source: Ministry of FinanceSource: Ministry of Finance

80

90

100

110

120

2010 2011 2012 2013 2014 2015-10,0

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

2010 2011 2012 2013 2014 2015

Primary balance Overall balance


Major reforms in the Portuguese public finances

Improve budgetary control across all levels of Public Administration

Impose penalties for infringement of expenditure limits

Restructure State Owned Enterprises

Control and possibly renegotiate Public Private Partnerships agreements

Streamline Public Administration

Implement an ambitious privatization programme

– EDP

– REN

– Caixa Seguros

– GALP

– TAP

– ANA

– RTP

– CTT

– AdP


FINANCIAL STABILITY


The deleveraging process is ongoing, as well as

reinforcement of banks’ capital

Deleveraging process

– Regulators will ensure the appropriate financing of the

economy, mainly to the export sector

– Banks’ financing plans will be periodically revised and

adjusted, if necessary

Reinforcement of banks’ capital

– Portugal’s approach is consistent with the European

framework

– The Recapitalization Law has already been approved at

the Parliament

– All instruments accepted by regulators will be available in

Portugal, including the European Banking Authority (EBA)Source: Bank of Portugal

Next challenges

1. BoP requirements: Core Tier 1 of 9% (end-2011) and 10% (end-2012)

2. EBA requirements: Core Tier 1 of 9% (June 2012) + buffer

3. Impact of the transfer of banking pension funds and of the on-site

inspections special program

Credit-to-resources ratio

Domestic Banks, Percentage

Gross ratio

Net ratio

Net ratio of impairment


STRUCTURAL

TRANSFORMATION


The Structural Transformation Agenda of the Portuguese

Economy will enhance future economic growth

Broad range of structural reforms

Privatizations

Liberalization of the Market for Corporate Control

Competition: e.g. reduction of rents in sectors shielded from foreign competition

Labour market

Education and training

Energy

Telecommunications and postal services

Transports

Other services

Housing Market

Framework conditions

Public procurement

Business environment(f) Forecast


GDP growth

Percentage

-3

-2

-1

0

1

2

3

2010 2011(f) 2012(f) 2013(f) 2014(f) 2015(f)


In the last months, many structural reforms were put in

place including …

Telecommunica

tions

Framework

conditions

Main progresses

Reduction of management positions by 27% (-1712) and administrative units by 38%

(-137)

Lowering of mobile termination rates by 22%

Launch of the auction of spectrum for broadband wireless access

Presentation of the Strategic Plan for Transports, with a deep restructuration of both

network and operators of railways, roads, maritime and air transport sectors

Presentation of the New Urban Lease Act Law

Simplification of the administrative procedures for renovation

Revision of the framework for the valuation of the housing stock and land for tax

purposes

Presentation of a comprehensive plan to reduce court backlogs

Proposal of a new court’s personnel management plan

Approval of the new Law on Arbitration

Transports

Housing market

Public

administration


…but the priority for next year is to pace up structural

transformation

Labour market

Energy

Competition

Next steps

Reduction of unemployment benefits

Reform the employment protection system

Flexibilization of the working time arrangements

Liberalization of electricity and gas markets

Reduction of rents and increase in competition.

Liberalization of the access and exercise of regulated professions

Simplification of the administrative burden of companies

Reform of the court’s management

Implementation of a new judicial map

Operationalization of a specialized court for Competition, Regulation and Supervision,

Revision of the Competition law

Other services

Framework

conditions


CONCLUSION:

HOW WILL IT WORK?


General government balance will be

approaching equilibriumThe public debt will be decreasing

General government gross debt


In the end of the programme, public finances will be on a

sustainable path

General Government


Source: Ministry of FinanceSource: Ministry of Finance

80

90

100

110

120

2010 2011 2012 2013 2014 2015-10,0

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

2010 2011 2012 2013 2014 2015

Primary balance Overall balance


In the medium-term, the financing needs of the economy

will by close to zero

Net lending (+) or borrowing (-) of the total economy

Percentage of GDP

(f) Forecast


-14,0

-12,0

-10,0

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

General Government

Private Sector

Total Economy


Portugal has a unique opportunity to lay the ground for

sustained growth and employment creation

Broad internal

consensus,

both political and

social, about the

necessity of

adjustment

Support from our

international

partners

providing

financing up to

2014

Success of

the

programme

Structural transformation of the Portuguese economy

– Open to foreign investment and to the challenges of international competition

– Competitive location for physical and human capital

– Fully integrated in the Single European Market

– Development of a stability culture

Gradual build-up of credibility leading to successful return to financing at normal market conditions already towards the end of 2013.


MINISTÉRIO DAS FINANÇAS

Vítor Gaspar

December 2, 2011

Portugal: Adjusting in

the Euro Area


BACKGROUND SLIDES


Successful adjustment processes are possible without a

devaluation process, as shown by Latvia’s experience

Source: European Commision, “The Adjustment in Latvia”

Strong implementation of the budget

– Fiscal adjustment over 16% of GDP

since end 2008

– Two-thirds of the adjustment on

expenditure side

Financial sector stabilization

– Restructuring of Parex Banka and

MLB

– Strengthen of supervision and

regulation

Internal adjustment for

competitiveness

– Wage flexibility

– Enhancement of productivity

– Gains in competitiveness

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