© 2012 International Monetary Fund
October 2012IMF Country Report No. 12/292 October 15, 2012 October 24, 2012 January 29, 2001September 11, 2012 January 29, 2001
Portugal: Fifth Review Under the Extended Arrangement and Request for Waivers of Applicability and
N
onobservance of End-September Performance Criteria—Staff Report; Press Release on the Executive Board Discussion; and Statement by theExecutive Director for Portugal.
In the context of the Fifth Review Under the Extended Arrangement and Request for Waivers of Applicability and Nonobservance of End-September Performance Criteria, the following documentshave been released and are included in this package:
The staff report for the Fifth Review Under the Extended Arrangement and Request for Waivers of Applicability and Nonobservance of End-September Performance Criteria, prepared by a staff team of the IMF, following discussions that ended on September 11, 2012,with the officials of Portugal on economic developments and policies. Based on informationavailable at the time of these discussions, the staff report was completed on October 15, 2012.The views expressed in the staff report are those of the staff team and do not necessarilyreflect the views of the Executive Board of the IMF.
A Press Release summarizing the views of the Executive Board as expressed during itsOctober 24, 2012 discussion of the staff report.
A statement by the Executive Director for Portugal.The documents listed below have been or will be separately released.Letter of Intent*Memorandum of Economic and Financial Policies*Technical Memorandum of Understanding*Letter of Intent to the European Commission and the European Central Bank*Memorandum of Understanding on Specific Economic Policy Conditionality**Also included in Staff ReportThe policy of publication of staff reports and other documents allows for the deletion of market-sensitiveinformation.
Copies of this report are available to the public fromInternational Monetary Fund
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International Monetary FundWashington, D.C.
INTERNATIONAL MONETARY FUNDPORTUGAL
Fifth Review Under the Extended Arrangement and Request for Waivers of Applicability and
N
onobservance of End-September Performance Criteria
Prepared by the European Department(In consultation with other departments)Approved by Poul M. Thomsen and Martin MühleisenOctober 15, 2012
Executive Summary
Developments.
The authorities have made good progress in reducing macroeconomic imbalancesunder the program. But after a strong start, the program has entered a more challenging phase. Onthe economic front, a large and durable fiscal gap has emerged due to a shift in the composition of output from domestic demand to less-taxed net-exports. And, politically, the broad-basedconsensus that has buttressed the program to date is being tested.
Program performance.
All end-June PCs and structural benchmarks for the review were met.However, the end-September PC on the government deficit was missed.
Focus.
Discussions centered on how best to address the revenue shortfall in the context of the 2013 Budget. The authorities and staff agreed that there was scope to recalibrate the fiscal path while maintaining a sufficient degree of frontloading to stabilize debt in the very near-termand ensure the required fiscal adjustment can be completed within the program period. Even inthe wake of these developments, yields have remained in the lower end of the trading range sincethe program was approved.
Outlook.
The recession is set to extend into next year—reflecting the slowdown in economicactivity in the euro area as well as fiscal drag from additional adjustment that is now needed.Output is likely to contract by around 1 percent next year. External adjustment continues apace,with the current account deficit projected to fall below 2 percent of GDP next year. Under thenew baseline public debt will peak at a higher level—at some 124 percent of GDP in 2014
Risks.
The risks to the macroeconomic outlook and fiscal targets are significant and tilted to thedownside. To mitigate these risks, staff is relying on more conservative macroeconomicassumptions and tax elasticities. An improvement in the broader euro area economic environmentwill be critical to the program’s success.
Staff supports the authorities’ request for completion of the fifth review
, including waivers of applicability and nonobservance of end-September performance criteria. The purchase subject tocompletion of this review would be in an amount equivalent to SDR 1.259 billion.
Mission.
Discussions took place during August 28–September 11 in Lisbon. The staff teamcomprised A. Selassie (head), D. Gershenson, M. Goretti, H. Lin, S. Roudet, and I. Vladkova-Hollar (all EUR); A. Piris (SPR); A. Lemgruber and M. Soto (FAD); M. Anthony and D. Parker (MCM); W. Bergthaler (LEG); and A. Jaeger and M. Souto (Res. Reps). Mr. Cardoso (OED) also participated in meetings.
2
Contents PageI. Background .............................................................................................................................4
II. Recent Developments ............................................................................................................5
III. Policy Discussions .............................................................................................................12
A. Outlook and Risks: A More Protracted Recession ..................................................12
B. Fiscal Policy: Balancing Growth and Debt Sustainability Considerations .............15
C. Safeguarding Financial Stability .............................................................................20
D. Boosting Competitiveness and Growth...................................................................23
IV. Financing ...........................................................................................................................24
V. Staff Appraisal ....................................................................................................................25
Tables1. Selected Economic Indicators – Program Baseline .............................................................30
2a. General Government Accounts, in Billions of Euros.........................................................31
2b. General Government Accounts, in Percent of GDP ..........................................................32
3. General Government Stock Positions ..................................................................................33
4. General Government Financing Requirements and Sources ...............................................34
5. Balance of Payments, 2009–17 ............................................................................................35
6. External Financing Requirements and Sources, 2009–17 ...................................................36
7. Selected Financial Indicators of the Banking System, 2007–12Q1 .....................................37
8. Monetary Survey, 2010–17 ..................................................................................................38
9. External Debt Sustainability Framework, 2007–17 .............................................................39
10. Government Debt Sustainability Framework, 2008–30 ....................................................40
11. Access and Phasing Under the Extended Arrangement, 2011–14 .....................................41
12. Indicators of Fund Credit ...................................................................................................42
Figures1. High Frequency Indicators ...................................................................................................43
2. Labor Market Indicators ......................................................................................................44
3. Competitiveness Indicators ..................................................................................................45
4. Balance of Payments Developments ....................................................................................46
5. Financing of the Economy, 2008–July 2012 .......................................................................47
6. Financial Indicators ..............................................................................................................48
7. External Debt Sustainability: Bound Tests ..........................................................................49
8. Government Debt Sustainability: Bound Tests....................................................................50
Boxes1. The SME Sector in Portugal ................................................................................................28
2. Comprehensive Labor Market Reform ................................................................................29
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