Portugal: policies, achievements and challenges

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1 MINISTÉRIO DAS FINANÇAS Portugal: policies, achievements and challenges MINISTÉRIO DAS FINANÇAS 1

2 Outline 1. On the way to become the difficult Portuguese case 2. The Economic Adjustment Program 3. Fiscal consolidation 4. Deleveraging and financial stability 5. Structural transformation 6. Conclusion: how will it work? MINISTÉRIO DAS FINANÇAS 2

3 ON THE WAY TO BECOME THE DIFFICULT PORTUGUESE CASE MINISTÉRIO DAS FINANÇAS 3

4 Portugal s imbalances exposed in the context of the economic and financial crisis 10-year Government bond yields Spread against Germany in basis points Macroeconomic imbalances and structural weaknesses that have been accumulated over more than a decade 1. Unsustainable public finances 2. Over-indebtedness 3. Anemic economic growth and low productivity Austria Belgium France Netherlands Finland Italy Spain Ireland Portugal Greece Source: Bloomberg MINISTÉRIO DAS FINANÇAS 4

5 Unsustainable public finances Persistent government deficits and increasing public debt Fragile public finances Deficit and public debt As a percentage of GDP Structural Current Primary Balance As a percentage of GDP Net borrowing of Gen. Govern. Public debt - right axis Portugal Euro Area Source: INE, Bank of Portugal and Ministry of Finance Source: AMECO and Ministry of Finance MINISTÉRIO DAS FINANÇAS 5

6 Over indebtedness Increasing indebtedness of the private sector Increasing external debt Debt of the Households and Non-financial Corporations As a percentage of GDP Portuguese gross external debt As a percentage of GDP Non-financial corporations Households (a) (*) Financial Debt Source: Bank of Portugal Source: Bank of Portugal MINISTÉRIO DAS FINANÇAS 6

7 Insufficient conditions to foster economic growth Obstacles Restrictions on the market for corporate control Protection of several sectors of the economy Weak conditions to entrepreneurial activity Poor functioning of the justice system Rigidity of the labor market Consequences Insufficient attraction of direct foreign investment Capital accumulation in non-tradable goods and services sectors Lack of competition in several sectors Low levels of innovation and productivity growth High levels of youth and long-term unemployment MINISTÉRIO DAS FINANÇAS 7

8 Disappointing performance of the Portuguese economy GDP Portugal and some of its European partners 2000 = Germany Greece France EA -17 Ireland Spain Italy Portugal In the period , the GDP of Portugal grew at an annual average rate of 1%, compared with 1.4% in the euro area Source: Eurostat MINISTÉRIO DAS FINANÇAS 8

9 THE ECONOMIC ADJUSTMENT PROGRAM MINISTÉRIO DAS FINANÇAS 9

10 Adjustment Program agreed with the IMF, EC and ECB in April 2011 Key facts Financial package EUR Billions The Economic Adjustment Program covers the financing needs of General Government for the period 2011 to mid Already disbursed (1) 5th Disebursement (July 2012) To be disbursed It comprises a financial package amounting to EUR 78 billion in loans, including EUR 12 billion for banking sector recapitalization. 4,1 20,6 53,3 EFSM EFSF 20,0 14,9 Each disbursement depends on the technical mission s quarterly assessment about Portugal s performance on the implementation of the Adjustment Program. (1) Net issuances Source: IGCP, May 2012 After the 4 th Review (completed in June 4) the program implementation was on track IMF 18,4 Statement by the EC, ECB and IMF on the Fourth Review Mission to Portugal: MINISTÉRIO DAS FINANÇAS 10

11 A balanced Program to cope with the major challenges of the Portuguese economy Fiscal consolidation Putting fiscal policy on a sustainable path Structural transformation Implementing structural reforms to contribute to potential growth The Economic Adjustment Program Deleveraging and financial stability Reduction of debt and financing needs of the economy The Economic Adjustment Program protects Government financing from market pressures, allowing an orderly adjustment of imbalances and time to build up confidence and credibility. MINISTÉRIO DAS FINANÇAS 11

12 Main macroeconomic indicators 4th Review, June GDP and components (in real terms, %) GDP -1,6-3,0 0,2 Private Consumption -3,9-6,0-0,5 Public Consumption -3,9-3,2-2,6 Investment (GFCF) -11,4-12,2-0,5 Exports of goods and services 7,4 3,5 3,5 Imports of goods and services -5,5-6,2 0,9 Prices (%) HICP 3,6 2,7 1,1 Current and Capital Account (% GDP) Current Account -6,4-3,9-3,4 Current plus Capital Account -5,2-2,7-2,2 Labor market (%) Unemployment rate 12,7 15,5 15,9 Fiscal accounts (% GDP) Budget balance -4,2-4,5-3,0 Public debt 107,8 114,4 118,6 Source: Ministry of Finance, June 2012 MINISTÉRIO DAS FINANÇAS 12

13 Reducing uncertainty: Portugal is delivering in all fronts At the start of the Program (in May 2011), Portugal faced a very uncertain outlook Main risks 1 Weakening of political support for the Program 2 Unfavorable macro-economic developments 3 Missing the fiscal targets 4 Uncertainty regarding the stability of the financial sector 5 Insufficient pace of structural reforms Major outcomes Broad political consensus Social support to the Program Milder recession than expected Stronger than expected external adjustment Dynamic exports Major reduction in overall and structural deficits Progress in institutional reforms Increase in banks capital Reduction of credit-to-deposit ratio Increase in transparency: on-site inspections Success of privatizations process Labor market tripartite agreement Broad range of implemented measures MINISTÉRIO DAS FINANÇAS 13

14 FISCAL CONSOLIDATION MINISTÉRIO DAS FINANÇAS 14

15 Overall deficit in 2011 close to euro area average General Government Deficit 2011 As percentage of GDP 13,1 9,1 8,5 8,3 5,2 4,7 4,2 4,1 3,9 3,7 2,6 1,0 Ireland Greece Spain United Kingdom France Netherlands Portugal Euro Area Italy Belgium Austria Germany Source: Eurostat, Excessive Deficit Procedure, April 2012 Without the partial transfer of banks pension funds, overall deficit would be 7,7% of GDP MINISTÉRIO DAS FINANÇAS 15

16 Portugal s fiscal adjustment was sizable in 2011 Fiscal Adjustment Change in general government cyclically adjusted overall balance Percentage points of GDP 3,3 2,8 2,2 1,9 1,5 1,2 1,2 1,2 0,7 0,4-0,3-0,5 Greece Portugal (1) Ireland United Kingdom Austria France Euro Area Spain Italy Germany Netherlands Belgium (1) Portugal cyclically adjusted deficit in corrected for the transfer of banks pension funds (3,5% of GDP) Source: IMF, "Fiscal Monitor", April 2012 MINISTÉRIO DAS FINANÇAS 16

17 and will be stronger in 2012 Fiscal Adjustment Change in general government cyclically adjusted overall balance Percentage points of GDP 4,2 3,0 2,4 2,2 1,8 1,7 1,5 1,4 1,2 0,7 0,6-0,1 Portugal (1) Spain Italy Greece Ireland Belgium Netherlands Euro Area United Kingdom France Germany Austria (1) Portugal cyclically adjusted deficit in 2011 corrected for the transfer of banks pension funds (3,5% of GDP) Source: IMF, "Fiscal Monitor", April 2012 MINISTÉRIO DAS FINANÇAS 17

18 Portuguese public debt is sustainable Feb-Mar 2012 projections Government Debt Sustainability Framework: Baseline As percentage of GDP Greece - 2 nd Program (1) Ireland - 5 th Review (2) Portugal - 3 rd Review (3) (1) Request for Extended Arrangement; March 9, 2012 (2) 5 th Review; February, (3) 3 rd Review; March 21, 2012 Source: IMF, Staff Reports MINISTÉRIO DAS FINANÇAS 18

19 Portuguese public debt is sustainable Jun 2012 projections Government Debt Sustainability Framework: Baseline As percentage of GDP ,5 120,3 119,5 117, ,4 118,6 117,7 115, , ,8 100 Portugal: Ireland: 3 rd Review (1) 5 th Review (2) 4 th Review (3) 6 th Review (4) 95 93, , Source: (1) IMF, Staff Report, 3 rd Review; March 21, 2012 (3) Ministry of Finance, Jun 2012 (2) IMF, Staff Report, 5 th Review; February, (4) DOF EDP & SPU Return, Jun 2012 MINISTÉRIO DAS FINANÇAS 19

20 under different growth scenarios ECB Projections Baseline scenario Adverse growth scenario Impact of structural reforms Baseline with smaller consolidation effort GDP growth scenarios Annual percentage changes Public debt scenarios As percentage of GDP Government debt dynamics for Portugal quickly stabilize in all scenarios Without taking into account the impact of structural reforms on growth: debt fall below 100% of GDP in 2020 In an adverse scenario of higher GDP decline in the short-term: debt reach a maximum of 124% of GDP in 2013 and decline to below 110% of GDP in 2020; Taking into account the impact of structural reforms: - Real GDP growth increases from 2015 onwards (3% after 2017 against 1.6% in the baseline scenario) - Large impact on debt dynamics that fall below 80% of GDP in 2020 Sources: Eurostat and ECB calculations; ECB Monthly Bulletin March 2012 MINISTÉRIO DAS FINANÇAS 20

21 Important progress in the institutional reform front NON-EXHAUSTIVE Public financial manage ment Public Adminis tration SOEs and PPPs Major actions Approval of the Spending Commitments Control Law Adoption of medium-term expenditure ceilings Establishment of the Portuguese Public Finance Council Adjustment Program for the Autonomous Region of Madeira Creation of the new Tax and Customs Authority Reduction of management positions (27%) and administrative units in central administration (40%) Negotiations with public sector labor unions on working time flexibility and geographical mobility Significant cost reductions in SOE (e.g.: voluntary redundancy programs) New fiscally-prudent PPPs institutional framework: enhanced role of MoF Ongoing revision of all PPP contracts by a top-tier accounting firm (to be completed by end-june) Next challenges Improve budgetary control across all levels of Public Administration Reduction of arrears Changes to national law in order to include the golden rule and the debt reduction rule from the Treaty on Stability, Coordination and Governance in the EMU Develop a public financial management strategy for the next three years Extend streamline measures to regional and local administration Comprehensive review of public pay scales Operational balance for SOEs as a whole by end-2012 Conditional on audit results, renegotiation of PPP contracts MINISTÉRIO DAS FINANÇAS 21

22 DELEVERAGING AND FINANCIAL STABILITY MINISTÉRIO DAS FINANÇAS 22

23 Stronger than expected external adjustment Better performance of current account than initial projections Current and capital account close to balance Current account As a percentage of GDP 0, Balance of payments EUR Millions ,0-4,0-6,0-6,5-4,1-3,4-2,7-2, Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q ,0-10,0-6, ,0-12,0-9,9-9,0 Actual (1) Forecast (2) Capital account Current and capital accounts Current account (1) Bank of Portugal, BP Stat, March 2012; (2) IMF, Staff report: Request for a Three-Year Arrangement Under the Extended Fund Facility, May 2011 MINISTÉRIO DAS FINANÇAS 23

24 Fast correction of external imbalances under adjustment programs Current account As a percentage of GDP, t = first year of the Adjustment Programs 4,0% 3,5% 2,0% 0,0% -2,0% -4,0% -6,0% -8,0% 0,5% 0,1% t-1 t t+1 t+2 t+3 t+4-4,0% -2,7% -3,7% -3,4% -4,1% -6,5% -8,4% -7,2% -6,7% 1st Program (1) (t=1978) 2nd Program (1) (t=1983) 3rd Program - Forecast (2) (t= 2011) -10,0% -12,0% -10,0% -9,9% -9,0% 3rd Program - Actual (3) (t= 2011) -14,0% -12,9% (1) Bank of Portugal, Long series (2) IMF, Staff report: Request for a Three-Year Arrangement Under the Extended Fund Facility, May 2011 (3) Bank of Portugal, BP Stat, March 2012 MINISTÉRIO DAS FINANÇAS 24

25 Significant contribution from exports growth Strong exports growth Exports market share is recovering Exports Index (2006=100) External demand and market share Annual rate of change Services Total Exports Goods (p) Source: Bank of Portugal Source: Bank of Portugal, Economic Bulletin, Spring 2012 MINISTÉRIO DAS FINANÇAS 25

26 Export profile is considerably changing Higher product diversification Export composition by product, Goods As percentage of total % 20% 19% Increase in weight Higher diversification: no group representing more than 15% of total Traditional industries substituted by more technology intensive industries (Portugal is not a pajama republic ) 13% 14% 14% 13% 14% 6% 6% 5% 5% 4% 4% 4% 5% 7% 6% 8% 8% 3% 5% 9% 5% 4% 4% 4% 3% 3% 6% 4% 4% 5% 2% 5% 9% Pharmaceuticals and Other Chemicals Prepared Food and Tobacco Plastics, Rubber products Base Metals Oil and Other Minerals Wood, Cork Ceramic, Stone and Glass Footwear, Others Pulp, Paper Textile Products Vehicles and parts Electrical and Mechanical Machinery Source: National Statistics Office MINISTÉRIO DAS FINANÇAS 26

27 Export profile is considerably changing Higher geographical diversification Exports destination by country, Goods As percentage of total Average annual growth rate Spain 25% 28% % 8% Germany 13% 14% 4% 20% France 13% 12% 3% 17% Angola 3% 6% 14% 22% United Kingdom 7% 5% -3% 7% Italy 4% 4% 1% 11% United States 6% 4% -7% 13% Belgium 3% 3% 4% 28% Brazil 1% 1% 18% 33% China 1% 1% 13% 68% Source: National Statistics Office MINISTÉRIO DAS FINANÇAS 27

28 Export profile is considerably changing Higher technological intensity Export composition by technological intensity, Goods As percentage of total High Mediumhigh Mediumlow Low Source: INE and GEE, Boletim Mensal de Economia Portuguesa, April 2012 MINISTÉRIO DAS FINANÇAS 28

29 International investment position is reversing International Investment Position As a percentage of GDP General Government Financial Sector Monetary Authorities Non-financial corporations and households Total Economy Source: Bank of Portugal and INE MINISTÉRIO DAS FINANÇAS 29

30 In 2012 Q1, exports of goods continued dynamic Exports of goods, 2012 Q1 y-o-y growth (%) Top contributors to growth Percentage points Jan-Mar y-o-y % 13,6 13,5 73,8 14,5 13,1 14,5 11,4 X 11,6 8,3 3,9 2,0 1,9 1,7 1,2 0,9 Jan Feb Mar Jan-Mar Mineral fuels and oils Transport equipment Machinery Ores and metals Agricultural products and food Others Source: GEE, Sintese Estatística de Comércio Internacional, May 2012 MINISTÉRIO DAS FINANÇAS 30

31 Markets outside EU are being the main contributors Exports of goods, Jan-Mar 2012 Contribution to growth (p.p.) Jan-Mar y-o-y % 5,4 10,7 7,6 11,4 20,1 32,3 50,5 29,8 186,2 53,9 4,1 1,5 1,0 0,6 0,6 0,4 7,5 1,7 11,6 1,4 1,4 0,4 2,6 Total Intra EU Germany France United Belgium Others Extra USA Angola China Morocco Others Kingdom EU Source: GEE, Sintese Estatística de Comércio Internacional, May 2012 MINISTÉRIO DAS FINANÇAS 31

32 Measures contributing to a more favorable environment to credit expansion Action Outcome ECB measures Liquidity support at longer maturities and broadening of eligible collateral Help to improve banks liquidity position Banks capitalization Banks capital augmentation plans of three major banks already announced Help to improve banks solvency Partial transfer of banks pension funds Payment of arrears in the health and regional/local administrations sectors in the context of the partial transfer of banks pension funds to the State Positive impact cash available to the economy BdP supervision Measures to discourage evergreening of non-performing loans Channel funds to more productive sectors of the economy Note: BdP Banco de Portugal / Bank of Portugal MINISTÉRIO DAS FINANÇAS 32

33 Easing of bank liquidity pressures ECB Measures (8 December) Longer-term refinancing operations: 36 months (December 22 and March 1) Euribor Percentage 2,25 2,00 1,75 ECB LTRO 36m 1,50 12m Reduction of the reserve requirements ratio: from 2% to 1% 1,25 1,00 0,75 ECB repo rate 3m Broadening of eligible collateral 0,50 0,25 1m 0,00 Source: Bank of Portugal, May 2012 MINISTÉRIO DAS FINANÇAS 33

34 Recapitalization of the banking system Ministry of Finance Announcement: June 4, 2012 Banks Injection of core tier 1 capital 1.65 bn 3.5 bn (BSSF) 1.5 bn (BSSF) Each bank will exceed the EBA s capital requirements coming into force at end-june The participating banks will become amongst the most highly capitalized in Europe They will be well positioned to ensure the continued access to credit for productive and tradable sectors of the Portuguese economy BCP and BPI will also each commit at least 30 million per year to invest in the equity of SME The State remains prepared to support any other banks that meet the BSSF s criteria and will analyze any recapitalization plans that may be presented Note: BSSF Bank Solvency Support Facility Source: Ministry of Finance, June 2012 MINISTÉRIO DAS FINANÇAS 34

35 Portuguese banks are stronger than before the crisis Key achievements Core Tier 1 (1), Portuguese Banking System Percentage Core Tier 1 target of 9% (EBA criteria) to be reached by end-june 2012, following a prudent evaluation of sovereign debt exposures End-2012 target: 10% Special on-site inspections confirmed the robustness of capital adequacy Regulatory framework was improved: legislation on early intervention, resolution and deposit insurance 9,6 7,8 7,9 7,8 8,1 8,7 6,8 Q4 Q2 Q4 Q2 Q4 Q2 Q (1) Excluding BPN Source: Bank of Portugal, April 2012 MINISTÉRIO DAS FINANÇAS 35

36 Deleveraging process is ongoing Key achievements Loans-to-deposits ratio, Portuguese Banking System Percentage Adjustment is progressing as planned Top 8 banks (1) Other banking groups contribution Important contribution of higher deposits and sizeable asset sales Q4 Q2 Q4 Q2 Q4 Q2 Q4 Indicative target in (1) About 85% of credit market share Source: Bank of Portugal, April 2012 MINISTÉRIO DAS FINANÇAS 36

37 Depositors trust in the Portuguese banking system Total deposits (excluding deposits from financial institutions) EUR Millions Greece Ireland Portugal Note: BS reference sector breakdown- MFIs excluding ESCB; BS counterpart sector- Non-MFIs; Data type- Outstanding amounts at the end of the period (stocks) Source: ECB; May 2012 MINISTÉRIO DAS FINANÇAS 37

38 STRUCTURAL TRANSFORMATION MINISTÉRIO DAS FINANÇAS 38

39 Economic growth: importance of the Structural Transformation Agenda Pillars Confidence, credibility and justice Openness, competition and competitiveness Entrepreneurship, innovation and labor market flexibility Limited State and economic democracy Broad range of reforms Judicial system Network industries: energy, telecommunications, transports Competition Housing Market Labor market Education and training Privatizations Special rights of the State Public procurement Administrative burden Structural transformation Opening to foreign investment and to the challenges of international competition Competitive location for physical and human capital Fully integration in the Single European Market Development of a stability culture MINISTÉRIO DAS FINANÇAS 39

40 Portugal needs a broad transformation agenda Structural reforms gaps in European economies: a heatmap (1) Euro area countries Selected comparators DE FR NL BE IT ES PT GR AT FI IE DK SE UK US JP Medium term Labor market inefficiency Business regulations Network regulation Retail sector regulation Profess. services regulation Long term Institutions and contracts Human capital Infrastructure Innovation (1) The heatmap is constructed based on a variety of structural indicators from alternative sources in order to flag areas where a country has the greatest need to implement structural reforms. For a discussion of the methodology and detailed components, see IMF, 2010d, Cross-Cutting Themes in Employment Experiences During the Crisis, IMF Report SM/10/274 Source: OECD; World Economic Forum; Fraser Institute and IMF staff calculations MINISTÉRIO DAS FINANÇAS 40

41 Structural reforms: long-run potential impact 2 empirical studies for Portugal Approach Results Bouis and Duval (2011) No model: use empirical results from several studies Broad range of reforms that include reforms in product and labor market and reforms of benefit, tax and retirements systems % GDP per capita, increase in level in percent at 10-year horizon PT ~13% (> 5% after 5 years) Gomes et al (2011) Multi-country DSGE Model Reforms of labor and services market Increase in long-term output of 7.8%, after 7 years (8.6% in case of cross-country coordination of reforms in the euro area) Source: Bouis and Duval (2011), OECD Economics Department Working Paper n.º 835; Gomes et al (2011), Banco de Portugal Working Paper n.º 13 MINISTÉRIO DAS FINANÇAS 41

42 In-depth labor market reform Agreement on Growth, Competitiveness and Employment NON-EXHAUSTIVE Objectives Implemented measures Tackle labor market segmentation Foster job creation Ease transition of workers across firms and sectors Reducing labor costs Labor market flexibili zation Active Labor Market Policies Reduction of 4 national holidays Elimination of 3 extra days of vacation Decrease in 50% of compensation for overtime work and eliminate compensatory time off (previously 25% of overtime worked hours) Restrictions on automatic extension of collective agreements Implementation of individual and group working time management mechanisms Reduction of restrictions to individual dismissal Reduction of severance payments to align with EU average Implementation of labor arbitration mechanisms Estímulo 2012 program with incentives for hiring of medium and long term unemployed in return for on job training Impulso Jovem program specifically designed to help youth unemployed The agreement between the Government, Unions and Enterprises Associations: an important step to implement reforms in an environment of social dialogue MINISTÉRIO DAS FINANÇAS 42

43 Broad product market reform NON-EXHAUSTIVE Objective Implemented measures Reduce mobile termination rates Reduce excessive mark-ups in network industries and nontradable Telecommu nications Energy Broad access of all operators to existing networks Auction access to new networks (4G mobile network) Speed up liberalization of Gas and Electricity Revise remuneration scheme of co-generation to accelerate converge to market-based pricing Redesign Power Guarantee mechanism Foster cross border market integration to increase competition Increasing tradable sector competitiveness by reducing nontradable sectors excessive costs cascaded through the economy Revise margins of pharmacies Health Set targets for reduction of pharmaceutical profit margins Increase share of generic drugs MINISTÉRIO DAS FINANÇAS 43

44 Improving business environment NON-EXHAUSTIVE Objective Judicial system Implemented measures Targeted measures to accelerate the resolution of the backlog: 50,000 enforcement cleared since November Adoption of a law on arbitration to facilitate out-of-court settlement New insolvency code and corporate recovery, focusing on speed, simplification and creation of an extra-judicial phase of corporate recovery Foster investment and innovation Incentive a more efficient use of resources Competition Other services Approval of a new Competition Law harmonized with the EU legal competition framework which will come into force early July Strengthen the power of the Competition Authority Set up of a specialized court on Competition, Regulation and Supervision (already in operation) Liberalization of regulated professions access and exercise Fostering the development of the European single market for services and labor: already transposed 32 out of 69 legal acts regarding services and have completed all aspects of the qualifications directive Reduction of firms administrative burden: licensing requirements and other legal formalities Approval of a new Urban Lease Law which is expected to come into force in October MINISTÉRIO DAS FINANÇAS 44

45 Privatization program as a flagship in the agenda Energy retail and production Energy retail and production Air infrastructure Railway logistics Water distribution (1) (2) Q1 Q2 Q3 Q4 Electricity distribution Air transport Insurance Mail distribution Television broadcasting Seguros Seguros (3) (1) Sale of Caixa Geral de Depósitos participation of 1%; sale yet to be materialized but already decided: tag along to another shareholder s sale (2) Concession (3) Expected completion date by Caixa Geral de Depósitos Source: Ministry of Finance, June 2012 MINISTÉRIO DAS FINANÇAS 45

46 Privatization results above expectations Selected bidders % Equity 21,35% 40% Asia: China Three Gorges Asia: State Grid Bidders Revenue Financing Europe: E.ON Latin America: Eletrobras and Cemig EUR 2,693M: premium of 53.6% per share 1 EUR 2,000M through Chinese banking entities Arabia: Oman Oil Company EUR 593M: average premium of 33.6% per share 1 EUR 1,000M through Chinese banking entities The proceeds amount to about 60% of the initial estimate of privatizations revenues foreseen in the Adjustment Program Investment EUR 2,000M until 2015 in wind farms Strategic plan for national economy development (e.g. I&D center construction) 1 Considering the closing price of the day before the Council of Ministers decision MINISTÉRIO DAS FINANÇAS 46

47 CONCLUSION: HOW WILL IT WORK? MINISTÉRIO DAS FINANÇAS 47

48 Restoring credibility and confidence The adjustment is inevitable The Program addresses fundamental imbalances and deficiencies Robustness of the overall Program Gradual credibility buildup Solid starting point for the Program Broad popular and social support for adjustment Elimination of budget deficit on a durable way supported by a new fiscal policy framework (at national and European level) Reduction and then elimination of external deficit The Program works disregarding positive impact of structural reforms on potential growth Structural reforms are likely to speed up adjustment The Program shelters government financing from the vagaries of financial markets Quantitative objectives and targets steered and monitored over time (9 reviews until Sep. 2013) Deep and frontloaded structural reform agenda that will boost potential output and competitiveness Compliance with the Program will push for a gradual change in markets expectations and perceptions MINISTÉRIO DAS FINANÇAS 48

49 MINISTÉRIO DAS FINANÇAS Portugal: policies, achievements and challenges Maria Luís Albuquerque Hong Kong July 6, 2012 MINISTÉRIO DAS FINANÇAS 49

50 BACKGROUND SLIDES MINISTÉRIO DAS FINANÇAS 50

51 Index 1. On the way to become the difficult Portuguese case Forecasted and actual budgetary balances Net international investment position Unemployment in Portugal Q Youth and long-term unemployment in Europe 3. Fiscal consolidation DSA: Nov-Dec 2011 projections for PT, IR and GR 4. Deleveraging and Financial Stability Current account in Portugal s past adjustments EBA Communication, 08 December The Economic Adjustment Program Quarterly GDP growth Recession in Q vs other European countries Okun's law for Portugal Unemployment rate quarterly forecasts Unemployment rate T-Bills: bid-to-cover ratio and international allocation T-Bonds: yields, 2Y, 5Y and 10Y 5. Structural transformation Higher qualifications of younger generations Positive performance in advanced education levels Portugal as a competitive location for business 6. Conclusion: how will it work? Council of the European Union, 30 January 2012 Private sector response in and 2009 MINISTÉRIO DAS FINANÇAS 51

52 ON THE WAY TO BECOME THE DIFFICULT PORTUGUESE CASE MINISTÉRIO DAS FINANÇAS 52

53 Index Lack of discipline Forecasted and actual budgetary balances As a percentage of GDP SGP SGP SGP SGP SGP SGP (June) -8 SGP Actual figures Source: INE and Ministry of Finance Note: The figures for the forecasts correspond to the values that have been reported in the SGP updates MINISTÉRIO DAS FINANÇAS 53

54 Very high levels of the economy borrowing requirements Index The worsening of the international investment position Net international investment position As a percentage of GDP led to the worst position among Euro area countries Net international investment position in 2010 As a percentage of GDP Portugal Ireland Greece Spain Italy France Austria General Government Financial Sector Non-financial corporations and Households Monetary Authorities Net Foreign Assets Position Finland Netherlands Germany Belgium Source: Bank of Portugal Note: The NIIP of Ireland refers to 30 June 2010 Source: AMECO, Bank of Portugal and IMF MINISTÉRIO DAS FINANÇAS 54

55 Unemployment in Portugal 4Q 2011 Index By age Percentage of total unemployed By duration Percentage of total unemployed By education level Percentage of total unemployed 29% 20% 14% 53% 47% 23% 63% 22% 28% and more Until 11 months 12 months and more (long-term) Until basic education ("3º ciclo") Secundary and post-secundary Higher education Source: INE, Estatísticas do Emprego, November 2011 MINISTÉRIO DAS FINANÇAS 55

56 High levels of youth and long-term unemployment Index As percentage of labor force, 2010 Youth unemployment (1) PT: 27,7 Long-term unemployment (2) PT: 6,3 (1) Less than 25 years, annual average (2) 12 months or more, annual average Source: Eurostat MINISTÉRIO DAS FINANÇAS 56

57 THE ECONOMIC ADJUSTMENT PROGRAM MINISTÉRIO DAS FINANÇAS 57

58 Quarterly GDP growth Index Real GDP Growth Percentage ,7-0,3-0,6-1,3-0,1 q-o-q ,6-1,1-1,9-2,8-2,2 y-o-y -4-5 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q Source: INE, May 2012 (Flash estimate for Q ) MINISTÉRIO DAS FINANÇAS 58

59 Recession in Q was close to euro area average Index Real GDP Growth in Q1 2012, based on seasonally adjusted data Percentage change compared with Q Q vs Q ,2 0,5 0,7 0,3 0,0-2,2 0,0-1,3-0,4-1,3 0,5 0,3 0,2 0,0 0,0-0,1-0,2-0,2-0,3-0,8 Germany Belgium Austria France Euro Area Portugal United Kingdom Netherlands Spain Italy Source: Eurostat, Flash estimate for the first quarter of 2012, May 2012 MINISTÉRIO DAS FINANÇAS 59

60 Okun's law for Portugal Index 2,5 2, Change in unemployment (p.p.) 1,5 1,0 0,5 0-0,5-1, Source: INE and Ministry of Finance Change in GDP (%) MINISTÉRIO DAS FINANÇAS 60

61 Index Unemployment rate quarterly forecasts Y-o-Y rate of change, percentage points 3,0 Realized Forecast Forecast range 95% Recession Periods 2,5 2,0 1,5 1,0 0,5 0,0-0,5-1, Source: INE and Ministry of Finance MINISTÉRIO DAS FINANÇAS 61

62 Unemployment rate Percentage Index 13 NAIRU Unemployment rate Source: INE and Ministry of Finance MINISTÉRIO DAS FINANÇAS 62

63 A turning point in Treasury financing Portuguese Treasury Bills Index Weighted (1) Bid-to-cover ratio Weighted (1) international allocation Percentage 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0, Oct 19 Jun 15 Jul 16 Jul 20 Aug 03 Aug 17 Sep 07 Sep 21 Oct 05 Oct 19 Nov 02 Nov 16 Dec 07 Jan 04 Jan 18 Feb 01 Feb 15 Mar 21 Apr 04 May 02 Oct 19 Jun 15 Jul 16 Jul 20 Aug 03 Aug 17 Sep 07 Sep 21 Oct 05 Oct 19 Nov 02 Nov 16 Dec 07 Jan 04 Jan 18 Feb 01 Feb 15 Mar 21 Apr 04 May (1) Weighted average of 3, 6,12 and 18 months auctions Note: Auction announcement date Source: IGCP, May MINISTÉRIO DAS FINANÇAS 63

64 A turning point in Treasury financing Portuguese Treasury Bonds Index 2 Years, yields Percentage 5 Years, yields Percentage 10 Years, yields Percentage Jun 2011 Jul 2011 Aug 2011 Sep 2011 Oct 2011 Nov 2011 Dec 2011 Jan 2012 Feb 2012 Mar 2012 May 2012 Apr 2012 Jun 2011 Jul 2011 Aug 2011 Sep 2011 Oct 2011 Nov 2011 Dec 2011 Jan 2012 Feb 2012 Mar 2012 Apr 2012 May 2012 Jun 2011 Jul 2011 Aug 2011 Sep 2011 Oct 2011 Nov 2011 Dec 2011 Jan 2012 Feb 2012 Mar 2012 Apr 2012 May 2012 Source: 2 years Bloomberg; 5 and 10 years Reuters, May 2011 MINISTÉRIO DAS FINANÇAS 64

65 FISCAL CONSOLIDATION MINISTÉRIO DAS FINANÇAS 65

66 Portuguese public debt is sustainable Nov-Dec 2011 projections Index Government Debt Sustainability Framework: Baseline As percentage of GDP Portugal (1) Greece (2) Ireland (3) Italy (4) Limit fixed for Greece debt sustainability (1) Second Review Under the Extended Arrangement; December 7, 2011 (2) Fifth Review Under the Stand-By Arrangement; November 30, 2011 (3) Fourth Review Under the Extended Arrangement; November 29, 2011 (4) 2011 Article IV Consultation; June 20, 2011 Source: IMF, Staff Reports MINISTÉRIO DAS FINANÇAS 66

67 DELEVERAGING AND FINANCIAL STABILITY MINISTÉRIO DAS FINANÇAS 67

68 Index Portugal succeeded in past adjustments Portugal is a paradigmatic example of successful and rapid adjustments in democracy Current balance As a percentage of GDP Adjustment programs in Portugal In the past, the adjustment was mainly due to the private sector Currently, the public sector will also adjust significantly Source: Bank of Portugal MINISTÉRIO DAS FINANÇAS 68

69 Portuguese measures are aligned with the European strategy The European Banking Authority (EBA) published a formal Recommendation, and the final figures, related to banks recapitalization needs. The aggregated shortfall amounts to 114.7bn Euros. Index Aggregated shortfall required by country, million Euros Banks will be required to strengthen their capital positions by building up an exceptional and temporary capital buffer against sovereign debt exposures to reflect market prices as at the end of September. In addition, banks will be required to establish an exceptional and temporary buffer such that the Core Tier 1 capital ratio reaches a level of 9% by the end of June Sales of sovereign bonds will not alleviate the buffer requirement to be achieved by June Pursuant to the Recommendation, the national authorities will require banks to submit, by 20th January, their plans detailing the actions they intend to take to reach the set targets. Source: EBA Communication, 08 December 2011 MINISTÉRIO DAS FINANÇAS 69

70 STRUCTURAL TRANSFORMATION MINISTÉRIO DAS FINANÇAS 70

71 Structural transformation is ongoing Higher qualifications of younger generations Index The increase in education level of younger generations Population with higher education by age group Percentage 60 has approached the human capital qualification to its European pears Population with higher education in age group in 2009 Percentage Source: OCDE - "Education at a Glance 2011" MINISTÉRIO DAS FINANÇAS 71

72 Index Structural transformation is ongoing Very positive performance in advanced education levels The completion rate of PhDs is the highest in Europe Some Portuguese schools are among best-inclass Students completing a PhD in 2009 Percentage Financial Times Business Education Rankings Position in 2011 Portugal Finland Germany Slovakia Austria EU 21 The Netherlands #33 European Business School #65 Master in Management #45 Executive education Customized #54 Executive education Open France Slovenia Ireland Belgium Spain Estonia #39 European Business School #2 e #61 Master in Management (1) #64 Executive education Open (1) The Master #2 (CEMS) is offered by a network of schools of which Nova SBE is part of Source: OCDE - "Education at a Glance 2011" Source: Financial Times Business Education Rankings MINISTÉRIO DAS FINANÇAS 72

73 Structural transformation is ongoing Portugal as a competitive location for business in the euro area Index Ease of Doing Business Rank (June 2011) Country position in OECD ranking Note: The rankings for all economies are benchmarked to June 2011 Source: World Bank and IFC; Doing Business 2012; October 2011 MINISTÉRIO DAS FINANÇAS 73

74 CONCLUSION: HOW WILL IT WORK? MINISTÉRIO DAS FINANÇAS 74

75 Council of the European Union, 30 January 2012 Communication by euro area Member States Index Today, we have taken major steps in the implementation of our overall strategy to fight the crisis: 1. The Treaty on stability, coordination and governance in the Economic and Monetary Union has been finalized. It will be signed in March. At the same time an arrangement will be decided about the procedure to be followed to bring to the Court of Justice a case of noncompliance with the Treaty. This represents a major step forward towards closer and irrevocable fiscal and economic integration and stronger governance in the euro area. It will significantly bolster the outlook for fiscal sustainability and euro area sovereign debt and enhance growth. 2. The Treaty establishing the European Stability Mechanism is ready for signature, and the objective is that it enters into force in July This permanent crisis mechanism will contribute to raising confidence, solidarity and financial stability in the euro area. It will have a wide range of tools available and a strong financial basis. As agreed in December, we will reassess in March the adequacy of resources under the EFSF and ESM. 3. Concerning Greece, we note progress made in the negotiations with the private sector to reach an agreement in line with the parameters agreed upon in October. We urge the Greek authorities and all parties involved to finalize negotiations on the new program in the coming days. Restoration of credibility requires that all political parties irrevocably commit to the new program. We urge our Finance Ministers to take all necessary steps for the implementation of the PSI agreement and the adoption of the new programme, including prior actions, well in time for the launching of the PSI operation by mid-february. We recall that PSI in Greece is an exceptional and unique case. 4. We welcome the latest positive reviews of the Irish and Portuguese programmes which concluded that quantitative performance criteria and structural benchmarks have been met. We will continue to provide support to countries under a programme until they have regained market access, provided they successfully implement their programmes. 5. We welcome the measures decided and already enacted by Italy and Spain to reduce the public deficit and boost growth and competitiveness and call on them to pursue their important efforts for fiscal consolidation and structural reforms. These reforms as well as their swift implementation will reinforce financial stability in Italy and Spain as well as the euro area as a whole. Source: Council of the European Union MINISTÉRIO DAS FINANÇAS 75

76 Dynamism of the private sector: a key issue to ensure the success of the program Index In the last adjustment program (83-84), the private sector had a rapid response In 2009, the private sector started the adjustment process (but ) Real growth rate Percentage Borrowing Requirements by Institutional Sector As a percentage of GDP Private consumption ( residents) Public consumption GDP Total economy Financial sector Non-financial private sector General Government Source: Bank of Portugal Source: Bank of Portugal MINISTÉRIO DAS FINANÇAS 76

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