22 March 2013

Vítor Gaspar: Adjusting in the euro area - Portugal as a Programme Country

The Portuguese Finance Minister writes about Portugal's situation within the Economic Adjustment Programme. The seventh review - which was ongoing at the time of writing this article - will mark the turnaround of the Programme towards sustainable exit from official financing.

In line with the main vulnerabilities in the Portuguese economy, the three central elements of the Portuguese Adjustment Programme are: first, budgetary consolidation; second, deleveraging and financial stability; and third, structural transformation. The programme will run until June 2014 and includes a financial envelope of €78 billion, of which 12 billion are earmarked for bank recapitalisation. The Programme foresaw 12 quarterly regular reviews from May 2011 to June 2014. The Programme has performed well as testified by six consecutive successful regular reviews. On average, 92 per cent of the measures foreseen for each quarter had been observed/were ongoing at the end of each review. The seventh review - which was on-going at the time of writing this article - will mark the turnaround of the Programme towards sustainable exit from official financing.

Since 2010, the structural primary balance has adjusted by approximately 6 percentage points of GDP, as can be seen in Figure 2. This effort represents about two-thirds of the total structural adjustment necessary under the Programme. In addition, all quarterly quantitative limits for the budget balance (as defined in the Programme) have been respected. These accomplishments were possible given the significant reduction in nominal public expenditure. From 2010 to 2012, the total decline was 14 per cent or approximately €13 billion.

2012 marked the correction of external imbalances. Internal demand was brought in line with domestic supply. According to the Bank of Portugal, the balance of goods and services was positive for the first time since 1952 – which is the earliest observation available. Portugal also became a net lender to the rest of the world, as can be seen in Figure 3. For the first time since 1993, the current and capital account registered a surplus.

In 2011 and 2012, significant reforms were implemented in the labour and product markets, as well as in the judicial system. The revision of the Labour Code in 2012 contributed to a higher flexibility in the labour market. In the product market, both the reduction of rents in network and sheltered sectors and the liberalisation of the energy and gas market constitute important progress. Reforms in the judicial system include the significant reduction in backlog cases, the revision of legislation with a view to simplifying procedures and the provision of new restructuring and recovery tools to indebted households and firms.

The flagship of the Portuguese structural transformation agenda is the privatisation programme. At about mid-point in the Adjustment Programme the privatisation of EDP, REN and ANA have already brought about the amount of privatisation revenue foreseen for the full Program. The privatisation process shows that Portugal is an open and competitive economy that provides good opportunities for investment and innovation.

Overall, it is now clear that Portugal did not adapt its institutions to fit the requirements of euro area participation. Better financing conditions should have triggered real convergence to the core countries in the European Union. Instead, the final result was the accumulation of macro-economic and financial imbalances. The postponement of their correction led to vulnerability which revealed itself in the context of the global crisis. In April 2011, the request for international financial assistance was unavoidable. This time, adjustment was not only urgent – it was compulsory.

In the early stages of the Economic Adjustment Programme, the priority was to correct the most pressing imbalances. Budgetary consolidation was of the utmost importance as it allowed for the accumulation of confidence and credibility at an international level and for the reverse in the long-run trend of external deficits. Important progress was also achieved in the two other dimensions of the Programme. In the financial sector, the main objective was to preserve stability in the banking system. As for the structural transformation agenda, the main reforms were launched and the privatisation programme was set in motion. Halfway into the Programme, progress has been recorded. As the balance between internal demand and supply was restored in 2012, a new stage in the adjustment process can begin. It is now crucial to consider the transition to economic recovery, so as to successfully complete the Programme. The priority is to lay the ground for sustainable growth leading to substantial job creation.  

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