19 February 2014

IMF: Portugal: Tenth Review Under the Extended Arrangement and Request for Waivers of Applicability of end-December Performance Criteria

The short-term outlook has improved and programme implementation remains on track, notwithstanding another adverse Constitutional Court ruling. However, with its high debt ratios and large refinancing needs, Portugal remains susceptible to abrupt changes in market sentiment.

Executive Summary

The short-term outlook has improved and programme implementation remains on track, notwithstanding another adverse Constitutional Court ruling. Stronger domestic demand is supporting a pick-up in activity and lower unemployment. A broad-based recovery in sentiment has led to a decline in yields, allowing Portugal to issue a five-year bond on favourable terms.

The end-September 2013 quantitative PCs were met, and preliminary estimates suggest that the end-December 2013 targets were also met. The authorities are also implementing prior actions to safeguard the 2014 fiscal deficit target, after the Constitutional Court struck down an important pension measure contained in the 2014 budget.

Portugal continues to confront major economic challenges. At above 15 per cent, unemployment remains at unacceptable levels. High household and corporate indebtedness will continue to act as a brake on both consumption and investment. Portugal’s public debt and external liabilities are also high. In this environment, continued efforts to rationalise public spending, encourage orderly deleveraging, and promote growth and investment in the tradable sector will be essential.

Programme review discussions focused on sustaining the progress already made and exploring future reform challenges. The 2014 fiscal targets were reaffirmed. In addition to reforms of public financial management and efforts to maintain financial stability, discussions focused on the need to reorientate the economy from a debt-financed and consumption-led model to an export-led growth model.

Risks to attaining the objectives of the programme remain high. Beginning in mid- 2012, legal challenges to fiscal measures have become recurrent, and—with key elements of the 2014 budget law now submitted to the Constitutional Court for review—these challenges have intensified in recent months. This significantly complicates the authorities’ efforts to rebalance the fiscal consolidation effort toward expenditure-based measures, undermines the quality of the resulting fiscal adjustment, and introduces high policy uncertainty, with an attendant negative impact on output and employment.

In addition, with its high debt ratios and large refinancing needs, Portugal remains susceptible to abrupt changes in market sentiment. Staff supports the authorities’ request for completion of the tenth review and for waivers of applicability of the end-December PCs. The purchase released upon completion of this review would be in an amount equivalent to SDR 803 million.

Full report

Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

IMF-Blog: Portugal: Completing the Job

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