Separate new reports by the Commission and the IMF highlight several remaining risks that could prevent Portugal achieving the goals of its painful adjustment programme.
1. Wage levels remain too high... However, Paulo Portas, deputy prime minister, has emphatically rejected any further private-sector wage cuts in response to the commission’s recommendation. “Let me underline this”, he said. “We do not believe in development based on low wages. The private sector has already made the necessary wage adjustments.” His response appeared to leave open the question of further cuts in public sector wages.
2. Export growth could prove unsustainable... Mr Portas, who is responsible for coordinating economic policy, responded that almost 23,000 export companies were behind the country’s “sustained growth in exports”, which now accounted for 45 per cent of gross domestic product, up from 28 per cent five years ago.
3. Structural reforms have not been deep enough...
4. Companies need more credit. Portugal needs to step up efforts to “reduce the overhang of private debt and free up credit for lending under better terms” to help increase private sector investment, says the IMF. The Commission highlights the “substantial losses” reported by the banking sector in 2013 and warns that increasing levels of bad debt are “a significant source of vulnerability” for Portuguese lenders. However, it also notes that improved liquidity and lower funding costs are “slowly feeding through to lower lending rates”.
5. More reforms could be blocked by the constitutional court. The IMF warns that legal challenges to fiscal measures have intensified in recent months with “key elements of the 2014 budget law being submitted to the constitutional court” for vetting. This “undermines the quality” of fiscal adjustment and introduces “high policy uncertainty”, it says, with a negative impact on output and unemployment, which “remains at unacceptable levels”. Portugal also remains susceptible to abrupt changes in bond market sentiment, the Fund says.
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