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21 April 2014

Portugal: Outlook improving but reform still needed

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In the eleventh IMF review on Portugal's bailout, the fund found that the Portuguese programme is on track but warned that reforms were still necessary. Meanwhile, for the first time in three years, Portugal sold bonds at auction indicating that Lisbon may make a clean exit from its bailout.

The IMF has completed its eleventh review of the Portuguese bailout saying that the "outlook has continued to improve and the programme is on track", however, it also warned that, "Portugal still needs to address important challenges, as large financing needs leave the country susceptible to market volatility, and remaining bottlenecks to growth and competitiveness risk delaying the necessary rebalancing of the economy."

 It also warned that after the penultimate bailout review in February, unemployment remains "troublingly high" at over 15 per cent, but said: "The near-term outlook continues to improve and the programme remains on track." The fund said the fact that Lisbon beat its 5.5 per cent of GDP budget deficit target last year with a gap of 4.9 per cent "contributes to the compliance with the 2014 target of 4 per cent through the partial carry-over effect."

The government's latest plans were consistent with reducing the budget gap further to the targeted 2.5 per cent of GDP next year, the IMF said. The EU and IMF bailout programme is due to end formally on 17 May 2014.

Portugal's economic recovery began last year with the IMF's mission chief for Portugal, Subir Lall, stating that Portugal's prospects for accessing funding in the markets is "very promising". But the IMF said on21 April that the government needed to keep bringing its spending under tighter control, its financing needs remain large, and credit to the economy has yet to be unlocked in earnest.

 With Portugal needing to raise some €16 billion to cover financing needs through end-2015, "sustained fiscal discipline and structural reform effort to anchor debt sustainability and support medium-term growth remain critical to secure market confidence and durable market access", it said.

Full IMF Country Report

Press release

Letter of Intent, Memorandum of Economic and Financial Policies, and Technical MoU, 283.14

Further reporting by Reuters

M eanwhile Reuters reported that Portugal sold its first bonds at auction in three years on Wednesday, paying a record low yield that was seen as vote of market confidence and a boost to Lisbon's chances of making a clean break from its bailout next month.

The Wall Street Journal reported Lisbon is expected to formally announce its exit from its 2011 bailout on 5 May as the country has swapped new bonds for old, and issued debt with the help of banks in recent months as it works to prepare for a return to standard, independent borrowing conditions and to build a cash buffer.

Portugal is emerging from its worst recession since the 1970s as a result of growing consumer demand and a hike in exports raising optimism that Lisbon can move on from its bailout without a standby loan.

However, the Irish Independent wrote that it still remains unclear whether the Lisbon government will need a standby loan. As the Independent reports, the Portuguese government has promised to define by 5 May, when the urozone's finance ministers are due to meet, whether it will follow Ireland by making a clean exit from its €78 billion bailout or request a precautionary loan from the European Union to support its debt market funding.

Reuters noted that Lisbon still needs to raise some €16 billion to cover financing needs through end-2015. But as Wednesday's bond sales were successful, many analysts expect Portugal will be able to make a clean exit.

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