MINISTÉRIO DAS FINANÇAS - PIIE

MINIST?RIO DAS FINAN?AS

Portugal: restoring credibility and confidence

MINIST?RIO DAS FINAN?AS

V?tor Gaspar

Peterson Institute, Washington March 19, 2012

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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?

MINIST?RIO DAS FINAN?AS

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ON THE WAY TO BECOME THE DIFFICULT PORTUGUESE CASE

MINIST?RIO DAS FINAN?AS

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Portugal's imbalances exposed in the context of the economic and financial crisis

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

10-year Government bond yields Spread against Germany in basis points

1200 1000

800

Austria Belgium France Netherlands Finland

Italy Spain Ireland Portugal Greece

600

400

200

0

MINIST?RIO DAS FINAN?AS

Source: Bloomberg 4

Unsustainable public finances

Persistent government deficits and increasing public debt

Fragile public finances

Deficit and public debt As a percentage of GDP

15

100

14

Net borrowing of Gen. Govern.

13

Public debt - right axis

90

12

80

11 10

70

9

60

8 7

50

6

40

5

30

4

3

20

2 1

10

0

0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Structural Current Primary Balance As a percentage of GDP

6

5

4

3

2

1

0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-1

-2

Portugal

Euro Area

-3

-4

Source: INE, Bank of Portugal and Ministry of Finance

Source: AMECO and Ministry of Finance

MINIST?RIO DAS FINAN?AS

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Debt accumulation by households and firms

Increasing indebtedness of the private sector

Increasing external debt

Debt of the Households and Non-financial Corporations As a percentage of GDP

160

140

120

100

80

60 Non-financial corporations

40 Households (a)

20

0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

(*) Financial Debt Source: Bank of Portugal

MINIST?RIO DAS FINAN?AS

Portuguese gross external debt As a percentage of GDP

250

200

150

100

50

0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Bank of Portugal 6

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

MINIST?RIO DAS FINAN?AS

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Disappointing performance of the Portuguese economy

GDP ? Portugal and some of its European partners 2000 = 100

150

Germany

Ireland

140

Greece France EA -17

Spain Italy Portugal

130

120

110

100

90 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Eurostat MINIST?RIO DAS FINAN?AS

In the period 1999-2010, the GDP of Portugal grew at an annual average rate of 1%, compared with 1.4% in the euro area

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