Portugal Programme Assessment

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Portugal

Programme Assessment

European Commission, DG ECFIN

15 May, 2014

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Root causes of Portugal's initial imbalances and need for assistance

 Low GDP and productivity for more than a decade

 High household, corporate and public debts

 Subdued implementation of structural reforms

 Deterioration of confidence and rating downgrades provoked rates incompatible with long-term fiscal sustainability

 Banking sector lost international market funding and started reliance on the Eurosystem for funding

Macro- economic imbalances

Trigger for financial assistance

request

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EU-IMF Economic Adjustment Programme

 Restoring investor confidence via consolidating public finances, enabling sustainable growth and safeguarding financial stability

 Executing a credible, balanced fiscal consolidation strategy

 Rebalancing the economy from non-tradable to tradable sector to improve Portugal's net external position

 Further supporting the financial sector through more robust supervision and strengthening bank capitalisation

 Implementing an ambitious structural reform agenda to boost potential growth, improve labour market outlook and regain competitiveness

 Mitigating negative social impact of the adjustment process

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Key Programme Achievements

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Output Recovery Gaining Momentum

Real GDP growth projection for 2014 in line with EA

Source: Eurostat, DG ECFIN

-5 -4 -3 -2 -1 0 1 2 3 4

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014f Portugal EA-18

% change y-o-y

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Government Bonds at Pre-Crisis Yields

Note: Daily data as of 14 May 2014 Source: Bloomberg

Financing costs have been reduced in recent issuances

0 50 100 150 200 250

France Ireland Spain Italy Slovenia Portugal Spread 10-year Germany Government Bond

bps

0 2 4 6 8 10 12 14 16 18 20

2007 2008 2009 2010 2011 2012 2013 2014

Portugal 10-year Bond Germany 10-year Bond in %

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Transition to Export-Oriented Growth Model

Exports as % of GDP have improved but remain below comparable EU MS

Source: Eurostat; DG ECFIN

20 25 30 35 40 45

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014f Exports as % of GDP Imports as % of GDP

% of GDP

0 20 40 60 80 100 120

Ireland The

Netherlands Belgium Austria Portugal Nominal exports as of 2013

% of GDP

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Competitiveness Is Recovering

Keeping reforms on track will be crucial to maintain the upward trend

Note: NULC and REER series are inverted Source: DG ECFIN

96 98 100 102 104 106 108 110 112 114

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 NULC EA18 REER 37 Countries

index 2005=100

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External Adjustment Is Ongoing

Further improvements in the external balance are necessary to reduce NIIP

Source: Eurostat

-140 -120 -100 -80 -60 -40 -20 0

-14 -12 -10 -8 -6 -4 -2 0 2 4

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Net lending/ Net Borrowing as % of GDP

Net International Investment Position as % of GDP (rhs)

% of GDP

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Labour Market Has Bottomed Out

High youth and general unemployment remains concerning

Source: Eurostat

15 20 25 30 35 40 45

5 10 15 20

2009 2010 2011 2012 2013 2014

General Unemployment Rate Youth Unemployment Rate (rhs)

% %

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Fiscal Adjustment Has Been Substantial

Note: For the purposes of the Programme, the budget deficit in 2012 excludes the impact of CGD recapitalisation (about 0.5% of GDP), and in 2013 BANIF recapitalisation (about 0.4% of GDP).

Source: Eurostat; DG ECFIN -12

-10 -8 -6 -4 -2 0 2 4

2009 2010 2011 2012 2013 2014f 2015f

Deficit - Programme purposes Structural balance

Structural primary balance

% of GDP

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Public Debt High but Sustainable

Source: Eurostat; DG ECFIN

60 70 80 90 100 110 120 130 140

2010 2015 2020 2025 2030

Baseline

Shock : -1p.p. GDP growth from 2016 Shock : +1pp GDP growth from 2016 Interest rate shock : +1p.p. from 2016

Combined shock (growth -1 pp, interest +1pp) from 2016 Combined shock (growth +1 pp, interest -1pp) from 2016

% of GDP

12

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Banks Have Adjusted Significantly

Note: Core Tier 1 ratio according to Programme definition and excluding the banks in resolution Source: Banco de Portugal

60 80 100 120 140 160 180

2009Q4 2010Q4 2011Q4 2012Q4 2013Q4

0 2 4 6 8 10 12 14

Core Tier 1 Ratio (rhs) Loan-to-deposit ratio

% %

13

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Corporate Sector: Slow Deleveraging and High NPLs

Note: Indebtedness refers to lending and securities other than shares in the domestic banking sector Source: Banco de Portugal; DG ECFIN

0 2 4 6 8 10 12 14

60 70 80 90 100 110 120 130 140

2007 2008 2009 2010 2011 2012 2013

NFCs Indebtedness Total NFCs NPLs (rhs)

% GDP %

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Key Structural Reforms Were Undertaken

 Key labour code changes to improve flexibility, reduce segmentation and increase incentives to work

 Implementation of strategic plan to fight youth unemployment Labour

market

 Comprehensive reform of pre-university education system to increase school autonomy and accountability

 Vocational training reforms to enhance labour market matching Education

 New urban lease law to increase access to rental housing and improve labour mobility

 New incentives for renovations Housing

market

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 Liberalisation of electricity and gas markets

 Several wide-ranging reform packages aimed at reducing excessive rents and cutting the electricity tariff debt

Energy markets

 Modernization of regulatory framework, including creation of AMT

 Reform package in ports sector to reduce end user costs,

including new port labour law and elimination of port use fees

 Various cost-saving and liberalisation measures in railways sector

Transport sector

 Liberalisation and opening up to competition of telecoms and postal sectors, including privatization of postal services company

 Strengthening of regulatory framework for telecoms sector Telecoms

& postal sector

Key Structural Reforms Were Undertaken

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 Simplification of licensing procedures for businesses, moving to a zero authorisation approach

 Establishment of Single Point of Contact for entrepreneurs

 Introduction of "one-in/one-out" rule for burdensome new regulations

 Compilation of inventory and cost analysis of regulations Business

environ- ment

Services &

regulated professions

 Sector-specific amendments to liberalise a wide range of legal regimes governing the services sector

 Framework law and new by-laws (in progress) to remove unjustified barriers to entry in key regulated professions

Key Structural Reforms Were Undertaken

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 New Code of Civil Procedure to expedite court process

 Court system reform to improve efficiency and accountability

 Various measures aimed at speeding up debt enforcement cases Judicial

system

 Adoption of new legal framework to strengthen role of key sectorial regulators and Competition Authority and to ensure their independence

Regulatory framework

Key Structural Reforms Were Undertaken

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Ease of Doing Business Improving

*Note: "Distance to Frontier" measures performance relative to the best performance ever observed for any country. Index values ranges from 0-100, with 100 being the best.

Source: World Bank "Doing Business" reports, 2010-2014

"Distance to Frontier

^*

" evolution for selected "Doing Business" indicators (Portugal versus average for other EU countries)

71 72 73 74 75 76 77

2010 2011 2012 2013 2014

Distance to Frontier (*)

Overall ease of doing business PT

EU26 exc. PT

84 86 88 90 92 94 96 98

2010 2011 2012 2013 2014

Starting a business PT

EU26 exc. PT

60 65 70 75 80 85

2010 2011 2012 2013 2014

Dealing with construction permits PT

EU26 exc. PT

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