MINISTÉRIO DAS FINANÇAS 2
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?
Outline
MINISTÉRIO DAS FINANÇAS 4
Portugal’s imbalances exposed in the context of the economic and financial crisis
Macro-economic
imbalances and
structural weaknesses
that have been
accumulated over more
than a decade
3. Anemic economic growth and low productivity
1. Unsustainable public finances
2. Over-indebtedness
10-year Government bond yieldsSpread against Germany in basis points
Source: Bloomberg
0
200
400
600
800
1000
1200Austria ItalyBelgium SpainFrance IrelandNetherlands PortugalFinland Greece
MINISTÉRIO DAS FINANÇAS 5
Persistent government deficits and increasing public debt Fragile public finances
Structural Current Primary BalanceAs a percentage of GDP
Unsustainable public finances
Deficit and public debtAs a percentage of GDP
Source: AMECO and Ministry of FinanceSource: INE, Bank of Portugal and Ministry of Finance
-4
-3
-2
-1
0
1
2
3
4
5
6
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Portugal Euro Area
0
10
20
30
40
50
60
70
80
90
100
0123456789
101112131415
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Net borrowing of Gen. Govern.Public debt - right axis
MINISTÉRIO DAS FINANÇAS 6
0
20
40
60
80
100
120
140
160
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Non-financial corporations
Households (a)
0
50
100
150
200
250
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Increasing indebtedness of the private sector Increasing external debt
Portuguese gross external debtAs a percentage of GDP
Over indebtedness
Debt of the Households and Non-financial CorporationsAs a percentage of GDP
Source: Bank of Portugal(*) Financial DebtSource: Bank of Portugal
MINISTÉRIO DAS FINANÇAS 7
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
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
Insufficient conditions to foster economic growth
Obstacles Consequences
MINISTÉRIO DAS FINANÇAS 8
Disappointing performance of the Portuguese economy
Source: Eurostat
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
GDP – Portugal and some of its European partners2000 = 100
90
100
110
120
130
140
150
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Germany IrelandGreece SpainFrance ItalyEA -17 Portugal
MINISTÉRIO DAS FINANÇAS 10
Statement by the EC, ECB and IMF on the Fourth Review Mission to Portugal: http://www.imf.org/external/np/sec/pr/2012/pr12203.htm
After the 4th Review (completed in June 4) the program
implementation was on track
Adjustment Program agreed with the IMF, EC and ECB in April 2011
The Economic Adjustment Program covers the financing needs of General Government for the period 2011 to mid-2014.
It comprises a financial package amounting to EUR 78 billion in loans, including EUR 12 billion for banking sector recapitalization.
Each disbursement depends on the technical mission’s quarterly assessment about Portugal’s performance on the implementation of the Adjustment Program.
(1) Net issuancesSource: IGCP, May 2012
Financial packageEUR BillionsKey facts
(1)
20,6
4,153,3
To be disbursed5th Disebursement (July 2012)Already disbursed
EFSF
18,4IMF
EFSM
14,9
20,0
MINISTÉRIO DAS FINANÇAS 11
A balanced Program to cope with the major challenges of the Portuguese economy
The Economic Adjustment Program protects Government financing from market pressures, allowing an orderly adjustment of imbalances and time to build up confidence and credibility.
Fiscal consolidationPutting fiscal policy on a
sustainable path
Structural transformationImplementing structural reforms to contribute to potential growth
Deleveraging andfinancial stability
Reduction of debt and financing needs of the economy
The Economic Adjustment Program
MINISTÉRIO DAS FINANÇAS 12
Main macroeconomic indicators4th Review, June 2012
Source: Ministry of Finance, June 2012
2011 2012 2013GDP and components (in real terms, %)GDP -1,6 -3,0 0,2
Private Consumption -3,9 -6,0 -0,5Public Consumption -3,9 -3,2 -2,6Investment (GFCF) -11,4 -12,2 -0,5Exports of goods and services 7,4 3,5 3,5Imports of goods and services -5,5 -6,2 0,9
Prices (%)HICP 3,6 2,7 1,1
Current and Capital Account (% GDP)Current Account -6,4 -3,9 -3,4Current plus Capital Account -5,2 -2,7 -2,2
Labor market (%)Unemployment rate 12,7 15,5 15,9
Fiscal accounts (% GDP)Budget balance -4,2 -4,5 -3,0Public debt 107,8 114,4 118,6
MINISTÉRIO DAS FINANÇAS 13
At the start of the Program (in May 2011), Portugal faced a very uncertain outlook
Reducing uncertainty: Portugal is delivering in all fronts
Weakening of political support for the Program
Unfavorable macro-economic developments
Missing the fiscal targets
Uncertainty regarding the stability of the financial sector
Insufficient pace of structural reforms
Broad political consensus Social support to the Program
Milder recession than expected Stronger than expected external adjustment Dynamic exports
Major reduction in overall and structural deficits
Progress in institutional reforms
Increase in banks’ capital Reduction of credit-to-deposit ratio Increase in transparency: on-site inspections
Success of privatizations process Labor market tripartite agreement Broad range of implemented measures
1
2
3
4
5
Main risks Major outcomes
MINISTÉRIO DAS FINANÇAS 15
Nether-lands
4,7
France
5,2
UnitedKingdom
8,3
Spain
8,5
Greece
9,1
Ireland
13,1
Germany
1,0
Austria
2,6
Belgium
3,7
Italy
3,9
Euro Area
4,1
Portugal
4,2
Overall deficit in 2011 close to euro area average
Source: Eurostat, “Excessive Deficit Procedure”, April 2012
General Government Deficit 2011As percentage of GDP
Without the partial transfer of banks’ pension funds, overall deficit would be 7,7% of GDP
MINISTÉRIO DAS FINANÇAS 16
Austria
1,2
United Kingdom
1,5
Ireland
1,9
Germa-ny
2,2
Portugal
2,8
Greece
3,3
Belgium
-0,5
Nether-lands
-0,3
Italy
0,4
Spain
0,7
Euro Area
1,2
France
1,2
Portugal’s fiscal adjustment was sizable in 2011…
Fiscal Adjustment 2010-2011Change in general government cyclically adjusted overall balancePercentage points of GDP
(1) Portugal cyclically adjusted deficit in corrected for the transfer of banks’ pension funds (3,5% of GDP)Source: IMF, "Fiscal Monitor", April 2012
(1)
MINISTÉRIO DAS FINANÇAS 17
-0,1
Ireland
1,8
Greece
2,2
Italy
2,4
Spain
3,0
Portugal
4,2
AustriaGermany
0,6
France
0,7
United Kingdom
1,2
Euro Area
1,4
Nether-lands
1,5
Belgium
1,7
… and will be stronger in 2012
Fiscal Adjustment 2011-2012Change in general government cyclically adjusted overall balancePercentage points of GDP
(1) Portugal cyclically adjusted deficit in 2011 corrected for the transfer of banks’ pension funds (3,5% of GDP)Source: IMF, "Fiscal Monitor", April 2012
(1)
MINISTÉRIO DAS FINANÇAS 18
93
107 112
115 114 113 111
103
80
90
100
110
120
130
140
150
160
170
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
93
107 112
115 114 113 111
103
145
165 163 167
161
153
145
138
130
123
117
80
90
100
110
120
130
140
150
160
170
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
93
107 112
115 114 113 111
103
93
105
114 118 118
115 113
145
165 163 167
161
153
145
138
130
123
117
80
90
100
110
120
130
140
150
160
170
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Portuguese public debt is sustainable…
(1) Request for Extended Arrangement; March 9, 2012 (2) 5th Review; February, 13 2012 (3) 3rd Review; March 21, 2012Source: IMF, Staff Reports
Feb-Mar 2012 projectionsGovernment Debt Sustainability Framework: BaselineAs percentage of GDP
Portugal - 3rd Review(3)
Ireland - 5th Review(2)
Greece - 2nd Program(1)
MINISTÉRIO DAS FINANÇAS 19
90
95
100
105
110
115
120
2010 2011 2012 2013 2014 2015
Portuguese public debt is sustainable…Jun 2012 projections
Government Debt Sustainability Framework: BaselineAs percentage of GDP
Source:(1) IMF, Staff Report, 3rd Review; March 21, 2012 (3) Ministry of Finance, Jun 2012(2) IMF, Staff Report, 5th Review; February, 13 2012 (4) DOF EDP & SPU Return, Jun 2012
93,3
107,8
114,4 118,6 117,7 115,7
92,5
108,2
117,5
120,3 119,5 117,4
90
95
100
105
110
115
120
2010 2011 2012 2013 2014 2015
3rd Review(1)Portugal:
5th Review(2)
4th Review(3)
6th Review(4)Ireland:
MINISTÉRIO DAS FINANÇAS 20
GDP growth scenariosAnnual percentage changes
Sources: Eurostat and ECB calculations; ECB Monthly Bulletin March 2012
… under different growth scenarios Baseline scenario Adverse growth scenarioImpact of structural reformsBaseline with smaller consolidation effort
Public debt scenariosAs percentage of GDP
ECB Projections
Government debt dynamics for Portugal quickly stabilize in all scenarios
Without taking into account the impact of structural reforms on growth: debt fall below 100% of GDP in 2020
In an adverse scenario of higher GDP decline in the short-term: debt reach a maximum of 124% of GDP in 2013 and decline to below 110% of GDP in 2020;
Taking into account the impact of structural reforms:
- Real GDP growth increases from 2015 onwards (3% after 2017 against 1.6% in the baseline scenario)
- Large impact on debt dynamics that fall below 80% of GDP in 2020
MINISTÉRIO DAS FINANÇAS 21
Important progress in the institutional reform frontNON-EXHAUSTIVE
Public financial management
Public Administration
SOEs and PPPs
Approval of the Spending Commitments’ Control Law
Adoption of medium-term expenditure ceilings Establishment of the Portuguese Public Finance
Council Adjustment Program for the Autonomous Region of
Madeira Creation of the new Tax and Customs Authority
Improve budgetary control across all levels of Public Administration
Reduction of arrears Changes to national law in order to include
the golden rule and the debt reduction rule from the Treaty on Stability, Coordination and Governance in the EMU
Develop a public financial management strategy for the next three years
Next challengesMajor actions
Reduction of management positions (27%) and administrative units in central administration (40%)
Negotiations with public sector labor unions on working time flexibility and geographical mobility
Extend streamline measures to regional and local administration
Comprehensive review of public pay scales
Significant cost reductions in SOE (e.g.: voluntary redundancy programs)
New fiscally-prudent PPPs institutional framework: enhanced role of MoF
Ongoing revision of all PPP contracts by a top-tier accounting firm (to be completed by end-June)
Operational balance for SOEs as a whole by end-2012
Conditional on audit results, renegotiation of PPP contracts
MINISTÉRIO DAS FINANÇAS 23
-6000
-5000
-4000
-3000
-2000
-1000
0
1000
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
Capital accountCurrent and capital accountsCurrent account
-9,9 -9,0
-6,7
-4,1 -3,4
-2,7 -2,2
-10,0
-6,5
-12,0
-10,0
-8,0
-6,0
-4,0
-2,0
0,02010 2011 2012 2013 2014 2015 2016
Stronger than expected external adjustment
(1) Bank of Portugal, BP Stat, March 2012;(2) IMF, Staff report: Request for a Three-Year Arrangement Under the Extended Fund Facility, May 2011
Forecast(2)
Actual(1)
Better performance of current account than initial projections Current and capital account close to balance
Balance of paymentsEUR Millions
Current accountAs a percentage of GDP
2010 2011 2012
MINISTÉRIO DAS FINANÇAS 24
-8,4%
-4,0%
0,1%
-12,9%
-7,2%
-3,7%
0,5%
3,5%
-9,9% -9,0%
-6,7%
-4,1% -3,4%
-2,7%
-10,0%
-6,5%
-14,0%
-12,0%
-10,0%
-8,0%
-6,0%
-4,0%
-2,0%
0,0%
2,0%
4,0%
t-1 t t+1 t+2 t+3 t+4
1st Program (1)(t=1978)
2nd Program (1)(t=1983)
3rd Program - Forecast (2)(t= 2011)
3rd Program - Actual (3)(t= 2011)
Fast correction of external imbalances under adjustment programs
Current accountAs a percentage of GDP, t = first year of the Adjustment Programs
(1) Bank of Portugal, Long series(2) IMF, Staff report: Request for a Three-Year Arrangement Under the Extended Fund Facility, May 2011(3) Bank of Portugal, BP Stat, March 2012
MINISTÉRIO DAS FINANÇAS 25
Significant contribution from exports growth
Source: Bank of Portugal
Strong exports growth Exports’ market share is recovering
External demand and market shareAnnual rate of change
ExportsIndex (2006=100)
(p)
131
120
111
122
116
100
122
108
95
113 110
100
119
103
89
109 107
100
75
85
95
105
115
125
135
201120102009200820072006
Services
Total Exports
Goods
Source: Bank of Portugal, Economic Bulletin, Spring 2012
MINISTÉRIO DAS FINANÇAS 26
4% 4% 4%
6%
3%
5%
4%
6% 5%
19%
14%
20%
5% 5% 5%
8%
5% 4%
4% 4%
2%
13% 14%
19%
6% 6% 7%
8% 9%
3% 3% 4%
5%
9%
13% 14%
Pharmaceuticalsand OtherChemicals
Prepared Foodand Tobacco
Plastics, Rubberproducts
Base Metals Oil and OtherMinerals
Wood, Cork Ceramic, Stoneand Glass
Footwear,Others
Pulp, Paper Textile Products Vehicles andparts
Electrical andMechanicalMachinery
2000 2005 2011
Export profile is considerably changing
Source: National Statistics Office
Export composition by product, GoodsAs percentage of total
Increase in weight
Higher product diversification
Higher diversification: no group representing more than 15% of total
Traditional industries substituted by more technology intensive industries (Portugal is not a “pajama republic”)
MINISTÉRIO DAS FINANÇAS 27
68%
33%
28%
13%
11%
7%
22%
17%
20%
8%
13%
18%
4%
-7%
1%
-3%
14%
3%
4%
1%
China
Brazil
Belgium
UnitedStates
Italy
UnitedKingdom
Angola
France
Germany
Spain
1%
1%
3%
4%
4%
5%
6%
12%
14%
25%
1%
1%
3%
6%
4%
7%
3%
13%
13%
28%
Export profile is considerably changingHigher geographical diversification
Exports destination by country, GoodsAs percentage of total Average annual growth rate
2006-20112010-2011
Source: National Statistics Office
20062011
MINISTÉRIO DAS FINANÇAS 28
Export profile is considerably changing
Source: INE and GEE, “Boletim Mensal de Economia Portuguesa”, April 2012
Export composition by technological intensity, GoodsAs percentage of total
Higher technological intensity
12
2002
44
15
31
10
2001
45
14
44
11
2000
36
22
31
11
2006
36
22
31
12
2005
30
38
2007
14
31
10
20
31
12
2004
39
17
31
12
2003
42
16
31
Low
Medium-low
Medium-high
High
2011
35
25
31
8
2010
37
24
31
8
2009
39
23
29
8
2008
36
23
31
11
MINISTÉRIO DAS FINANÇAS 29
International investment position is reversing
Source: Bank of Portugal and INE
International Investment PositionAs a percentage of GDP
-104-107-111
-96-89
-79-67-63-58-55
-46-39
-120
-100
-80
-60
-40
-20
0
20
40
2004200320022000 2001
Monetary Authorities
General Government
Financial Sector
Total Economy
Non-financial corporationsand households
2011201020092005 20082006 2007
MINISTÉRIO DAS FINANÇAS 30
In 2012 Q1, exports of goods continued dynamic
Source: GEE, “Sintese Estatística de Comércio Internacional”, May 2012
Exports of goods, 2012 Q1y-o-y growth (%)
8,3
13,513,6
X
MarFebJan
3,9
2,0
1,9
1,7
1,20,9
11,6
MachineryTransport equipment
Mineral fuels
and oils
Jan-Mar OthersAgricultural products and food
Ores and metals
73,8 14,5 13,1 14,5 11,4
Top contributors to growthPercentage points
Jan-Mary-o-y %
MINISTÉRIO DAS FINANÇAS 31
Markets outside EU are being the main contributors
Source: GEE, “Sintese Estatística de Comércio Internacional”, May 2012
2,60,41,4
1,4
1,70,40,6
0,61,0
1,5
7,5
4,1
USAExtra EU
OthersBelgiumUnited Kingdom
France Angola OthersMoroccoChinaGermanyIntraEU
Total
11,6
5,4 10,7 7,6 11,4 20,1 32,3 50,5 29,8 186,2 53,9
Jan-Mary-o-y %
Exports of goods, Jan-Mar 2012Contribution to growth (p.p.)
MINISTÉRIO DAS FINANÇAS 32
Measures contributing to a more favorable environment to credit expansion
Liquidity support at longer maturities and broadening of eligible collateral
Banks capital augmentation plans of three major banks already announced
Payment of arrears in the health and regional/local administrations sectors in the context of the partial transfer of banks pension funds to the State
Measures to discourage evergreening of non-performing loans
Action
ECB measures
Banks capitalization
Partial transfer of banks pension funds’
BdPsupervision
Outcome
Help to improve banks liquidity position
Help to improve banks solvency
Positive impact cash available to the economy
Channel funds to more productive sectors of the economy
Note: BdP – Banco de Portugal / Bank of Portugal
MINISTÉRIO DAS FINANÇAS 33
0,00
0,25
0,50
0,75
1,00
1,25
1,50
1,75
2,00
2,25
ECB repo rate 1m
3m
12m
Reduction of the reserverequirements ratio: from 2% to 1%
Broadening ofeligible collateral
Easing of bank liquidity pressures
Source: Bank of Portugal, May 2012
ECB Measures (8 December)EuriborPercentage
Longer-term refinancingoperations: 36 months
(December 22 and March 1)
ECB LTRO 36m
MINISTÉRIO DAS FINANÇAS 34
Recapitalization of the banking system
Note: BSSF – Bank Solvency Support FacilitySource: Ministry of Finance, June 2012
Injection of core tier 1 capital
Each bank will exceed the EBA’s capital requirements coming into force at end-June
The participating banks will become amongst the most highly capitalized in Europe
They will be well positioned to ensure the continued access to credit for productive and tradable sectors of the Portuguese economy
BCP and BPI will also each commit at least €30 million per year to invest in the equity of SME
€1.65 bn
Banks
€3.5 bn
€1.5 bn
(BSSF)
(BSSF)
Ministry of Finance Announcement: June 4, 2012
The State remains prepared to support any other banks that meet the BSSF’s criteria and will analyzeany recapitalization plans that may be presented
MINISTÉRIO DAS FINANÇAS 35
Core Tier 1(1), Portuguese Banking SystemPercentage
6,8 7,8 7,9 7,8 8,1 8,7
9,6
Q4 Q2 Q4 Q2 Q4 Q2 Q42011201020092008
End-2012 target: 10%
Core Tier 1 target of 9% (EBA criteria) to bereached by end-June 2012, following a prudent evaluation of sovereign debt exposures
Special on-site inspections confirmed the robustness of capital adequacy
Regulatory framework was improved: legislation on early intervention,resolution and deposit insurance
Key achievements
Portuguese banks are stronger than before the crisis
(1) Excluding BPNSource: Bank of Portugal, April 2012
MINISTÉRIO DAS FINANÇAS 36
151 152 152 157
147
137 129
162 162 163 167
158
149
139
Q4 Q2 Q4 Q2 Q4 Q2 Q4
Adjustment is progressing as planned
Important contribution of higher deposits and sizeable asset sales
Deleveraging process is ongoing
Key achievements
120
Loans-to-deposits ratio, Portuguese Banking SystemPercentage
(1) About 85% of credit market shareSource: Bank of Portugal, April 2012
Other banking groups contribution
Top 8 banks (1)
2011201020092008
Indicative target in 2014
MINISTÉRIO DAS FINANÇAS 37
150000
170000
190000
210000
230000
250000
270000
Greece Ireland Portugal
Depositors’ trust in the Portuguese banking system
Note: BS reference sector breakdown- MFIs excluding ESCB; BS counterpart sector- Non-MFIs; Data type- Outstanding amounts at the end of the period (stocks)Source: ECB; May 2012
Total deposits (excluding deposits from financial institutions)EUR Millions
MINISTÉRIO DAS FINANÇAS 39
Economic growth: importance of the Structural Transformation Agenda
Opening to foreign investment and to the challenges of international competition
Competitive location for physical and human capital
Fully integration in the Single European Market
Development of a stability culture
Judicial system
Broad range of reformsStructural transformation
Confidence, credibility and justice
Openness,competition and competitiveness
Entrepreneurship, innovation and labor market flexibility
Limited State and economic democracy
Network industries: energy, telecommunications, transports
Competition Housing Market
Labor market Education and training
Privatizations Special rights of the State Public procurement Administrative burden
Pillars
MINISTÉRIO DAS FINANÇAS 40
Portugal needs a broad transformation agenda
(1) The heatmap is constructed based on a variety of structural indicators from alternative sources in order to flag areas where a country has the greatest need to implement structural reforms. For a discussion of the methodology and detailed components, see IMF, 2010d, “Cross-Cutting Themes in Employment Experiences During the Crisis”, IMF Report SM/10/274 Source: OECD; World Economic Forum; Fraser Institute and IMF staff calculations
Structural reforms gaps in European economies: a heatmap(1)
Labor market inefficiency
Business regulations
Network regulation
Retail sector regulation
Profess. services regulation
Institutions and contracts
Human capital
Infrastructure
Innovation
Medium term
Longterm
DE FR NL BE IT ES PT GR AT FI IE DK SE UK US JP
Selected comparatorsEuro area countries
MINISTÉRIO DAS FINANÇAS 41
0
5
10
15
20%
Structural reforms: long-run potential impact
Source: Bouis and Duval (2011), OECD Economics Department Working Paper n.º 835; Gomes et al (2011), Banco de Portugal Working Paper n.º 13
2 empirical studies for Portugal
Approach
No model: use empirical results from several studies
Broad range of reforms that include reforms in product and labor market and reforms of benefit, tax and retirements systems
Multi-country DSGE Model
Reforms of labor and services market
Bouisand Duval (2011)
Gomes et al (2011)
GDP per capita, increase in level in percent at 10-year horizon
PT ~13%(> 5% after 5 years)
20
15
10
5
0
Results
Increase in long-term output of 7.8% , after 7 years (8.6% in case of cross-country coordination of reforms in the euro area)
MINISTÉRIO DAS FINANÇAS 42
In-depth labor market reformAgreement on Growth, Competitiveness and Employment
The agreement between the Government, Unions and Enterprises Associations: an important step to implement reforms in an environment of social dialogue
Implemented measures
Tackle labor market segmentation
Foster job creation
Ease transition of workers across firms and sectors
Objectives
Reduction of 4 national holidays Elimination of 3 extra days of vacation Decrease in 50% of compensation for overtime
work and eliminate compensatory time off (previously 25% of overtime worked hours)
Restrictions on automatic extension of collective agreements
Implementation of individual and group working time management mechanisms
Reduction of restrictions to individual dismissal Reduction of severance payments to align with
EU average Implementation of labor arbitration mechanisms
“Estímulo 2012” program with incentives for hiring of medium and long term unemployed in return for on job training
“Impulso Jovem” program specifically designed to help youth unemployed
Reducing labor costs
Labor market flexibilization
NON-EXHAUSTIVE
Active Labor Market Policies
MINISTÉRIO DAS FINANÇAS 43
Reduce mobile termination rates Broad access of all operators to existing
networks Auction access to new networks (4G mobile
network)
Speed up liberalization of Gas and Electricity Revise remuneration scheme of co-generation
to accelerate converge to market-based pricing Redesign Power Guarantee mechanism Foster cross border market integration to
increase competition
Revise margins of pharmacies Set targets for reduction of pharmaceutical
profit margins Increase share of generic drugs
Increasing tradable sector competitiveness by reducing non-tradable sectors excessive costs cascaded through the economy
Implemented measures
Broad product market reform
Reduce excessive mark-ups in network industries and non-tradable
Telecommunications
Energy
Health
Objective
NON-EXHAUSTIVE
MINISTÉRIO DAS FINANÇAS 44
Implemented measures
Improving business environment
Foster investment and innovation
Incentive a more efficient use of resources
Targeted measures to accelerate the resolution of the backlog: 50,000 enforcement cleared since November
Adoption of a law on arbitration to facilitate out-of-court settlement New insolvency code and corporate recovery, focusing on speed,
simplification and creation of an extra-judicial phase of corporate recovery
Approval of a new Competition Law harmonized with the EU legal competition framework which will come into force early July
Strengthen the power of the Competition Authority Set up of a specialized court on Competition, Regulation and
Supervision (already in operation)
Liberalization of regulated professions’ access and exercise Fostering the development of the European single market for services and
labor: already transposed 32 out of 69 legal acts regarding services and have completed all aspects of the qualifications directive
Reduction of firms’ administrative burden: licensing requirements and other legal formalities
Approval of a new Urban Lease Law which is expected to come into force in October
Judicial system
Competition
Other services
Objective
NON-EXHAUSTIVE
MINISTÉRIO DAS FINANÇAS 45
Privatization program as a flagship in the agenda
(1) Sale of “Caixa Geral de Depósitos” participation of 1%; sale yet to be materialized but already decided: tag along to another shareholder’s sale(2) Concession(3) Expected completion date by “Caixa Geral de Depósitos”Source: Ministry of Finance, June 2012
Electricity distribution
Energy retail and production
Mail distribution
Water distribution
Air infrastructure
Railway logistics
Seguros
Insurance
Seguros
Energy retail and production
2011 2012 2013Q1
Air transport Television broadcasting
(1) (2)
Q3Q2
(3)
Q4
MINISTÉRIO DAS FINANÇAS 46
40%
Asia: State Grid Arabia: Oman Oil Company
EUR 593M: average premium of 33.6% per share1
EUR 1,000M through Chinese banking entities
Strategic plan for national economy development (e.g. I&D center construction)
21,35%
Asia: China Three Gorges Europe: E.ON Latin America: Eletrobras
and Cemig
EUR 2,693M: premium of 53.6% per share1
EUR 2,000M through Chinese banking entities
EUR 2,000M until 2015 in wind farms
Privatization results above expectations
Bidders
Revenue
Financing
1 Considering the closing price of the day before the Council of Ministers decision
Investment
% Equity
The proceeds amount to about 60% of the initial estimate of privatizations revenues foreseen in the Adjustment Program
Selected bidders
MINISTÉRIO DAS FINANÇAS 48
The Program addresses fundamental imbalances and deficiencies
Restoring credibility and confidence
The adjustment is inevitable
Solid starting point for the Program
Broad popular and social support for adjustment
Elimination of budget deficit on a durable way –supported by a new fiscal policy framework (at national and European level)
Reduction and then elimination of external deficit
Deep and frontloaded structural reform agenda that will boost potential output and competitiveness
Robustness of the overall Program
The Program works disregarding positive impact of structural reforms on potential growth
Structural reforms are likely to speed upadjustment
Gradual credibility buildup
The Program shelters government financing from the vagaries of financial markets
Quantitative objectives and targets steered and monitored over time (9 reviews until Sep. 2013)
Compliance with the Program will push for a gradual change in markets’ expectations and perceptions
MINISTÉRIO DAS FINANÇAS 49
MINISTÉRIO DAS FINANÇAS
Portugal: policies, achievements and challenges
Maria Luís Albuquerque
Hong KongJuly 6, 2012
MINISTÉRIO DAS FINANÇAS 51
Index
1. On the way to become the difficult Portuguese case Forecasted and actual budgetary balances Net international investment position Unemployment in Portugal – Q4 2011 Youth and long-term unemployment in Europe
2. The Economic Adjustment Program Quarterly GDP growth Recession in Q1 2012 vs other European countries Okun's law for Portugal Unemployment rate – quarterly forecasts Unemployment rate 1991-2011 T-Bills: bid-to-cover ratio and international allocation T-Bonds: yields, 2Y, 5Y and 10Y
3. Fiscal consolidation DSA: Nov-Dec 2011 projections for PT, IR and GR
4. Deleveraging and Financial Stability Current account in Portugal’s past adjustments EBA Communication, 08 December 2011
5. Structural transformation Higher qualifications of younger generations Positive performance in advanced education levels Portugal as a competitive location for business
6. Conclusion: how will it work? Council of the European Union, 30 January 2012 Private sector response in 83-84 and 2009
MINISTÉRIO DAS FINANÇAS 53
SGP 1999-2002 SGP 2003-2006
SGP 2005-2009 (June)
SGP 2010-2013
Actual figures
SGP 2007-2011 SGP 2004-2007
SGP 2002-2005
-12
-10
-8
-6
-4
-2
0
21999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Lack of discipline
Source: INE and Ministry of FinanceNote: The figures for the forecasts correspond to the values that have been reported in the SGP updates
Forecasted and actual budgetary balancesAs a percentage of GDP
Index
MINISTÉRIO DAS FINANÇAS 54
The worsening of the international investment position…
… led to the worst position among Euro area countries
Net international investment position in 2010As a percentage of GDP
Very high levels of the economy borrowing requirements
Net international investment positionAs a percentage of GDP
Note: The NIIP of Ireland refers to 30 June 2010Source: AMECO, Bank of Portugal and IMFSource: Bank of Portugal
-120
-100
-80
-60
-40
-20
0
20
40
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
General GovernmentFinancial SectorNon-f inancial corporations and HouseholdsMonetary AuthoritiesNet Foreign Assets Position
-150 -100 -50 0 50 100
Belgium
Germany
Netherlands
Finland
Austria
France
Italy
Spain
Greece
Ireland
Portugal
Index
MINISTÉRIO DAS FINANÇAS 55
Unemployment in Portugal
Source: INE, “Estatísticas do Emprego”, November 2011
By agePercentage of total unemployed
By education levelPercentage of total unemployed
By durationPercentage of total unemployed
4Q 2011
20%
28% 22%
29%
15-24 25-34 35-44 45 and more
47% 53%
Until 11 months12 months and more (long-term)
63% 23%
14%
Until basic education ("3º ciclo")Secundary and post-secundaryHigher education
Index
MINISTÉRIO DAS FINANÇAS 56
0123456789
10
05
1015202530354045
High levels of youth and long-term unemployment
(1) Less than 25 years, annual average(2) 12 months or more, annual averageSource: Eurostat
PT: 27,7
As percentage of labor force, 2010
Youth unemployment (1)
Long-term unemployment (2)
PT: 6,3
Index
MINISTÉRIO DAS FINANÇAS 58
Quarterly GDP growth
Source: INE, May 2012 (Flash estimate for Q1 20112)
Real GDP GrowthPercentage
-0,1-1,3-0,6-0,3-0,7
-2,2-2,8
-1,9
-1,1-0,6
-5
-4
-3
-2
-1
0
1
2
y-o-y
q-o-q
Q4 Q1Q3Q1 Q2Q4Q1 Q2 Q3Q2Q1Q4Q3Q2Q1Q4Q3
2008 2009 2010 2011 2012
Index
MINISTÉRIO DAS FINANÇAS 59
Recession in Q1 2012 was close to euro area average
Source: Eurostat, “Flash estimate for the first quarter of 2012”, May 2012
Real GDP Growth in Q1 2012, based on seasonally adjusted dataPercentage change compared with Q4 2011
0,00,0
Germany
0,5
-0,8
SpainNether-lands
United Kingdom
-0,2
Portugal
-0,3-0,2
Italy
0,3 0,2
France Euro Area
Belgium
-0,1
Austria
Q1 2012 vsQ1 2011
1,2 -1,3-0,4-1,30,0-2,20,00,30,70,5
Index
MINISTÉRIO DAS FINANÇAS 60
Okun's law for Portugal1980-2011
2,5
2,0
1,5
1,0
0,5
0
-0,5
-1,0
-2 0 2 4 6
2011
Change in GDP (%)
Cha
nge
in u
nem
ploy
men
t (p.
p.)
Source: INE and Ministry of Finance
Index
MINISTÉRIO DAS FINANÇAS 61
Unemployment rate – quarterly forecastsY-o-Y rate of change, percentage points
Source: INE and Ministry of Finance
Forecast range 95%ForecastRealized
Recession Periods
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
3,0
2012201120102009200820072006200520042003200220012000
Index
MINISTÉRIO DAS FINANÇAS 62
Unemployment rate 1991-2011Percentage
Source: INE and Ministry of Finance
0
1
2
3
4
5
6
7
8
9
10
11
12
13
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
Unemployment rateNAIRU
Index
MINISTÉRIO DAS FINANÇAS 63
A turning point in Treasury financingPortuguese Treasury Bills
(1) Weighted average of 3, 6,12 and 18 months auctionsNote: Auction announcement date Source: IGCP, May 2011
Weighted(1) Bid-to-cover ratioWeighted(1) international allocationPercentage
20122011
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
Jun
15Ju
l 16
Jul 2
0
Feb
15M
ar 2
1A
pr 0
4M
ay 0
2
Oct
19
Sep
21
Oct
05
Jan
18Fe
b 01
Jan
04D
ec 0
7
Sep
07
Aug
17
Aug
03
Oct
19
Nov
16
Nov
02
05
1015202530354045505560
Jun
15Ju
l 16
Jul 2
0
Feb
15M
ar 2
1A
pr 0
4M
ay 0
2
Oct
19
Sep
21
Oct
05
Jan
18Fe
b 01
Jan
04D
ec 0
7
Sep
07
Aug
17
Aug
03
Oct
19
Nov
16
Nov
02
20122011
Index
MINISTÉRIO DAS FINANÇAS 64
A turning point in Treasury financingPortuguese Treasury Bonds
Source: 2 years – Bloomberg; 5 and 10 years – Reuters, May 2011
2 Years, yieldsPercentage
5 Years, yieldsPercentage
10 Years, yieldsPercentage
0
2
4
6
8
10
12
14
16
18
20
22
24
May
201
2A
pr 2
012
Mar
201
2Fe
b 20
12Ja
n 20
12D
ec 2
011
Nov
201
1O
ct 2
011
Sep
201
1A
ug 2
011
Jul 2
011
Jun
2011
0
2
4
6
8
10
12
14
16
18
20
22
24
May
201
2
Mar
201
2Fe
b 20
12Ja
n 20
12D
ec 2
011
Nov
201
1O
ct 2
011
Sep
201
1A
ug 2
011
Jul 2
011
Jun
2011
Apr
201
2
0
2
4
6
8
10
12
14
16
18
20
22
24
Oct
201
1
Dec
201
1N
ov 2
011
Aug
201
1S
ep 2
011
May
201
2
Mar
201
2
Jan
2012
Feb
2012
Apr
201
2
Jul 2
011
Jun
2011
Index
MINISTÉRIO DAS FINANÇAS 66
93
107
116 118
116 114 112
80
90
100
110
120
130
140
150
160
170
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
93
107
116 118
116 114 112
145
161
152 155
152 147
142
136 131
125
120
80
90
100
110
120
130
140
150
160
170
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
93
106
114 118 118 115
111
93
107
116 118
116 114 112
145
161
152 155
152 147
142
136 131
125
120
119 121 120 120 119 119 118
80
90
100
110
120
130
140
150
160
170
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Portuguese public debt is sustainable…
(1) Second Review Under the Extended Arrangement; December 7, 2011 (2) Fifth Review Under the Stand-By Arrangement; November 30, 2011(3) Fourth Review Under the Extended Arrangement; November 29, 2011 (4) 2011 Article IV Consultation; June 20, 2011Source: IMF, Staff Reports
Government Debt Sustainability Framework: BaselineAs percentage of GDP
Portugal(1) Greece(2)
Ireland(3) Italy(4)
Nov-Dec 2011 projections
Limit fixedfor Greecedebt sustainability
Index
MINISTÉRIO DAS FINANÇAS 68
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986
Portugal succeeded in past adjustments
Adjustment programs in Portugal
Source: Bank of Portugal
Portugal is a paradigmatic example of successful and rapid adjustments in democracy
Current balanceAs a percentage of GDP In the past, the
adjustment was mainly due to the private sector
Currently, the public sector will also adjust significantly
Index
MINISTÉRIO DAS FINANÇAS 69
Portuguese measures are aligned with the European strategy
The European Banking Authority (EBA) published a formal Recommendation, and the final figures, related to banks’ recapitalization needs. The aggregated shortfall amounts to 114.7bn Euros.
Banks will be required to strengthen their capital positions by building up an exceptional and temporary capital buffer against sovereign debt exposures to reflect market prices as at the end of September.
In addition, banks will be required to establish an exceptional and temporary buffer such that the Core Tier 1 capital ratio reaches a level of 9% by the end of June 2012.
Sales of sovereign bonds will not alleviate the buffer requirementto be achieved by June 2012.
Pursuant to the Recommendation, the national authorities will require banks to submit, by 20th January, their plans detailing the actions they intend to take to reach the set targets.
Source: EBA Communication, 08 December 2011
Aggregated shortfall required by country, million Euros
Index
MINISTÉRIO DAS FINANÇAS 71
0
10
20
30
40
50
60
The increase in education level of younger generations…
… has approached the human capital qualification to its European pears
Population with higher education in age group 25-34 in 2009Percentage
Structural transformation is ongoing…
Source: OCDE - "Education at a Glance 2011"
Population with higher education by age groupPercentage
25-34 35-44 45-54 55-64
1999 2009
Higher qualifications of younger generations
0
10
20
30
40
50
60
Index
MINISTÉRIO DAS FINANÇAS 72
The completion rate of PhDs is the highest in Europe
Some Portuguese schools are among best-in-class
Financial Times – Business Education RankingsPosition in 2011
Students completing a PhD in 2009Percentage
#33 European Business School#65 Master in Management#45 Executive education – Customized#54 Executive education – Open
#39 European Business School#2 e #61 Master in Management(1)
#64 Executive education – Open
Source: OCDE - "Education at a Glance 2011"
(1) The Master #2 (CEMS) is offered by a network of schools of which Nova SBE is part of
Source: Financial Times – Business Education Rankings
Very positive performance in advanced education levelsStructural transformation is ongoing…
0 1 2 3
Estonia
Spain
Belgium
Ireland
Slovenia
France
The Netherlands
EU 21
Austria
Slovakia
Germany
Finland
Portugal
Index
MINISTÉRIO DAS FINANÇAS 73
8 9 13 15 17 18 19 20 21 23 24 25 26
30 31
Structural transformation is ongoing…Portugal as a competitive location for business in the euro area
Note: The rankings for all economies are benchmarked to June 2011Source: World Bank and IFC; Doing Business 2012; October 2011
Ease of Doing Business Rank (June 2011)Country position in OECD ranking
+ -
Index
MINISTÉRIO DAS FINANÇAS 75
Council of the European Union, 30 January 2012Communication by euro area Member States
Today, we have taken major steps in the implementation of our overall strategy to fight the crisis:
1. The Treaty on stability, coordination and governance in the Economic and Monetary Union has been finalized. It will be signed in March. At the same time an arrangement will be decided about the procedure to be followed to bring to the Court of Justice a case of noncompliance with the Treaty.
This represents a major step forward towards closer and irrevocable fiscal and economic integration and stronger governance in the euro area. It will significantly bolster the outlook for fiscal sustainability and euro area sovereign debt and enhance growth.
2. The Treaty establishing the European Stability Mechanism is ready for signature, and the objective is that it enters into force in July 2012. This permanent crisis mechanism will contribute to raising confidence, solidarity and financial stability in the euro area. It will have a wide range of tools available and a strong financial basis.
As agreed in December, we will reassess in March the adequacy of resources under the EFSF and ESM.
3. Concerning Greece, we note progress made in the negotiations with the private sector to reach an agreement in line with the parameters agreed upon in October. We urge the Greek authorities and all parties involved to finalize negotiations on the new program in the coming days. Restoration of credibility requires that all political parties irrevocably commit to the new program. We urge our Finance Ministers to take all necessary steps for the implementation of the PSI agreement and the adoption of the new programme, including prior actions, well in time for the launching of the PSI operation by mid-February. We recall that PSI in Greece is an exceptional and unique case.
4. We welcome the latest positive reviews of the Irish and Portuguese programmes which concluded that quantitative performance criteria and structural benchmarks have been met. We will continue to provide support to countries under a programme until they have regained market access, provided they successfully implement their programmes.
5. We welcome the measures decided and already enacted by Italy and Spain to reduce the public deficit and boost growth and competitiveness and call on them to pursue their important efforts for fiscal consolidation and structural reforms. These reforms as well as their swift implementation will reinforce financial stability in Italy and Spain as well as the euro area as a whole.
Source: Council of the European Union
Index
MINISTÉRIO DAS FINANÇAS 76
-2
0
2
4
6
8
10
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989
Private consumption( residents)
Public consumption GDP
In the last adjustment program (83-84), the private sector had a rapid response
In 2009, the private sector started the adjustment process (but …)
Borrowing Requirements by Institutional SectorAs a percentage of GDP
Dynamism of the private sector: a key issue to ensure the success of the program
Real growth ratePercentage
-6
-4
-2
0
2
4
6
8
10
12
2004
2005
2006
2007
2008
2009
2010
Total economy Non-financial private sector
Financial sector General Government
Source: Bank of PortugalSource: Bank of Portugal
Index