Recent developments and
challenges for the Portuguese
economy
Nameda
• Job
Carlos
Silva Costa • Governor
13 January 2014
Seminar
Seminar
National
Bankname
of Poland
19 June 2015
Outline
1. Growing imbalances and the sudden stop
2. The ongoing adjustment of the Portuguese economy
3. Recent developments and the macroeconomic outlook
4. Challenges ahead: Portugal and the EMU
5. Conclusions
2•
1. Growing imbalances and the sudden stop
Macroeconomic imbalances came to the spotlight in the context of the global crisis
Indebtedness of the non-financial private sector
(% of GDP)
Deficit and public debt (% of GDP)
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
100
Net borrowing of Gen. Govern.
Public debt - right axis
160
90
Non-financial corporations
140
80
Households
120
70
20
20
10
0
2003
2004
2005
2006
2008
2009
0
International Investment Position
2010
2009
-12
2008
-10
-120
2007
-100
2006
-8
2005
-6
-80
2004
-4
-60
2003
-2
-40
2002
-20
Current+Capital Account (rhs)
3 • Source: Banco de Portugal
2007
0
2001
1995 1997 1999 2001 2003 2005 2007 2009
2002
External Accounts and International Investment
Position
% of GDP
Trend TFP growth (per cent)
HodrickPrescott
2001
2000
1,4
1,2
1,0
0,8
0,6
0,4
0,2
0,0
2000
Sources: INE and Banco de Portugal.
1999
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
40
1998
30
60
1997
40
80
1996
50
Percentage of GDP
100
60
2010
1. Growing imbalances and the sudden stop
Over-indebtedness and excessive
bank leverage
Unsustainable public finances
Anemic economic growth and
low productivity
Sudden stop in private external
finance
Outstanding amounts of monetary policy
operation of Portuguese banks
Euro million
10-year Government bond yields
Spread against Germany in basis points
1200
60
Deposit Facility
50
1000
Marginal lending Facility
40
Longer-term refinancing operations
30
800
Main Refinancing Operations
600
20
10
400
0
200
-10
-20
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
4 • Sources: Banco de Portugal and Reuters
Jul-10
Jan-11
Jul-11
0
Austria
Italy
Belgium
Spain
France
Ireland
Netherlands
Portugal
Finland
Greece
2. The ongoing adjustment of the economy
• Sizeable adjustment of imbalances in a monetary union
i) Net lender position (improvement of around 12 p.p. in the current
and capital account between 2010 and 2014)
ii) Strong and unprecedented fiscal consolidation effort in 2011-14
(around 10 p.p. improvement in the structural primary deficit)
Current and capital account (% GDP)
The composition of the fiscal adjustment
30
5.0
25
20
3.0
15
10
1.0
5
0
-1.0
-5
-3.0
-10
-15
2008
2009
2010
2011
Current and capital account
5•
Sources: INE and Banco de Portugal
2012
Investment
2013
2014
Savings
-5.0
2009
2010
2011
2012
Contribution from expenditure
Change in structural primary balance
Sources: INE and Banco de Portugal
2013
Contribution from revenues
2014
2. The ongoing adjustment of the economy
• Restructuring of the economy and reallocation of resources
i) Weight of exports in GDP increased 10 p.p. between 2010 and 2014
ii) Export market share gains of around 10 p.p. in 2010-14
iii) Increased geographical diversification of exports; significant share
due to young firms
Accumulated export market shares (index: 2007=100)
Export decomposition by firms’ birth year
120
115
110
105
100
95
90
85
80
2007
2008
Portugal
France
2009
2010
2011
Germany
Ireland
6•
Sources:
ECB and Banco de Portugal
2012
2013
Spain
Italy
2014
Source: Banco de Portugal calculations based on IES database
2. The ongoing adjustment of the economy
• The deleveraging process of the private sector is ongoing
i) Indebtedness levels remain above the euro area average
ii) They affect consumption and investment decisions of the most
indebted agents
Financial debt in Portugal: households and non-financial
corporations (% GDP)
140.0
120.0
100.0
80.0
60.0
Households
Non-financial corporations (non-consoli dated)
Non-financial corporations (consolidated)
7•
Sources: INE and Banco de Portugal
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
40.0
2. The ongoing adjustment of the economy
• The strengthening of the financial system
i) Increased solvency and liquidity position of the banking sector
ii) Orderly deleveraging process, consistent with the deleveraging of
the private sector
iii) There were no disruptions in financial intermediation stemming
from the resolution of BES
Core Tier 1 ratio (until 2013) and CET 1 ratio (2014) – End of
period values
Source: Banco de Portugal
8•
Loan to deposits ratio (%) - End of period values
Source: Banco de Portugal
2. The ongoing adjustment of the economy
• Sustained return of the sovereign to international markets
i) Successful exit from the Programme, anchored on sounder
fundamentals & institutional progress on a European level
ii) Policy measures at the Eurosystem level are contributing to
historically low yields in the euro area
10-year government bond yields
20
15
10
5
0
Jan-10
9•
Jan-11
Portugal
Jan-12
Italy Spain
Source: Thomson Reuters
Jan-13
France
Jan-14
Jan-15
Germany Ireland
3. Recent developments and outlook
• The international environment is improving
i) The recovery in the euro area has been sluggish but is becoming
more broad-based
ii) Improving monetary transmission mechanism, following years of
significant impairment
GDP evolution in the euro area
(index; 100=peak before recession)
116
Interest rates on bank loans to NFCs below 1 million euros
– new business (per cent)
8
112
6
P e rcentage
108
104
4
2
100
2009Q2
2013Q1
Average of past recoveries
96
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
92
0
2
4
6
8
10
12
14
Qu arters since the trough of the recession
10 •
Sources: EUROSTAT, CEPR and Banco de Portugal calculations
DE
FR
IT
ES
NL
GR
IRL
PT
AU
BE
FI
MRO
Sources: ECB and Banco de Portugal calculations
3. Recent developments and outlook
• A gradual recovery has been observed in Portugal since mid-2013
i) GDP growth close to the euro area in the last quarters
ii) Improvement in the labor market, albeit long-term and structural
unemployment remain historically high
Year-on-year rate of change of GDP (per cent)
4.0
Unemployment rate (per cent)
19.0
Portugal
3.0
Euro area
2.0
Portugal
17.0
Euro area
15.0
1.0
0.0
13.0
-1.0
11.0
-2.0
11 •
Sources: EUROSTAT and INE
Sources: EUROSTAT and INE
2015Q1
2014Q1
2013Q1
2011Q1
2015Q1
2014Q1
5.0
2013Q1
-5.0
2012Q1
7.0
2011Q1
-4.0
2012Q1
9.0
-3.0
3. Recent developments and outlook
• The gradual recovery is rooted in resilient exports coupled with
improving domestic demand
i) The deceleration in the exports of goods in 2014 was due to
temporary factors, notably related to exports of fuels
ii) Investment dynamics is still lagging, but growth is already strong in
machinery, equipment and transport material
Portuguese exports and external demand
(volume, annual rate of change)
15
GFCF by type of investment (2011Q1=100)
120
10
110
5
100
0
90
80
-5
70
-10
60
-15
2000
2002
2004
2006
2008
2010
2012
Cumulated differential since 2000 (in p.p.)
External demand
Portuguese exports
12 •
Sources: INE and Banco de Portugal calculations
2014
50
2011
2012
2013
2014
GFCF: Total
Machinery and equipment
Transport material
Construction
Sources: INE and Banco de Portugal calculations
3. Recent developments and outlook
• Credit developments have been consistent with the adjustment
i) Improvement in credit market conditions since 2013
ii) Credit flows have been channeled to the most dynamic and
productive firms, notably exporting firms in the private sector
Distribution of interest rate to non-financial corporations
(new business), in percentage
Credit to private firms by risk profile
15.0
.25
10.0
5.0
.2
0.0
.15
-10.0
.1
-15.0
-20.0
0
5
10
15
Rate
Nov 2012
13 •
Source: Banco de Portugal
Nov 2013
1st quartile
3rd quartile
2nd quartile
4th quartile
Nov 2014
Note: Low (high) risk corresponds to the low (high) z-score deciles
Source: Banco de Portugal
Jul. 14
Jan. 14
Jul. 13
Jan. 13
Jul. 12
Jan. 12
Jul. 11
Jan. 11
.05
-25.0
0
Density
-5.0
3. Recent developments and outlook
• The latest macroeconomic projections by Banco de Portugal
i) GDP growth close to the euro area throughout the horizon
ii) Gradual recovery of domestic demand and strong export dynamics
iii) Significant recovery in business GFCF
iv) Sustained correction of macroeconomic imbalances
Projection June 2015 (annual rate of change, per cent)
2014
2015(p)
2016(p)
2017(p)
Gross Domestic Product
0.9
1.7
1.9
2.0
Private Consumption
Public Consumption
GFCF
Exports
Imports
2.1
-0.3
2.5
3.4
6.4
2.2
-0.5
6.2
4.8
5.7
1.7
0.2
4.4
6.0
5.5
1.7
0.0
6.0
6.4
6.5
2.1
1.1
3.0
2.1
3.2
2.1
3.4
2.1
-0.2
0.5
1.2
1.3
Current and capital account (% of GDP)
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
-10.0
-12.0
Current & Capital Account (% GDP)
Trade Balance (% GDP)
HICP
Source: Banco de Portugal.
14 •
-14.0
2008
2009
2010
2011
2012
2013
Goods and services account
Secondary income account
Current and capital account
Sources: INE and Banco de Portugal.
Note: (p) - projected.
2014 2015 (p)2016 (p)2017 (p)
Primary income account
Capital account
4. Challenges ahead: PT and the EMU
• Adjustment of accumulated imbalances will continue in PT
15 •
i)
Even under conservative macroeconomic assumptions, fulfilling
the Fiscal Compact ensures debt sustainability
ii)
Need to increase financial autonomy of non-financial
corporations
iii)
Need to restore banking sector profitability
4. Challenges ahead: PT and the EMU
EMU - MUTUAL TRUST
Responsibility
Solidarity
It is not possible to reinforce the
area as a whole without the
acceptance by the parties of the
rules resulting from the whole
It is not possible to guarantee the
stability of the whole without
policy instruments to absorb
shocks that Member State are
subject
Sound Economic Policies
- Comply with fiscal compact and MIP
- Create a European Fiscal Council
- Enforcement should rest with Eurogroup
16 •
Cross-country risk sharing
- Create a European Monetary Fund
- Complete banking union (Single
Resolution Fund and Common Deposit
Guarantee Scheme)
- Create a Capital Markets Union
4. Challenges ahead: PT and the EMU
• Improving long-run growth is of the essence (PT and EMU)
17 •
i)
Need to sustain the reform momentum
ii)
Investments in physical and human capital are key
iii)
Deepen Single Market
iv)
Capital Markets Union
5. Conclusions
• Sounder fundamentals, coupled with institutional progress on a
European level, have solidly anchored the exit from the Assistance
Programme
• The projections point to a sustained but gradual recovery, which
can only be enhanced via an acceleration of investment
• The ongoing macroeconomic adjustment requires long-term
commitments which anchor agents’ incentives; maintaining
ownership and social cohesion throughout the process is key
• The current process of institutional deepening on a European level
is essential to foster macroeconomic stability and enhance
potential growth
18 •
Thank you!
19 •