Restoring Stability and Growth
in the Portuguese Economy
Carlos da Silva Costa
Restoring Stability and Growth in the Portuguese Economy
I.
The seeds of the crisis (1995-2010)
II.
The closure of markets (2007-11)
III.
The Economic Adjustment Programme (2011-14)
IV.
Looking beyond 2014
Outline
2
I. The seeds of the crisis (1995-2010)
EMU enlarged the financing possibilities of domestic agents …
Indebtness of the non-financial private sector
(% of GDP)
24
35
160
21
30
140
20
0
Jan-07
0
Jan-09
Money-market (3 months)
Loans to non-monetary private sector (annual growth rate, right axis)
2010
Jan-05
2009
Jan-03
2009
Jan-01
2008
Jan-99
2008
Jan-97
1997
Jan-95
2007
0
40
2006
5
3
2005
6
60
2004
10
80
2003
15
9
2002
12
100
2001
20
2000
15
Households
120
1999
25
1998
18
Non-f inancial corporations
Growth of loas; In percentage
Sources: INE (Statistics Portugal) and Banco de Portugal.
Sources: ECB and Banco de Portugal.
Credit to deposits ratio
Households' Savings Rate
180
(% Disposable Income)
13
160
12
140
11
120
In percentage
10
9
8
7
100
80
60
40
6
20
5
2008
2009
2010
2010
2007
2007
2006
2006
2005
2005
2004
2004
2003
2003
2002
2002
2001
2001
2000
2000
1999
1999
1998
1998
1997
1997
1996
1996
0
4
1995
Interest rate; In percentage
Interest rate and loans to the private sector
3
I. The seeds of the crisis (1995-2010)
Higher spending not matched by higher income …
Income and Consumption
Savings and Investment
(Total economy, % GDP)
(% GDP)
105
35
70
100
30
60
95
25
50
90
2010
2009
2008
2007
Investment rate
Domestic Saving
-5
Capital Transf.
-10
-15
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Disposable income
2006
0
2005
70
2004
0
2003
10
2002
75
2001
5
2000
20
1999
80
1998
10
1997
15
30
1996
85
Savings (rhs)
Savings-Investment
gap
20
40
Final consumption
A unfavourable composition of expenditure …
Portugal - Composition of Expenditure (current prices)
(average rate of nominal growth)
GDP
1996-2010
1999-2010
1996-2001
2002-2007
2008-2010
4,7
3,9
7,3
4,0
0,7
Private
consumption
4,8
4,3
6,8
4,5
1,4
Public
consumption
6,1
5,5
9,1
4,5
3,3
GFCF
3,5
1,0
10,3
0,7
-4,3
Exports
Imports
5,8
5,0
8,0
6,4
0,1
5,8
4,4
9,7
4,9
-0,2
p.m. EA12
GDP
3,3
3,3
4,1
4,1
0,5
Source: INE and AMECO.
4
I. The seeds of the crisis (1995-2010)
A growing weight of the non-tradable sector…
Loans to Non-Financial Corporations
Investment by Type of Goods
Million euro
Current prices; Million euro
140000
45.000
40.000
120000
35.000
100000
30.000
25.000
80000
20.000
60000
40000
Non-Tradables
15.000
Tradables
10.000
5.000
Construction
Machinery and other Equipment
Transport Equipment
Other
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1995
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0
1996
0
20000
Weight in GVA
PPPs and Concessions
2010-1995; Change in p.p.
8,0
Number of projects lauched
6,0
20
18
16
14
12
10
8
6
4
2
0
4,0
2,0
0,0
-2,0
-4,0
-6,0
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
Other services
Finance and real estate
Transportation; ICT
Accommodation and food
Trade
Construction
Energy, water
Industry
Agriculture
5
I. The seeds of the crisis (1995-2010)
Lower productivity and wage pressures hurt competitiveness.
The effect was compounded by EU enlargement and globalisation.
Trend TFP growth
6
Compensation per employee and labour productivity
Total economy
Real rate of change (%)
5
1,4
4
1,2
3
1,0
Hodrick-Prescott
2
0,8
1
0,6
0
0,4
-1
0,2
-2
Labour productivity
1996
1997
1998
1999
2000
2001
Compensation per employee
2002
2003
2004
2005
2006
2007
2008
2009
2010
0,0
1995
1997
1999
2001
2003
2005
2007
Sources: INE and Banco de Portugal.
2009
Source: Banco de Portugal.
Real Effective Exchange Rate
Consumer Prices
(Deflated by Relative Unit Labour Costs)
130
average rate of change
120
8
110
1996=100
4
2
0
100
90
-2
80
PT
GER
ESP
FR
GRE
IRL
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
2010
2009
2008
2007
2006
2005
2004
Services
70
1996
Goods
2003
2002
2001
2000
1999
1998
-4
1997
In per cent
6
IT
6
I. The seeds of the crisis (1995-2010)
Higher relative spending and lower relative output…
External Accounts and International Investment
Position
% of GDP
0
International Investment Position by sector
0
0
-20
-10 -13
Public
Administration
-13 -11
-14
-40
Financial Sector
-32,8
-60
2010
2009
2008
2007
2006
-100
2005
-80
-12
2004
-10
-120
2003
-100
2002
-8
2001
-6
-80
2000
-60
1999
-4
1998
-40
1997
-2
Total
18
20
-20
1996
% of GDP
40
-51
Monetary
authorities
-108
-120
1996
Non-financial
private sector
2010
International Investment Position
Current+Capital Account (rhs)
Net financial assets
International Investment Position by instrument
% of GDP
40
150
18
20
Total
-40
-10 -14
-5
-10
-20
FDI
Portfolio investment
-30
-60
-80
-67
-100
-120
1996
50
0
-50
-8
2010
-1
-10
-27
-62
-100
Financial derivatives
-150
Other investment
-200
-104
-104
-164
1996
Reserve assets
-108
123
100
9
0
-20
% of GDP
132
2010
Total economy
Public administration
Financial sector
Non-financial corporations
Households
7
I. The seeds of the crisis (1995-2010)
Imprudent fiscal policies led to unsustainable public finances
Deficit and public debt
As a percentage of GDP
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
Structural Current Primary Balance
As a percentage of GDP
100
Net borrowing of Gen. Govern.
Public debt - right axis
6
90
5
80
4
70
3
60
2
50
1
40
0
30
-1
20
-2
10
-3
Structural Current Primary Balance
As a percentage of GDP
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Portugal
Euro Area
-4
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Huge fiscal expansion in 2007-10
Fiscal indicators 2007-2010
% of GDP
Total balance
Structural balance
Structural primary balance
Public debt
Source: INE and Banco de Portugal.
2007
2008
2009
2010
-3,1
-4,3
-1,4
68,3
-3,6
-6,2
-3,2
71,6
-10,2
-11
-8,2
83,1
-9,8
-13,2
-10,3
93,3
Change
2010-2007
-6,7
-8,9
-8,9
25
Success in stabilising the economy
was short-lived.
Not timely-targeted-temporary.
Risk of refinancing grossly
underestimated.
8
II. The closure of markets (2007-11)
Macroeconomic imbalances came to the spotlight in the context of the
global economic and financial crisis
10-year Government bond yields
Spread against Germany in basis points
1200
Unsustainable public
finances
1000
Over-indebtedness and
excessive bank leverage
Anemic economic growth
and low productivity
Markets
question
the ability
of Portugal
to repay its
debts
800
Austria
Italy
Belgium
Spain
France
Ireland
Netherlands
Portugal
Finland
Greece
600
400
PT
200
0
Source: Bloomberg
9
III. The Economic Adjustment Program (2011-14)
Addressing the challenges of the Portuguese economy: A strategy for sustainable growth in the euro area
Fiscal consolidation
Putting fiscal policy on a
sustainable path
Deleveraging and
financial stability
Economic
Adjustment Program
Structural transformation
Implementing structural reforms
to contribute to potential growth
Reduction of debt and financing
needs of the economy
The Economic
Adjustment Program
protects the
financing of the
economy from
market pressure,
allowing an orderly
adjustment of
imbalances and
time to restore
credibility.
10
III. The Economic and Financial Adjustment Program (2011-14)
Portugal is delivering on all fronts…
%
Yields on Portuguese Government Bonds
25
20
• Banks more capitalized and less
leveraged
15
10
• Significant structural adjustment of
public accounts
5
2-years
Mai-2011
Set-2011
Jan-2012
Mai-2012
External accounts
• Structural reforms under way:
10,0
Current plus Capital Account
Trade Balance
Income Account
Transfers
5,0
Percentage of GDP
Fiscal framework
Privatization
Labour market
Utilities
Justice
Housing market
10-years
0
External
imbalance is under adjustment
Jan-2011






5-years
0,0
-5,0
-10,0
-15,0
1999
2001
2003
2005
2007
2009
2011
2013 (p)
Sources: INE (Statistics Portugal) and Banco de Portugal.
11
III. The Economic and Financial Adjustment Program (2011-14)
The near term challenges…
• Keep momentum on program implementation
 Reform design and enforcement are key
• Key concerns:
 Labour market developments
 Credit to the economy
• Return to markets in Sep 2013
 Depends also on EU institutional developments
 Insurance mechanism needed
12
III. The Economic and Financial Adjustment Program (2011-14)
The longer-term challenge: Sustainable macroeconomic
stability and healthy growth
• Consolidating a new economic model
 Debt levels will remain high
 Significant export growth potential to be tapped
 Redefining the role of the State
 The State as a referee not a player
 Highly qualified public administration
 Ensuring the stability of the tax system and public policies
 Promoting transparency (a “free lunch”)
13
The Economic and Financial Situation in Portugal
Thank You!
14