Portugal makes ‘clean exit’ from international bailout program

By Enrique Jorge

This article was first published on www.focus-economics.com.

Portugal exited the international bailout program on 17 May and, for the time being, it will not have to resort to a European Stability Mechanism (ESM) credit line. In May 2011, the country entered a EUR 78 billion financial assistance program with the International Monetary Fund (IMF), the European Commission (EC) and the European Central Bank (ECB). Although the country introduced harsh austerity measures during the three-year-long program, the fast widening of the public deficit prompted ratings agencies to downgrade its sovereign credit ratings and the government lost access to capital markets.

Photo by Tuválkin

Photo by Tuválkin

Currently, 97.0% of the assistance funds have been disbursed and the country is ready to return to international capital markets in what most analysts call a ‘clean exit’ from the bailout program. According to Secretary of State for the Treasury Isabel Castelo Branco, Portugal holds a sufficient cash buffer of more than EUR 15 billion in order to cover around two-thirds of its financing needs for 2015. On 23 April, Portugal held its first regular debt auction since it entered the bailout. The Portuguese government successfully issued EUR 750 million in 10-year bonds at a better-than-expected 3.57% yield, which was the lowest level since 2006.

The government achieved its 2013 fiscal deficit target of 5.5% of GDP that was set by the international lenders. In fact, in 2013, the fiscal deficit was at 4.9% and, in the twelfth bailout revision by the IMF, EC and ECB, international lenders acknowledged that, “the deficit target in 2013 was reached by a comfortable margin,” and reaffirmed the targets for 2014 and 2015. For 2014 the budget deficit is targeted at 4.0% of GDP and it is expected to narrow to 2.5% of GDP in 2015.

In the three years of the bailout program, the strong austerity measures, which included tax increases, reductions in public salaries and spending cuts, drove the economy into a period of prolonged recession. Meanwhile, structural reforms helped the country regain competitiveness, which was reflected in an improvement in the country’s external position; the current account turned from a record deficit of 12.6% of GDP in 2008 to a 0.5% surplus in 2013.

The public deficit is expected to remain in the red until 2018, although progressive improvements are projected. FocusEconomics Consensus Forecast panelists expect the budget deficit to narrow to 4.1% of GDP this year, which is unchanged over the previous month’s estimate, but slightly below the target set by the international lenders. Nevertheless, if achieved, the 2014 projection would mark an improvement over the 4.9% deficit tallied in 2013. For 2015, the panel sees public deficit narrowing further to 2.9% of GDP, which is also below the international lender’s target. Meanwhile, public debt closed 2013 at 129.0% of GDP, the third highest in the Euro area after Greece (175%) and Italy (132%). For 2014, the FocusEconomics Consensus Forecast panel sees public debt remaining virtually unchanged at 128%, and expects it to inch down to 127% in 2015.

* Note: The FocusEconomics Consensus Forecast is a monthly forecast based on many individual projections from investment banks, consultancies and think tanks. For more information, please contact us via www.focus-economics.com.

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