20120201 mef restaurar credibilidade confianca
TRANSCRIPT
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MINISTRIO DAS FINANAS 1
MINISTRIO DAS FINANAS
London School of Economics and Political ScienceVitor Gaspar
February 1, 2012
Portugal: restoringcredibility and confidence
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MINISTRIO DAS FINANAS 2
1. On the way to become the difficult Portuguese case
2. The Economic and Financial Assistance Program
3. Fiscal consolidation4. Financial stability
5. Structural transformation
6. Conclusion: how will it work?
Outline
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MINISTRIO DAS FINANAS 3
ON THE WAY TO BECOME THEDIFFICULT PORTUGUESE CASE
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MINISTRIO DAS FINANAS 4
0
500
1000
1500
2000
2500
3000
3500
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
France Netherlands
Italy Spain
Austria Finland
Belgium Greece
Ireland Portugal
Portugals imbalances exposed in the context of the
economic and financial crisis
Macro-economic
imbalances
andstructural
weaknessesthat have
beenaccumulated
over morethan adecade
3. Anemic economic growthand low productivity
1. Unsustainable publicfinances
2. Over-indebtedness
10-year Government bond yieldsSpread against Germany in basis points
Source: Bloomberg
Dec-11
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MINISTRIO DAS FINANAS 5
0
10
20
30
40
50
60
70
80
90
100
0123456
789
101112131415
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Net borrowing of Gen. Govern.
Public debt - right axis
Persistent government deficits and increasingpublic debt
Fragile public finances
Structural Current Primary Balance
As a percentage of GDP
Persistent imprudence in fiscal policy
Deficit and public debt
As a percentage of GDP
Source: AMECO and Ministry of FinanceSource: INE, Bank of Portugal and Ministry of Finance
1. UNSUSTAINABLE PUBLIC FINANCES
-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
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MINISTRIO DAS FINANAS 6
Increasing indebtedness of the private sector Increasing external debt
Portuguese gross external debt
As a percentage of GDP
Debt accumulation by households and firms
Debt of the Households and Non-financial Corporations
As a percentage of GDP
0
50
100
150
200
250
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Bank of Portugal
(*) Financial Debt
Source: Bank of Portugal
2. OVER-INDEBTEDNESS
40
60
80
100
120
140
160
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Households (*) Non-financial Corporations
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Insufficient attraction of direct foreigninvestment
Capital accumulation in non-tradablegoods and services sectors
Lack of competition in several sectors
Low levels of innovation andproductivity growth
High levels of youth and long-termunemployment
Restrictions on the market forcorporate control
Protection of several sectors of theeconomy
Weak conditions to entrepreneurialactivity
Poor functioning of the justice
system
Rigidity of the labor market
Insufficient conditions to foster economic growth3. ANEMIC ECONOMIC GROWTH AND LOW PRODUCTIVITY
Obstacles Consequences
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Disappointing performance of the Portuguese economy
Source: Eurostat
3. ANEMIC ECONOMIC GROWTH AND LOW PRODUCTIVITY
90
100
110
120
130
140
150
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Germany Ireland
Greece Spain
France Italy
EA -17 PortugalIn the period
1999-2010, theGDP ofPortugal grewat an annualaverage rate of1%, comparedwith 1.4% inthe euro area
GDP Portugal and some of its European partners2000 = 100
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THE ECONOMIC AND FINANCIALASSISTANCE PROGRAM
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15,6
9,8
13,1
IMF
EFSF
EFSM
38,539,5
Already disbursed(1)
To be disbursed
After the 2nd Review, the programimplementation was considered on track
Adjustment Program agreed with the IMF, EC and ECB in
April 2011
The Economic and FinancialAdjustment Program covers thefinancing needs of General Governmentfor the period 2011 to mid-2014.
It comprises a financial packageamounting to EUR 78 billion in loans,including EUR 12 billion for bankingsector re-capitalization.
Each disbursement depends on thetechnical missions quarterlyassessment about Portugals
performance on the implementation ofthe Adjustment Program.
1 Net issuancesSource: IGCP, January 2012
Financial packageEUR Billions
More information is available at:IMF: http://www.imf.org/external/pubs/ft/scr/2011/cr11363.pdf
European Commission: http://ec.europa.eu/economy_finance/publications/occasional_paper/2011/pdf/ocp89_en.pdf
Key facts
http://www.imf.org/external/pubs/ft/scr/2011/cr11363.pdfhttp://www.imf.org/external/pubs/ft/scr/2011/cr11363.pdfhttp://ec.europa.eu/economy_finance/publications/occasional_paper/2011/pdf/ocp89_en.pdfhttp://ec.europa.eu/economy_finance/publications/occasional_paper/2011/pdf/ocp89_en.pdfhttp://www.imf.org/external/pubs/ft/scr/2011/cr11363.pdf -
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A balanced Program to cope with the major challenges of
the Portuguese economy
The EconomicAdjustment Program
protectsGovernmentfinancing frommarket pressures,allowing an orderlyadjustment ofimbalances andtime to build upconfidence andcredibility.
Fiscal consolidation
Putting fiscal policy on asustainable path
Structural transformation
Implementing structural reformsto contribute to potential growth
Financial stabilityAddressing banking sector
vulnerabilities
The Economic andFinancial
Adjustment Program
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At the startof theProgram,Portugalfaced averyuncertainoutlook
Reducing uncertainty: Portugal is delivering in all fronts
Weakening of politicalsupport for the Program
Unfavorable macro-economic developments
Missing the fiscal targets
Uncertainty regardingthe stability of the
financial sector
Insufficient pace ofstructural reforms
Broad political consensus Social support to the Program
Milder recession than expected in2011
Strong performance of exports
Major reduction in overall andstructural deficits
Progress in institutional reforms
Compliance with the Core Tier 1ratios
Reduction of loan-to-deposit ratio
Success of privatizations process Labor market tripartite agreement Broad range of implemented
measures
1
2
3
4
5
Main risks Major outcomes
Successful debtauction in January,18
Bond issuance of11 months T-bills(last issuance inApril 2011)
High demand in allmaturities
Significantparticipation fromnon residentinvestors
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FISCAL CONSOLIDATION
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10,1 9,8
4,0 4,5
2009 2010 2011 2012
9,6
11,4
6,9
2,6
2009 2010 2011 2012
Major reduction of structural deficit in 2011 and 2012
(*) Deficit adjusted for the effect of the cycle; excludes transfer of pensions funds in 2010 and 2011 and concessions in 2011(**) Excludes temporary effects in 2012
Source: Ministry of Finance, January 2012
Overall deficitAs a percentage of GDP
Structural deficit (*)As a percentage of GDP
Limit of 5,9% prescribedin the Program
(**) (**)
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4,0
3,0
2,32,0
1,5 1,51,3 1,2
0,8
Portugal Greece Germany Ireland Italy UnitedKingdom
Euro area Spain France
Portugals structural adjustment stands out
(1) Change in General Government Cyclically Adjusted Balance
Source: IMF, Fiscal Monitor Update, January 2012
Structural adjustment 2010-2011(1)
Percentage points of potential GDP
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MINISTRIO DAS FINANAS 16
7,7
9,0
3,8
Q1 Q2 Q3 Q4
Q3 budget deficit below 4%
Source: INE, December 2011
?
Accumulateddeficit fell from8,3% in the firstsemester to6.8% for thefirst threequarters.
Quarterly general government deficit - national accountsAs a percentage of GDP
8,3
6,8
Accumulateddeficit
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MINISTRIO DAS FINANAS 17
48,444,9
42,0
2,9
4,14,9
2010 2011 2012
Interest
Primary expenditure
22,2 23,4 24,6
19,321,5 17,8
2010 2011 2012
Other revenue
Tax Revenue
Significant fiscal consolidation in 2011
(*) Excludes temporary effects in 2012
Source: Ministry of Finance, January 2012
Total revenues
In percentage of GDP
Total expenditure
In percentage of GDP
(*) (*)
41,5
44,942,4
51,348,9
46,9
7,4%
3,0%4,5%
-7,3%
-5,3%-5,9%
-8,1%-7,9%
Coercive tax collection of1.230M: 12% above target
Percent changein total values
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MINISTRIO DAS FINANAS 18
Important progress in the institutional reform front
Major actions Next challenges
Improve budgetary control across all levels of
Public Administration
Control and possibly renegotiate PublicPrivate Partnerships agreements
Restructure State Owned Enterprises
Continue to streamline Public Administration
Effective operation of the Portuguese Public
Finance Council
Presentation of the Commitments ControlLaw
Creation of the new Tax and CustomsAuthority
Implementation of the PREMAC (Plan for theReduction and Modernization of the CentralAdministration of the Government)
NON-EXHAUSTIVE
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MINISTRIO DAS FINANAS 19
FINANCIAL STABILITY
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MINISTRIO DAS FINANAS 20
6,8
7,8 7,9 7,88,1
8,6 8,5
5
6
7
8
9
Dec-08Jun-09Dec-09Jun-10Dec-10Jun-11Sep-11
Reinforcement of banks capital and deleveraging
process are ongoing
Core Tier 1 target of 9% to be reachedby end-June 2012, following a prudentevaluation of sovereign debt exposures
Special on-site inspections confirmedthe robustness of capital adequacy
Regulatory framework was improved:legislation on early intervention, resolutionand deposit insurance
Adjustment is progressing as planned
Important contribution of higher depositsand sizeable asset sales
Stabilization of financing from theEurosystem
Core Tier 1 ratio, percentageKey achievements
Source: Bank of Portugal
Reinforcement ofbanks
capital
Deleveragingprocess
Credit-to-deposits ratio, percentage
140
145
150
155
160
165
170
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MINISTRIO DAS FINANAS 22
STRUCTURALTRANSFORMATION
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MINISTRIO DAS FINANAS 23
GDP decline of1.6% in 2011,against 2.2%
initiallyprojected in theProgram (May
2011)
-8,9
-6,8
-1,6
-6,5
-3,7
0,3
-10
-8
-6
-4
-2
0
2
2010 2011 2012
Current and capital account
Trade balance
Milder recession than expected in 2011
Source: Bank of Portugal, Boletim Econmico Inverno 2011, January 2012
Strong performance of Portuguese exports
As a percentage of GDP
Export of goods increased16% up to November
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MINISTRIO DAS FINANAS 24
Economic growth: importance of the Structural
Transformation Agenda
Opening to foreigninvestment and to thechallenges ofinternational
competition
Competitive location forphysical and humancapital
Fully integration in theSingle EuropeanMarket
Development of astability culture
Privatizations Liberalization of the Market for Corporate
Control Competition: e.g. reduction of rents in sectors
shielded from foreign competition Labor market Education and training Energy Telecommunications and postal services Transports
Other services Housing Market Judicial system Public procurement Business environment
Fiscal
consolidationand financialstability arenecessaryconditions forsustainedgrowth
but they arenot sufficient.
Broad range of structural reformsStructural transformationof the Portuguese economy
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MINISTRIO DAS FINANAS 25
Clear strategy and strong implementation effort
Structural TransformationAgenda
Confidence,credibility and
justice
Openness,competition and
competitiveness
Entrepreneurship,innovation and
labor marketflexibility
Limited State andeconomic
democracy
Structural MoU measures implementation Second Review
Source: European Commission, The Economic Adjustment Programme for Portugal Second Review, December 2011
Observed / Ongoing 22Partially observed 4Not observed 0
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MINISTRIO DAS FINANAS 26
Privatization program as a flagship in the agenda
Electricitydistribution
Energy retailand production
Maildistribution
Waterdistribution
Airinfrastructure
Railwaylogistics
Seguros
Insurance
Seguros
Energy retailand production
2011 2012 2013
Q1
Air transportTelevision
broadcasting
(1) Sale of Caixa Geral de Depsitos participation of 1%(2) Concession
(3) Expected completion date by Caixa Geral de Depsitos
(1) (2)
Q3Q2
(3)
Q4
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MINISTRIO DAS FINANAS 27
Internationalization
vehicle
1 Considering the closing price of the day before the Council of Ministers decision
Source: EDP Investor Presentation, November 2011; Ministry of Finance
20%
40%
19%
20%
EBITDA, 9M2011
#1 hydro developer in Europe
#3 wind player worldwide
Ranked as Best Electric Utility Worldwidein 2010 and 2011
4 international bidders
1 Europe
2 Latin America
1 Asia
Sale of 21.35% of equity toChina Three Gorges
Total revenue of EUR2,693M with a premium of53.6% per share1
Investment of 2,000M
until 2015 in wind farms Guaranteed funding of
EUR 2,000M throughChinese banking entities
Key facts
Opportunities
identified
Success of EDP privatization: a global operation
Privatization process
Access tospecializedknow-how
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MINISTRIO DAS FINANAS 28
Labor market reformAgreement on Growth, Competitiveness and Employment
The agreementbetween theGovernment,Unions and
EnterprisesAssociations: animportant step toimplement reforms inan environment ofsocial dialogue
NON-EXHAUSTIVE
Key measures
Increase in
competitivenessthrough
Labor marketflexibilization
Labor costreduction
Objectives
Implementation of individual and groupbank of hours (working time accumulation)
Decrease in 50% of compensation forovertime work
Reduction of 4 national holidays Elimination of 3 extra days of vacation
Reduction of restrictions to individualdismissal
Reduction of severance payments to alignwith EU average
Implementation of labor arbitrationmechanisms
Workingtime
Holidays/vacations
Dismissal
andcompensation
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MINISTRIO DAS FINANAS 29
Key measures
Improving business environment
Portugalas acompetitivelocation forphysicaland humancapital
Conclusion of an audit with targeted measures to accelerate theresolution of the backlog
Adoption of a law on arbitration to facilitate out-of-court settlement
Proposal to amend the insolvency code and corporate recovery,
focusing on speed, simplification and creation of an extra-judicialphase of corporate recovery
Approval of a new Competition Law harmonized with the EU legalcompetition framework
Strengthen the power of the Competition Authority
Operationalization of specialized court on Competition,Regulation and Supervision
Liberalization of regulated professions access and exercise
Reduction of companies administrative burden
Judicialsystem
Competition
Otherservices
Objective
NON-EXHAUSTIVE
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MINISTRIO DAS FINANAS 30
CONCLUSION:HOW WILL IT WORK?
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MINISTRIO DAS FINANAS 31
General government balance approachingequilibrium
Decreasing of public debt
General government gross debt
As a percentage of GDP
Public finances on a sustainable path
General Government balance
As a percentage of GDP
Source: Ministry of Finance, November 2011
(1) Deficit adjusted for the effect of the cycle; excludes transfer of pensions funds in2010 and 2011 and concessions in 2011(2) Excludes temporary effects in 2012
Source: Ministry of Finance, 2010-2012 : Jan. 2012, 2013-2015: Nov. 2011
60
70
80
90
100
110
120
2010 2011 2012 2013 2014 2015-12,0
-10,0
-8,0
-6,0
-4,0
-2,0
0,02010 2011 2012 2013 2014 2015
Overall balance Structural balance (1)
(2)
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MINISTRIO DAS FINANAS 32
Elimination of the trade deficit
Source: Ministry of Finance, November 2011
As percentage of GDP
Capital account balance
Current account balance
Balance of trade (goods only)
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MINISTRIO DAS FINANAS 33
Sustained economic growth Job creation
Unemployment rate
Percentage
Return to growth
GDP Growth
Year-on-year percent change
Source: Ministry of Finance, November 2011Source: Ministry of Finance, November 2011
6
7
8
9
10
11
12
13
14
15
2010 2011 2012 2013 2014 2015-3
-2
-1
0
1
2
3
2010 2011 2012 2013 2014 2015
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MINISTRIO DAS FINANAS 34
Broad internal
consensus, bothpolitical and social,about the need ofadjustment
Support from ourinternational
partners providingfinancing up to2014
Portugal has entered a transformation process
Portugal was asuccess case inthe second half ofthe 20th century
History proves thatwe attain great
achievementswhen facingnational challenges
Crisis as an opportunity forpositive change that fosters furtherprogress
Building up credibilityand confidence athome and abroad
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MINISTRIO DAS FINANAS
London School of Economics and Political ScienceVitor Gaspar
F b 1 2012
Portugal: restoringcredibility and confidence