annual report - 1997 · 2016. 10. 11. · the es cudo re mained quite sta ble within the ex change...

Chap ter 1

INTRODUCTION

In 1997, Por tu gal ex hib ited eco nomic re sults com pati ble with the ful fil ment of the nec es sary con di tions to the adop tion of the sin gle cur -rency. In deed, Por tu gal re corded a high levelof sus tain able con ver gence re flected in pricesta bil ity, in the level and the term struc ture ofin ter est rates, in budg et ary con soli da tion, andin ex change rate sta bil ity. On 2 May 1998, theEuro pean Com mu nity Coun cil join ing theState or Gov ern ment heads con firmed thatPor tu gal shall in te grate the group of Mem berStates par tici pat ing in the euro area from 1Janu ary 1999 on wards.

This date marks the be gin ning of the thirdstage of the Eco nomic and Mone tary Un ion(EMU), as en vis aged in the Euro pean Un ionTreaty. The con ver gence of eco nomic re sultsand poli cies, aim ing at the ful fil ment of thenec es sary con di tions to the EMU, con trib utedto the ex change rate sta bil ity within the Euro -pean Mone tary Sys tem. Fur ther more, this pro -cess led to the low est in fla tion and in ter estrates since the late 1960’s. More gen er ally, thecon ver gence pro cess con trib uted to wards ahigh level of syn chro ni sa tion of eco nomic per -form ance be tween the Mem ber States in te grat -ing the euro area.

In Por tu gal, the con ver gence pro cess tookplace in the con text of a broader ef fort to wardsshift ing the eco nomic re gime, ini ti ated in the1980’s. This shift con sisted of strength en ing the role of mar ket mecha nisms, the open ness of the econ omy and mac roeconomic sta bil ity — in -clud ing price sta bil ity and the con soli da tion ofpub lic fi nances and of the Por tu guese bal anceof pay ments.

In 1997, in fla tion in Por tu gal reached lev elscom pati ble with price sta bil ity. In fla tion meas -

ured by the an nual av er age rate of change ofthe Har mo nised In dex of Con sumer Prices(HICP) was 1.9 per cent, one per cent age pointless than in the pre vi ous year. This valuestands clearly be low the up per limit rele vant to the con duc tion of mone tary pol icy, as in di -cated by the Banco de Por tu gal in the March1997 Eco nomic Bul le tin. There fore, this yearmarks the cul mi nat ing of the grad ual and sus -tained dis in fla tion pro cess, con tinu ously re -corded since late 1990.

Mone tary pol icy played a de ci sive role inthe pro cess. Mone tary pol icy was based uponan in ter me di ate ob jec tive of ex change rate sta -bil ity vis- à- vis cur ren cies tra di tion ally ex hib it -ing price sta bil ity. Dis in fla tion was ex ten siveto both trad able and non- tradable goods,along side a slow down in nomi nal wages. Themod era tion of (nomi nal) wages is a nec es sarycon di tion to the main te nance of the econo my’s com peti tive ness in a con text of nomi nal sta bil -ity.

Dis in fla tion in Por tu gal was con tem po raryto a trend of re duc tion in av er age in fla tion inthe Euro pean Un ion Mem ber States. This pro -cess was ac com pa nied by a sharp nar row ing ofin fla tion dif fer en tials be tween Mem ber States.In deed, in 1997 vir tu ally all Mem ber Statesreached in fla tion rates com pati ble with pricesta bil ity.

The exe cu tion of mone tary pol icy in 1997was de ter mined by the pro gresses in nomi nalcon ver gence, from which ex change rate sta bil -ity and the fa vour able de vel op ment of in fla -tion per spec tives are worth not ing. In this con -text, the Banco de Por tu gal gradu ally cut its in -ter ven tion rates. The rate of li quid ity ab sorp -tion was cut by 1.3 per cent age points in 1997,

Banco de Portugal / 1997 Annual report 19

Introduction

stand ing at 4.9 per cent at the end of the year.On its turn, the rate for regu lar op era tions of li -quid ity sup ply was cut by 1.4 per cent agepoints, to 5.3 per cent. By the end of the year,the 3- month in ter est rate of the es cudo stood at5.0 per cent, 1.4 per cent age points less than inlate 1996. The 3- month dif fer en tial vis- à- vis the Deut sche mark rates nar rowed from 3.3 per -cent age points at the end of 1996, to 1.4 per cent -age points at the end of 1997. Through out 1997,the es cudo re mained quite sta ble within theEx change Rate Mecha nism. The es cudo was al -ways traded against the Deut sche mark withina nar row in ter val. Over the course of the wholeyear, the es cudo was quoted above its cen tralpar ity. Through out 1997, the es cudo ac com pa -nied the con ver gence to wards the cen tral bi lat -eral pari ties ex hib ited by most cur ren cies in the Ex change Rate Mecha nism of the Euro peanMone tary Sys tem.

The re duc tion of in fla tion, and more gen er -ally the an tici pa tion of our par tici pa tion in theeuro area in flu enced de ci sively the re cent de -vel op ments in the Por tu guese econ omy. Thelevel reached by in ter est rates by the end of1997 re flected al ready the strong like li hood as -so ci ated to the main te nance of a high level ofnomi nal sta bil ity, in the con text of the Por tu -guese par tici pa tion in the third stage of theEco nomic and Mone tary Un ion, be gin ning 1Janu ary 1999. The con soli da tion of nomi nalcon ver gence per spec tives for 1996 and 1997was re lated to the sharp fall in in ter est rates, es -pe cially in longer ma turi ties. The pace of fall ofin ter est rates stands as the most ob vi ousachieve ment of the Por tu guese in te gra tion inthe euro area.

The in ter est rates of the 10- year Treas urybonds fell from 10.0 per cent in De cem ber 1995to 5.7 per cent in De cem ber 1997. In the samepe riod, the 10- year in ter est rate dif fer en tialvis- à- vis the Deut sche mark nar rowed 4.0 per -cent age points, to 0.4 per cent age points.

In ter est rates fell in all ma turi ties, in bothbank de pos its and loans. In fla tion also de -creased along side nomi nal in ter est rates. Sincethe fall in the lat ter was sharper than that ex -hib ited by in fla tion, most real in ter est rates de -creased as well.

The de crease in nomi nal and real in ter estrates had a de ter mi nant in flu ence over the Por -tu guese econ omy in 1997. The re duc tion of real in ter est rates for com pa nies re sults in a re duc -tion of the cost of capi tal utili sa tion. On its turn, for a given level of real in ter est rates, the re duc -tion in the in fla tion rate im plies the re duc tionin nomi nal in ter est rates, lead ing to a lowershare of debt serv ice in firms’ Op er at ing Ac -count. This re lief in debt serv ice eases firms’ ac -cess to credit. The re duc tion of the cost of capi -tal utili sa tion and the im proved ac cess to bor -row ing in flu ence posi tively the growth of in -vest ment.

The re duc tion in in ter est rates is also im por -tant in de ter min ing house holds’ ex pen di ture,as it is to the Gen eral Gov ern ment. As re gardshouse holds, the key ef fect is due to the re duc -tion in the debt serv ice bur den as so ci ated to agiven amount of capi tal due. This is sue is par -ticu larly rele vant as re gards credit to hous ing.As re gards Gen eral Gov ern ment, the fall in in -ter est rates leads to a re duc tion in the pub licdebt serv ice, leav ing an ac crued mar gin to thegrowth of pri mary ex pen di ture com pati blewith defi cit con soli da tion.

The con tem po rary and lagged ef fects of in -ter est rates re duc tion, and the fa vour able per -spec tives re gard ing the be hav iour of the econ -omy trans lated into a par ticu larly stronggrowth of credit ag gre gates and of do mes ticde mand — spe cially its in vest ment com po -nent.

The growth of credit to non- financial com -pa nies and to in di vidu als rose from 14.6 percent in 1996 to 23.7 per cent at the end of 1997.Bank credit to non- financial com pa nies ac cel er -ated; the year- on- year rate of change of thisitem of bank credit in creased from 7.1 per centin De cem ber 1996 to 21.0 per cent in De cem ber1997. Worth not ing is the strong growth ofbank credit to non- financial com pa nies for in -vest ment pur poses. This item grew by 24.4 percent in year- on- year terms, in De cem ber 1997(15.9 per cent in De cem ber 1996). Bank lend ingto in di vidu als main tained the strong growthre corded in pre vi ous years. In De cem ber 1997,credit to in di vidu als grew by 27.1 per cent inyear- on- year terms. Given its im por tance in to -

20 Banco de Portugal / 1997 Annual report

Introduction

tal credit granted to in di vidu als, the be hav iourof bank lend ing for hous ing pur chase shouldbe sin gled out. This item grew by 26.3 per centin 1997. De spite the in crease in the in debt ed -ness of both com pa nies and in di vidu als, thepro por tion in GDP of in ter est paid by these sec -tors con tin ued to de crease.

In 1997, eco nomic ac tiv ity ac cel er ated. Ac -cord ing to the Banco de Por tu gal, GDP is es ti -mated to have grown by 4 per cent in 1997 inreal terms — 0.4 per cent age points more thanin 1996.

This in crease in the rate of growth of eco -nomic ac tiv ity was de ter mined by the ac cel era -tion of do mes tic de mand, which is es ti mated to have grown by 5.1 per cent in real terms — 1.7per cent age points more than 1996.

In this con text, the dy na mism of GrossFixed Capi tal For ma tion is worth be ing sin gled out. The real growth of GFCF amounted to 12.9per cent, clearly above that re corded in 1996 —7.7 per cent. In fact, in 1997 Gross Fixed Capi talFor ma tion ex hib ited a very strong growth in all its com po nents, whether broken- down by eco -nomic cate go ries or by in sti tu tional sec tor.Both pub lic and pri vate con sump tion also ac -cel er ated in real terms in 1997.

Net ex ter nal de mand had a nega tive con tri -bu tion to the growth of GDP (-1.4 per cent agepoints), fol low ing a vir tu ally null con tri bu tionin 1996.

The ag gre gate be hav iour of out put showedno sig nifi cant intra- annual pat tern through out1997. In deed, GDP growth is es ti mated to havestood close to 4 per cent in both halves of theyear. How ever, the growth of do mes tic de -mand de creased sig nifi cantly in the sec ondhalf of 1997. Nev er the less, the ef fect of thelower con tri bu tion of do mes tic de mand toGDP growth in the sec ond half of the year wascom pen sated by a change in the con tri bu tion of net ex ter nal de mand. The lat ter was due bothto a slow down in im ports and to an ac cel era -tion in ex ports.

The pat tern of the cur rent cy cle of eco nomicre cov ery, started in 1994, has been simi lar tothat char ac ter is ing most small open econo miesin te grat ing the Euro pean Un ion. At first, re -cov ery was led by ex ports, there fore the con tri -

bu tion of net ex ter nal de mand be ing de ter mi -nant in the pro cess. Af ter wards, the grad ualstrength en ing of ex pec ta tions re gard ing thebe hav iour of de mand and the im prove ment offi nan cial con di tions — as so ci ated to the sys -tem atic re duc tion in in ter est rates — led to astronger growth of GFCF in the pri vate sec tor.In Por tu gal, this pat tern was strength ened bythe par ticu larly sig nifi cant con tri bu tion of thepub lic in vest ment pro gramme. The re cov ery of pri vate con sump tion tended to be slower. InPor tu gal, too, pri vate con sump tion has grownless than GDP in the re cent past — though ex -ceed ing growth of con sump tion in most otherMem ber States.

In the pres ent cy cle, the first stage of eco -nomic re cov ery was slower than in the pre vi -ous eco nomic cy cle. This pat tern is ex plainedby fac tors spe cific to the Por tu guese econ omy,and by the slow down of the Euro pean econ -omy from mid- 1995 on wards. The re centstrength en ing of the Euro pean econ omy re -bounded to the Por tu guese econ omy, al low ingfor paces of growth cur rently com pa ra ble tothose achieved in the cor re spond ing phase ofthe pre vi ous cy cle. The strong growth of GFCFis also com mon to the pre vi ous eco nomic cy -cles.

In 1997, pro duc tive fac tor utili sa tion in -creased sig nifi cantly. This fact is il lus trated bythe in crease in the rate of pro duc tive ca pac ityutili sa tion in manu fac tur ing. How ever, themost rele vant as pect re fers to the de vel op -ments in the la bour mar ket. The key vari ableschar ac ter is ing the la bour mar ket re act with alag to the be hav iour of eco nomic ac tiv ity. Ac -cord ing to the Em ploy ment Sur vey of the In sti -tuto Na cional de Es tatís tica, em ploy ment in 1997in creased by 81 thou sand work ers. This change ac counts for a 1.9 per cent in crease in em ploy -ment, which com pares to 0.6 per cent in 1996.The rate of un em ploy ment fell from 7.3 percent in 1996, to 6.7 per cent in 1997, in av er ageterms. The re duc tion in the un em ploy mentrate be came par ticu larly no tice able from thesec ond quar ter of 1997 on wards. In the lastquar ter of the year, the un em ploy ment ratestood at 6.5 per cent, which com pares to 7.2 percent in the same pe riod of 1996.


Introduction

The 1.9 per cent in crease in to tal em ploy -ment was ac com pa nied by a 1.4 per cent in -crease in wage- earners, fol low ing con secu tivere duc tions in the four pre vi ous years. Thegrowth in the number of wage- earners waschiefly due to the growth in the number offixed- term em ploy ees — 15.7 per cent, asagainst 12.1 per cent in 1996. The share offixed- term work ers in to tal em ploy ment con -tin ued in creas ing, reach ing 14.8 per cent in1997. Fixed- term con tracts have come to beused as a means of ad just ment of work force inpe ri ods of eco nomic slow down, as in pe ri odsof ac tiv ity ex pan sion. Hence, fixed- term con -tract ing stands as one of the ele ments con trib -ut ing to wards the flexi bil ity of the Por tu guesela bour mar ket. On the other hand, the ri gid ityas so ci ated to per ma nent con tract ing is gen er -ally high, which in duces firms to search for al -ter na tive job crea tion schemes.

The cy cli cal be hav iour of the Por tu gueseecon omy is more ap par ent in wages than in the mag ni tude of the la bour mar ket flows (namelythose re sult ing from lay- offs, new con tractsand vol un tary ex its). The flexi bil ity of realwages ap pears as a dis tinc tive ele ment of thePor tu guese la bour mar ket, when com pared tothat of other Euro pean coun tries — char ac ter -ised by sub stan tially higher un em ploy mentrates.

Ac cord ing to the es ti mates of the Banco dePor tu gal, com pen sa tions per em ployee in theecon omy as a whole ex clud ing GG grew by 4.7per cent, which cor re sponds to a 2.4 per centgrowth in real terms. In nomi nal terms, thegrowth of com pen sa tions per em ployee was0.4 per cent age points lower than in 1996. Given the re duc tion in the in fla tion rate, this slow -down was com pati ble with a higher growth ofreal wages.

The Cur rent Ac count defi cit, cal cu lated on a trans ac tions ba sis, stood at PTE 322.2 bil lion(PTE 232.3 bil lion in 1996). As a per cent age ofGDP, the CA defi cit in creased from 1.4 per cent to 1.8 per cent, chiefly due to the in crease in the

trade defi cit (from 8.6 to 9.3 per cent of GDP).This situa tion re flects the strong growth of do -mes tic de mand, and in spe cial of in vest ment,in line with the po si tion in the eco nomic cy cle.

Ac cord ing to the fig ures dis closed by thePor tu guese authori ties to the Euro pean Com -mis sion on 28 Feb ru ary 1998, the pub lic defi citwas of PTE 435.1 bil lion in 1997. This cor re -sponds to 2.5 per cent of GDP, 0.7 per cent agepoints less than in 1996, and 3.2 per cent agepoints be low the 1995 fig ure. There fore, thepub lic defi cit to GDP ra tio in 1997 fell short ofthe pro jec tion based on the 1997 State Budgetby 0.4 per cent age points. The 1990’s have gen -er ally been marked by the achieve ment of fig -ures for the budg eted defi cit be low those ini -tially pro jected in the State Budget. In 1997, asin the year be fore, Por tu gal ac com plished theso- called ‘Golden Rule of Pub lic Fi nance’, since pub lic in vest ment ex ceeded pub lic defi cit by1.8 per cent age points of GDP.

The pub lic debt to GDP ra tio de creased forthe sec ond year around, amount ing to 62.0 percent at the end of 1997. The high amount ofreve nue from pri va ti sa tion al lo cated to debt re -demp tion (amount ing to 3.6 per cent age pointsof GDP) con trib uted to the re duc tion of pub licdebt in 1997.

From 1 Janu ary 1999 on wards, Por tu gal will be sub ject to the sin gle mone tary pol icy. Thedefi ni tion of mone tary pol icy in the euro areashall be an at tri bu tion of the Euro pean Cen tralBank. The man date of the ECB shall take pricesta bil ity in the whole euro area as its ob jec tive.Sin gle mone tary pol icy will be per formed bythe Euro pean Sys tem of Cen tral Banks in a con -text where na tional eco nomic poli cies are de -fined in an eco nomic frame work char ac ter isednot only by mac roeconomic sta bil ity — com -pris ing the sta bil ity of prices and rules aim ingat pub lic fi nance dis ci pline — but also by theprin ci ple of na tional re spon si bil ity re gard ingthe con duc tion of eco nomic poli cies within thegen eral frame work de fined in the Treaty andde rived law.


Introduction


Table I.1

PORTUGAL: MAIN ECONOMIC INDICATORS, 1995-1997

Units 1995 1996 1997I. Prices, wages and unit labour costs

Inflation (CPI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % arc 4.1 3.1 2.2Inflation (HICP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % arc n.a. 2.9 1.9Inflation (tradables) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % arc 3.0 1.9 0.6Inflation (non-tradables) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % arc 5.6 4.5 4.1GDP deflator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % rc 4.8 2.6 3.1Private consumption deflator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % rc 4.0 3.0 2.3Goods and services export deflator . . . . . . . . . . . . . . . . . . . . . . . . . % rc 3.9 -2.5 0.7Goods and services import deflator . . . . . . . . . . . . . . . . . . . . . . . . . % rc 1.6 -0.1 0.3Nominal wages, total economy (a) . . . . . . . . . . . . . . . . . . . . . . . . . . % rc 6.9 6.5 5.6Nominal wages, total industry (a) (b) . . . . . . . . . . . . . . . . . . . . . . . . % rc 6.2 5.1 4.7Unit labour costs, total economy . . . . . . . . . . . . . . . . . . . . . . . . . . . % rc 3.7 3.4 3.4Unit labour costs, total industry (b) . . . . . . . . . . . . . . . . . . . . . . . . . . % rc 3.0 2.0 2.5

II. Expenditure, income and saving

Gross domestic product (GDP) . . . . . . . . . . . . . . . . . . . . . . . . . . . % rrc 2.4 3.6 4.0Overall domestic demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % rrc 2.4 3.4 5.1Private consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % rrc 2.3 2.8 3.0Public consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % rrc 2.0 1.7 2.6Gross fixed capital formation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % rrc 1.9 7.7 12.9Exports of goods and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % rrc 11.8 9.6 8.2Imports of goods and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . % rrc 9.6 7.8 10.3Households disposable income (DI) . . . . . . . . . . . . . . . . . . . . . . . % rrc 1.3 2.4 3.3Domestic saving rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % of GDP 20.1 19.9 20.6

Private sector (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % of GDP 22.5 20.0 19.7Individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % of DI 9.7 9.4 9.7Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % of GDP 15.4 13.2 12.8

General government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % of GDP -2.4 -0.1 1.0

III. Employment and unemploymentTotal employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % arc -0.6 0.6 1.9Wage earners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % arc -1.0 -0.4 1.4Unemployment rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annual

average, in % 7.2 7.3 6.7

IV.Balance of payments and official reservesCurrent account on a transaction basis . . . . . . . . . . . . . . . . . . . . . % of GDP -0.2 -1.4 -1.8Current account on a transaction basis . . . . . . . . . . . . . . . . . . . . . US million -158 -1 506 -1 838Trade balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % of GDP -8.6 -8.6 -9.3Invisibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % of GDP 8.4 7.2 7.5Non-official financial account (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . % of GDP -0.1 1.8 1.3Foreign direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % of GDP 0.7 0.7 1.7Net official reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December

US million 20 719 20 633 18 754

V. Exchange ratesNominal effective exchange rate (e) . . . . . . . . . . . . . . . . . . . . . . . . . % arc 2.0 -0.5 -1.9DM exchange rate (f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % arc 2.3 -2.0 -1.4US dollar exchange rate (f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % arc -9.6 2.8 13.7Real effective exchange rate (g). . . . . . . . . . . . . . . . . . . . . . . . . . . . . % arc 1.2 -1.5 -1.6

VI.Interest rates and interest rate differentialsIntervention rates of the Banco de Portugal

Regular operations of liquidity supply . . . . . . . . . . . . . . . . . . . . % 31 Dec 8.5 6.7 5.3Overnight standing credit facility . . . . . . . . . . . . . . . . . . . . . . . . % 31 Dec 10.5 8.3 6.9Standing absorption facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % 31 Dec 7.8 6.2 4.9

LISBOR-3 months interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . % Dec 9.0 6.5 5.1Treasury bond 10 year fixed rate yield . . . . . . . . . . . . . . . . . . . . . . % Dec 10.0 7.0 5.73-month interest rate differential vis-à-vis the DM . . . . . . . . . . . % Dec 5.0 3.3 1.4Differential of interest rate at 10 years vis-à-vis the DM . . . . . . . % Dec 4.0 1.2 0.4Discount of commercial bills, 91-180 days (h) . . . . . . . . . . . . . . . . % Dec 14.6 12.1 10.7Loans and other credits, 91-180 days (h) . . . . . . . . . . . . . . . . . . . . . % Dec 12.7 11.0 8.4Time deposits, 181 days -1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . % Dec 8.1 5.4 4.1

VII. Share price index of the Lisbon Stock Exchange . . . . . . . . . . . . % Dec -4.6 32.6 65.2

VIII. Monetary and credit aggregates (i)

L– . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % rc, Dec/Dec 8.0 8.8 6.2M3H . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % rc, Dec/Dec 8.0 9.0 6.6M1– . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % rc, Dec/Dec 8.7 10.3 13.8Total domestic credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % rc, Dec/Dec 12.0 12.0 9.7Credit to non-financial companies and individuals (j) . . . . . . . % rc, Dec/Dec 15.1 14.6 23.7Net credit to the public sector . . . . . . . . . . . . . . . . . . . . . . . . . . . % rc, Dec/Dec -5.5 -5.7 -33.5

IX. Public financeGeneral Government overall balance (k) . . . . . . . . . . . . . . . . . . . . % of GDP -5.7 -3.2 -2.5General Government primary balance . . . . . . . . . . . . . . . . . . . . . % of GDP 0.0 1.1 1.5Gross direct public debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % of GDP Dec 65.9 65.0 62.0

X. Pour mémoireEuropean Union GDP (l) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % rrc 2.5 1.8 2.7European Union CPI (l) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % arc 3.0 2.5 2.0European Union HICP (m) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % arc n.a. 2.4 1.7

Notes:(a) Compensation of employees include wages, additional benefits and Social Security contributions.(b) Total industry: economy as a whole excluding GG.(c) Aggregated saving for the economy except the General Government.(d) Includes leads/lags and statistical adjustments.(e) A positive change indicates an escudo effective appreciation; a decrease indicates a depreciation.(f) A positive change indicates an escudo depreciation vis-à-vis the foreign currency; a negative change indicates an appreciation.(g) Unit labour costs in the manufacturing industry. A negative change means a reduction in relative costs of Portuguese producers.(h) This rate refers to operations with non-financial private companies.(i) End-of-month figures.(j) Series subject to revisions.(k) Excluding financial operations.(l) Source: European Commission.(m) Source: Eurostat.arc Average rate of change.rc Rate of change.rrc Real rate of change.

Chapter II

INTERNATIONAL BACKGROUND AND EUROPEAN INTEGRATION

1. Introduction and synthesis

In 1997, the Portuguese economy profitedfrom a favourable international background,characterised by the strengthening of economicactivity in the European Union countries, andby the maintenance of a strong growth in theUnited States of America (USA) (chart II.1). Inthe advanced economies as a whole, activityaccelerated, growing 3.0 per cent in 1997 (2.7per cent in 1996). The higher economic growthwas accompanied by a slight reduction in infla-tion in these countries (consumer prices rose2.1 per cent, which compares to 2.4 per cent in1996). In the European Union, the accelerationof economic activity benefited from the reduc-tion and convergence of long-term interestrates, in a context of exchange rate stability.The disinflationary and budgetary consolida-tion progresses, as well as the optimism re-garding the accomplishment of the Economicand Monetary Union also contributed to thesedevelopments.

Economic growth in the European Union(EU) rose from 1.8 per cent in 1996 to 2.7 percent in 1997, in a context of significant strength-ening of convergence between the Europeaneconomies. The higher growth of economic ac-tivity in the EU characterised virtually allMember States, following the generalised im-provement in European economic agents’ con-fidence. Inflation decreased again in 1997, from2.4 per cent to 1.7 per cent; furthermore, the re-duction of the dispersion between inflationrates in the various countries was strengthenedthis year. Labour market situation continued tobe characterised by high levels of unemploy-ment in most European economies, and by

small amounts of job creation. In 1997, the EUMember States proceeded with budgetary con-solidation efforts, developed within the con-vergence process. These efforts resulted in anarrowing of differences between countries’public finance situation.

In 1997, the USA economy entered its sixthyear of expansion. GDP accelerated from 2.8per cent to 3.8 per cent. In this context, thestrong growth exhibited by domestic demandshould be highlighted. Resource utilisation inthe USA remained at very high levels, speciallyin the labour market. Employment grew 2.2 percent, while the unemployment rate fell sharplythroughout the year. The stronger growth ofeconomic activity was accompanied by a re-duction in inflation over the course of 1997.

Following the strong growth recorded in1996, Japanese economic activity exhibited asignificant slowdown, from 3.9 to 0.9 per centin 1997. The behaviour of economic activity inJapan throughout the year was influenced bythe adjustment in the expansionist orientationof budgetary policy — unsustainable in thelong run — and by the worsening of problemsin the financial sector.

The second half of 1997 was marked bysome instability in world financial markets, re-sulting from the Asian crisis (see box “FinancialInstability in Asia”). Asian currencies recordedan increase in volatility, while depreciatingsharply vis-à-vis the US dollar in the secondhalf of the year. In 1997 as a whole, the US dol-lar again appreciated vis-à-vis the Deutschemark and the yen, in consonance with the dis-tinct cyclical positions exhibited by these


International background and European integration

economies and with expectations of changes inofficial interest rates. The US dollar appreci-ated on average 15.3 per cent vis-à-vis theDeutsche mark and 11.2 per cent vis-à-vis theyen, which compares to appreciations of 5.0and 15.6 per cent respectively, in 1996 (chartII.2). In Europe, the Deutsche mark depreciatedvis-à-vis most currencies in 1997, specially asregards the Sterling and the Irish pounds (17.4and 8.5 per cent, respectively). In nominal ef-fective terms, the Deutsche mark depreciated4.6 per cent in annual average terms (2.7 percent in 1996).

In 1997, the Exchange Rate Mechanism ofthe European Monetary System (ERM-EMS)was characterised by the maintenance of stabil-ity, with most currencies concentrating close tothe respective central bilateral rates. Progressesin terms of convergence between the EU Mem-ber States, together with the increasing percep-tion of the sustainability of these results con-tributed to the behaviour of the currencies inte-grating the ERM-EMS.

Long-term interest rates in the three lead-ing industrialised countries exhibited a down-ward trend in 1997, sharper in the second halfof the year. In the first half of 1997, long-terminterest rates recorded distinct behaviours, re-flecting expectations about economic growthin these countries (chart II.3). In Europe, theimprovement of expectations regarding con-vergence between the various economies con-



Chart II.1ECONOMIC GROWTH UNEMPLOYMENT

AND INFLATIONGross domestic product

Year-on-year rates of change, in real terms

-2

0

2

4

6

8

Per

cent

age

1990 1991 1992 1993 1994 1995 1996 1997

USAJapan

EU

Unemployment rate

1

3

5

7

9

11

Per

cent

age

1990 1991 1992 1993 1994 1995 1996 1997

USA

Japan

EU

Consumer pricesYear-on-year rates of change

-2

0

2

4

6

8

Per

cent

age

1990 1991 1992 1993 1994 1995 1996 1997

USA

Japan

EU

Source: Datastream.

Chart II.2EXCHANGE RATES VIS-À-VIS THE US DOLLAR

Monthly averages

1.3

1.4

1.5

1.6

1.7

1.8

1.9

DM

/US

D

80

90

100

110

120

130

DM

/US

D

1994 1995 1996 1997

Yen

Deutsche mark



FINANCIAL INSTABILITY IN ASIA

The second half of 1997 was marked by some in-stability in the world financial markets. The firstepisodes of turbulence occurred in Thailand,spreading to other Asian countries in the monthsthat followed. Such instability was characterisedby a strong depreciation of the respective curren-cies, a significant capital outflow, and the appear-ance of serious solvency problems in these coun-tries’ financial systems.

In recent years, the Thai economy (as othereconomies in the region) exhibited high current ac-count deficits, and consequently a high dependenceon external capital — most of which were chan-nelled to the various sectors through the bankingsystem. Investors’ distorted perception of risk ledto excessive price rises in equity and real estatemarkets, and to a gradual deterioration of the qual-ity of assets held by financial institutions — giventhe absence of an adequate regulatory backgroundfor the financial sector.

Given the high level of integration of the Thaiand Japanese economies the strengthening of theUS dollar eroded the foreign competitiveness of theThai economy. From May onwards, strong pres-sures towards the devaluation of the Thai currency(THB) were rendered, while doubts concerning thesustainability of the exchange rate fixing to the USdollar intensified. On 2 July, after significant capi-tal outflows, the Thai authorities abandoned thefixing to the US dollar, deciding to let the THBfloat. The THB depreciated sharply in the firstweeks of July and its fall rose doubts regarding themaintenance of the neighbour countries’ exchange rate regimes. Currencies of the Philippines (PHP), Ma-laysia (MYR) and Indonesia (IDR) were the most affected in this first stage (chart 1).

With the aggravation of the situation in the Southeast Asian financial markets, the crisis expanded toother currencies in the region — like the SGD (Singapore dollar), TWD (Formosa dollar), HKD (Hong-Kong dollar), and the KRW (South Korea won). Up to October, the financial crisis was still mostly confinedto the Asian zone.

From mid-October onwards, the instability in the Asian financial markets worsened — culminating inthe sharp fall of the Hong-Kong stock market in the last week of the month. This development triggered nega-tive effects in most world stock markets. In the industrialised countries, except Japan, stock markets recov-ered, after recording corrections in last October. Indeed, these stock markets exhibited high accumulatedgains in 1997 as a whole (chart2). In November, due to the fragility of its financial system, South Korea wasforced to devaluate its currency and negotiate a stabilisation agreement with the International Monetary

Chart 1ASIAN CURRENCIES: 1997

Exchange rates vis-à-vis the US Dollar

60

70

80

90

100

110

120

Inde

x 01

.01.

1997

= 1

00J F M A M J J A S O N D

THB IDR PHP MYR

0

20

40

60

80

100

120

Inde

x 01

.01.

1997

= 1

00

J F M A M J J A S O N D

HKD TWD KRW SGD

Source: Datastream.



Fund (IMF). In Japan, the Government announcedthe bankruptcy of some important financial insti-tutions, hence highlighting the problems affectingits financial system. World financial markets con-tinued to exhibit high levels of volatility up to theend of the year, recording substantial resourceflows into the markets considered to be more stable.

The impact of the Asian crisis on theworld economy

The crisis in the Asian financial markets be-came a significant constraint in the internationalmacroeconomic background. Indeed, the crisis ledto reductions in inflation and economic growthprojections. Most international organisations con-sider that the impact on growth forecasts for theEuropean and USA economies in 1998 shall be sig-nificantly lower than that for Japan. These perspec-tives lie on the assumption that the Asian situationshall not worsen in a serious fashion and will havea limited contagion to other emerging markets.

World economic activity grew 4.1 per cent in1997. This figure is expected to decrease to 3.1 percent in 1998 (table 1). In October, the IMF projec-tions pointed towards a 4.3 per cent growth for theworld economy in 1998. The downward revisionchiefly results from the lower growth forecasts forthe developing world — specially for the Asianeconomies. The strong downward revision reflectsthe adjustments for external imbalances that thesecountries must carry out, given the reduction ofthese economies’ borrowing capacity from the restof the world. The adoption of more restrict mone-tary policies and the deterioration of economicagents’ confidence levels — in a context of high un-certainty about the recovery of financial markets— shall contribute to a slowdown in domestic de-mand. The improved competitiveness achievedthrough substantial nominal depreciations shalllead to an increase in exports.

Economic activity in advanced economies is ex-pected to grow 2.4 per cent in 1998, 0.5 percentagepoints less than in the former IMF forecasts. However, domestic demand in most of these countries is ex-pected to accelerate — specially in the European Union. The projected growth of domestic demand in the in-dustrialised countries will help the adjustment of the external imbalances of the Asian economies. The shiftof international financial flows into more developed stock markets has contributed to a greater reduction of

Chart 2EQUITY MARKETS

20

40

60

80

100

120

140

160

180

200

Inde

x 01

.01.

1996

=10

0

J F M A M J J A S O N D J F M A M J J A S O N D

Tailand Indonesia Philippines Malaysia

1996 1997

20

40

60

80

100

120

140

160

180

200 In

dex

01.0

1.19

96=

100


Hong Kong Taiwan Korea Singapore

1996 1997

Source: Datastream.

20

40

60

80

100

120

140

160

180

200

Inde

x 01

.01.

1996

=10

0


USA JapanGermany United Kingdom

1996 1997



real interest rates in these countries. The sharp fall in the international commodity prices and the strong de-preciation of the Asian currencies will be reflected in gains in terms of trade in the industrialised countries,contributing as well to the strengthening of domestic demand in these countries. The contracting impact ofthe growth of Asian economies’ net exports shall be higher, the greatest the trade integration with thesecountries.

Japan is the country the Asian crisis will affect the most, since over 30 per cent of Japanese trade flows areheld with the Asian countries more affected by the financial crisis (chart 3). Hence, the most recent forecastspoint towards a stagnation of economic activity in 1998, clearly below the previous estimate — 2.1 per cent.Exports shall record a lower growth, due both to the slowdown projected for the remaining Asian economies,as to the increased competition in the international markets — resulting from the competitiveness gains re-corded by those countries. The behaviour of the Japanese economy in 1998 will also be negatively affected bya less favourable behaviour of domestic demand than that initially expected and by the aggravation of theproblems affecting the Japanese financial system.

The repercussions of the Asian crisis on the USA contributed to the reduction of the likelihood associatedto inflationary pressures, in an economy where the rate of productive capacity utilisation is very high. In-deed, after the acceleration of economic activity in 1997, the USA economy is expected to exhibit a pace ofgrowth closer to the real output path. Projections point towards a more negative contribution of external de-mand to growth, reflecting the dollar appreciation and the growth of net imports from the Asian economies.

Table 1

FORECASTS FOR GDP GROWTH

1997 1998 1999

Oct 97(1)

Apr 98(2)

Revision(2)-(1)

Apr 98

World economy . . . . . . . . . . . . . . . 4.1 4.3 3.1 -1.2 3.7Advanced economies . . . . . . . . . . 3.0 2.9 2.4 -0.5 2.5Economies in transition . . . . . . . . 1.7 4.2 2.9 -1.3 3.4Developing countries . . . . . . . . . . 5.8 6.3 4.1 -2.2 5.3

Asia . . . . . . . . . . . . . . . . . . . . . . . . 6.7 7.4 4.4 -3.0 5.9ASEAN-4 . . . . . . . . . . . . . . . . . . . 3.9 5.4 -2.7 -8.1 2.5

EU . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7 3.0 2.8 -0.2 3.0

Germany . . . . . . . . . . . . . . . . . . . . . 2.2 3.2 2.6 -0.6 2.9France. . . . . . . . . . . . . . . . . . . . . . . . 2.4 3.1 3.0 -0.1 3.1Italy. . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 2.5 2.4 -0.1 3.0United Kingdom. . . . . . . . . . . . . . . 3.5 2.1 1.9 -0.2 2.2Spain. . . . . . . . . . . . . . . . . . . . . . . . . 3.4 3.5 3.6 0.1 3.7Portugal . . . . . . . . . . . . . . . . . . . . . . 3.7 3.7 4.0 0.3 3.8

USA . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 2.6 2.9 0.3 2.2Japan . . . . . . . . . . . . . . . . . . . . . . . . 0.9 2.1 0.0 -2.1 1.3

Source: IMF and European Commission.Note: ASEAN-4 includes Indonesia, Thailand, Philippines and Malaysia.



Economic activity in the European Union shallaccelerate slightly in 1998, despite the less favour-able international background, due to the Asian cri-sis. Domestic demand is expected to strengthen itscontribution to economic growth, putting an end toa period where external conditions were the leadingengine of growth. The lower interest rate levels andthe maintenance of a sentiment of confidence inEurope will contribute to the acceleration of domes-tic demand in 1998. Inflation is expected to proceedits downward path in 1998, partly as an outcome ofthe fall in the international commodity prices.

The effects of the Asian crisis on the Portugueseeconomy shall be small. Trade integration withthese countries is quite small and the increasedcompetition of Asian products in the leading exportmarkets is limited, given the existence of con-straints to the entry of these products in the Euro-pean Union. The amount of credit granted to Asiancountries by the Portuguese banking system is in-expressive, so no problems shall emerge at this level.

The basic scenery drawn by the IMF presents afairly optimistic vision of the implications of theAsian crisis on the world economy, foreseeing thegradual recovery of the Asian economies from 1999onwards and the absence of significant contagion effects to other emerging markets. However, some uncer-tainty still exists on the success of stabilisation measures adopted by the most affected countries. The rise inrisk associated to banking credit granted to Asian countries may result in the allocation of greater propor-tions of funds to provision constitution, hence moderating the growth of banking credit supplied. In Europe,the German banking system is the most exposed to Asia. The spreading of financial instability to otheremerging markets constitute the major risk in this scenery: a sharp reduction in external financing in mostdeveloping countries would lead to a simultaneous adjustment of these countries’ external imbalances. Inthis case, the impact would be significantly more global and lasting than what is currently supposed — i.e.,that the Asian financial crisis will have moderate contractionary and disinflationary impacts on the worldeconomy.

Chart 3TRADE RELATIONS WITH THEEASTERN ASIAN COUNTRIES(a)

0 5 10 15 20 25 30 35

United Kingdom

France

Germany

Portugal

European Union

USA

Japan

Percentage

Note:(a) Share of exports and imports to/from a set of 8

Asian countries (Thailand, Philippines, Malaysia,Indonesia, Singapore, Taiwan, Hong-Kong andSouth Korea) in total foreign trade in 1996.

Source: IMF, Direction of Trade Statistics Yearbook,1997.

vergence between the various economies con-tributed to the narrowing of the differentialvis-à-vis the German yields in all EU MemberStates. In Germany, long-term interest ratesdecreased from 5.8 per cent in December 1996to 5.3 per cent in December 1997.

2. International background of Europeaneconomies

World trade grew strongly in 1997, after theslowdown recorded in the previous year (9.4per cent in volume terms, as against 6.6 percent in 1996). This development is greatly ex-plained by the acceleration of trade flows in theAmerican continent.

In 1997, the behaviour of commodity pricesin international markets continued to contrib-ute towards the reduction of inflation in mostindustrialised countries. Unlike what occurredin the previous year, when oil prices rosestrongly, the price of oil barrels decreased 7.1per cent in annual average terms.

In 1997, the USA economy entered its sixthconsecutive year of expansion. GDP acceler-ated from 2.8 per cent to 3.8 per cent (table II.1).The acceleration of economic activity was de-termined by the strong growth of domestic de-mand, since external demand continued tocontribute negatively to the growth of GDP(chart II.4).

Private consumption grew 3.3 per cent (2.6per cent in 1996), reflecting the outstanding in-creases in employment and disposable incomeover the course of the year — with positive ef-fects on consumers’ confidence — as well as thehigh increases in households’ net wealth due tothe behaviour of capital markets. The USAstock market again exhibited substantial gains(the Dow Jones Index rose around 23 per centbetween late 1996 and late 1997), despite theadjustment recorded in October 1997. GrossFixed Capital Formation (GFCF) also grewstrongly — 7.9 per cent, which compares to 8.3per cent in 1996. This behaviour was due to thereduction in long-term interest rates and to theincrease in companies’ profits. Exports acceler-ated in 1997, despite the strong appreciation ofthe US dollar in the two last years (5.3 and 8.8per cent, in real effective terms, respectively).In the year as a whole, exports grew 12.3 percent and imports grew 14.2 per cent, whichtranslated into a negative contribution of exter-nal demand to GDP growth.

Resource utilisation in the USA economy re-mained at very high levels, specially in the la-bour market. Employment grew 2.2 per cent(1.4 per cent in the previous year) and the un-employment fell sharply throughout the year.In December 1997, the unemployment ratestood at 4.7 per cent, which compares to 5.3 percent in the same period in 1996. The rate of pro-



Chart II.3LONG-TERM INTEREST RATES

Monthly averages

1

2

3

4

5

6

7

8

Per

cent

age

1994 1995 1996 1997

Yen

Deutsche mark

US dollar

Table II.1

USA — NATIONAL ACCOUNTS

Real rates of change

1995 1996 1997

GDP . . . . . . . . . . . . . . . . . . . . . . . 2.0 2.8 3.8Private consumption . . . . . . . . . 2.4 2.6 3.3Public consumption . . . . . . . . . . 0.0 0.5 0.9GFCF. . . . . . . . . . . . . . . . . . . . . . . 5.1 8.3 7.9

Change in inventories (a) . . . -0.5 0.0 0.6Domestic demand (a). . . . . . . 1.9 3.0 4.2

Exports . . . . . . . . . . . . . . . . . . . . . 11.1 8.3 12.3Imports. . . . . . . . . . . . . . . . . . . . . 8.9 9.1 14.2

Net foreign demand (a) . . . . . 0.1 -0.2 -0.5

Source: Datastream.Note:(a) Contributions to GDP growth (as percentage of GDP of the

previous year).

ductive capacity utilisation in manufacturingindustry also increased throughout 1997 (chartII.5).

The reduction in the unemployment ratethroughout 1997 reflected into a higher growthof real wages. Unit labour costs in the non-agricultural sector recorded only a slight accel-eration in relation to the previous year (from1.9 to 2.1 per cent), due to the maintenance ofhigh productivity gains (chart II.6).

The stronger growth of economic activitywas accompanied by a reduction in inflationduring 1997. The average rate of inflation —measured by the Consumer Price Index (CPI)— decreased from 2.9 per cent in 1996 to 2.3 percent in 1997. The year-on-year rate of change ofthe CPI recorded an even sharper reductionover the course of the year, from 3.3 per cent inDecember 1996 to 1.7 per cent in December1997 (chart II.7). Core producer prices rose only0.3 per cent in underlying terms (1.5 per cent inthe previous year), since the growth of labourcosts was compensated by the fall in the pricesof imported goods — due to the significant dol-lar appreciation.

In 1997, the monetary authorities carriedout a single rise in the federal funds rate, from5.25 to 5.5 per cent, in late March. The discountrate remained unchanged at 5.0 per centthroughout the whole year (chart II.8). Short-

term interest rates accompanied the changes inofficial interest rates, remaining at levelsslightly above those recorded in 1996. Yields inthe bond market recorded a somewhat unevenpattern over the course of 1997. From Decem-ber 1996 up to April 1997, these yields rosefrom 6.3 per cent to 6.9 per cent, reflecting ex-pectations of price acceleration, due to thestrengthening of economic activity. This be-haviour was totally inverted in the period fol-



Chart II.4USA

CONTRIBUTIONS TO GDP GROWTH

-3

-2

-1

0

1

2

3

4

5

Per

cent

age

1990 1991 1992 1993 1994 1995 1996 1997

External demand

Domestic demand

GDP (year-on-yearrate)

Source: Datastream.

Chart II.5USA

RATE OF UNEMPLOYMENT ANDRATE OF CAPACITY UTILISATION

4

5

6

7

8

Per

cent

age

78

79

80

81

82

83

84

85

Out

put a

s a

perc

enta

ge o

f cap

acity

1990 1991 1992 1993 1994 1995 1996 1997

Rate of capacity utilisation in themanufacturing industry

Unemployment rate

Source: Datastream.

Chart II.6USA

UNIT LABOUR COSTSYear-on-year rates of change

-2

0

2

4

6

8

Per

cent

age

1990 1991 1992 1993 1994 1995 1996 1997

Wages

ProductivityULC

Source: Datastream.

lowing the rise in the federal funds rate: long-term interest rates fell 1.1 p.p. between Apriland December 1997. Following the Asian crisis,expectations regarding the behaviour of offi-cial interest rates also changed, in a context ofrelative instability in the international markets.

The budgetary consolidation process re-corded in recent years proceeded in 1997. Pub-lic accounts were balanced in 1997, after abudgetary deficit amounting to 1.1 per cent ofGDP in 1996 (chart II.9). Public deficit adjustedfor cyclical changes in activity, estimated bythe OECD, also decreased in the period, from0.9 to 0.3 per cent of GDP.

After the strong growth recorded in 1996,economic activity in Japan exhibited a sharpslowdown, from 3.9 to 0.9 per cent in 1997 (ta-ble II.2). The intra-annual behaviour of eco-nomic activity in Japan was influenced by thecorrection in the expansionist orientation ofbudgetary policy — unsustainable in the longrun — and by the worsening of the problemsaffecting the financial sector, following theAsian crisis. In 1997 as a whole, exports led eco-nomic growth in Japan, since domestic de-mand had a negative contribution to thegrowth of GDP (chart II.10).

Exports accelerated in 1997, to 11.0 per cent(3.4 per cent in 1996), reflecting the growth ofexternal demand and the depreciation of theyen (chart II.11). As a result, net external de-mand contributed positively to growth (1.4percentage points, against -0.9 p.p. in 1996).Private consumption recorded a slowdown,from 2.9 per cent in 1996 to 1.1 per cent in 1997.In the first quarter of the year, this item of de-mand recorded a strong growth, reflecting theanticipation of expenditure due to the rise inindirect taxes in early April. In the followingquarters, the growth of private consumptiondecreased, with consumers’ confidence being



Chart II.7USA

CONSUMER AND PRODUCER PRICESYear-on-year rates of change of the quarter

ended in each month

-1

0

1

2

3

4

5

6

7

8

Per

cent

age

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

Per

cent

age

1994 1995 1996 1997

Underlying CPI (excludesfoodstuffs and energy)

PPI

CPI

Underlying producer price index(excludes foodstuffs and energy)

Source: Datastream.

Chart II.8USA

INTEREST RATES

4

5

6

7

8

Per

cent

age

J96F M A M J J A S O N DJ97F M A M J J A S O N D

Fed Funds rate

Discount rate

Interest rate 10-year bonds

Short-term interest rates

Chart II.9USA

GENERAL GOVERNMENT DEFICIT AND DEBT

-1

0

1

2

3

4

5

As

a pe

rcen

tage

of G

DP

40

50

60

70

80

As

a pe

rcen

tage

of G

DP

1990 1991 1992 1993 1994 1995 1996 1997

Cycle-adjusteddeficit(a)(left-hand scale)

Budgetary deficit(left-hand scale)

Public debt(right-hand scale)

-

-

-

-

-

Source: OECDNote:(a) Budgetary deficit adjusted for the GDP cyclical

deviation from trend.

negatively affected by the uncertainty regard-ing employment perspectives and the develop-ments in financial markets. Contrasting withthe previous year, Gross Fixed Capital Forma-tion decreased by 3.6 per cent in 1997 (10.1 percent increase in 1996). Public investment fell by11.1 per cent, as a result of the extinction of theeffects of public expenditure programmesadopted in previous years. Despite the low lev-els of interest rates, households’ investment inhousing fell by 15.7 per cent, after the stronggrowth recorded in 1996 (13.9 per cent). Non-housing investment by the private sector con-tinued to increase in 1997, though at a lowerpace than in 1996 (4.5 per cent, as against 9.5per cent in the previous year), due to the wors-ening of entrepreneurs’ confidence — speciallyfrom mid-1997 onwards.

The re-orientation of budgetary policy to-wards the adjustment of significant public fi-nance imbalances is estimated to have had animpact on the behaviour of economic activitygreater than expected. Following the Statebudget law for the fiscal year 1997/1998, indi-rect taxeswere increased inearlyAprilandpub-lic investment fell sharply over the course of1997. Hence, public deficit fell from 4.3 to 3.1 percent of GDP in 1997. The deficit adjusted for cy-clical changes, estimated by the OECD, de-creased from 4.0 to 2.6 per cent of GDP (chartII.12).

Japanese financial institutions continued toface serious problems related to the quality oftheir assets, resulting from the sharp fall inprices in the real estate and stock markets since1990. Following the Asian crisis, the problemsof the financial system worsened, contributingto the deterioration of economic agents’ confi-dence. In November, the Government an-nounced the bankruptcy of some important fi-nancial institutions, and in the year as a whole,the Tokyo stock market recorded a 21 per cent



Chart II.10JAPAN

CONTRIBUTIONS TO GDP GROWTH

-3

-1

1

3

5

7

Per

cent

age

1990 1991 1992 1993 1994 1995 1996 1997

Domestic demand

GDP (year-on-year rate)

External demand

Source: Datastream.

Chart II.11JAPAN

EXPORTS AND REAL EFFECTIVEEXCHANGE RATE

-5

0

5

10

15

20

Qua

rter

ly y

ear-

on-y

ear

chan

ge

80

100

120

140

160

180

Inde

x 19

90=

100

1990 1991 1992 1993 1994 1995 1996 1997

Real effectiveexchange (a)(right-hand scale)

Exports (left-hand scale)

Source: Datastream.Note: A positive (negative) change indicates a loss

(gain) of cost-competitiveness.

Table II.2

JAPAN — NATIONAL ACCOUNTS

Real rate of change

1995 1996 1997

GDP . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 3.9 0.9Private consumption . . . . . . . . . . . 2.0 2.9 1.1Public consumption. . . . . . . . . . . . 3.3 1.5 -0.2GFCF . . . . . . . . . . . . . . . . . . . . . . . . 1.5 10.1 -3.6

Change in inventories (a) . . . . . 0.2 0.1 0.0Domestic demand (a) . . . . . . . . 2.1 4.9 -0.5

Exports. . . . . . . . . . . . . . . . . . . . . . . 5.4 3.4 11.0Imports . . . . . . . . . . . . . . . . . . . . . . 14.2 11.5 -0.1

Net foreign demand (a) . . . . . . -0.8 -0.9 1.4

Source: Datastream.Note:(a) Contributions to GDP growth (as a percentage of the pre-

vious year).

fall. Given the serious problems of the financialsystem, in early 1998 the Government ap-proved a package of measures aiming at fi-nancing the deposits guarantee fund and atstrengthening the equity of some financial in-stitutions.

The pace of growth of economic activity in1997 was not enough to reduce the level ofnon-utilised resources in the Japanese econ-omy (chart II.13). The unemployment rate re-mained at high levels, standing at 3.4 per cent

in annual average terms. In 1997, consumerprices rose on average 1.7 per cent — compar-ing to 0.1 per cent in the previous year — re-flecting the rise in the VAT rate in early April.In year-on-year terms, consumer prices accel-erated from 0.5 per cent in March to 1.9 per centin April.

Given the concern about sustaining eco-nomic growth, the Japanese monetaryauthorities left the discount rate unchanged at0.5 per cent throughout 1997; this level hasbeen maintained since September 1995 (chartII.14). Short-term interest rates remained atvery low levels over the course of the year, al-though increasing in December — due to therise in the risk premium associated to the Japa-nese financial institutions. Long-term interestrates decreased from 2.6 per cent in December1996 to 1.9 per cent in December 1997, fallingmore sharply in the second half of the year,with the deterioration of expectations regard-ing economic growth in Japan.

In the developing countries, according tothe estimates of the IMF, economic growth de-creased from 6.6 per cent in 1996 to 5.8 per centin 1997 (chart II.15). This slowdown resultedfrom the lower growth in the Asian economies(6.7 per cent, against 8.3 per cent in the previ-ous year), due to the financial instability in theregion. Economic activity in Latin Americagrew 5.0 per cent in 1997, accelerating in rela-tion to the previous year (3.5 per cent growth).



Chart II.12JAPAN

GENERAL GOVERNMENT DEFICIT AND DEBT

-3

-2

-1

0

1

2

3

4

5

As

a pe

rcen

tage

of G

DP

50

60

70

80

90

100

As

a pe

rcen

tage

of G

DP

1990 1991 1992 1993 1994 1995 1996 1997

Cycle adjusteddeficit (a) (left-handscale)

Budgetary deficit(left-hand scale)

Public debt(right-hand scale)

-

-

-

-

-

Source: OECD.Note:(a) Budgetary deficit adjusted for the GDP cyclical

deviation from trend.

Chart II.13RATE OF UNEMPLOYMENT AND RATE OF

CAPACITY UTILISATION

1

1.5

2

2.5

3

3.5

4

Per

cent

age

80

85

90

95

100

105

Inde

x 19

90 =

100

, mm

3

1990 1991 1992 1993 1994 1995 1996 1997

Rate of capacity utilisation in themanufacturing industry (right-hand scale)

Rate of unemployment(left-hand scale)

Source: Datastream.

Chart II.14JAPAN

INTEREST RATES

0

0.5

1

1.5

2

2.5

3

3.5

4

Per

cent

age

J96F M A M J J A S O N DJ97F M A M J J A S O N D

Discount rate

Interest rate 10-year bonds

Short-terminterest rate

In most economies in transition(1), significantreductions in inflation were accomplished and

economic activity grew 1.7 per cent, after sev-eral years of negative growth rates.

3. Developments in the European Union

Throughout 1997, significant progresses inthe convergence process between the EUMember-states were accomplished. In early1998, 11 countries fulfilled the required condi-tions to adopt the single currency (Belgium,Germany, Spain, France, Ireland, Italy, Luxem-bourg, the Netherlands, Austria, Portugal andFinland) (see box “Economic convergence in theEU”). In 1997, the political-institutional com-mitments towards the fulfilment of the thirdstage of the Economic and Monetary Union on1 January 1999 were reaffirmed. In this context,worth noting are the results of the European



(1) Includes countries of Central and Eastern Europe, Russia,non-European States of the former Soviet Union andMongolia.

Chart II.15GROSS DOMESTIC PRODUCT

-15

-10

-5

0

5

10

Per

cent

age

1990 1991 1992 1993 1994 1995 1996 1997

Industrialised countries

Developing countries

Economies in transition (a)

Source: IMF.Note:(a) Includes countries of Central and Eastern Europe,

Russia, non-European states of the former SovietUnion and Mongolia.

Table II.3

EUROPEAN UNION COUNTRIES: ECONOMIC GROWTH, UNEMPLOYMENT AND INFLATION

GDP: Real rate of change; Unemployment: as a percentage of labour force (standardised rate)Inflation: rate of change of the harmonised index of consumer prices

GDP Unemployment Inflation

1995 1996 1997 1995 1996 1997 1995 1996 1997

EU . . . . . . . . . . . . . . . . 2.5 1.8 2.7 10.8 10.9 10.7 — 2.4 1.7EU - 11 (a) . . . . . . . . . . 2.4 1.6 2.5 11.4 11.6 11.7 — — —

Germany. . . . . . . . . . . 1.8 1.4 2.2 8.2 8.8 9.7 — 1.2 1.5France . . . . . . . . . . . . . 2.1 1.5 2.4 11.7 12.4 12.5 — 2.1 1.3United Kingdom . . . . 2.8 2.3 3.5 8.7 8.2 7.1 — 2.5 1.9Italy . . . . . . . . . . . . . . . 2.9 0.7 1.5 11.9 12.0 12.1 — 4.0 1.9Spain . . . . . . . . . . . . . . 2.8 2.3 3.4 22.9 22.1 20.9 — 3.6 1.9Portugal . . . . . . . . . . . 2.4 3.6 3.9 7.3 7.3 6.4 — 2.9 1.9Ireland. . . . . . . . . . . . . 11.1 8.6 10.0 12.3 11.6 10.2 — 2.2 1.2Greece . . . . . . . . . . . . . 1.8 2.6 3.5 9.2 9.6 9.5 — 7.9 5.4Netherlands . . . . . . . . 2.3 3.3 3.3 6.9 6.3 5.3 — 1.4 1.9Belgium. . . . . . . . . . . . 2.1 1.5 2.7 9.9 9.8 9.5 — 1.8 1.5Luxembourg. . . . . . . . 3.8 3.0 4.1 2.9 3.3 3.7 — 1.2 1.4Austria . . . . . . . . . . . . 2.1 1.6 2.5 3.9 4.4 4.4 — 1.8 1.2Sueden . . . . . . . . . . . . 3.9 1.3 1.8 9.2 10.0 10.2 — 0.8 1.9Denmark. . . . . . . . . . . 2.6 2.7 2.9 7.2 6.9 6.1 — 1.9 2.0Finland . . . . . . . . . . . . 5.1 3.6 5.9 16.3 15.4 14.0 — 1.1 1.2

Source: European Commission and Eurostat.Note:(a) EU-11 includes the countries which will integrate the euro area from 1 January 1999 onwards (Belgium, Germany, Spain,

France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland).



ECONOMIC CONVERGENCE IN THE EU

In the European Union there is a large consen-sus regarding the need for maintaining conditionsof macroeconomic stability, and for economiescharacterised by open and competitive markets.Together with the high level of market integrationlinked to the fulfilment of the Single Market Pro-gramme, this consensus led to a much wider anddeeper level of convergence between economic poli-cies and results than that defined in the conver-gence criteria of the European Union Treaty.

This box aims at assessing the level of conver-gence between the economies that will integrate theeuro area, as well as the sustainability of such con-vergence. The euro area shall begin on 1 January1999, integrating eleven Member States. Theseare: Belgium, Germany, Spain, France, Ireland, It-aly, Luxembourg, the Netherlands, Austria, Por-tugal and Finland. The four Member States out-side this group are the United Kingdom and Den-mark — which opted out — and Sweden andGreece — which did not fulfil the required condi-tions to the adoption of the single currency.

It should be highlighted in the first place theoutstanding progress regarding economic integra-tion, due to the process of European integrationand to the creation of a single market in goods andservices. The level of European integration trans-lates into the high proportion of intra-communitytrade in Member States’ total foreign trade (chart1). Secondly, it should be noted that, due to the in-creasing economic integration and policy conver-gence, economic cycles in the European Union ex-hibit a strong correlation (chart 2) and a high levelof synchronisation (chart 3), translated into the ab-sence of significant divergence between the currentcyclical positions. Prospectively, one can note thatthe convergence between the cyclical positions ofMember States is expected to strengthen (chart 4).This fact will tend to be strengthened with the Monetary Union, due to several factors. First, the increase ineconomic integration, resulting from the absence of exchange rate uncertainty. Second, the convergenceamong productive structures, hence reducing the likelihood of idiosyncratic shocks. Third, the stronger fi-nancial integration, and the reinforcement of the mechanisms of adjustment for asymmetric shocks, basedupon international risk sharing. Lastly, the convergence between financial structures, and hence betweenthe mechanisms of transmission of the single monetary policy.

Chart 1SHARE OF INTRA-COMMUNITY TRADE IN THE

FOREIGN TRADE OF EACH COUNTRY

30

35

40

45

50

55

60

65

70

75

80

De

nm

ark

Ge

rma

ny

Gre

ec

e

Spa

in

Fra

nc

e

Irela

nd

Italy

Ne

the

rlan

ds

Port

ug

al

Un

ited

Kin

gd

om

Au

stria

Swe

de

n

Fin

lan

d

Belg

ium

-Lu

xem

b.

Perc

en

tag

e

1985 1997

Source: European Commission (Database/AMECO -March 1998).

Chart 2CORRELATIONS BETWEEN NATIONAL

ECONOMIC CYCLES AND AVERAGE CYCLEIN THE EU-15

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Beg

ium

De

nm

ark

Ge

rma

ny

Gre

ec

e

Spa

in

Fra

nc

e

Irela

nd

Italy

Luxe

mb

ou

rg

Ne

the

rlan

ds

Port

ug

al

Un

ited

Kin

gd

om

Au

stria

Swe

de

n

Fin

lan

d

Co

rre

latio

n




For 1998 and 1999 output in the European Union is expected to grow at a rate close to that of real trendoutput (chart 5). More generally, the Monetary Union is expected to be characterised by the absence of infla-tionary tensions. The various countries are expected to present similar economic situations. The low value ofthe standard deviation of the respective cyclical positions (chart 5) illustrates this. In the 1990’s as a whole,1999 shall record the closest similarity between countries’ cyclical position — as occurred in 1996.

The statute of the European Central Bank elects price stability as the main objective of monetary policy.From an operational point of view, an inflation rate between 0 and 2 per cent is considered compatible withthe concept of price stability. As shown in chart 6, the current situation in the European Union is not onlycompatible with price stability, but also reveals a high level of convergence between countries. These find-

Chart 3CYCLIC POSITION OF THE EU ECONOMIES

1997

-8

-6

-4

-2

0

2

4

6

8

Belg

ium

De

nm

ark

Ge

rma

ny

Gre

ec

e

Spa

in

Fra

nc

e

Irela

nd

Italy

Luxe

mb

ou

rg

Ne

the

rlan

ds

Port

ug

al

Un

ited

Kin

gd

om

Au

stria

Fin

lan

d

Ou

tpu

tg

ap

(p.p

.)


Chart 4CYCLIC POSITION OF THE EU ECONOMIES

1999

-8

-6

-4

-2

0

2

4

6

8

Belg

ium

De

nm

ark

Ge

rma

ny

Gre

ec

e

Spa

in

Fra

nc

e

Irela

nd

Italy

Luxe

mb

ou

rg

Ne

the

rlan

ds

Port

ug

al

Un

ited

Kin

gd

om

Au

stria

Fin

lan

d

Ou

tpu

tg

ap

(p.p

.)


Chart 5CYCLIC POSITION OF THE EU

Average output gap in the EU

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1990 1992 1994 1996 1998PAve

rag

e(p

erc

en

tag

e)

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Sta

nd

ard

de

via

tion

Standard deviation Average

Source: European Commission (Database/AMECO-March 1998).

Chart 6INFLATION RATES ON THE EU-15

AVERAGE AND DISPERSIONEU15

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1993 1994 1995 1996 1997

Ave

rag

e(p

erc

en

tag

e)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Sta

nd

ard

de

via

tion

Standard deviation Average

Source: Eurostat.

Council in Amsterdam, carried out in June1997: the approval of the Stability and GrowthPact, the definition of a legal framework for theutilisation of the euro and the adoption of aresolution establishing the exchange ratemechanism which, in the third stage of the Eco-nomic and Monetary Union, shall substitutethe current European Monetary System. Theinformal ECOFIN meeting held in Mondorf inmid-September established that the announce-ment of the bilateral rates of conversion shouldbe held at the moment of disclosure of thecountries joining the euro area. The Luxem-bourg European Council confirmed this deci-sion in December, and the announcement ofthe bilateral exchange rates took place on 3May 1998.

Economic growth in the European Union(EU) increased from 1.8 per cent in 1996 to 2.7per cent in 1997. The stronger growth of eco-nomic activity in the EU characterised virtuallyall Member States (table II.3). However, coun-tries continued to exhibit somewhat differentpaces of growth. Indeed, the economies thathad grown above the EU average throughout1996 continued to exhibit a higher growth in1997 (chart II.16). Such is the case of the UnitedKingdom and of Spain, but also of some smallEU economies, as the Netherlands, Finlandand Denmark. In these countries, economicgrowth has come to be driven not only by thebehaviour of exports, but also by the accelera-tion of domestic demand. On the other hand,Germany and France continued to recordgrowth rates close to the EU average, with ex-



ings are even more robust if the four countries not participating in the Monetary Union from its beginning(Denmark, Greece, the United Kingdom and Sweden) are not included in our calculations.

This situation of convergence between the cyclical position of countries, and of absence of inflationarypressures, alongside the European consent regarding the importance of macroeconomic stability in general— and of price stability in particular — grants the ideal conditions to the establishment of the reputation ofthe European Central Bank.

Chart II.16GROSS DOMESTIC PRODUCT

Year-on-year rates of change

-1

0

1

2

3

4

5

6

Per

cent

age

1994 1995 1996 1997

France

Germany

Italy

EUSweden

-1

0

1

2

3

4

5

6

Per

cent

age

1994 1995 1996 1997

EU

Denmark

Netherlands

Spain

United Kingdom

Source: Datastream.

ternal demand having an important contribu-tion to GDP growth in 1997.

In the EU as a whole, the acceleration of eco-nomic activity in 1997 resulted to a great extentfrom the increase in the contribution of domes-tic demand to growth, from 1.5 to 2.3 percent-age points (table II.4). Gross Fixed Capital For-mation grew 2.3 per cent (1.2 per cent in 1996),favoured by the low levels of interest rates andby improvement of entrepreneurs’ confidence.Expectations of an acceleration in demand ledto a stock accumulation, translated into a 0.4percentage points contribution to GDP growth(-0.3 p.p. in the previous year). On the otherhand, private consumption continued to growat a moderate pace (2.0 per cent), despite thesubstantial improvement in consumers’ confi-dence, while public consumption deceleratedin relation to 1996, in line with the maintenanceof budgetary consolidation efforts. For the fifthyear around, net external demand gave a posi-tive contribution to economic growth. This re-flects gains in competitiveness linked to themoderate growth of unit labour costs and thestrong appreciation of the US dollar. In 1997,both exports and imports grew at rates clearlyabove those recorded in the previous year, re-flecting not only the increase in intra-community trade but also the maintenance of afavourable world demand.

Acceleration of activity over the course of1997 profited from the fall in interest rates re-corded in recent years and from the mainte-nance of exchange rate stability in Europe — ina context of sustainable reduction in inflationand of strengthening of convergence betweenMember States. The acceleration of economicactivity was accompanied by a generalised im-provement in economic agents’ confidence inthe EU: the economic sentiment indicator im-proved in all Member States in 1997. In the EUas a whole, the significant increase in the eco-nomic sentiment indicator resulted from an im-provement of confidence in all sectors. In 1997,both the confidence in industry and consum-ers’ confidence recorded very high levels (chartII.17). Industrial confidence was positively in-fluenced by the growth of companies’ profitsand by the greater optimism in industrial or-ders appraisal, specially as regards external or-ders. For the EU as a whole, expectations ofproduction in the manufacturing industryreached a historical maximum in October andproductive capacity utilisation exhibited anupward trend throughout 1997. The indicatorthat synthesises consumers’ appraisal of theeconomic situation in the EU increased overthe course of 1997, reflecting the expected sta-bilisation of unemployment and expected in-creases in real income.

In 1997, economic activity accelerated inGermany (2.2 per cent, comparing to 1.4 percent in 1996) (chart II.18). The external sectorgave an important contribution to the growthof GDP in 1997 (1.0 percentage points, compar-ing to 0.6 percentage points in the previousyear). Exports accelerated in 1997, profitingfrom an improvement in external competitive-ness and from a stronger growth in the leadingexport markets. In the year as a whole, exportsgrew 10.7 per cent (5.3 per cent in 1996), thatcontrasts with the behaviour of most items ofdomestic demand.

Private consumption recorded a slowdownin 1997, partly reflecting the sharp increase inunemployment. Private consumption grew byonly 0.2 per cent (1.4 per cent in the previousyear). Gross fixed capital formation grew by 0.2per cent, which compares to a 1.2 per cent fall



Table II.4

EUROPEAN UNION — NATIONAL ACCOUNTS

Real rate of change

1995 1996 1997

GDP . . . . . . . . . . . . . . . . . . . . . . . 2.5 1.8 2.7Private consumption . . . . . . . . . 1.8 2.0 2.0Public consumption . . . . . . . . . . 0.6 1.4 0.8GFCF . . . . . . . . . . . . . . . . . . . . . . 3.6 1.2 2.3

Change in inventories(a) . . . 0.2 -0.3 0.4Domestic demand(a) . . . . . . . 2.1 1.5 2.3

Exports. . . . . . . . . . . . . . . . . . . . . 8.0 4.7 9.0Imports . . . . . . . . . . . . . . . . . . . . 6.8 3.8 8.1

Net external demand(a) . . . . 0.4 0.3 0.4

Source: European Commission.Note:(a) Contributions to GDP growth (as a percentage of GDP of

the previous year).

in 1996, due to the more favourable behaviourof investment in equipment. Investment in

equipment accelerated in 1997, reflecting theimprovement of industrial confidence, the lowlevel of interest rates and the increase in com-panies’ profits. On the contrary, investment inconstruction continued to exhibit a negativebehaviour, recording a further decrease in theyear as a whole. The improvement of expecta-tions regarding the growth of demand moti-vated an adjustment in stocks, specially in thetwo last quarters of 1997. As a result, thechange in stocks had a very high contributionto growth in 1997 (1.1 percentage points), un-like the previous year (-0.1 p.p.).

In 1997, the French economy grew at ahigher rate than in 1996 (2.4 and 1.5 per cent,respectively) (chart II.18). Alike the Germaneconomy, the French economy was driven byexports, although in France the contributionof domestic demand strengthened over thecourse of the year. Exports accelerated in 1997,to 11.3 per cent (4.7 per cent in 1996), reflectingthe growth of external demand and the im-provement in competitiveness of the Frencheconomy. Private consumption recoveredthroughout the year, in line with the increasein households’ confidence — specially afterthe elections held in early June. However, inthe year as a whole, private consumption ex-hibited a slowdown (0.9 per cent, compared to2.1 per cent in 1996). This behaviour partly re-flects the end of Governments’ incentivemeasures to automobile purchases imple-mented in 1996. Gross fixed capital formationrecovered slightly, following the slowdownrecorded throughout the previous year. How-ever, GFCF recorded an inexpressive growthin annual average terms (0.2 per cent, com-pared to -0.5 per cent in 1996). Likewise, theprocess of stocks reduction recorded through-out 1996 was interrupted. In 1997, the changein stocks contributed 0.1 percentage points tothe growth of GDP (-0.6 p.p. in 1996).

In 1997, the growth of the Italian economyincreased to 1.5 per cent (0.7 per cent in 1996)(chart II.18). This behaviour of activity re-flected the stock accumulation recorded fromthe second quarter onwards, following thestrong stock reduction in 1996, together withthe strengthening of private consumption. Pri-



Chart II.17EUROPEAN UNION CONFIDENCE INDICATORS

Economic sentiment indicator

97

98

99

100

101

102

103

104

Inde

x 19

85=

100

Jan94 Jan95 Jan96 Jan97 Dec97

Average 1987-1996

Industrial confidence

-20

-15

-10

-5

0

5

10

Bal

ance

of r

espo

nden

ts


Average 1987-1996

Consumers confidence

-25

-20

-15

-10

-5

Bal

ance

of r

espo

nden

ts


Average 1987-1996

Source: European Commission.



Chart II.18STRUCTURE OF GROWTH IN THE MAJOR EU ECONOMIES

Year-on-year rates of changeGross domestic product

-1

0

1

2

3

4

5

Per

cent

age

1994 1995 1996 1997

EU

GermanyFrance

-1

0

1

2

3

4

5

Per

cent

age

1994 1995 1996 1997

Spain

Italy

United Kingdom

-1

0

1

2

3

4

5

Per

cent

age

1994 1995 1996 1997

Germany

France

EU

-1

0

1

2

3

4

5

6

Per

cent

age

1994 1995 1996 1997

SpainItaly

United Kingdom

Private consumption

-8

-6

-4

-2

0

2

4

6

8

10

12

Per

cent

age

1994 1995 1996 1997

EU

Germany

France

GFCF

-8

-6

-4

-2

0

2

4

6

8

10

12

Per

cent

age

1994 1995 1996 1997

Spain

ItalyUnited Kingdom

Exports

-10

-5

0

5

10

15

20

25

Per

cent

age

1994 1995 1996 1997

EU

Germany

France

-10

-5

0

5

10

15

20

25

Per

cent

age

1994 1995 1996 1997

Spain

Italy

United Kingdom

Imports

-10

-5

0

5

10

15

20

25

Per

cent

age

1994 1995 1996 1997

EU

Germany

France

-10

-5

0

5

10

15

20

25

Per

cent

age

1994 1995 1996 1997

Spain

Italy

United Kingdom

Source: Datastream.

vate consumption grew 2.3 per cent in 1997 (1.1per cent in 1996), accelerating throughout theyear — influenced by the Government’s incen-tives to car purchasing. Despite the strong re-covery of exports, net external demand con-tributed negatively to the growth of GDP in1997 (-0.9 percentage points, against 0.3 p.p. inthe previous year).

The Spanish economy grew 3.4 per cent in1997, comparing to 2.3 per cent in 1996 (chartII.18). Over the course of the year, domestic de-mand accelerated, as most of its components.The stronger growth of domestic demand re-flected the fast expansion of credit, the fall ininterest rates and the increase in real income, ina context of sustainable decrease in inflation.Economic agents’ confidence improved, fa-voured by the high levels of job creation.Therefore, domestic demand gave a 2.7 per-centage points contribution to GDP growth (1.4p.p. in 1996). The lower contribution of net ex-ternal demand throughout 1997 was an out-come of the dynamism of imports, since ex-ports maintained a strong pace of growth.

Economic activity in the United Kingdomaccelerated in 1997 (3.5 per cent, comparing to2.3 per cent in the previous year). Worth notingthe strong dynamism of domestic demand(chart II.18). Economic activity deceleratedslightly in the last quarter of the year, partly re-flecting the more restrictive monetary condi-tions. Despite the significant appreciation ofthe Sterling pound, exports continued to growstrongly in 1997. Thus, the negative contribu-tion of net external demand to economicgrowth (-0.3 percentage points, comparing to-0.5 p.p. in 1996) reflects the acceleration of do-mestic demand over the course of the year. Thebehaviour of private consumption — 4.2 percent growth in 1997, against 3.5 per cent in 1996— was linked to the improvement in consum-ers’ confidence, in a context of continuing re-ductions in unemployment, and by the signifi-cant increase in disposable income.

In 1997, the labour market situation in theEU continued to be characterised by high levelsof unemployment in most Member States andby slow job creation, despite the strengtheningof economic activity (chart II.19 and table II.3).

Since the existence of a high and persistentlevel of unemployment in Europe is chieflylinked to structural factors of rigidity in the la-bour market, the reduction of unemploymentwill tend to be slow despite economic activityacceleration. Employment only grew 0.4 percent in the EU as a whole in 1997 (0.1 per cent in1996). In Germany, the labour market situationworsened over the course of 1997. Employ-ment decreased by 1.4 per cent (comparing to1.2 per cent reduction in 1996). On the contrary,in Spain, economic activity acceleration led to ahigh growth of employment — 2.6 per cent,against 1.5 per cent in 1996.

As in the previous year, the unemploymentrate remained virtually unchanged in the EU asa whole (10.7 per cent, against 10.9 per cent in1996). In this context, it is worth highlighting



Chart II.19UNEMPLOYMENT RATES

As a percentage of civilian labour force

6

7

8

9

10

11

12

13

Per

cent

age

1994 1995 1996 1997

France

Germany

United Kingdom

EU

Source: Eurostat.

10

12

14

16

18

20

22

24

26 P

erce

ntag

e

1994 1995 1996 1997

Spain

Italy

the significant rise of unemployment in Ger-many. The German unemployment rate in-creased by around 1 percentage point through-out 1997, greatly due to the increase in thenumber of unemployed population in the con-struction sector and to the reduction in publicschemes of incentive to employment in EasternGermany. In the United Kingdom, the unem-ployment rate decreased progressivelythroughout 1997, in line with the accelerationof economic activity, reaching the lowest levelsof the decade.

In 1997, the lower growth of wages in theleading European economies, except for theUnited Kingdom, resulted in a wage raise of 3.1per cent in the EU as a whole (3.5 per cent in1996). In the United Kingdom, the low level ofunemployment recorded in 1997 shall haveplaced some pressure on wages (4.3 per cent in-crease, against 4.2 per cent in the previousyear). Unit labour costs rose 2.4 per cent (2.2per cent in 1996). In Germany, wage agree-ments in 1997 resulted in more moderate wageraises: 1.8 per cent (2.4 per cent in the previousyear). Unit labour costs decreased 1.8 per cent,also reflecting the high productivity gains re-corded in 1997 (3.7 per cent, compared to 2.6per cent in 1996). In Italy, wages continued togrow steadily at 4.6 per cent, compared to 5.5per cent in the previous year. Productivitygains recorded in 1997 — 1.4 per cent, com-pared to 0.5 per cent in 1996 — were notenough to compensate for the high wage in-creases. Hence, unit labour costs again re-corded a significant increase.

In March 1997, the Eurostat began to releasethe Harmonised Index of Consumer Prices(HICP), particularly adequate to comparisonsbetween EU Member States. According to thisindex, average inflation in the EU fell from 2.4per cent in 1996 to 1.7 per cent in 1997, whilethe dispersion between Member States’ infla-tion rates tended to narrow increasingly. In1997, only Greece exhibited an average infla-tion above 2 per cent (table II.3). The greaterconvergence between inflation rates in the EUpartly reflected a lower increase of prices incountries traditionally presenting higher infla-tion rates — specially Spain and Italy. In an-

nual average terms, consumer prices rose 1.9per cent in Spain and in Italy (3.6 and 4.0 percent in 1996, respectively). Furthermore, pricesrecorded a slight acceleration in some coun-tries traditionally exhibiting lower inflationrates — e.g., the Netherlands and Sweden(chart II.20). In Germany, average inflationrose from 1.2 per cent to 1.5 per cent in 1997, in-fluenced by the significant increase in importprices (3.2 per cent, against 0.5 per cent in theprevious year). Producer prices recorded asharper increase between May and August, asan outcome of the appreciation of the US dollar— which translated into a substantial increasein the prices of imported goods in thosemonths.

In the United Kingdom, despite the sharpfall in imports prices, average annual inflation— measured by the national retail price index(2)

— increased from 2.4 per cent in 1996 to 3.1 percent in 1997. This development partly reflectsthe significant growth of private consumption.The need to avoid inflationary pressures ledthe Bank of England to increase the official in-terest rates throughout the year. The accelera-



Chart II.20HARMONISED INDEX OF CONSUMER PRICES


0

1

2

3

4

5

6

Per

cent

age

1996 1997

Sweden

EU

Netherlands

Italy

Spain

Source: Eurostat.

(2) Average annual inflation in the United Kingdom, meas-ured by the HICP, fell from 2.5 per cent in 1996 to 1.9 percent in 1997. The divergence between the Retail Price In-dex and the HICP is greatly due to the exclusion of hous-ing expenditure from the HICP.

tion of consumer prices also resulted from theincrease in the oil tax and the rise in costs asso-ciated to mortgage credit — in line with the be-haviour of official interest rates. The retail priceindex excluding mortgage interests grew 2.8per cent in 1997 (2.9 per cent in the previousyear), standing above the medium-term objec-tive of the Bank of England (2.5 per cent).

In 1997, the EU Member States progressedwith the budgetary consolidation efforts, de-veloped in the context of the convergence pro-cess. In the process, the differences between thepublic finance situation of the various coun-tries were attenuated. In 1997, all EU countriesreduced significantly the respective publicdeficits: only Greece continued to exhibit apublic deficit clearly above the reference valuedefined in the Maastricht Treaty (chart II.21).The budgetary deficit in the EU as a whole de-

creased from 4.2 per cent of GDP in 1996 to 2.4per cent in 1997. According to estimates pre-pared by the European Commission, the re-duction of the deficit adjusted for cyclicalchanges of economic activity amounted to 1.7p.p. standing at 1.9 per cent of GDP (table II.5).As regards public debt, progresses accom-plished in 1997 were less expressive: only inFrance, the United Kingdom, Finland and Lux-embourg did public debt amount to less than60 per cent of GDP in 1997. For the EU as awhole, public debt as a proportion of GDP de-creased from 73.0 per cent to 72.1 per cent in1997.

Throughout 1997, official interest rates ofcountries participating in the Exchange RateMechanism of the European Monetary System(ERM-EMS) converged, which constitutes a fa-vourable development from the viewpoint of



Table II.5

GENERAL GOVERNMENT BALANCE

Deficit(-) or surplus(+)As a percentage of GDP

1995 1996 1997 1997(a)

Effectivechange

Adjustedchange(b)

EU . . . . . . . . . . . . . . . . . . . . . . -5.0 -4.2 -2.4 1.8 1.7EU - 11 (c) . . . . . . . . . . . . . . . . -4.8 -4.1 -2.5 1.6 1.5

Germany . . . . . . . . . . . . . . . . -3.3 -3.4 -2.7 0.7 0.8France. . . . . . . . . . . . . . . . . . . -4.9 -4.1 -3.0 1.1 1.0United Kingdom. . . . . . . . . . -5.5 -4.8 -1.9 2.9 2.3Italy. . . . . . . . . . . . . . . . . . . . . -7.7 -6.7 -2.7 4.0 4.1Spain. . . . . . . . . . . . . . . . . . . . -7.3 -4.6 -2.6 2.0 1.6Portugal . . . . . . . . . . . . . . . . . -5.7 -3.2 -2.5 0.7 0.3Ireland . . . . . . . . . . . . . . . . . . -2.2 -0.4 0.9 1.3 0.3Greece. . . . . . . . . . . . . . . . . . . -10.3 -7.5 -4.0 3.5 5.3Netherlands. . . . . . . . . . . . . . -4.0 -2.3 -1.4 0.9 0.6Belgium . . . . . . . . . . . . . . . . . -3.9 -3.2 -2.1 1.1 0.7Luxembourg . . . . . . . . . . . . . 1.9 2.5 1.7 -0.8 -0.7Austria . . . . . . . . . . . . . . . . . . -5.2 -4.0 -2.5 1.5 1.4Sweden. . . . . . . . . . . . . . . . . . -6.9 -3.5 -0.8 2.7 2.7Denmark . . . . . . . . . . . . . . . . -2.4 -0.7 0.7 1.4 1.2Finland . . . . . . . . . . . . . . . . . . -4.7 -3.3 -0.9 2.4 0.6

Source: European Commission.Notes:(a) A plus sign indicates a reduction in the deficit (or an increase in the surplus); a negative sign indicates an increase in the deficit

(or a reduction in the surplus).(b) Change in the estimated structural component of the budgetary deficit.(c) EU-11 includes the countries which will integrate the euro area from 1 January of 1999 onwards (Belgium, Germany, Spain,

France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland).

monetary policy in Europe — namely from theperspective of a monetary union (chart II.22)(see box “Economic regime in the euro area”). Thisdevelopment was determined by the increasein the intervention rates of countries wherethese were lower, but above all by the cuts inthe Spanish, Italian and Portuguese official in-terest rates.

Official interest rates were cut in Portugal,Spain, Italy and Greece between late 1996 andlate 1997, having increased in all remaining EU

countries. The Bank of Spain cut its repo rate by1.5 p.p. in the year as a whole, standing at 4.75per cent in late December. In Italy, the down-ward behaviour of intervention rates trans-lated into a 2.0 p.p. cut in the discount rate, to5.5 per cent in late 1997. In early October, theBundesbank increased its repo rate, from 3.0 to3.3 per cent. Following this change, centralbanks in France, the Netherlands, Denmark,Belgium and Austria also rose their officialrates. In the United Kingdom, monetary



Chart II.21PUBLIC DEBT AND PUBLIC DEFICIT IN THE EUROPEAN UNION

0

20

40

60

80

100

120

140

Deb

t as

a pe

rcen

tage

of G

DP

-4 -2 0 2 4 6 8 Deficit as a percentage of GDP

UK

Ita

Gre

Den

Lux

Irl Aus

SweNDUE

SpaPor

GerFinFra

1996

Bel

0

20

40

60

80

100

120

140

Deb

t as

a pe

rcen

tage

of G

DP

-4 -2 0 2 4 6 8 Deficit as a percentage of GDP

UK

Ita

Gre

Den

Lux

1997

Bel

Irl

Swe ND

Fin

UESpaAus

Por GerFra


Chart II.22OFFICIAL INTEREST RATES

2

2.5

3

3.5

4

4.5

5

Per

cent

age

J96F MAM J J A S O N DJ97F M A M J J A S O N D

Germany

Denmark

Belgium

Netherlands

France

2

3

4

5

6

7

8

9

10

Per

cent

age

J96F MAM J J A S O N DJ97F M A M J J A S O N D

Germany

Italy

Ireland

Spain United Kingdom

Sweden

Note: Germany: repo rate, France: intervention rate; Belgium: key central rate; Netherlands: special advances rate; Den-mark: repo/certificate of deposit rate; United Kingdom: base rate; Ireland: short-term facility rate; Italy: discountrate; Spain: key money rate; Sweden: repo rate.



ECONOMIC REGIME IN THE EURO AREA

The Third Stage of the Economic and Monetary Union (EMU) shall begin on 1 January 1999. On thisdate, eleven Member States(1) will adopt the euro, and will share a single monetary and exchange rate policy.Monetary unification will represent to these Member States a change in their economic regime. EMU shallintroduce important changes in the conduct of economic policies, in the structure and functioning of mar-kets, and in the behaviour of economic agents. EMU will also have significant implications for the Interna-tional Monetary System. The prevailing economic regime in the euro area will be characterised by open andcompetitive markets, and by macroeconomic stability — namely price stability and the sustainability of pub-lic finance. This regime reflects a widespread consensus, at the level of industrialised countries, that the mar-ket constitutes the most efficient form of resource allocation, and that macroeconomic stability is a necessarycondition to attain sustainable growth and development.

For the Member States participating in the euro area, the responsibility for the conduct of the singlemonetary and exchange rate policies will be transferred to the community level. At the same time, and inagreement with the principle of subsidarity, the definition of the remaining economic policies, including thebudgetary policy and structural policies — namely the employment policy — will continue to be a nationalcompetence. This competence will be carried out in the framework of rules and procedures defined in theTreaty on European Union. Here, the rules and procedures regarding the budgetary policy are particularlyrelevant.

The single monetary policy will be defined and implemented by the European System of Central Banks(ESCB). The ESCB will be granted a high level of independence, and will have as its primary objective themaintenance of price stability in the euro area. The definition of the exchange rate regime, or of any generalguidelines for the exchange rate policy, will be a competence of the Ecofin Council. In turn, the ESCB will beresponsible for the conduct of exchange rate policy. As in the case of monetary policy, exchange rate policywill also be subject to the primary objective of maintaining price stability(2). The definition of a mandate ofprice stability is justified by the existence of costs associated to inflation. Inflation blurs the identification ofrelative price changes, generates uncertainty regarding future inflation and promotes a discretionary distri-bution of income and wealth. Therefore, inflation distorts the allocation of resources, affecting economic effi-ciency and growth. Empirical evidence consistently suggets the existence of a negative relationship betweeninflation and economic growth in the medium- and long-run. A set of estimates points towards a reductionin the annual rate of economic growth ranging between 0.02 and 0.08 percentage points, due to a 1 percent-age point rise in the inflation rate(3). Such an effect is quite considerable in accumulated terms.

Macroeconomic stability also requires sustainable budgetary policies. In this context, Member Stateswill be subject to a set of constraints to financing the public sector(4). These include the prohibition of mone-tary financing, the prohibition of privileged access of the public sector to financial institutions and a no bail-out clause(5). Simultaneously, Member States will have a legal obligation to avoid excessive budgetary defi-cits, and will be subject to a set of procedures of evaluation and supervision of the respective budgetary posi-

(1) Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, Netherlands, Austria, Portugal and Finland.(2) Article no.3-A of the Treaty on European Union.(3) IMF (1996), “ The Rise and Fall of Inflation: Lessons from the Postwar Experience”, World Economic Outlook, October 1996.(4) Articles no 104 to 104-B of the Treaty on European Union. These apply to all Member States and were put into force at the begin-

ning of the Second Stage of the EMU, on 1 January 1994.(5) This clause establishes that the commitments of a Member State shall not be assumed by the Community nor by other Member Sta-

tes.



tions(6). The persistence of an excessive deficit in a Member State participating in the euro area will lead tothe imposition of pecuniary sanctions to the country concerned. The classification of a deficit as being exces-sive, as well as the decision to apply sanctions will not be automatic. On the contrary, both actions shall re-sult from a complex evaluation procedure involving the European Commission and the Ecofin Council.

The stability and Growth Pact clarifies and imposes deadlines for application of the procedures of super-vision and evaluation of budgetary positions(7). Under the Pact, which will enter into force on 1 January1999, Member States have commited themselves to attain budgetary positions “close to balance or in sur-plus” in the medium-run. This commitment aims at ensuring that the functioning of automatic stabilisers— in the context of normal economic fluctuations — does not lead to the infringement of the 3 per cent limitestablished in the European Union Treaty for the budgetary deficit. Each Member State will define itsmedium-run budgetary objective in numerical terms, bearing in mind the size of its automatic stabilisers, aswell as the potential need for the restructuring of its public expenditure — due, for instance, to demographicdevelopments. The Ecofin Council shall assess the compatibility of this objective with the notion of a budget-ary position “close to balance or in surplus.”

The arguments for budgetary discipline build upon the negative effect of persistent deficits on economicgrowth and on the productive capacity of an economy(8), as well as upon the need for ensuring the solvencyof the public sector. In a short-run perspective, a good budgetary performance will provide the necessarymargin for the automatic stabilisers to work, therefore contributing to attenuate the cyclical fluctuations ofthe economy. The advantages of budgetary discipline are reinforced in the context of a monetary union char-acterised by decentralised budgetary policies, namely due to the systemic risks resulting from inadequatepolicies — specially by larger Member States. The need to protect the ESCB from pressures due to unsus-tainable public finance paths in one or more Member States (which could jeopardise the price stability man-date), together with the potential negative impact resulting from the international transmission of budget-ary policies (which is enhanced in the context of a single currency) reinforce the rationale behind the defini-tion of rules and procedures aiming at preventing the occurrence of excessive budgetary deficits in the EUcountries in general, and in the participants in the euro area in particular.

In the euro area, the adjustment of relative prices between countries will rest chiefly upon changes in thequantities and prices of both productive factors and output. In this context, the level of rigidity currentlycharacterising the functioning of labour markets in most EU countries constitutes a major difficulty. Thenew economic regime, based upon a non-accommodating monetary policy and greater budgetary discipline,will facilitate the adjustment of prices and wages. However, a significant improvement of markets’ capacityof adjustment will necessarily require the implementation of structural reforms.

The introduction of the euro will have deep implications for the functioning of the international mone-tary system. The share of the euro area in world output and trade, as well as the economic regime of stabilitywhich will characterise the euro area, suggest that the euro will emerge as a stable and strong currency,partly substituting the US dollar as an international reserve currency. The emergence of the euro as an in-ternational currency shall result in higher gains of seigniorage for the countries in the area, in lower costs offinancial intermediation (given the depth of the euro markets) and in a lower exchange rate risk faced by eco-

(6) Articles no.103 and 104-c of the European Union Treaty. Article no.103, referring to the co-ordination of economic policies isapplicable since the European Union Treaty was put into force on 1 November 1993. The legal duty of “avoiding excessive budge-tary deficits” (paragraph 1 of Article 104-c) is put into force at the beginning of the third stage of the EMU. Until then, MemberState shall carry out “efforts to avoid excessive budgetary deficits” (Article no. 109-E, paragraph 4). Paragraphs 2 to 8 of Article104-C (covering part of the excessive deficit procedure) have been applicable since the beginning of the second stage of the EMU. Infact, the non-existence of an expressive deficit is a condition of eligibility to the adoption of the single currency.

(7) See box on the Stability and Growth Pact(8) See for instance Easterly, W., C. Rodriguez and K. Schmidt - Hebbel (eds.) (1994) “Public Sector Deficits and Macroeconomic Per-

formance, Oxford University Press.

authorities carried out successive increases inthe intervention rates, aiming at the fulfilmentof their medium-term objective for inflation.The base rate was increased from 6.0 per cent inDecember 1996 to 7.25 per cent in late 1997.

In a context of strengthening convergencebetween the EU Member States and of depre-ciation of the Deutsche mark vis-à-vis the USdollar, the European foreign exchange marketsituation remained stable in 1997. The volatilityof most currencies vis-à-vis the Deutsche markdecreased this year. Throughout the year, theimprovement of economic agents’ expectationsregarding the process of creation of a singlecurrency was also an important factor influenc-ing the exchange rate behaviour. The averagewidth of the fluctuation band in the ExchangeRate Mechanism of the European MonetarySystem (ERM-EMS) recorded high values overthe course of 1997, following the significantwidening in the two last months in 1996. Thisdevelopment resulted from the appreciation ofthe Irish pound, induced by the strengtheningof the Sterling pound (chart II.23). The spreadbetween the second strongest and the weakestcurrency narrowed in annual average terms,from 3.0 per cent in 1996 to 2.3 per cent in 1997,which reflects the concentration of the ex-change rate of most currencies close to the re-spective central bilateral rates. The differentposition in the economic cycle exhibited by theUnited Kingdom sustained the sharp apprecia-tion of the Sterling pound, both vis-à-vis theDeutsche mark (21 per cent) and in effectiveterms (16.5 per cent).

In 1997, long-term interest rates continuedto decrease in the EU countries — with particu-lar evidence in Italy (1.9 p.p.) and in Spain (1.4 )



nomic agents in the euro area (given the fact that a significant proportion of transactions with the rest of theworld shall be denominated in euro). On the other hand, the international use of the euro shall also result in alower control of the money supply in the Monetary Union.

Chart II.23EUROPEAN MONETARY SYSTEM

Bilateral fluctuations

-8

-6

-4

-2

0

2

4

6

8

Per

cent

age

J F M A M J J A S O N D1997

Deutsche mark

Peseta

French franc

Irish pound

Italian lira

Note: Curves are to be compared in pairs. The dis-tance between each two curves measures thedeviation between the market exchange rateof those two currencies and their bilateralcentral rate, wherefore, when the curves in-tersect, the deviation is null.The chart also indicates the relative positionof the currencies (stronger currencies areabove the weaker ones).

-8

-6

-4

-2

0

2

4

6

8

Per

cent

age

J F M A M J J A S O N D1997

Irish pound

Dutch guilderDanish krone

Finnish markka

(table II.6). The disinflation and budgetary con-solidation accomplishments, as well as the op-timism regarding the fulfilment of the Eco-nomic and Monetary Union, contributed to the

strengthening of convergence between long-term interest rates in the EU. The differentialvis-à-vis the German yields narrowed in allMember States, specially in Italy, Spain and theUnited Kingdom (chart II.24).



Table II.6

LONG-TERM INTEREST RATES IN THE EU

Percentage p.p.

Dec 96 Dec 97 Change

Germany . . . . . . . 5.8 5.3 -0.5France . . . . . . . . . 5.7 5.3 -0.4United Kingdom 7.6 6.3 -1.3Italy . . . . . . . . . . . 7.6 5.7 -1.9Spain . . . . . . . . . . 7.0 5.6 -1.4Portugal. . . . . . . . 7.0 5.7 -1.3Ireland . . . . . . . . . 6.6 5.5 -1.1Netherlands . . . . 5.7 5.3 -0.4Belgium . . . . . . . . 6.0 5.4 -0.6Austria. . . . . . . . . 5.9 5.4 -0.5Sweden . . . . . . . . 6.8 6.0 -0.8Denmark . . . . . . . 6.8 5.7 -1.1Finland . . . . . . . . 6.3 5.5 -0.8

-1

0

1

2

3

4

5

6

7

Per

cent

age

1994 1995 1996 1997

France

Spain

Italy

United Kingdom

Chart II.24LONG-TERM INTEREST RATES DIFFERENTIALS

VIS-À-VIS GERMANYMonthly averages

Chapter III

PRICES, DEMAND, OUTPUT AND LABOUR MARKET

1. Prices

The behaviour of prices in 1997 contributedto the consolidation of the convergence processundergone by the Portuguese inflation rate,continuously observed since late 1990. Infla-tion, measured by the annual average rate ofchange of the Consumer Price Index (CPI) ex-cluding housing rents, fell from 13.4 per cent in1990 to 2.2 per cent in 1997. The rate of infla-tion, calculated with the Harmonised Index ofConsumer Prices (HICP), decreased to 1.9 percent in 1997, in annual average terms. This fig-ure is compatible with price stability, standingbelow the upper limit of 2.25 per cent taken bythe Banco de Portugal as a relevant referencefor the conduction of monetary policy. In addi-tion, since July 1997 the inflation rate in Portu-gal stood systematically below the referencevalue for the price stability criterion. In January1998 the Instituto Nacional de Estatística (INE)began to disclose a new series of the CPI basedupon the Households Budget Survey of1994-95 (see box Change in the Consumer PriceIndex).

1.1 Inflation in 1997

In 1997, the inflation rate maintained itsdownward path. The annual average rate ofchange of the CPI, excluding housing rents, de-creased from 3.1 per cent in 1996 to 2.2 per cent(table III.1 and chart III.1). Including the class“rents and dwelling expenses”, only availablein annual average terms, the CPI rose 2.3 percent in 1997, compared with 3.1 per cent in1996. Housing rents increased 3.8 per cent, 0.8

percentage points (p.p.) more than in the previ-ous year.

The disinflation process in Portugal hastaken place in a gradual and sustained fashion,having the Portuguese inflation rate convergedto the average values of the European Union(EU) in 1997. According to the HICP — themost adequate indicator for comparisons be-tween the behaviour of prices in the EU coun-tries — the annual average inflation in Portugalwas of 1.9 per cent, 1.0 p.p. less than in 1996 (ta-ble III.2). The differential vis-à-vis the EU aver-age decreased from 0.5 p.p. in 1996 to 0.2 p.p. in1997. Also in year-on-year terms, the inflationdifferential between Portugal and the EU aver-age narrowed, from 0.8 p.p. in December 1996to 0.5 p.p. in December 1997.

Considering the set of EU countries present-ing the lowest inflation rates, the strengtheningof the nominal convergence process is also evi-dent. The annual average rate of change of theHICP in Portugal has systematically stood be-low the reference value for the application ofthe price stability criterion since July 1997(chart III.2). Unlike the behaviour of the infla-tion rate in Portugal, this reference value in-creased, from 2.5 per cent in December 1996 to2.7 per cent in late 1997.

Inyear-on-year terms, inflationmeasuredbythe CPI fell sharply in the first half of 1997, from3.3 per cent in December 1996 to 1.8 per cent latein the first half of the year. This behaviour re-flected the significant slowdown in prices ofmost foodstuff goods in the first months in 1997.From June up to October 1997, the year-on-year


Prices, demand, output and labour market

52 Banco de Portugal /1997 Annual report


CHANGE IN THE CONSUMER PRICE INDEX

Both relative prices of goods and services and consumers’ choices change in line, responding to factorsaffecting costs and quality, as to income and technology changes — which justifies the regular revision ofthe CPI weights. On 2 March 1998, the Instituto Nacional de Estatística began to publish a new ConsumerPrice Index (CPI), calculated on the basis of the structure of expenditure based upon the 1994/95 FamilyBudget Survey (FBS).

The new CPI series takes 1997 as its base year, hence substituting the 1991 based CPI, disclosed for theperiod 1991-97 and based upon the 1998-91 FBS. This new series is monthly released with a national cover-age and including rents on dwellings, which made possible that the monthly reference for the inflation ratebegan to be given from January 1998 by the “Total CPI-National”, instead of the “CPI except hous-ing-Mainland”. The new CPI was published for the first time in early March 1998. At this date, the INEalso released the retrospective data referring to the period January to December 1997. With the new CPIdata, year-on-year rates of change can be calculated from January 1998 onwards, while average rates ofchange up to end 1998 can only be assessed by comparing with the previous index.

Regarding the HICP, its new series, also based upon the 1994/95 FBS, maintains the 1996 base of theprevious index (published during the period 1995-97), and is available since December 1997.

Concerning to the coverage of the new CPI, the number of products considered was increased from 577to 700, and now includes prices of sales and promotions. These prices exhibit strong changes throughout theyear, introducing a new seasonal pattern in the total index. The effect should be taken into considerationwhen analysing the behaviour of the chain rates of consumer price indexes, and even of the year-on-yearchanges in the case of the harmonised index, since the new series is only available since December 1997.Also the number of classes was increased, from nine to twelve. The principal change was that of class“rents”, which started to be monthly calculated in the CPI, comprising only effective rents — as already re-corded in the HICP. The monthly CPI previously released excluded housing, which was included only on anannual basis. The annual average of rents encompassed the effective value of rents, and imputed rent forown housing.

Regarding the structure of the CPI, the differences between the indexes calculated upon the FBS1994/95 and the FBS 1998/91 are shown in table 1. To make comparison easier, the 1991 CPI structure wasrevalued for the new CPI classes. Note that the new CPI includes instead of class “food and beverage” of theprevious disclosed index, the classes “Food and non-alcoholic beverages” and “alcoholic beverages and to-bacco”. In addition, item “catering”, previously included in class “food and beverage” started to be in-cluded in class “Hotels, Cafés and Restaurants”. As table 1 shows, the weight of foodstuffs fell sharply, be-ing nevertheless chiefly compensated by the increase in the weight of non-foodstuff services. The weight ofclass “food and non-alcoholic beverages” decreased seven percentage points, while symmetrically theweight of the “health”, “transport”, “communications”, “culture and recreation” and “education” classesincreased by about nine percentage points. Class “furnishing, household equipment and routine mainte-nance of the house expenses” also recorded an increase in the respective weight, though to a lesser extent,tough to a lesser extent. In the remaining classes, the weight of the items therein included decreased. Thischange reflects the change in the structure of consumption due to the growth of income, also reflecting theeffect of changes in relative prices. Indeed, foodstuff goods tend to exhibit a demand with an in-come-elasticity below one, resulting in a reduction in the item’s weight for higher income levels. In addition,the reduction in the weight of foodstuff goods also reflects the slowdown of these goods’ prices over thecourse of recent years.



Table 1

CONSUMER PRICE INDEX – BREAKDOWN BY ITEMS

Items of index 1997=100 Items of index 1991=100

Indexbase1997

Indexbase

1991 (a)

Indexbase1991

Weight(%)

Weight(%)

Weight(%)

Food and non-alcoholic beverages . . . . 22.7 29.5 Food and beverages . . . . . . . . . . . . . . . . . . 41.8Alcoholic beverages and tobacco . . . . . . 3.2 3.8 Clothing and footwear . . . . . . . . . . . . . . . . 9.4Clothing and footwear . . . . . . . . . . . . . . . 7.2 9.4 Rents and dwelling expenses (b) . . . . . . . . 8.2Housing, water, electricity and otherfuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1 12.2 Housing expenditure . . . . . . . . . . . . . . . . . 11.2

Accessories housing equipment,current duelling expenses . . . . . . . . . . . 8.1 7.2 Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0

Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.0 3.0 Transports and communications . . . . . . . 16.1Transport . . . . . . . . . . . . . . . . . . . . . . . . . . 21.2 15.1 Educations, culture and recreation. . . . . . 3.9Communications . . . . . . . . . . . . . . . . . . . . 2.5 1.0 Tobacco and related expenditures . . . . . . 1.4Recreation and culture . . . . . . . . . . . . . . . 4.2 2.8 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9Education . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 1.1 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0Hotels, cafés and restaurants. . . . . . . . . . 9.2 10.2Miscellaneous goods and services . . . . . 4.0 4.7Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0

Notes:

(a) Revaluation of the structure of CPI base 1991 to the classes of new CPI. In the 1997 basis CPI the number of classes was in-creased from nine to twelve.

(b) Available only in annual average terms.

Table III.1

INFLATION INDICATORS

Rates of change

Percentage

Average rates of change

1992 1993 1994 1995 1996 1997

Total excluding housing rents . . . . . . . . . . . . . . . . 8.9 6.5 5.2 4.1 3.1 2.2

Tradables (58%) . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 4.6 4.4 3.0 1.9 0.6Foodstuff tradables . . . . . . . . . . . . . . . . . . . . . 4.9 1.0 4.9 3.5 1.9 -0.6Non-foodstuff tradables . . . . . . . . . . . . . . . . . 9.8 7.9 3.9 2.6 1.9 1.6

Non-tradables (42%) . . . . . . . . . . . . . . . . . . . . . . 11.2 9.0 6.3 5.6 4.5 4.1

Total including housing rents . . . . . . . . . . . . . . . . 9.5 6.8 5.4 4.2 3.1 2.3


Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Dec 97

Total excluding housing rents . . . . . . . . . . . . . . . . 8.4 6.4 4.0 3.4 3.3 2.3

Tradables (58%) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7 5.0 2.8 2.2 1.8 1.1Foodstuff tradables . . . . . . . . . . . . . . . . . . . . . 3.7 3.5 3.2 1.8 1.8 0.9Non-foodstuff tradables . . . . . . . . . . . . . . . . . 9.6 6.3 2.5 2.5 1.9 1.2

Non-tradable (42%). . . . . . . . . . . . . . . . . . . . . . . . 10.6 8.5 5.6 4.9 5.0 3.6

Source: INE and Banco de Portugal.

rate of change remained quite stable, recordingin July its lowest value in the year (1.7 per cent).In late 1997 the year-on-year inflation rate re-corded an increase, to 2.3 per cent in December,basically due to arithmetic effects linked to thebehaviour in 1996 of prices of the CPI subgroup“meat”.

The occurrence of temporary shocks is re-flected in the irregularity of the rates of change

of prices, which makes it harder to identify atrend for the behaviour of inflation. For in-stance, the behaviour of the CPI has been fre-quently influenced by the volatility of prices ofsome foodstuff goods. Therefore, and in thesense of limiting the effects of changes in pricesdue to temporary phenomena, it becomes nec-essary to resort to trend measures that allowfor a more proper perception of the generaltrend of prices. Using the trimmed mean at 10per cent and the first principal component(1) astrend indicators of inflation, the price slow-down yielded by the CPI is confirmed (chartIII.3). This statement strengthens the charac-terisation of the disinflation process, recordedsince late 1990, as a sustainable phenomenon.

The disinflation process in Portugal re-flected a slowdown of prices of tradablesalongside that of non-tradables, though a sig-nificant differential between the growth ofboth kinds of prices was maintained (chart



Chart III.1CONSUMER PRICE INDEX

0

2

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6

8

10

12

Jan92 Jan93 Jan94 Jan95 Jan96 Jan97

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Average rate

Year-on-year rate

Source: INE.

Table III.2

HARMONISED INDICES OF CONSUMERPRICES

Rates of change

Average rates ofchange

Year-on-year ratesof change

1996 1997 Dec 96 Dec 97

EU . . . . . . . . . . . . . . . . 2.4 1.7 2.1 1.6Belgium. . . . . . . . . . . . 1.8 1.5 2.1 0.9Denmark . . . . . . . . . . . 1.9 2.0 2.1 1.7Germany . . . . . . . . . . . 1.2 1.5 1.2 1.4Greece . . . . . . . . . . . . . 7.9 5.4 6.9 4.5Spain . . . . . . . . . . . . . . 3.6 1.9 3.3 1.9France . . . . . . . . . . . . . 2.1 1.3 1.7 1.2Ireland. . . . . . . . . . . . . 2.2 1.2 2.4 1.0Italy . . . . . . . . . . . . . . . 4.0 1.9 2.9 1.8Luxembourg. . . . . . . . 1.2 1.4 1.3 1.5Netherlands . . . . . . . . 1.4 1.9 1.9 2.2Austria . . . . . . . . . . . . 1.8 1.2 2.3 1.0Portugal . . . . . . . . . . . 2.9 1.9 2.9 2.1Finland . . . . . . . . . . . . 1.1 1.2 1.7 1.6Sweden . . . . . . . . . . . . 0.8 1.8 0.5 2.7United Kingdom . . . . 2.5 1.9 2.3 1.8

Source: Eurostat.

1.8

2.2

2.6

3.0

3.4

3.8

Dec95 Jun96 Dec96 Jun97 Dec97

Perc

en

tag

e

1.8

2.2

2.6

3.0

3.4

3.8

IICP

HICPReference value *

Chart III.2INTERIM AND HARMONISED INDICES OF

CONSUMER PRICESAverage rates of change and reference value

Source: Eurostat.* Simple average of the three EU countries scoring

the lowest inflation rates +1.5 percentage points.

(1) The trimmed mean is calculated using the central obser-vations of the CPI, after excluding the 10 per cent highestand the 10 per cent lowest price changes; the first princi-pal component is determined through attributing higherweights to the goods and services whose CPI changes areless volatile.

III.4). Over the course of 1997, namely from thethird quarter onwards, this differential nar-rowed, reaching 2.5 p.p. in late 1997 in whatconcerns to year-on-year changes (3.2 p.p. inDecember 1996).

In broken-down terms, the slowdown oftraded goods’ prices strikes out. The averageannual growth of these prices fell from 1.9 percent in 1996 to 0.6 per cent in 1997. This reduc-tion is also reflected in the year-on-year rates ofchange, which however behaved quite irregu-larly. The year-on-year rate of change oftradables’ prices decreased from 1.8 per cent inDecember 1996 to 1.1 per cent in December

1997. Between April and October, this rate re-corded very low values, between -0.2 and 0.4per cent. In 1997, the behaviour of prices offoodstuff goods contributed both to the reduc-tion as to the irregularity of the growth oftraded goods’ prices. Indeed, prices of tradedfoodstuffs fell 0.6 per cent in 1997, as against a1.9 per cent growth in 1996. These prices con-tinued to exhibit a high volatility, due partiallyto the correction of some anomalous changes inthe prices of some foodstuff goods recorded in1996 (chart III.5). In fact, traded foodstuffs re-corded price falls, in year-on-year terms, be-tween March and October 1997 which were



Chart III.3INFLATION TREND INDICATORS

Trimmed mean at 10 per cent

0

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12


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Annual average rate of change

Year-on-year rate of change

First principal component

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Annual average rate of change



Chart III.4INFLATION INDICATORS

-2

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6

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12

14


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-2

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4

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8

10

12

14

Non-tradables

TradablesDifferential

(p.p.)


Chart III.5PRICES OF TRADABLES

-4

-2

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12


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-4

-2

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8

10

12

Non-foodstuff tradables

Foodstuffs tradables


sharper in the second quarter of the year. Bro-ken-down by CPI classes, an analysis of the be-haviour of prices confirms the significant con-tribution of foodstuff prices to the slowdown ofinflation in 1997. Indeed, the average change inthe price index of the class “foodstuffs and bev-erages” decreased to 0.6 per cent in 1997, whichcompares with 2.5 per cent in the previous year(table III.3). Prices of traded non-foodstuffs, inturn, continued to record increases, though in aregular downward fashion. The respectiveyear-on-year rate of change stood at 1.2 percent in late 1997, compared with 1.9 per cent inDecember 1996. In annual average terms, therespective change was of 1.6 per cent, 0.3 p.p.less than in 1996.

Regarding prices of non-traded goods, therespective average growth decreased from 4.5per cent in 1996 to 4.1 per cent in 1997. Theseprices exhibited in general a clearly downward

intra-annual profile throughout 1997. Indeed,the year-on-year rate of change decreased from5.0 per cent in December 1996 to 4.1 per cent inJune 1997, and to 3.6 per cent late in the year. Abroken-down analysis of these developmentsshows that prices of non-traded foodstuffgoods recorded a sharp slowdown, increasingby 2.4 per cent in average terms, 1.0 p.p. lessthan in 1997. In fact, the annual average changeof prices of the item “catering” reached 2.3 percent, 1.1. p.p. less than in 1996. In turn, prices ofnon-traded non-foodstuffs also exhibited amarkedly downward intra-annual profile, inyear-on-year terms. The respective averagerate of change reached 5.1 per cent, 0.2 p.p. lessthan in 1996. Regarding prices of goods andservices conditioned by administrative proce-dures, included in the non-tradables, thesegrew 3.8 per cent in annual average terms in1997, that is, below the average of non-



Table III.3

CONSUMER PRICE INDEX BY CLASSES

Percentage

Weight in total Average rates of change

1992 1993 1994 1995 1996 1997

Food and beverages . . . . . . . . . . . . . . . . . . 41.8 7.1 2.8 4.8 4.0 2.5 0.6Clothing and footwear . . . . . . . . . . . . . . . . 9.4 11.9 7.0 4.1 1.9 1.6 0.6Housing expenditure . . . . . . . . . . . . . . . . . 11.2 9.6 7.0 3.5 3.3 2.7 3.2Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 15.5 12.6 9.1 6.2 4.7 6.0Transports and communications . . . . . . . 16.1 9.7 11.1 5.9 4.8 4.6 3.8Education, culture and recreation . . . . . . . 3.9 9.5 9.0 7.6 6.2 2.7 3.3Tobacco and related expenditures . . . . . . . 1.4 19.1 11.5 6.1 6.3 4.8 7.6Other goods and services . . . . . . . . . . . . . . 4.9 8.6 13.2 6.7 5.5 5.2 3.6Total excluding housing . . . . . . . . . . . . . . . 91.8 8.9 6.5 5.2 4.1 3.1 2.2Rents and dwelling expenses . . . . . . . . . . 8.2 15.7 9.5 7.5 5.0 3.0 3.8Total including housing . . . . . . . . . . . . . . . 100.0 9.5 6.8 5.4 4.2 3.1 2.3

Weight in totalexcluding

housing rents


Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Dez97

Food and beverages . . . . . . . . . . . . . . . . . . . 45.6 5.8 4.1 4.1 2.5 2.4 1.5Clothing and footwear. . . . . . . . . . . . . . . . . 10.3 9.4 5.4 2.2 1.5 1.6 0.2Housing expenditure . . . . . . . . . . . . . . . . . . 12.2 9.1 6.0 2.9 3.3 3.1 2.5Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 16.5 11.2 6.3 6.6 4.2 6.6Transports and communications . . . . . . . 17.6 10.7 10.1 3.8 5.1 5.0 3.5Education, culture and recreation . . . . . . . 4.2 9.8 8.8 7.0 3.3 4.7 0.6Tobacco and related expenditures . . . . . . . 1.5 22.8 5.5 6.9 5.9 7.3 6.2Other goods and services . . . . . . . . . . . . . . 5.4 9.2 13.0 5.2 5.4 4.9 3.2Total excluding housing rents . . . . . . . . . . 100.0 8.4 6.4 4.0 3.4 3.3 2.3

Source: INE.

tradables. In this group, it is worth highlight-ing the behaviour of prices of “carburants andlubricants”, whose slowdown chiefly reflectedchanges in the calculation of the tax on oilproducts. Unlike in 1996, the year-on-yearchange of this item of the CPI exhibited adownward trend over the course of 1997, withthe annual average rate of change reaching 3.7per cent (4.1 per cent in the previous year). Inthe opposite direction evolved the prices of to-

bacco. According to data relative to the class “tobacco and related expenses”, these recordedan average growth of 7.6 per cent, which com-pares with 4.8 per cent in 1996.

1.2 Determinants of inflation

The behaviour of the escudo exchange ratehas played a decisive role in the disinflationprocess (see box The disinflation process:



THE DISINFLATION PROCESS: 1986-1997

From the mid-1980s onwards, Portugal begana gradual change in its economic regime. Not onlydid the market gain an increasing note in price de-termination and in resource allocation, but alsomacroeconomic stability was recognised as a con-dition for achieving a sustainable growth and de-velopment. These national options were strength-ened by the adhesion to the European EconomicCommunity in January 1986.

The credibility of the change in the economicregime was widened by the integration in the EECin general, and by the monetary integration pro-cess in particular. This option is fully consistentwith the Portuguese and European consensus inthis matter and the convergence of the Portugueseeconomy took place in a background of multilateralconvergence between European Union (EU)Member States. It became therefore possible to en-sure that the nominal convergence of the Portuguese economy was carried out without bearing the adjust-ment costs usually associated to stabilisation programme.

On 1 January 1986, date of its adhesion to the EC, Portugal recorded the second highest inflation rate be-tween the fifteen countries currently constituting the European Union (16.8 per cent, year-on-year rate ofchange in December 1985). Following to the adhesion to the EC, the inflation rate proceeded its downwardtrend exhibited since 1984. This year, after systematic increases since 1980, inflation peaked at 29.3 per cent(chart 1), reflecting the continuous devaluation of the escudo exchange rate in the context of the stabilisationprogramme agreed with the IMF. Afterwards, the progressive reduction in the pace of devaluation of the es-cudo and the strong fall in oil prices and of the dollar made possible a significant reduction in the inflationrate, to 19.3 per cent in 1985, 11.8 per cent in 1986 and 9.3 per cent in 1997. After 1987, inflation rose up to1990 (13.4).

The convergence of the inflation rate took place in a continuous way from 1990 onwards (chart 1). Be-tween December 1990 and December 1997, the inflation rate, measured by the annual average rate of changeof the Consumer Price Index, decreased by 11.2 percentage points. In late 1997, the inflation rate already

Chart 1INFLATION IN PORTUGAL AND IN THE EU

0

5

10

15

20

25

30

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97

Ave

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era

teo

fch

an

ge

Differential (p.p.)

EUPortugal

Source: INE and OECD

1986-1997). In addition, the behaviour of inter-national prices, the slowdown of wages andthe maintenance of output level below its trendalso contributed to the slowdown of prices.

1.2.1 Exchange rate stability and international prices

The behaviour of imports prices basicallyreflected the maintenance of the exchange rate



stood by 2.2 per cent (chart 1). According to theHarmonised Index of Consumer Prices — im-proved measure when comparisons across coun-tries are required — the annual average rate stoodin December 1997 below the key threshold of 2 percent. With this figure, Portugal inflation reachedin 1997 levels considered to be compatible withprice stability.

The disinflation experience reflects the adop-tion of monetary policy aiming at price stabilitythrough the prosecution of an intermediate objec-tive of exchange rate stability.

Between April 1986 and October 1990, thePortuguese authorities gradually cut the monthlyrate of escudo devaluation (the crawling-peg). InOctober 1990, the abandon of the crawling-peg re-gime is announced. Thereafter, the exchange ratereference starts to be defined against a set of cur-rencies participating in the Exchange Rate Mecha-nism of the European Monetary System, and theescudo begins to float within a limited spread. Inthis same month, a new Organic Law of the Bancode Portugal is approved, restructuring monetaryfinancing of the public sector. From 6 April 1992onwards, the escudo entered the ERM of the EMS,which explicitly institutes exchange rate stabilityas an intermediate objective of monetary policy. InDecember 1992, capital movements were whollyliberalised. In late 1992 and in early 1993 the ERMof the EMS exhibited a strong turbulence. In thiscontext, the escudo central parities were twice ad-justed. The growing stability of the escudo, espe-cially since August 1993, results clear from chart2.

The disinflation process took place in both thetradable goods sector and in the non-tradable goods

sector. However, disinflation was begun earlier in the sector exposed to international competition (chart 3).In this context, the slowdown of unit labour costs recorded since 1991 — which reflects the gradual modera-tion in the growth of nominal wages — should be singled out (chart3). This shall provide a determinant fac-tor if the real convergence process carried out by the Portuguese economy is to proceed in a background ofmacroeconomic stability.

Chart 2INFLATION AND EXCHANGE RATE

-5

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5

10

15

20

25

1986 1988 1990 1992 1994 1996

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Index of effectiveexchange rate ofthe escudo (a)

Deflator of importsof consumergoods in escudos

Traded goods

Total CPI

Source: Direcção-Geral das Relações EconómicasInternacionais, INE and Banco de Portugal.

Note:(a) A positive (negative) value indicates a deprecia-

tion (appreciation) of the escudo.

Chart 3INFLATION AND WAGES

-5

0

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20

25

1987 1989 1991 1993 1995 1997

Perc

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ep

oin

ts

Inflation of non-traded goods

Inflation of tradedgoods

Growth differential between real wages and productivity

Unit labour costs


stability of the escudo within the ExchangeRate Mechanism and the favourable develop-ment of most international prices (chart III.6).Indeed, in 1997 imports prices denominated inescudos exhibited a very low growth. Accord-ing to estimates of the Banco de Portugal, thedeflator of merchandise imports stood at 0.2per cent in annual average terms, which com-pares with -0.2 per cent in 1996. Using dataavailable for the period January-November,prices of imported consumer goods fell 0.5 percent in year-on-year terms, due to the behav-iour of prices of foodstuff consumer goods (-1.6per cent) and those of the remaining importedconsumer goods (-0.2 per cent) (table III.4). Stillregarding the period January-November, andfocussing on economic categories, it is worthhighlighting the fall in prices of agriculturaland foodstuffs (-1.0 per cent), which contrib-uted favourably to the behaviour of prices oftraded foodstuffs.

In 1997, the escudo exhibited a considerablestability vis-à-vis the currencies participatingin the Exchange Rate Mechanism of the Euro-pean Monetary System. Throughout the year,namely from the second quarter of 1997 on-wards, the deviation of the escudo from its cen-tral parity vis-à-vis the Deutsche mark nar-rowed, having the former appreciated 1.4 percent vis-à-vis the latter. In 1997, the escudo de-preciated on average 13.7 per cent vis-à-vis theUS dollar, and 19.2 per cent against the Sterlingpound. In nominal effective terms, and in acontext of generalised depreciation of the cur-rencies within the Exchange Rate Mechanismvis-à-vis the US dollar, the escudo depreciated1.9 per cent on average (chart III.7). However, itshould be noted that the potential effects on in-flation due to the strengthening of the dollarwere substantially attenuated by the moderatebehaviour of most international prices.

In 1997, the behaviour of internationalprices continued to contribute to the disinfla-tion process in Portugal. Regarding consumerprices, average inflation in the EU fell from 2.5per cent in 1996 to 2.0 per cent in 1997. The re-duction in inflation was particularly significantin countries traditionally exhibiting higher

rates of inflation. This phenomenon is also evi-dent when taking the HICP as an indicator ofthe behaviour of price levels. According to thisindex, annual average inflation in the EU fell0.7 p.p., relatively to 1996, standing at 1.7 percent in 1997. In this year, only Greece recordedan inflation rate above 2 per cent. Alongsidethe reduction in average inflation in the EU, in-flation rates in the EU Member States contin-ued to converge, as shown by the lower disper-



Chart III.6PRICES OF CONSUMER GOODS IMPORTS (INESCUDOS) AND ESCUDO EXCHANGE RATEWEIGHTED BY THE STRUCTURE OF IMPORTS

-10

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15


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Escudo exchange rate(a)

Prices of imports(in escudos)

Source: Direcção-Geral das Relações EconómicasInternacionais, INE and Banco de Portugal.

Note: Increases (decreases) indicate an escudo de-preciation (appreciation).

Table III.4

PRICES OF IMPORTED GOODS

Year-on-year rates of changes

Percentage

Total Consumer goods

Total Foodstuffs Others

1995 1.7 -0.6 0.8 -1.21996

I. . . . . . . . . 1.8 1.4 1.2 1.5II . . . . . . . . 0.1 2.4 5.0 1.1III . . . . . . . -0.9 1.9 3.4 1.0IV . . . . . . . -1.7 -1.4 -1.3 -1.5

1997Jan-Nov . . 0.1 -0.5 -1.6 -0.2

Source: Direcção-Geral das Relações Económicas Internacionais.

sion between the year-on-year rates of changeof prices in the EU (chart III.8).

In 1997, inflation in Portugal also benefitedfrom the low growth of the producer prices ofmanufactured products from our leading tradepartners. In a context of slowdown of wages,and of the maintenance of the level of economicactivity below its trend in most of these coun-tries, producer prices of manufactured goodsin escudos increased 2.3 per cent in 1997, which

compares with 1.2 per cent in 1996. Excludingthe USA from the group of our leading tradepartners, and consequently eliminating the ef-fect of the strengthening of the dollar, producerprices of manufactured goods grew 1.7 per centin 1997 when denominated in escudos (1.0 percent in 1996).

In addition, oil prices recorded a sharpslowdown in 1997, after exhibiting stronggrowth rates in the previous year (chart III.9).The annual average change of the price of oilbarrels, measured in US dollars, fell 7.1 per centin 1997, as against the 21.1 per cent growth re-corded in 1996. The downward trend of oilprices was particularly significant in late 1997,and also in early 1998. Measured in escudos,the growth of the price of oil barrels amountedto 5.3 per cent in 1997, quite below the 24.6 percent growth recorded in 1996. In what concernsprices of the remaining raw-materials, those ofindustrial goods, specially of textiles, mea-sured in US dollars exhibited falls for the sec-ond year round. On its turn, despite increasingin 1997 as a whole, prices of foodstuffraw-materials fell sharply in the second half ofthe year. Prices of industrial and foodstuffraw-materials in escudos grew strongly in thefirst half of 1997; however, these growths weresharply adjusted in late 1997 and in early 1998.These developments in late 1997 and in the firstmonths of 1998 were greatly influenced by thedevelopments linked to the crisis affecting theAsian financial markets, which contributed toattenuate strongly the effects of the US dollarappreciation on prices of most raw-materials,and hence on consumer prices.

1.2.2 Wages

The acceleration of economic activity al-lowed for a reduction of the unemploymentrate, from 7.3 per cent in 1996 to 6.7 per cent in1997. Despite the significant growth of employ-ment and the reduction in the number of un-employed, the observed unemployment rateremained above the estimates for the naturalrate, which contributed to low signs of wagepressures on the behaviour of prices. However,



Chart III.7ESCUDO EXCHANGE RATES

80

81

82

83

84

85

86

87

88

89

90

Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec Apr Aug Dec

EER

(198

7=10

0)

140

150

160

170

180

190

USD

/PTE

(inve

rte

dsc

ale

)

USD/PTE

EER

1993 1994 19961995 1997

Source: Banco de PortugalNote: (+) escudo appreciation, (-) escudo deprecia-

tion.

Chart III.8CONSUMER PRICE INDICES


1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5


Perc

en

tag

e

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Standard-deviation of the year-on-year rates of CPIof the EU countries

(right-hand scale)

EU (left-hand scale)

Source: Datastream and INE.

it should be noted the existence of pressures insome sectors, namely in the construction sec-tor. The rate of growth of nominal compensa-tions per employee in the economy as a whole,is estimated to have decreased from 6.5 percent in 1996 to 5.6 per cent in 1997. In the samedirection, compensations per employee in thecorporate sector (hence excluding GeneralGovernment) are estimated to have grown by4.7 per cent in 1997, compared with 5.1 per centin 1996 (table III.5). The slowdown of compen-sations per employee in the corporate sector,combined with the growth of productivity be-low that in 1996, led to an acceleration in the re-spective unit labour costs, from 2.0 per cent in1996 to 2.5 per cent in 1997.

1.2.3 Economic activity

In 1997, according to estimates of the Bancode Portugal, the Portuguese economy grew 4.0per cent in real terms, which accounts for a 0.4p.p. acceleration in relation to 1996. Despite thefact that the Gross Domestic Product (GDP)growth stood above the potential outputgrowth for the second year round, economicactivity remained below its reference level.Therefore, in a context where the unemploy-ment rate continued above the estimates for thenatural rate of employment, and hence wherein general wage pressures were weak the cycli-cal position of the Portuguese economy is ex-pected to have continued contributing to theslowdown of prices, namely to the mainte-



Chart III.9INTERNATIONAL PRICE INDICES OF RAW-MATERIALS

1990=100

60

80

100

120

140

160

180


Foodstuffs

Industrials

In US dollars

cxv

40

60

80

100

120

140


Textile raw materials

Brent

Metals

In US dollars

60

80

100

120

140

160

180


Foodstuffs

Industrials

In escudos

40

60

80

100

120

140


Textile raw materials

Brent

Metals

In escudos

Source: The Economist, IMF and Banco de Portugal.

nance of the downward trend in the growth ofprices of non-tradables.

2. Demand

In 1997, the convergence of the Portugueseeconomy proceeded, leading to the fulfilmentof the necessary conditions to the adoption ofthe single currency. In nominal terms, inflationcontinued its downward path, the differentialvis-à-vis the EU average having narrowed to0.2 percentage points (average change of theHICP). Public deficit also decreased, to 2.5 percent of GDP, benefiting the convergence oflong-term interest rates. Alongside the

achievements in nominal stabilisation, the Por-tuguese economy recorded again a real growthclearly above that of the EU average; therefore,average income per capita rose to levels closerto the EU average. According to estimates ofthe Banco de Portugal, GDP grew by 4.0 percent in real terms, hence accelerating in relationto the previous year (3.6 per cent) (table III.6).In 1997, average growth in the EU reached 2.7per cent (1.8 per cent in 1996), thus a positivegrowth differential in real income was re-corded for the second year. In purchasingpower parities, and according to data of theEuropean Commission (April 1998), GDP per



Table III.5

COSTS AND PRICES IN THE CORPORATE SECTOR(a)

Average rates of change

Percentage

1992 1993 1994 1995 1996 1997

Compensation per employee (1) . . . . . . . . . . . . . . . . . . . . . . . 11.4 6.6 6.7 6.2 5.1 4.7

Productivity per employee (2). . . . . . . . . . . . . . . . . . . . . . . . . 1.0 0.6 2.4 3.1 3.0 2.1

Unit labour costs (1)/(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3 5.9 4.2 3.0 2.0 2.5


Note:

(a) Corporate sector: Total economy excluding General Government workers.

Table III.6

GROSS DOMESTIC PRODUCT – EXPENDITURE ANALYSIS(a)

PTE billion and percentage

1995 1996 1997

g.r. g.r. g.r. Deflator Current prices

Private consumption . . . . . . . . . . . . . . . . . . . . . . . 2.3 2.8 3.0 2.3 11469.6Public consumption . . . . . . . . . . . . . . . . . . . . . . . . 2.0 1.7 2.6 6.0 3310.2Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 6.4 12.8 1.7 4546.6

GFCF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9 7.7 12.9 1.8 4440.1Changes in inventories(b) . . . . . . . . . . . . . . . 0.3 -0.2 0.1 106.5

Domestic demand. . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 3.4 5.1 2.8 19326.4Contributions to GDP growth. . . . . . . . . . . 2.5 3.6 5.4

Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.8 9.6 8.2 0.7 5735.0Merchandise (FOB) . . . . . . . . . . . . . . . . . . . . 12.9 12.7 9.5 0.6 4335.7Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6 1.0 4.4 1.0 1399.3

Total demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 4.8 5.8 2.3 25061.4Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.6 7.8 10.3 0.3 7145.3

Contribution to GDP growth . . . . . . . . . . . -0.1 0.0 -1.4GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 3.6 4.0 3.1 17916.1

Notes:

(a) Estimates of the Banco de Portugal from the official National Accounts (INE) for 1994.

(b) Contribution to the GDP growth rate (in percentage).



THE PORTUGUESE ECONOMIC CYCLE: 1953-1995

The most relevant economic fact common to alldeveloped economies consisted of their growthswithout precedents occurred this century. How-ever, this growth was far from stable. Expansionsswitched with recessions through time. The charac-terisation of the economic cycle consists of identify-ing recurrent patterns of output fluctuationsaround its trend.

We can observe through chart 1 that the behav-iour of real output (in logarithms) in the last fourdecades in Portugal matches the general descrip-tion presented: the most relevant fact was outputgrowth, but not in the stable fashion illustrated bythe trend. Instead, growth exhibited fluctuationswhose attributes should be known(1). The annualaverage rate of growth of real “per capita” outputreached 3.6 per cent. The standard deviation of out-put in Portugal (the most used volatility measure)is 3.5 percentage points. Existing research con-clude that the Portuguese cycle is more volatilethan in the remaining developed countries. Wemay notice this feature up to the mid-1980’s, but inrecent years the volatility of the Portuguese cyclebecomes alike that of the remaining countries.Worth noting is that this change was not due to achange in the Portuguese cycle, but to a great in-crease in the volatility of the cycle of the other de-veloped countries in recent years. The issue of sta-bility of this indicator over time is not a consensualone: the answer to which of the two sub-periods —that prior to 1975 and the following one— exhibitshigher volatility differs according to the study.Given the significant heterogeneity of the period1971-1978, the answer depends chiefly on whethersome years are excluded from both samples.

The analysis of the correlation between the cyclein Portugal and that of its leading partners provides another relevant feature. The most relevant character-istic actually consists of the relative synchronisation between the Portuguese cycle and that of the EC on av-erage. Table 1 exhibits this relative synchronisation measured by the current correlation between Portu-guese output and average EC output (based upon the 12 indicated countries). One can observe that Portu-gal is strongly correlated to the community average (0.73) and that, as regards this indicator, Portugal is in

Chart 1OUTPUT PER CAPITA

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

4.8

5.0

5.2

53 56 59 62 65 68 71 74 77 80 83 86 89 92 95

Logarithm of real output percapita at 1977 prices

Trend

Table 1

CORRELATION BETWEEN THE ECCOUNTRIES 1960-1990

EC average (12)

Belgium . . . . . . . . . . . . . . . . . 0.80Denmark. . . . . . . . . . . . . . . . . 0.22France . . . . . . . . . . . . . . . . . . . 0.91Germany. . . . . . . . . . . . . . . . . 0.84Greece . . . . . . . . . . . . . . . . . . . 0.62Ireland. . . . . . . . . . . . . . . . . . . 0.53Italy . . . . . . . . . . . . . . . . . . . . . 0.59Luxembourg . . . . . . . . . . . . . 0.71Netherlands . . . . . . . . . . . . . . 0.78Portugal . . . . . . . . . . . . . . . . . 0.73Spain . . . . . . . . . . . . . . . . . . . 0.62United Kingdom . . . . . . . . . . 0.68

Source:Table 4, Critodoularis et. Al. (1995) “Comparisonsof Business cycles in the EC: Idiosyncrancies andRegularities”, Economic, 62,1-27.

(1) Series used in this box were built for the period 1953-1993, using data from the “Historical series for the Portuguese economy” andfor 1994 to 1996 using the data in the Annual Reports of the Banco the Portugal.

capita in Portugal rose to 67.5 per cent of the EUaverage in 1997 (66.9 per cent in 1996).

In 1997, GDP grew above potential output,which led to the narrowing of the output gap.The contribution of the components of demandto GDP growth was substantially differentfrom those recorded in the previous year (chartIII.10). Indeed, domestic demand — speciallyinvestment — grew strongly, while net exter-nal demand — which in 1996 had rendered anull contribution to GDP growth — had a sig-nificantly negative contribution to the expan-sion of output.

The strengthening of the contribution of do-mestic demand to GDP growth in 1997, partlyreplacing external demand as the engine of

economic growth, was a phenomenon com-mon to other economies in the European Un-ion, mostly in small countries (see Chapter II —International background and European integra-tion). Indeed, the profile of the current Portu-guese economic cycle has not differed greatlyfrom that observed in most small open econo-mies in the EU (see box The Portuguese economiccycle: 1953-1996). At first, exports led the recov-ery of economic activity. The gradual improve-ment of expectations regarding external de-mand induced to a progressive acceleration ofinvestment; in the Portuguese case, this devel-opment was initially driven by public expendi-ture in infrastructure, and strengthened by theacceleration of private investment. The growth



the context of the fifteen EU Member States thefifth most correlated country — second only toFrance, Germany, Belgium and the Netherlands.

The volatility of output “per capita” when com-pared to that of the components of demand, as wellas the correlation between these components andoutput “per capita” , are those characteristics ofthe cycle exhibiting the greatest stability whencompared over time or between countries. Table 2summarises these cyclical moments in Portugalover the last 4 decades. We see that the cycle ischaracterised by a volatility of private consump-tion virtually equal to that of output. When takinginto account only private consumption ofnon-durable goods and services, the relative vola-tility of consumption decreases to 0.9. This is dueto the high volatility of the consumption of durablegoods, which exhibit a relative volatility (2.3) usu-ally equivalent to that of investment (2.7). The volatility of public consumption is similar to that of output,which is consistent with the contemporary correlations described below. The trade account deficit exhibitsthe highest relative volatility (8.3).

For the expenditure components, the most significant correlations with output are the contemporaryones, and all demand components are pro-cyclical. Private consumption presents the greatest contemporarycorrelation (0.86). Investment has a 0.78 contemporary correlation, and exports exhibit the lowest (0.43).The trade deficit is, as expected, pro-cyclical and has a contemporary correlation of 0.43. We therefore canconclude that the description of cycles in the Portuguese economy matches the stylised facts in literature. Thestability of this picture over time is again highly dependent on the year for which the sample is split into twosub-periods.

Table 2

REGULARITIES OF THE PORTUGUESEECONOMY (1953-1996)

Aggregates Volatilityrelative to

outputvolatility

contempo-rary

correlation

Total private consumption . 1.10 0.86

Non-durable consumption. 0.92* 0.89*

Durable consumption . . . . . 2.33* 0.72*

Public consumption . . . . . . 1.06 0.49

Investment . . . . . . . . . . . . . . 2.69 0.78

Exports . . . . . . . . . . . . . . . . . 2.47 0.43

Imports . . . . . . . . . . . . . . . . . 2.34 0.74

Trade deficit . . . . . . . . . . . . . 8.30 0.43

* 1953-1993 series.

of private consumption, sluggish at start, pro-gressed gradually, supporting the progressiverecovery of activity.

The acceleration of economic activity in Por-tugal was in line with the strengthening ofgrowth pursued in most western economiessince the second half of 1996. As a matter offact, the momentum gathered by domestic de-mand growth gained over the course of 1997 inthe EU, was reflected in the acceleration of Por-tuguese exports throughout the year. Thestrong growth of gross fixed capital formationin equipment and transport equipment and themaintenance of a significant pace in privateconsumption was reflected in a fast importgrowth, resulting in a negative contribution ofnet external demand to GDP growth and an in-crease in the trade deficit, to 7.9 per cent of GDP(7.2 per cent in 1996).

The acceleration of GDP in 1997 was mainlydue to the dynamism of domestic demand,which grew by 5.1 per cent. In fact, investmentin fixed capital recorded a substantial growthin all its components. This expansion in invest-ment reflects a very high level of activity inconstruction — already evident in the secondhalf of 1996; this level was initially induced bythe amount of public works and strengthenedthroughout 1997 by the consolidation of recov-ery in the housing sector. Additionally, the in-

crease in the companies’ rate of return, bene-fited from the reduction in interest rates andthe moderate growth of prices of raw-materialprices, alongside an improvement in demandexpectations in general, favoured the growthrecorded in investment in equipment andtransport equipment.

Private consumption growth continued toexhibit a strong pace, above that recorded inthe previous year, and also above those of theEU average and in most of the Member States.The significant increase recorded again by realdisposable income, the reduction in interestrates and in inflation and the improvement ofexpectations regarding employment allowedhouseholds’ consumption expenditure to havegrown by an estimated 3.0 per cent in volumeterms.

In turn, domestic production also recordeda significant increase. This development is il-lustrated by the path of the coincident indica-tor on activity (chart III.11). The supply in theconstruction and services sectors is estimatedto have grown significantly — specially in thesectors of trade, hotels and restaurants, andtransports and communications. This develop-ment basically reflects the trend in publicworks and housing investment, as well as inprivate consumption. Industrial output againgrew strongly (4.8 per cent, according to the es-



Chart III.10CONTRIBUTION OF EXPENDITURECOMPONENTS TO GDP GROWTH

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

1995 1996 1997

Private consumption Public consumptionGFCF Change in inventoriesNet external demand

Chart III.11COINCIDENT INDICATOR


-3

-2

-1

0

1

2

3

4

5

6

7

19831992

19841993

19851994

19861995

19871996

19881997

Cycle 1983/88 Cycle 1992/97

timated growth for value added in industry),roughly as much as in the previous year. Theacceleration of production in intermediategoods and investment goods industries isworth noting, in line with the improvement ofexternal and domestic demand for these indus-tries.

2.1 Domestic demand

As referred above, domestic demand re-corded a significant increase in 1997 (5.1 percent in volume terms, following to 3.4 per centin 1996), strongly influenced by the marked ex-pansion in investment. In addition to the gen-eralised optimistic sentiment among economicagents — evident in all EU countries — thesharp fall in the Portuguese interest rates mayhave determined the strong growth of domes-tic demand in 1997.

The credibility of the convergence processexperienced by the Portuguese economy andthe sustained reduction in the inflation rate en-abled significant reductions in nominal interestrates, specially in longer maturities. The reduc-tion in nominal interest rates has allowed for areduction in households and companies’ li-quidity constraints, making easier households’access to bank credit for financing consump-tion and investment expenditure.

The development of domestic demand inPortugal over the course of 1997 was especiallymarked by the intra-annual pattern exhibitedby gross fixed capital formation, an item thathad already been determinant to the accelera-tion recorded in the second half of 1996. In-deed, the rate of growth of domestic demandwas particularly high in the first half of theyear, slowing down in the second half.

2.1.1 Private consumption

Private consumption in 1997 recorded againa significant growth, estimated at 3.0 per cent,above that recorded in the previous year (2.8per cent), but clearly below the growth rate ofoutput. The expressive increase in households’real disposable income (3.3 per cent), the im-

provement in consumer’s confidence inducedby the expansion of employment — speciallyevident in wage earners —, the fall in interestrates and the reduction in inflation contributedto a slight increase of the contribution of pri-vate consumption to output growth (to 1.9 per-centage points).

The growth path of private consumption inPortugal in the last two years has followed thetrend observed in the EU as a whole, thoughexhibiting a stronger pace of growth than theaverage. This performance has also been evi-denced by other small economies (Denmark,Ireland, the Netherlands and Luxembourg), bySpain and by the United Kingdom, where therecovery of economic activity has been com-pleted. In 1997, the growth in consumption ex-penditure in the EU (2.0 per cent) did not differsubstantially from that recorded in the previ-ous year, despite the significant improvementin consumers’ confidence in most EU coun-tries. The sharper growth of real wages and ofdisposable income in Portugal than in most EUcountries, but specially greater gains in job cre-ation allowed for a faster growth of consump-tion in Portugal than in its European partnerson average.

In 1997, households’ real disposable incomegrew strongly — by an estimated 3.3 per cent(table III.7). For the third year around, house-holds’ real disposable income exhibited a posi-tive rate of growth, accelerating again signifi-cantly from the previous year (2.4 per cent in1996). This development chiefly reflects thesignificant increase in wages. Property incomegrew below the rate recorded in the previousyear due to the particularly sharp fall in net in-terest income. In 1997, direct tax burden onhouseholds (direct taxes and social contribu-tions) increased by about 0.2 percentage pointsof gross income.

Real wages recorded again a significant in-crease in 1997. In nominal terms, averagewages implicit in collective agreements, ex-cluding General Government, grew by 3.5 percent — quite above the estimated change inthe private consumption deflator (2.3 percent).



According to estimates of the Banco de Por-tugal, the increase in effective nominal wagesexceeded that of collective contracts, in linewith the better financial situation of companiesand the current position in the business cycle.Also the number of wage-earners increased (by1.4 per cent), after successive falls recordedsince 1993. As a result, wages exhibited a 7.0per cent nominal increase (6.1 per cent in 1996).In the private sector, wages paid grew by 6.1per cent, compared with 5.1 per cent in 1996.

Property income (including operating sur-plus of households) grew by 3.2 per cent, ac-counting for a slowdown from 1996 (4.8 percent). This development was basically due tothe sharp fall in net interest received by house-holds, resulting both from the fall in the inter-est rates of their financial assets, and from theincrease in the interest burden due to the in-creasing indebtedness of households in recentyears. Worth noting that, in the last two years,the outstanding amount of households’ debt tobanks grew by 59.5 per cent (more than twicethe amount due at the end of 1994), as a conse-quence of both the sharp increase in mortgagelending (59.6 per cent), and the upward trendfollowed by bank lending to consumption ex-

penditure. The latter development was fa-voured by the sharp reduction in the relevantinterest rates. In the years under scrutiny,banking credit to individuals other than mort-gage grew by 59.1 per cent (of which creditover one year more than doubled), already ac-counting for about 25 per cent of total individu-als’ indebtedness to the banking system.

Meanwhile, total transfers to householdsalso recorded a substantial increase (7.9 percent). Unlike the trend exhibited in previousyears, transfers from abroad grew at a veryhigh pace (13.3 per cent). On its turn, domestictransfers grew 6.9 per cent, less than in 1996(8.6 per cent). This slowdown is in line with thereduction in the number of unemployedthroughout 1997, and took place despite theaverage increase of 3.8 per cent recorded by so-cial pensions (above that recorded by inflation)and the coverage of the whole territory by theminimum guaranteed income scheme. Theminimum guaranteed income scheme, whichhad covered a limited number of constituen-cies in 1996 and accounted for less than 0.1 percent of domestic transfers net of social contri-butions (about PTE 0.4 billion), became na-tion-wide in the second half of 1997, account-



Table III.7

HOUSEHOLDS’ DISPOSABLE INCOME(a)

PTE billion and percentage

1995 1996 1997

g.r. g.r. g.r. Value

Wages (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8 6.1 7.0 7792.3Property income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 4.8 3.2 4889.0Domestic transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1 8.6 6.9 3057.5External transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11.2 1.6 13.3 587.4- Direct taxation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6 7.4 5.4 1178.6- Social security contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1 8.1 8.0 2442.3

Disposable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 5.5 5.7 12705.3

- Private consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 5.9 5.4 11469.6Saving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -3.5 2.0 9.3 1235.7Saving rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.7 9.4 9.7

Disposable income (excluding external transfers) . . . . . . . . . . . . . . . 6.2 5.7 5.4 12117.9

Saving (excluding external transfers). . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 2.4 5.8 648.3Saving rate (excluding external transfers). . . . . . . . . . . . . . . . . . . . . . . . 5.5 5.3 5.3

Notes:

(a) Estimates of the Banco de Portugal from the official National Accounts (INE) for 1994.

(b) Remuneration received by resident households. Includes social security contributions by employers.

ing for around 3 per cent of that aggregate (PTE18.3 billion).

Alongside the expressive increase in dis-posable income, also consumers’ confidencebetter significantly in 1997(2). In addition to theimproved financial situation of households,the positive developments in the labour marketcontributed to improve expectations regardingemployment. In 1997, total employment grewby 1.9 per cent; worth noting the increase re-corded in the number of wage-earners (1.4 percent), after successive reductions since 1993.These developments should have accountedfor a substantial improvement in confidenceamong consumers, which combined with themaintenance of the downward trend in interestrates and the reduction in inflation, boosted therise in consumption expenditure.

Households’ saving rate increased slightlyin 1997, to 9.7 per cent of disposable income,hence interrupting the downward trend ob-served since 1992. This declining path has par-tially reflected the effect of inflation on the levelof saving. Ceteris paribus, lower inflation re-duces households’ saving, since the erosing onthe real value of financial effect decreases.Hence, when inflation decreases, the amountof saving required to restore the real value of fi-

nancial wealth is lower. Adjusted for inflation,individuals’ saving rate has shown an upwardtrend since 1994 (table III.8 and chart III.12). Ex-cluding external transfers, which rendered asignificant contribution to the growth of dis-posable income in 1997, the saving rate of indi-viduals remained unchanged at 5.3 per cent.

Still regarding households’ saving rate,worth noting the downward revision of thelevels estimated for the years prior to 1997.This revision resulted from the inclusion in theestimates of the Banco de Portugal of the 1994National Accounts data disclosed by the INE.According to these data, the saving rate of indi-viduals in 1994 stood clearly below the previ-ously estimated figure of the Banco de Portu-gal, therefore affecting the respective levels inthe following years.

Thus, private consumption maintained in1997 the trend of gradual acceleration shown inprevious years. When compared to the year be-fore, consumption of services and of high in-come-elasticity goods grew faster. However,expenditure on cars was an exception: thoughcontinuing to exhibit a growth rate above thatof total private consumption, a slight slow-down is estimated in 1997. This developmentmay reflect some substitution between expen-



(2) The European Commission interrupted the disclosure ofthe consumer confidence indicator in February 1997. InSeptember 1997 the INE started to release the results of anew survey according to the methodology followed bythe EU countries. However, the little number of observa-tions makes difficult to conclude on the path of consumerconfidence, both throughout 1997 and in relation to theprevious year.

Table III.8

SAVING RATE OF INDIVIDUALS

Percentage

1994 1995 1996 1997

Non-adjusted . . . . . . . . . 10.6 9.7 9.4 9.7Adjusted for inflation . . 6.8 7.1 7.4 8.4


Chart III.12SAVING RATE OF INDIVIDUALS

0

4

8

12

16

20

1991 1992 1993 1994 1995 1996 1997

As

ap

erc

en

tag

eo

fdisp

osa

ble

inc

om

e

Adjusted Non-adjusted

diture on cars and expenditure related to in-vestment in housing.

2.1.2 Public consumption

In 1997, public consumption grew by 2.6 percent in real terms (1.7 per cent in the previousyear), contributing by 0.5 percentage points toGDP growth (0.3 percentage points in 1996). Innominal terms, this component of domestic de-mand grew by 8.7 per cent (9.0 per cent in1996), amounting to 18.5 per cent its share inGDP (18.2 per cent in the previous year).

Bothcompensationofemployeesandexpen-diture on goods and services exhibited similargrowth rates, though presenting distinct trendsfrom 1996. Labour costs grew by 8.9 per cent, af-ter 8.2 per cent in 1996 — clearly above the aver-age increase in the wage scale for civil servants(3.0 per cent). This growth reflects not only theincrease in the number of employees — spe-cially in Health, Education and Security— butalso several wage adjustments for specificgroups of civil servants — namely those in theeducationandhealthsectors.Transfers fromtheState Budget to the Caixa Geral de Aposentações(the social security of civil servants) continuedto grow faster than the average rate of change ofthe wage scale. Meanwhile, expenditure ongoods and services made rose by 8.1 per cent innominal terms, less than in 1996 (11.6 per cent).Expenditure on goods and services made by theNational Health System (SNS) was again an im-portant cause to the growth of this item of publicconsumption (on the developments in GeneralGovernment of revenue and expenditure seeChapter V — Public finance).

2.1.3 Investment

In 1997, investment recorded again a highgrowth rate (12.8 per cent), significantly abovethat recorded in 1996 (6.4 per cent). This perfor-mance was basically due to the strong accelera-tion of gross fixed capital formation (GFCF) —growing 12.9 per cent, 5.2 percentage pointsmore than in the previous year. Unlike in 1996,the changes in inventories contributed posi-

tively to the growth of GDP, by an estimated0.1 percentage points.

The trend followed by this item of domesticdemand in the current cycle has not differedsignificantly from that exhibited in other smallEU economies. However, the pace of growth ofinvestment in Portugal has been stronger thanin the other European economies. This devel-opment partially reflects the significant contri-bution of public investment, in part financedby EU structural funds; however, specially inthe last two years, the substantial fall in interestrates — sharper in Portugal than in most EUcountries — also induced to a faster private in-vestment growth in the Portuguese economythan that in the majority of the other EU econo-mies.

In 1997, all components of GFCF recordedsubstantial growth rates (table III.9). Invest-ment in transport equipment recorded thehighest growth rate — estimated at 28.6 percent — accelerating strongly from the previousyear (2.3 per cent). Investment in machineryalso exhibited a marked growth (9.3 per cent),though decelerating from the previous year(11.4 per cent). As a whole, GFCF in equipmentincluding transport equipment is estimated tohave increased by 14.0 per cent, thus consoli-dating the recovery begun in the previous year(9.1 per cent, as against -1.2 per cent in 1995).Investment in construction also acceleratedstrongly, growing by 12.0 per cent (6.5 per cent



Table III.9

GROSS FIXED CAPITAL FORMATION

Rates of growth (in volume terms)

Percentage

1995 1996 1997

Equipment goods. . . . . . . . 7.9 11.4 9.3Transport material . . . . . . . -22.2 2.3 28.6Construction . . . . . . . . . . . . 5.0 6.5 12.0

Total . . . . . . . . . . . . . . . . . . . 1.9 7.7 12.9

in 1996). Furthermore, this component exhib-ited a high level throughout the whole year. Inaddition to public works, also residential con-struction contributed significantly to the in-crease in the capital stock, accelerating signifi-cantly when compared with 1996 (charts III.13and III.14).

In intra-annual terms, the growth of GFCFwas particularly strong in the first half of theyear, chiefly due to the sharp growth of activityin construction. Since investment in construc-tion had already recorded a high level one yearbefore — specially as regards public works —the year-on-year rate of change of this item fellsharply in the second half of 1997.

The performance of GFCF in 1997 wasmostly induced by the maintenance of a highlevel of public investment, the increase in therate of capacity utilisation in industry, optimis-tic expectations among entrepreneurs regard-ing both domestic and external demand, andthe sustained reduction in real and nominal in-terest rates. Therefore, maintaining the trend ofprevious years, public investment continued tocontribute significantly to the growth of GFCF,namely through the undertaking of infrastruc-ture development projects. The nominalgrowth of General Government investmentreached 12.9 per cent, accounting for 17 percent of total GFCF in the year. Worth notingthat activity in construction (the main compo-nent of GG investments) continued to show astrong dynamism in the year as a whole, par-tially induced by large-scale projects related tothe Lisbon World Exhibition in 1998.

The increase in GFCF in construction in1997 also reflected households’ investment,which yielded a significant growth. Residentialconstruction was the key item in this invest-ment, boosted by the improvement in house-holds’ confidence and economic situation, andabove all, by the marked fall in interest rates onmortgage (by about 3 percentage points in1997). The accessibility of households to creditfor housing purposes, which has increasedsince 1992, rose strikingly in 1997; this develop-ment chiefly resulted from the reduction in in-terest rates (see box An indicator for households’

access to housing credit). As a result, the intensedemand on banking credit to buy a house al-ready recorded in 1996, strengthened in 1997.The number of mortgage agreements (normaland bonified regimes) grew by 30.5 per cent,according to data disclosed by the Director-ate-General of the Treasury (24.4 per cent in1996). The average amount borrowed also in-creased (8.1 per cent, which compares with 7.1per cent in the previous year); therefore, the re-duction in the corresponding interest rate al-



Chart III.13INVESTMENT IN CONSTRUCTION

Normalised 3-month moving averages

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

1993 1994 1995 1996 1997

Bala

nc

eo

fre

spo

nd

en

ts(a

.s.e

.)

-30

-20

-10

0

10

20

30

Yea

r-o

n-y

ea

rra

teo

fch

an

ge

Activity appraisal Confidence indicatorCement sales (left-hand scale)

Source: European Commission, INE, Cimpor andSecil.

Chart III.14CONSTRUCTION BREAKDOWN BY SECTORSNormalised 3-month moving averages

-3

-2

-1

0

1

2

3

1993 1994 1995 1996 1997

Bala

nc

eo

fre

spo

nd

en

ts(a

.s.e

.)

Public works Housing Non-residential buildings

Source: INE. Seasonal adjustment: Tramo/Seats.



AN INDICATOR FOR HOUSEHOLDS’ ACCESS TO HOUSING CREDIT

Credit to households for housing purchasingagain rose significantly in 1997, continuing thetrend recorded in recent years. Indeed, the rate ofgrowth of credit to housing reached 26.3 per cent in1997, the fourth year of growth close to 25 per cent(chart 1). This behaviour reflected the improved ac-cess of Portuguese households to credit for housingpurposes, enabled “inter alia” by the reduction ininterest rates on mortgage credit.

Amounts involved in housing purchases repre-sent for many households several years of saving,for whom the decision towards purchasing real es-tate depends decisively on their indebtedness ca-pacity. Households face constraints to indebted-ness resulting from their limits to the possibility ofmeeting debt service through current income.

Chart 1 presents an indicator attempting to re-flect changes in the conditions under which house-holds accede to the housing credit market. This in-dicator is called “Accessibility Indicator” and isdefined as the percentage change of the ratio of dis-posable income (DI) in a given period, to theamount supported in debt service (S) in the sameperiod, for a given amount and financing term(1).

Chart 1ACCESSIBILITY TO THE HOUSING MARKET

AND DEVELOPMENTS IN CREDITRate of change

-10

-5

0

5

10

15

20

25

30

35

91 92 93 94 95 96 97Pe

rce

nta

ge

Accessibility indicator (a)Rate of growth of housing credit

Notes: (a) Indicator synthesising some of the deter-minants of households’ access to housingpurchasing — e.g. the relative price of hous-ing, the interest rate on housing credit andhouseholds’ income, measured by disposableincome. Positive values show an improvedaccess to housing purchasing compared tothe previous year.

(1) The ratio of disposable income to housing credit payments — i.e., the inverted effort rate — can be written as follows:

( ) ( ) ( ) ( )DIS

DIf r C

DIf r V

DIf r HPI A

DIDef

f r HPIh h h

h

= = = =. . . . . . . .α α α

DefA.

C = Amount borrowed; f (rh) = value of (constant) payments per unit of financing, where rh is the interest rate on mortgagecredit for a 25-year-maturity operation;

α = proportion of the transaction value of the house which is financed through credit; V= transaction value of the house.HPI = Average price per square metre of housing (housing price index).A = Average area of houses traded.Def = Private consumption deflator.

Taking proportion α and average house area A constant, the change in the inverted effort rate (the “accessibility indicator” -AI) is given by:

( )( )

AIf r

f r

HPIDefHPIDef

DI

t

h

h

t

t

t

t

t

t

t

=

−

−

−1

1

1 .DefDIDef

t

t

t

−

−

−1

1

1

lowed for a significant increase in the averageamount borrowed without increasing house-holds’ debt burden significantly. At the end of1997, the outstanding amount of bankingcredit to individuals for housing purchasingsurpassed that of the previous year by 26 percent.

In turn, investment of industrial companieswas mostly oriented to the modernisation andrationalisation of the productive process. Ac-cording to the latest available results of the In-vestment Survey (April 1997), about one thirdof investment intentions in the manufacturingindustry aimed at rationalising production,chiefly through the mechanisation and auto-mation of the existing production processes.Equipment replacement and the expansion of

capacity continued also to account for a signifi-cant share of intentions of investment in indus-trial companies. The rate of capacity utilisationin manufacturing has exhibited an upwardtrend since 1994, reaching 81 per cent in 1997on average — slightly more than the average ofthe last decade (80 per cent). According to theMonthly Manufacturing Industry Survey, in1997 the insufficiency of equipment was an im-portant obstacle to production for around 20per cent of companies (9 per cent in 1996),while the share of companies with an excess incapacity fell sharply (from 26 per cent to 17 percent of total respondents).

The upward trend followed by expecta-tions regarding demand — in both industryand trade — already visible in the second half



This indicator synthesises the effects of thechanges in the interest rate on housing credit, ofthe relative price of housing and of real disposableincome on households’ capacity of purchasinghousing. Therefore, positive values for this indica-tor suggests that households’ access to the purchas-ing of a house through credit is easier, when com-pared to the previous year, this situation occurringif: the nominal interest rate on housing credit de-creases, yielding lower payments per escudo of fi-nancing; the relative price of housing (defined inrelation to the deflator of private consumption) de-creases; or if disposable income rises in real terms.Chart 2 shows the breakdown of the contributionsof these three variables to the behaviour of the dis-posable income to housing credit payments ratio.

As we can observe in charts 1 and 2, house-holds’ access to the housing market recorded quitesignificant and successive increases since 1992, be-ing the greatest contribution to this improvementgiven by the reduction in interest rates on housingcredit. To the acceleration of the indicator up to 1993 — linked to the sharp fall in interest rates and the mod-erate growth of housing prices — followed a period of less expressive growth in 1994 and in 1995; this slow-down took place in a context where interest rates recorded lower reductions. The recovery of the indicator in1996, and its acceleration in 1997, resulted from further sharp reductions in the interest rate, and also fromthe increase in real disposable income, and was linked to the maintenance of strong rates of growth of creditto housing.

Chart 2DETERMINANTS OF ACCESSIBILITY

RATES OF CHANGE

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

91 92 93 94 95 96 97

Perc

en

tag

e

Accessibility indicator (a)Relative price of housing (a)Interest rate (b)Real disposable incoming

Contributions of:

Notes:(a) Contribution of a change in housing prices rela-

tive to the private consumption’s deflator.(b) Contribution of a change in service per escudo,

for a 25-year fixed-payments loan.

of 1996, became more evident this year. Thisoptimism was confirmed by the dynamism ex-hibited by all items of domestic demand aswell as by the recovery of exports throughoutthe year. Alongside the high levels of confi-dence (chart III.15), domestic activity grewstrongly, inducing to new investments. Thistrend was strengthened by further reductionsin interest rates, particularly as regards lend-ing rates. In addition to lower costs of credit,this contributed to improve the financial situa-tion of companies — allowing for higher lev-els of self-financing. In fact, over the last twoyears, most of the bank lending rates fell byabout 5 percentage points, hence giving roomfor a significant reduction in companies’ fi-nancial costs.

Therefore, GFCF of the private sector (com-panies and households) grew above public in-vestment — around 15 per cent in value terms.The strong growth of investment by companiesin transport equipment should be singled out:sales of commercial vehicles over 3.5 ton grewby 32.0 per cent in volume terms (4.4 per cent in1996) (table III.10), partly reflecting the mod-ernisation of the land transport fleet, and alsothe dynamism in the merchandise transportssub-sector.

The strong growth recorded by companies’investment expenses translated into a greaternet borrowing requirement of this sector,which resorted mostly to banking credit (seeChapter IX — Financing the economy). Indeed,banking credit to non-financial companies forinvestment purposes rose substantially in1997, reaching in December 1997 almost 25 percent more than one year before.

2.2 Exports and imports

In 1997, world trade accelerated signifi-cantly, partly reflecting the performance ofeconomic activity in developed economies,namely in the USA and in the EU. According todata from the International Monetary Fund(IMF), the trade of goods and services grew by9.4 per cent in real terms, compared with 6.6per cent in 1996. Merchandise trade grew by 9.6per cent, 3.4 percentage points more than in theprevious year. The strengthening of domesticdemand, specially in the USA and in some Eu-ropean countries accounted significantly forthe acceleration in merchandise trade. On aver-age, the growth rate of domestic demand in theEU countries reached 2.3 per cent in 1997 (1.4per cent in 1996), mostly reflecting the accelera-tion of investment in equipment and of inven-tory restoring. The acceleration of domestic de-mand in the USA was more expressive (from3.0 per cent in 1996 to 4.1 per cent in 1997), withstronger contributions of the referred items ofdemand (see Chapter II — International back-ground and European integration).

Portuguese exports of goods and servicesgrew strongly in real terms (by an estimated 8.2per cent), despite decelerating from 1996 (9.6per cent). The lower contribution of exports toGDP growth in 1997 was due to slower growthof transport equipment exports, which hadrendered a particularly high contribution togrowth in 1996. Excluding transport equip-ment, exports of goods and services grew by7.7 per cent, above the figure recorded in 1996(3.7 per cent), in line with the pace of externaldemand growth — specially in the EU coun-tries. Despite the slower export growth than in



Chart III.15CONFIDENCE INDICATORS

Normalised 3-month moving averages(seasonally-adjusted)

-3

-2

-1

0

1

2

3

1993 1994 1995 1996 1997

Bala

nc

eo

fre

spo

nd

en

ts

Industry Construction Retail


the previous year, it did not differ substantiallyfrom that estimated for the market of Portu-guese exports of goods and services.

Imports also grew markedly (by an esti-mated 10.3 per cent), boosted by the strong dy-namism of domestic demand, particularly in-vestment in equipment — which has a strongimported content. In 1997, the external sectorcontributed negatively to output growth (-1.4percentage points, after a null contribution in1996).

In a small open economy as Portugal, eco-nomic activity is particularly affected by exter-nal developments, whether directly — throughtrade — or by influencing the confidence of res-ident economic agents — hence affecting theirconsumption, investment and production deci-sions.

As a matter of fact, the full integration ofPortugal in the European Union has resulted ina greater interdependence of economic senti-ment and in an increasing cycle synchronisa-tion with the leading European economies.These developments are marked by the highimportance of the external sector in the Portu-

guese economy. Reflecting the significant paceof growth of external trade — above that of out-put — the openness of the Portuguese econ-omy, measured by the average share of exportsand imports in GDP, continued to increase in1997. Measured at 1990 prices, trade flowsreached 50 per cent of GDP (table III.11), withthe merchandise trade with the EU countriesaccounting for around 80 per cent of total ex-ports, and for 75 per cent of imports.

Reflecting the acceleration and the structureof domestic demand, the trade deficit reached7.9 per cent of GDP in 1997, 0.7 percentagepoints wider than in the previous year. This in-crease was mostly due to the widening of thedeficit in volume, since the change of prices inescudos was towards a reduction in the tradedeficit. As a matter of fact, the prices in escudosof Portuguese exports and imports did notchange significantly in 1997; regarding exports,prices grew by 0.7 per cent, above the rise inimport prices — only by 0.3 per cent. Conse-quently, and in contrast to the previous year,the terms of trade improved slightly (tableIII.11 and chart III.16).



Table III.10

INVESTMENT INDICATORS

Percentage rates of change and balances

1995 1996 1997

ConstructionCement sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 6.6 11.9Confidence indicator (balances) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -35 -20 -7Activity appraisal (balances) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8 0 14Order books (balalances) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -61 -41 -21

Transport equipmentSales of commercial vehicles under 3.5 ton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -33.4 27.1 20.9Sales of commercial vehicles above 3.5 ton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 4.4 32.0

Other equipmentIPI of investment goods(a) (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3 7.5 6.6Imports of equipment goods(a) (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.3 13.1 17.2Pour mémoire: exports of equipment goods(a) (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33.5 7.6 23.0Domestic order books in equipment goods industry (a) (balance) . . . . . . . . . . . . . . . . . 24 16 20

Source: Cimpor, Secil, European Commission, ACAP, INE and DGREI.Notes:(a) Excluding transport equiment.(b) The rate of change for 1997 was calculated by comparing the index published in the December 1997 version with the corre-

sponding values in the December 1996 version.(c) The nominal implicit change for 1997 was calculated by the Banco de Portugal comparing preliminary data on declared trade

for the period January-November, to the corresponding preliminary figures for the same period in 1996.

The favourable development in the termsof trade in 1997 was chiefly due to merchan-dise trade. The relative price of Portuguese ex-ports of goods rose by about 0.4 per cent, de-spite the sharp fall in the prices of some prod-ucts, as machinery and transport equipment(about 32 per cent of total sales to the rest ofthe world in 1997); their prices fell by 5.3 and4.2 per cent, respectively (chart III.17).

The slower growth of exports of goods andservices in volume in 1997 was chiefly due to amore moderate export growth of merchandisesthan in the previous year. Exports of services,in turn, grew by 4.4 per cent in volume (1.0 percent in 1996), with travel and tourism recover-ing from 1996 (7.0 per cent growth in 1997, fol-lowing a 1.1 per cent reduction). This recoveryreflects both the increase in real disposable in-come and the improvement in consumers’ con-fidence in most of the European economies, theorigin of around 95 per cent of total foreign vis-itors.

In 1997, exported goods increased by 9.5 percent in volume, below the exceptional in-creases recorded in the two previous years(12.7 and 12.9 per cent, respectively in 1996 andin 1995). This growth was virtually equal tothat recorded by external demand directed toPortuguese produced goods (chart III.18).

Measured by the real weighted growth of man-ufactured imports in our leading trade part-ners (OECD data — April 1998), this demandgrew by 9.7 per cent, more than in 1996 (4.9 percent). In nominal terms, external demand is es-



Table III.11

EXPORTS AND IMPORTS OF GOODS AND SERVICES

Rates of change in percentage

1994 1995 1996 1997

Exports (volume) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 11.8 9.6 8.2Imports (volume) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0 9.6 7.8 10.3

Level of openness of the economy (a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.0 45.4 47.5 50.0Trade balance as a percentage of GDP (1990 constant prices) . . . . . . . . . . -13.6 -13.8 -13.7 -15.3Trade balance as a percentage of GDP (current prices) . . . . . . . . . . . . . . . -7.8 -6.8 -7.2 -7.9

Exports deflator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 3.9 -2.5 0.7Imports deflator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 1.6 -0.1 0.3Change in terms of trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8 2.2 -2.4 0.4


Note:

(a) [(Exports+Imports)/2]/PIB, measured at constant prices of 1990.

Chart III.16GAINS/LOSSES IN TERMS OF TRADE(a)

-2

-1

0

1

2

1989 1990 1991 1992 1993 1994 1995 1996 1997

As

ap

erc

en

tag

eo

fGD

P

Notes: Let X and M denote the exports and imports

of goods and services at previous year prices,Px and Pm the respective price changes andP=(Px+Pm) /2 the change in an internationalprice indicator. The impact of gains or lossesin terms of trade are given by

[ ]X Px M Pm X M P( ) ( ) ( )( )1 1 1+ − + − − + ,

measured in a percentage of GDP.

timated to have grown by 12.2 per cent (4.8 percent in 1996).

Consequently, the market share of Portu-guese exporters did not change significantly involume terms in 1997. However, in nominalterms, the penetration of Portuguese productsin foreign markets shall have decreased in 1997(chart III.19).

Measured by the nominal growth of sales ofPortugal to its leading customers, there weremarket share gains in the French, British, Bel-gian and Italian markets, while in Spain and inGermany Portuguese exporters lost marketshares, in both value and volume terms.

In 1997, exports of transport equipmentcontinued to contribute significantly to thegrowth of total exports, increasing by 12.5 percent in volume. Other goods exhibiting out-standing growth rates were chemicals (14.8 percent), minerals and metals (14.2 per cent), agri-cultural and foodstuffs (11.2 per cent) and ma-chinery (10.3 per cent) (table III.12). In turn, ex-ports from the traditionally exporting sectors— e.g., wood, cork and paper, hides, leatherand textiles and clothing and footwear —which account for around 40 per cent of Portu-guese exports, contributed 2.4 percentagepoints to volume growth of total merchandiseexports in 1997 (2.7 percentage points in theprevious year).

As in the previous years, the competitive-ness of Portuguese exports, measured by therelative unit labour costs in manufacturing, im-proved slightly in 1997. This improvementchiefly reflected the path of the escudo effec-tive exchange rate. As recorded, on average, inour leading trade partners, unit labour costs inthe Portuguese industry, when measured in es-cudos, remained virtually unchanged from theprevious year.

The trend followed by compensations ofemployees adjusted for productivity, and bythe prices in escudos of intermediate goods al-lowed for a further reduction in the unit costsof Portuguese exporters (chart III.22). As a re-sult, the unit profit margin of the exportingfirms is estimated to have widened in 1997.Note, however, that the referred indicator on



Chart III.17FOREIGN TRADE PRICES

Contribution of each group of productsto the change in the export and import

price in the periodJanuary/November 1997

-1.0

-0.5

0.0

0.5

1.0

1.5 Export price Import price

Totalchange

Agriculturaland foodstuffs

Energy Chemicals,mineralsand metals

Wood,cork andpaper

Hides,leathertextilesclothingandfootwear

Machinery Transportequip-ment

Miscel-laneousfinishedgoods

Source: Direcção-Geral das Relações EconómicasInternacionais.

Chart III.18MERCHANDISE EXPORTS

In real terms

-20

-15

-10

-5

0

5

10

15

20

1989 1990 1991 1992 1993 1994 1995 1996 1997

Ra

teo

fch

an

ge

Merchandise exports

External demand (a)

Relative ULC (b)

Source: Banco de Portugal, INE, Ministério doTrabalho e da Solidariedade, IMF and OECD.

Notes:(a) Real growth of manufactured imports of 17 trade

partners. Each country was weighted accordingto its share as an export market, in the previousyear.ULC in trade partners relative to Portuguese ULC(in manufacturing industry). Adjusted forchanges in the exchange rate. A positive changeindicates a reduction in Portuguese exporters’ rel-ative costs.

aggregate costs does not reflect developmentsin capital costs (see note (a) in chart III.22). Thesignificant reduction in interest rates in the re-cent years allowed for a substantial reductionin the financial costs of Portuguese companies,also contributing to the improvement in theprofitability of the exporting sector.

In 1997, imports of goods and services ex-hibited a significant growth rate in real terms,estimated at 10.3 per cent. This increase repre-sents a substantial acceleration from the previ-ous year (7.8 per cent growth in 1996), and is aresult of the strong growth in merchandise im-ports — 11.5 per cent (8.4 per cent in 1996)(chart III.23). The strong dynamism of domes-tic demand — specially of gross fixed capitalformation in equipment, which has a strongimported content — and the acceleration of do-mestic industrial production determined thissignificant increase.

On its turn, imports of services recorded aslowdown in 1997, reflecting the slowergrowth of residents’ expenditure abroad, intourism and in business travels, which hadgrown strongly in the previous year.

Measuring by the difference between thegrowth rate of domestic demand and that ofimports of goods and services, the share offoreign exporters in the Portuguese marketrose significantly in 1997, both in value and involume terms (chart III.24). The market sharegain of foreign producers benefited partlyfrom the structure of GDP growth in 1997 —characterised by a strong participation ofgross fixed capital formation in equipmentand, albeit to a lesser extent, of exports, bothof which have an important imported content.

By economic categories, the performance ofmerchandise imports is compatible with theparticularly dynamic path of investment inequipment, the acceleration of production inmanufacturing and the maintenance of a sig-nificant growth rate in private consumption. Inparticular, imports of equipment goods grewby 11.6 per cent in real terms, with purchases tothe exterior of machinery accelerating stronglyin the year (table III.13). Also the imports of in-termediate goods increased strongly (12.0 per



Chart III.19MARKET SHARE OF EXPORTS(a)

Accumulated gains (1989 = 100)

80

100

120

140

1989 1990 1991 1992 1993 1994 1995 1996 1997

Ac

cu

mu

late

dg

ain

s19

89=

100

In value

In volume index

Source: Banco de Portugal, INE, Direcção dasRelações Económicas Internacionais andOECD.

Notes:(a) Nominal (real) growth of merchandise exports

versus nominal (real) growth of external demand.An increase indicates a market share gain of Por-tuguese exporters.

Chart III.20EXPORTS BY DESTINATION MARKETS

In value

-10 0 10 20 30

Total

Extra EU (19.8%)

Total EU (80.2%)

Germany (20.0%)

France (14.1%)

Spain (14.1%)

United Kingdom (12.1%)

Netherlands (4.8%)

Year-on-year rate of change (a)

19971996

Source: INE and Banco de PortugalNote:(a) The nominal change was determined by the

Banco de Portugal based on preliminary declaredvalues, in relation to equally preliminary figuresfor the same period of the previous year. Theshare of each country in total exports in 1997 ispresented in parenthesis.

cent), in line with the significant growth of do-mestic industrial production. On its turn, im-ports of consumer goods including passengervehicles recorded a growth rate close to that re-

corded in 1996, similarly to private consump-tion.

3. Output

The Portuguese economy is estimated tohave grown above potential output in 1997,nonetheless remaining below its referencegrowth path. In 1997, productive factor utilisa-tion increased. The trend of reduction of theunemployment rate, started in the third quar-ter of 1996, strengthened in the year, alongsidean increase in the participation rate. The rate ofproductive capacity utilisation in the manufac-turing industry increased, and in the construc-tion sector the available indicators point to-wards a very high level of productive capacityutilisation as well (see box Industrial restructur-ing).

In 1997, economic activity recorded a fur-ther acceleration, reflecting above all a verystrong acceleration of activity in the construc-tion and services sectors and the maintenanceof a high growth of industrial production. Thecoincident indicator of the Banco de Portugal,



Table III.12

MERCHANDISE EXPORTS

Rates of change

Share inoverall

exports (96)

1996(a) Share inoverallexports

(Jan-Nov 97)

1997 Jan-Nov (a)

Value Volume Price Value Volume Price

By groups of products:Agricultural and foodstuffs . . . 7.5 9.0 6.5 2.3 7.3 10.0 11.2 -1.1Energy . . . . . . . . . . . . . . . . . . . . . 2.3 -22.3 -31.5 13.4 2.4 15.7 3.9 11.4Chemicals . . . . . . . . . . . . . . . . . . 5.9 2.2 5.8 -3.4 6.1 14.1 14.8 -0.6Wood, cork and paper. . . . . . . . 9.3 -8.7 8.7 -16.0 9.7 12.6 7.0 5.2Hides, leathers and textiles. . . . 7.5 5.4 5.7 -0.3 7.9 16.1 10.1 5.5Footwear and clothing . . . . . . . 23.5 5.5 5.6 -0.1 22.3 6.7 2.6 4.0Minerals and metals . . . . . . . . . 5.4 -1.9 2.7 -4.5 5.6 16.3 14.2 1.8Machinery . . . . . . . . . . . . . . . . . . 16.1 2.4 4.8 -2.3 15.8 4.5 10.3 -5.3Transport material . . . . . . . . . . . 15.6 72.8 89.5 -8.8 16.0 7.8 12.5 -4.2Miscellaneous finished goods . 6.9 1.6 5.0 -3.2 6.9 8.9 8.0 0.8

Source: INE, Direcção-Geral das Relações Económicas Internacionais and Banco de Portugal.

Note:

(a) The implicit nominal change was determined by the Banco de Portugal based on preliminary declared values, in relation to equally pre-liminary figures for the same period in the previous year.

Chart III.21EXPORTS BY GROUPS OF PRODUCTS:

SHARES IN TOTAL EXPORTSIn value

0

5

10

15

20

25

30

35

40

Perc

en

tag

e

1988 1991 1994 1997

Wood,cork andpaper

Hides,leatherandtextiles

Clothingandfootwear

Machines Transportequipment

Other


Note:(a) Agricultural and foodstuffs, energy, chemicals,

minerals and metals, miscellaneous finishedgoods.

which synthesises the activity in trade, indus-try and construction recorded a strongergrowth than that exhibited in the previousyear. As for the remaining sectors, activity re-corded a slowdown in the electricity, gas andwater sector, while falling in the agriculture,forestry and fisheries sector.

Gross domestic product at market pricesgrew 4.0 per cent in real terms, which followsto a 3.6 per cent growth recorded in 1996 (tableIII.14). Broken-down by sectors, Gross ValueAdded (GVA) decreased in agriculture, for-estry and fisheries (by 3.1 per cent, which com-pares with a 6.5 per cent increase in 1996); itgrew at virtually the same rate of 1996 in indus-try (4.8 per cent in 1997, compared with 4.9 percent in 1996). GVA grew, though slowingdown, in the electricity, gas and water sector(2.2 per cent, compared with 5.2 per cent in1996); increased strongly in construction (12.0per cent, as against 6.5 per cent in 1996) and ac-celerated in the services sector (3.6 per cent, af-ter 2.4 per cent in 1996).



Chart III.22UNIT PROFIT MARGIN IN EXPORTS SECTOR

-10

-5

0

5

10

15

1989 1990 1991 1992 1993 1994 1995 1996 1997

Ra

teo

fch

an

ge Aggregate cost (a) Merchandise exports' deflator

Unit profit margin

Source: INE, Ministério do Trabalho e daSolidariedade, Direcção-Geral das RelaçõesEconómicas Internacionais and Banco de Por-tugal.

Note:(a) Unit labour costs (ULC) in manufacturing indus-

try and intermediate goods imports’ deflator, ag-gregated according to goods and servicesexports’ content of remunerations and imports,from the 1985 input-output matrix.

Chart III.23IMPORTS OF GOODS AND SERVICES

In real terms

-10

-5

0

5

10

15

20

1989 1990 1991 1992 1993 1994 1995 1996 1997

Ra

teo

fch

an

ge

Imports of goods and services

Overall demand

Relative ULC(a)

Source: IMF, INE, Ministério do Trabalho e daSolidariedade and Banco de Portugal.

Note:(a) Portuguese ULC in relation to trade partners’

ULC (in manufacturing industry), adjusted forchanges in the exchange rate. A negative changeindicates a decrease in Portuguese products’ rela-tive costs.

Chart III.24IMPORT PENETRATION

Accumulated growth (1989 = 100)

60

80

100

120

140

1989 1990 1991 1992 1993 1994 1995 1996 1997

Ac

cu

mu

late

dg

row

th19

89=

100

In value

In volume

Source: INE and Banco de PortugalNote:(a) Import penetration = growth of imports of goods

and services minus growth of domestic demand.An increase indicates a gain of market share offoreign producers.

3.1 Agriculture, forestry and fisheries

GVA of agriculture, forestry and fisheriesrecorded in 1997 a 3.1 per cent reduction in realterms, as against a 6.5 per cent growth in 1996.This fall chiefly reflects the reduction of activ-ity in agriculture and fisheries.

According to the Agriculture Income Indexof the INE , agricultural GVA fell 4.3 per cent inreal terms. Production in the sector decreased

by 3.1 per cent, which comprises a 9.1 per centfall in vegetable output and a 1.3 increase in an-imal production. The behaviour of vegetal out-put — negatively affected by the bad weatherconditions recorded in 1997 — reflected aboveall the behaviour of the cereal, potato and wineharvests. Intermediate consumption also fell inreal terms (1.7 per cent), basically due to alower consumption of energy. In 1997, unlikein previous years, net real income per capita inagriculture decreased.

In the forestry sub-sector, GVA is estimatedto have recorded a lower growth in 1997 thanthat in the previous year, with Portuguese pro-ductionbeingsubstitutedbyimportsasaninter-mediate consumption of the wood industry.

In 1997, activity in the fisheries sub-sectorfell 7.9 per cent, which follows to an 11.4 percent reduction in the previous year. Maritimefish and shellfish captured decreased in rela-tion to the previous year.

3.2 Industry

According to estimates of the Banco de Por-tugal, GVA in industry grew 4.8 per cent in1997 (4.9 per cent in 1996). Activity acceleratedsignificantly in most industries, in line with the



Table III.13

MERCHANDISE IMPORTS

Share inoverall

export (96)

1996(a) Share inoverallexports

(97 Jan-Nov)

1997 Jan-Nov(a)

Value Volume Price Value Volume Price

By economic categories:Consumer goods . . . . . . . . . . . . 28.6 10.2 10.2 0.0 27.7 7.6 8.2 -0.5

Foodstuffs . . . . . . . . . . . . . . . . 8.3 6.0 5.3 0.7 7.6 4.3 6.0 -1.6Others . . . . . . . . . . . . . . . . . . . . 20.3 12.0 12.3 -0.3 20.1 9.0 9.2 -0.2

Capital goods . . . . . . . . . . . . . . . 28.0 14.6 14.9 -0.3 28.5 10.8 11.6 -0.7Transport material . . . . . . . . . 10.0 19.9 18.5 1.2 10.4 4.7 2.5 2.1

Others . . . . . . . . . . . . . . . . . . . . 18.1 11.8 13.1 -1.2 18.1 14.6 17.2 -2.2Intermediate goods . . . . . . . . . . 35.8 3.1 6.5 -3.2 35.8 11.7 12.0 -0.2Fuel . . . . . . . . . . . . . . . . . . . . . . . 7.5 1.2 -14.5 18.4 8.0 15.8 8.6 6.6

Source: INE, Direcção-Geral das Relações Económicas Internacionais and Banco de Portugal.Note:(a) The implicit nominal change was determined by the Banco de Portugal based on preliminary declared values, in relation to

equally preliminary figures for the same period of the previous year.

Table III.14

GROSS DOMESTIC PRODUCT

Real growth rates by sectors of activity

Percentage

1996 1997

Agriculture, forestry and fisheries . . . . 6.5 -3.1Industry . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9 4.8Electricity, gas and water. . . . . . . . . . . . 5.2 2.2Construction . . . . . . . . . . . . . . . . . . . . . . 6.5 12.0Services (a) . . . . . . . . . . . . . . . . . . . . . . . . 2.4 3.6

Gross domestic product (b) . . . . . . . . . . 3.6 4.0

Notes:

(a) Services excluding imputed output of banking services.

(b) Gross domestic product at market prices. GDP nominal valuecorresponds to the sum the GVA by sectors of activity, VAT8+)import duties (+) and imputed output of banking services (-).



INDUSTRIAL RESTRUCTURING

After its adhesion to the EU, Portugal underwent a significant reduction in employment in manufactur-ing, a change in its sectoral composition, as well as a change in the structure of merchandise exports and im-ports. This dynamic reflects the process of industrial restructuring that characterised the Portuguese econ-omy over the course of the last decade, without however being followed by an increase in structural unem-ployment. This situation represents the completion of the transition of the industrial development modeladopted up to 1975. This box will overview the main issues involved.

Following the adhesion of Portugal to the European Economic Community in 1986, the structure of thePortuguese economy went through important changes, due to the new framework of the national economy.This consisted of an institutional reform and of a change in the rules of the game for Portuguese economicagents (increase in external competition and domestic liberalisation).

Regarding the share of output in each of the leading sectors of the Portuguese economy, and according tothe data from the Historical Series for the Portuguese Economy, this period is characterised by a significantreduction of the importance of the primary sector (from 10.7 per cent of GDP in 1985 to 6 per cent(1) in1993), and also by the reduction in the share of manufacturing from 26.4 to 21.3 per cent(1) of GDP in thesame period (from 25.8 to 23.7 per cent as regards its share in total employment). On the other hand, the im-portance of the tertiary sector rose from 59.4 to 65.8 per cent(1) of GDP (from 56.7 per cent to 63.4 per cent intotal employment).

These aggregate changes resulted from important modifications recorded at a more broken-down level.Indeed, the structure of manufacturing industry shifted significantly after 1986, due to the building of theSingle Market for goods and services and, therefore, to the gradual integration in the European Union area.

Table 1 shows the data for nine industrial sectors, corresponding to the two-digit Classification of Portu-guese Economic Activities (CAE). The level of sectoral aggregation of the analysis does not reveal the hetero-geneity of situations recorded at the level of firms in each sector.

The industrial restructuring dynamics is evident in the behaviour of sectoral output and in the net accu-mulated creation of employment in each sector. In what concerns to the share in industrial GDP, thenon-metal mineral industries and the food, beverages and tobacco industries were those growing the most.On the contrary, the metal products, machinery and transport material industries, the chemicals, petroleumand by-products industries and the paper, printing and related industries exhibited the greatest falls as ashare of industrial output between 1985 and 1993. These developments did not take place uniformlythroughout this period. For instance, the food, beverages and tobacco industry fell as a share of industryGDP up to 1988, recovering systematically thereafter. The non-metal mineral products industry providesthe sole exception — increasing as a share of GDP in all years under scrutiny.

The dynamism in terms of share in GDP is linked to sectorally distinct changes in employment and inproductivity. The sectors which most contributed to the growth in employment were the textile, clothing andleather industry, the metallic products, machinery and transport material industry and the non-metallicmineral products industry (which, alongside the growth in employment, exhibited the second greatest in-crease in productivity in manufacturing). Meanwhile, some sectors recorded a net job destruction — spe-cially in the chemicals, oil and related industries, the metal base industries and the wood and cork industry(which in this case is linked to a reduction in productivity).

It is worth noting the developments in the so-called traditional sectors of the Portuguese economy (CAE32, 33, 34 and 36). Indeed, the share of these sectors in the economy as a whole decreased from 12.1 per centin 1985 to 10.2 per cent in 1993 (from 14.8 per cent to 14.1 per cent in total employment); as a share in total

(1) Excluding duties on imports and VAT.



secondary sector, these sectors increased from 45.8 to 48.0 per cent of industrial output, and from 57.2 to59.7 per cent of industrial employment.

In a small open economy, the industrial restructuring dynamics is necessarily associated to the behav-iour of foreign trade. In Portugal, this dynamics was closely linked to the European integration process. In-deed, in aggregate terms, the share of intra-community exports and imports in Portuguese GDP at 1991prices rose from 21.3 per cent in 1985 to 56.6 per cent in 1996, according to data from the European Com-mission. Meanwhile, the share of intra-community trade in total foreign trade rose from 57.0 per cent in1985 to 77.7 per cent in 1996. Regarding the structure of exported goods, the dynamism of the Portugueseeconomy is confirmed by chart 1, which also presents information concerning to the structure of Portugueseimports.

The structure of exports of the Portuguese industry is dominated by clothing and footwear, by machines,by wood, cork and paper, and by transport material. Between 1985 and 1993, exports of machines and trans-port material increased as a share of total exports — by 2.8 and 2.7 percentage points, respectively — hav-ing also exhibited the greatest increases in volume terms (only surpassed by energy). Among the set of in-dustries which decreased as a share of total exported goods, the skin, leather and textile industries, and thewood, cork and paper industries, may be singled out. Contrasting with the community average,inter-industry trade accounts for over two thirds of Portuguese trade(2). However, since Portugal joined theEU, the profile of Portuguese trade has been characterised by the strengthening of its intra-industrial com-ponent, namely in differentiated products, and at a higher pace than the EU average.

As a result, the period 1985-1993 was characterised by a combination of specialisation in the so-called“traditional” industries (whose share in total industrial GVA and in employment, and in total exports ofgoods increased in the period) with an increase in intra-industrial trade, in a wide range of sectors.

The sectoral dynamism of industry in recent years is evident in the Employment Survey data of the INE.According to this survey, the sectoral restructuring of employment in industry proceeded between the first

Table 1

OUTPUT AND EMPLOYMENT INDICATORS

CAE

Share in totalindustrial output

Share in total industrialemployment

Real annualaverage rate

of change GVA

Annualaverage rate ofchange of totalemployment

1993%

Change1993-1985

p.p.

1993%

Change1993-1985

p.p.

1993-1985%

1993-1985%

Food, beverages and tobacco . . . . . . . . . . 22.6 3.6 11.3 -0.3 5.7 -0.26Textile, clothing and leather . . . . . . . . . . . 25.6 -0.6 38.0 2.9 7.0 1.03Wood and cork . . . . . . . . . . . . . . . . . . . . . . 6.0 0.3 9.6 -0.9 -2.3 -1.04Paper, printing and related industries. . . 6.2 -1.2 5.1 -0.1 3.1 -0.2Chemicals, oil and related industries. . . . 11.1 -1.3 5.7 -1.4 4.6 -2.73Non-metallic mineral products. . . . . . . . . 10.2 3.7 7.0 0.5 10.4 0.99Basic metal industries. . . . . . . . . . . . . . . . . 2.1 -1.1 2.1 -1.0 1.7 -4.73Manufacturing of metallic products,machines and transport material . . . . . . 15.2 -3.7 20.2 0.3 1.6 0.22

Other manufacturing industries . . . . . . . . 1.0 0.2 1.0 -0.1 8.7 -0.85

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9 0.03

Source: “Historical Series for the Portuguese Economy”.

(2) See European Commission (1996), Economic Evaluation of the Internal Market.

trend evidenced by the European Union econo-mies as a whole. This development was com-patible with the maintenance of the growth ofindustrial GVA, given the slowdown of pro-duction in the automobile industry. An analy-sis by economic categories reveals a marked ac-celeration in the industrial supply of interme-diate goods and the maintenance of a high paceof growth — though in deceleration — in the

supply of investment goods excluding trans-port material. According to the Monthly Man-ufacturing Industry Survey, this behaviourwas determined by both external and domesticdemand (chart III.28). The increase in externaldemand directed towards the referred indus-tries stood in line with the acceleration of eco-nomic activity in our leading trade partners,being corroborated by the growth of the re-



quarter of 1994 and the fourth quarter of 1997. In-deed, the higher growth of employment in industrywas recorded in the car and other transport mate-rial industry, while slight employment increaseswere recorded in the wood and paper, publishingand printing industries, the base metal industriesand in the metallic product industries. On the con-trary, the furniture and recycling, the electronicand electrical machines and the textile, clothingand footwear industries exhibited, according to thissource, the greater percentage falls in employment.

These recent developments are also evident inthe structure of exports between 1993 and 1996(chart 1). On the one hand, we can observe thestrong rise in the share of transport material in to-tal exports (by 9.1 percentage points), while on theother hand clothing and footwear fell as share of to-tal exports (by 6.4 percentage points). According tothe data from the “Direcção-Geral das RelaçõesEconómicas Internacionais”, while total Portu-guese exports grew 46.2 per cent in volume termsbetween 1993 and 1996, exports of clothing andfootwear grew by less than 12 per cent in real termsin the same period. This behaviour is consistentwith the reduction of employment in this sector ac-cording to the Employment Survey.

We have seen that the change in the sectoralstructure of the Portuguese industry allows toidentify the existence of a continuous industrial re-structuring dynamics linked to the European inte-gration process, evidenced in the changes in thecomposition of employment, output and foreigntrade.

Chart 1STRUCTURE OF EXPORTS IN VALUE

0 5 10 15 20 25 30 35

Agricultural and food stuff

Energy

Chemicals

Wood, cork and paper

Hides, leathers and textile

Footwear and clothing

Minerals and metals

Machinery

Transport equipment

Miscellaneous finished goods

Percentage

198519931996

STRUCTURE OF IMPORTS IN VALUE

0 5 10 15 20 25 30

Agricultural and food stuff

Energy

Chemicals

Wood, cork and paper

Hides, leathers and textile

Minerals and metals

Machinery

Transport material

Miscellaneous finished goods

Percentage

198519931996


spective exports. Also the dynamism of invest-ment reflected positively in the production ofequipment goods and of intermediate goodsfor the construction sector.

The Industrial Production Index (IPI) inmanufacturing (table III.15) recorded a 5.3 percent growth in 1997 (1.6 per cent in 1996). Thedifference between the rates of growth of theIPI and those of GVA in industry estimated bythe Banco de Portugal is chiefly due to the factthat in the latter case weights reflecting themost recent information on the sectoral break-down of industrial GVA are used, whichproved different from those used in the IPI(3).The Industrial Turnover Index in the manufac-turing industry (table III.16) grew 4.1 per centin nominal terms (6.7 per cent in 1996). Theslowdown of this indicator is basically due tothe behaviour of the automobile industry. The

rate of productive capacity utilisation in themanufacturing industry (table III.17) stood at80.6 per cent, 1.3 percentage points more thanin the previous year.

The intra-annual pattern of activity in in-dustry differed according to the economic cate-gory. Indeed, the industrial production of in-termediate goods recorded a slowdown in thelast quarter, after accelerating in the first threequarters (chart II.26), while the production oftransport material accelerated strongly in thelast months in the year. In 1997 as a whole, theIPI of the intermediate goods industries grew7.6 per cent (0.0 per cent in 1996), while in nom-inal terms the respective Turnover Index grew



Table III.15

INDUSTRIAL PRODUCTION INDICES


Percentage

Weights 1993 1994 1995 1996 1997 1996 1997

% I II III IV I II III IV

Overall index . . . . . . . . . . . . . . . . . . . 100.0 -4.4 -0.1 4.6 1.3 3.2 0.7 1.6 4.5 -1.1 1.7 2.5 2.8 5.6Manufacturing industries . . . . . . . . . 78.3 -5.7 0.4 3.6 1.6 5.3 -3.0 0.7 4.1 4.9 5.4 6.0 5.7 4.2

Foodstuffs, beverages and tobacco 13.0 1.4 -1.9 1.3 2.3 3.2 -0.4 1.9 4.7 2.6 2.5 2.1 6.1 1.8Textile and leather . . . . . . . . . . . . . . 17.2 -11.9 4.4 -0.6 -4.3 1.7 -6.5 -8.9 -8.5 -4.4 -0.7 4.5 0.6 2.0Clothing . . . . . . . . . . . . . . . . . . . . . . . 10.5 -9.9 -11.3 8.9 -1.6 -8.1 -6.9 -5.3 -3.1 10.4 -5.6 -6.9 -9.4 -10.3Footwear. . . . . . . . . . . . . . . . . . . . . . . 5.1 -2.4 5.4 -9.8 2.5 0.6 -5.8 -0.1 7.7 10.9 2.2 7.6 -0.4 -7.2Wood and cork . . . . . . . . . . . . . . . . . 2.6 2.9 -15.6 7.3 5.9 10.5 -4.3 6.0 12.1 11.0 18.9 9.8 5.9 7.9Paper. . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 -7.3 6.0 5.3 -2.0 7.1 -13.7 -5.0 8.7 4.1 6.7 11.1 6.3 4.6Chemicals and by-products . . . . . . 13.7 -9.4 4.6 1.6 3.3 6.9 -2.7 1.1 12.9 3.6 9.8 6.4 5.4 5.7Non-metal minerals . . . . . . . . . . . . . 9.7 4.7 0.8 3.3 2.7 14.6 -2.3 1.0 5.2 7.1 20.4 17.8 12.2 8.9Metal-basic industries . . . . . . . . . . . 3.6 -4.4 3.9 5.2 -3.4 13.6 -13.3 -0.8 -10.4 11.8 11.0 10.2 21.4 13.6Metal products . . . . . . . . . . . . . . . . . 4.6 -4.0 7.2 1.4 11.6 11.0 1.2 20.5 10.7 14.5 9.8 8.2 12.4 13.8Non-electrical machines. . . . . . . . . . 3.2 -10.4 -0.6 3.5 10.9 8.5 -0.6 16.8 18.2 10.9 21.3 6.1 2.3 4.7Electrical machines and apparatus. 7.9 -5.8 2.2 18.0 4.1 5.9 5.7 0.7 5.3 5.0 -1.5 5.7 14.6 7.0Transport equipment . . . . . . . . . . . . 3.7 -14.8 -9.5 6.3 18.6 6.6 18.4 31.4 24.9 3.0 1.9 -0.1 4.5 20.1

Mining industries . . . . . . . . . . . . . . . . 3.6 -6.3 -5.4 -2.0 -1.3 0.1 -3.2 4.1 2.7 -7.9 3.1 0.0 7.1 -8.9Electricity and gas. . . . . . . . . . . . . . . . 18.1 0.9 -1.2 9.7 0.9 -4.0 15.4 4.8 6.1 -18.6 -10.0 -10.4 -7.7 13.4

Consumer goods . . . . . . . . . . . . . . . . . 38.1 -5.7 -3.1 1.9 1.7 1.6 -3.4 0.2 3.5 6.9 3.0 2.8 1.3 -0.7Intermediate goods. . . . . . . . . . . . . . . 52.2 -5.3 3.0 3.7 0.0 7.6 -4.3 -1.1 2.8 3.2 6.7 8.3 8.9 6.6Investment goods . . . . . . . . . . . . . . . . 9.7 -7.8 0.1 9.4 10.1 6.6 5.9 13.2 15.0 7.4 6.9 4.8 5.9 8.5

Source: INE, “Industrial Production Index”.

Note: Year-on-year rates of change are calculated on comparable version of the IPI.

(3) The fixed-base weights of the IPI do not reflect the currentimportance of the car industry in total industrial produc-tion.



Table III.17

RATE OF PRODUCTIVE CAPACITY UTILISATIONPercentage

1996 1997

1995 1996 1997 I II III IV I II III IV

Manufacturing industries . . . . . . . . . . . . 80 79 81 77 80 78 81 80 80 82 81

Foodstuffs and beverage . . . . . . . . . . . 73 74 75 71 75 73 78 73 75 78 74

Textiles . . . . . . . . . . . . . . . . . . . . . . . . . . 80 76 78 76 75 76 78 77 77 78 80

Clothing . . . . . . . . . . . . . . . . . . . . . . . . . 81 84 84 83 84 85 85 85 84 87 82

Footwear . . . . . . . . . . . . . . . . . . . . . . . . . 80 82 85 77 76 83 91 85 84 84 85

Wood and cork . . . . . . . . . . . . . . . . . . . 75 77 82 77 74 77 78 79 81 83 85

Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 90 86 87 91 90 91 89 89 90 75

Publishing and printing . . . . . . . . . . . . 85 83 84 84 82 83 84 81 81 87 86

Petroleum by products . . . . . . . . . . . . . 88 90 74 92 89 85 93 73 72 80 73

Chemicals . . . . . . . . . . . . . . . . . . . . . . . . 77 75 79 74 77 75 72 75 82 80 78

Rubber and plastics. . . . . . . . . . . . . . . . 79 80 78 79 83 78 81 72 81 80 81

Non-metal minerals . . . . . . . . . . . . . . . 81 82 89 80 83 83 84 87 88 92 89

Metal basic industries . . . . . . . . . . . . . . 77 75 81 79 72 76 75 77 73 83 89

Metal products. . . . . . . . . . . . . . . . . . . . 79 82 81 78 81 83 88 83 77 79 87

TV, radio and communicationsapparatus.. . . . . . . . . . . . . . . . . . . . . . .

89 82 86 84 80 84 80 88 89 88 81

Electrical machines and apparatus . . . 80 81 86 79 79 78 88 84 86 86 88

Other machines and apparatus . . . . . . 82 80 82 78 80 79 84 81 77 85 86

Cars and trailers . . . . . . . . . . . . . . . . . . 81 78 85 68 87 74 81 94 80 82 85

Other transport . . . . . . . . . . . . . . . . . . . 89 84 83 84 85 85 83 84 84 83 81

Consumer goods . . . . . . . . . . . . . . . . . . . . 77 78 79 76 78 77 81 77 79 81 78

Intermediate goods . . . . . . . . . . . . . . . . . . 82 81 81 81 80 80 82 80 81 83 82

Investment goods excluding cars . . . . . 79 83 84 79 84 83 88 84 82 86 85

Source: INE, “Monthly Manufacturing Industry Survey”.

Note: Average rates of capacity utilisation calculated from quarterly rates.

Table III.16

TURNOVER INDICES


Percentage

Weights 1993 1994 1995 1996 1997 1996 1997

% I II III IV I II III IV

Overall index. . . . . . . . . . . . . . . . . . . . . 100.0 2.5 8.4 7.3 5.5 4.1 4.2 6.2 7.3 4.5 0.8 3.8 4.9 6.5Manufacturing industries . . . . . . . . . . 92.2 2.4 8.4 6.7 6.7 4.1 5.2 7.6 8 5.9 0.8 3.7 4.7 6.9

Foodstuffs, beverage and tobacco. . . 17.3 8.7 4.5 -6.1 18.0 6.3 13.7 19.4 18.6 20.2 2.6 5.6 8.1 8.7Textile . . . . . . . . . . . . . . . . . . . . . . . . . . 16.7 -1.9 3.6 1.8 -2.1 -3.5 -4.8 0.4 0.4 -4.0 -2.2 -5.8 -2.8 -3.3Leather and by-products . . . . . . . . . . 5.0 9.3 20.1 4.0 -9.7 2.5 -13.4 -17.3 -6.8 -0.5 3.6 13.4 -1.4 -4.4Wood and cork . . . . . . . . . . . . . . . . . . 4.3 -2.7 -0.7 8.8 -8.5 4.2 -10.8 -8.4 -6.8 -8.0 -1.0 8.9 7.1 2.2Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6 -3.2 14.9 22.0 -10.8 4.4 -10.5 -13.3 -11.5 -7.7 -1.4 5.4 5.3 7.8Chemicals and by-products . . . . . . . . 17.0 4.3 12.3 9.6 6.6 1.6 1.1 3.8 9.7 12.3 2.1 -0.4 2.6 2.6Non-metal minerals . . . . . . . . . . . . . . 6.5 -0.9 10.8 8.5 0.3 0.2 -5.9 -1.6 7.5 1.2 0.5 2.7 -2.3 0.1Metal-basic industries . . . . . . . . . . . . 2.4 -2.7 -1.4 13.8 -7.2 23.9 -28.4 -13.4 8.5 11.4 35.0 24.4 24.6 10.8Metal products . . . . . . . . . . . . . . . . . . 4.4 0.7 15.3 3.0 13.0 13.9 7.3 13.4 10.6 19.3 7.7 14.5 18.7 14.4Non-electrical machines . . . . . . . . . . 3.8 -3.2 6.6 6.1 4.6 11.2 -7.1 -0.5 8.6 17.4 10.7 7.8 10.0 15.6Electrical machines and apparatus . . 6.4 -2.4 15.0 18.5 -0.1 10.3 11.1 0.0 -4.6 -6.0 -3.7 13.0 14.4 18.6Transport equipment . . . . . . . . . . . . . 6.9 3.0 7.3 19.4 42.7 3.9 79.8 77.4 37.6 2.7 -8.0 -1.2 2.6 22.8

Mining industries . . . . . . . . . . . . . . . . . 1.4 -4.4 5.0 15.0 -2.4 -1.5 -2.6 -3.2 -3.3 -0.6 -4.1 10.6 -1.4 -11.2Electricity and gas . . . . . . . . . . . . . . . . . 6.4 5.0 8.4 13.2 -5.6 4.9 -5.3 -7.3 0.9 -9.8 2.6 3.3 9.1 4.6

Consumer goods . . . . . . . . . . . . . . . . . . 35.3 4.0 5.8 0.9 6.9 2.7 2.5 8.5 8.2 8.3 1.4 2.0 3.0 4.4Intermediate goods . . . . . . . . . . . . . . . . 53.1 1.9 9.4 11.2 -0.8 3.9 -2.8 -3.1 2.4 0.5 1.2 4.5 5.5 4.3Investment goods . . . . . . . . . . . . . . . . . 11.6 0.2 11.8 10 31.7 8.1 49.9 47.8 27.6 10.8 -1.9 5.4 8.4 19.2

Source: INE, “Industry Turnover index”.

3.9 per cent (0.8 per cent reduction in 1996).Production in the consumer goods industriesslowed down over the course of the first ninemonths of the year, falling in the last quarter(chart III.27). The IPI in these industries grew1.6 per cent (1.7 per cent in 1996), while theTurnover Index grew 2.7 per cent (6.9 per centin the previous year). The investment goods in-

dustries exhibited a slowdown developmentpath throughout the first half of 1997, recover-ing in the second half — due to the accelerationof activity in the automobile industry in late1997. The IPI in the industry of investmentgoods rose 6.6 per cent (10.1 per cent in 1996),having the respective Turnover Index grown8.1 per cent (31.7 per cent in 1996).



Chart III.25TOTAL MANUFACTURING INDUSTRY

PRODUCTION3-month moving average

-10

-8

-6

-4

-2

0

2

4

6

8

Jan93 Jan94 Jan95 Jan96 Jan97

Yea

r-o

n-y

ea

rra

teo

fch

an

ge

-8

-6

-4

-2

0

2

4

6

8

10

Bala

nc

eo

fre

spo

nd

en

ts

Production

(right-hand scale)

IPI (left-hand scale)

Chart III.26INTERMEDIATE GOODS INDUSTRY

PRODUCTION

3-month moving average

-10

-5

0

5

10

15


Yea

r-o

n-y

ea

rra

teo

fch

an

ge

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

Bala

nc

eo

fre

spo

nd

en

ts

Production

(right-hand scale)


Chart III.27CONSUMPTION GOODS INDUSTRY — PRODUCTION


-10

-8

-6

-4

-2

0

2

4

6

8

10


Yea

r-o

n-y

ea

rra

teo

fch

an

ge

-10

-8

-6

-4

-2

0

2

4

6

8

10

Bala

nc

eo

fre

spo

nd

en

ts

Production

(right-hand scale)


Source: INE “Industrial Production Index” and “Monthly Manufacturing Industry Survey”.Note: The balance of respondents regarding production were seasonally adjusted and normalised as to have the same

mean and standard deviation as the year-on-year rate of change of the IPI.

3.3 Construction

Activity in the construction sector exhibitedan outstanding growth in 1997. GVA grew 12.0per cent (6.5 per cent in 1996). The trend of ac-celeration evidenced from the second half of1996 onwards, was maintained throughout thefirst half of the year, leading activity in the sec-tor to a very high level. In the second half, de-spite a lower growth in year-on-year terms, the

level of activity remained high. Reflecting thisdevelopment, employment in the constructionsector is estimated to have recorded an expres-sive rise in 1997. The quantitative and qualita-tive indicators of activity in the sector confirmthis analysis. Cement sales rose 11.9 per cent in1997, 5.3 percentage points more than in theprevious year. Growth in the first half-yearreached 19.5 per cent, and 5.3 per cent in thesecond half. According to the Monthly Con-



Chart III.28TOTAL MANUFACTURING INDUSTRY

DEMAND3-month moving average

-25

-20

-15

-10

-5

0

5

10

15

Jan95 Jan96 Jan97

Bala

nc

eo

fre

spo

nd

en

ts

-30

-25

-20

-15

-10

-5

0

Bala

nc

eo

fre

spo

nd

en

ts

Domestic demand(right-hand scale)

External demand(left-hand scale)

Chart III.29INTERMEDIATE GOODS INDUSTRY

DEMAND3-month moving average

-40

-30

-20

-10

0

10

20

30

Jan95 Jan96 Jan97

Bala

nc

eo

fre

spo

nd

en

ts

-35

-30

-25

-20

-15

-10

-5

0

Bala

nc

eo

fre

spo

nd

en

ts

Domestic demand(right-hand scale)

External demand(left-hand scale)

Chart III.30CONSUMER GOODS INDUSTRY — DEMAND


-40

-35

-30

-25

-20

-15

-10

-5

0

Jan95 Jan96 Jan97

Bala

nc

eo

fre

spo

nd

en

ts

-25

-20

-15

-10

-5

0

5

Bala

nc

eo

fre

spo

nd

en

ts

Domestic demand (right-hand scale)

External demand (left-hand scale)

Source: INE, “Monthly Manufacturing Industry Survey”.

struction Survey, entrepreneurs’ appraisal ofactivity and employment expectations reachedvery high levels over the course of 1997 (chartIII.31). The percentage of companies in the sec-tor indicating the shortage of skilled staff as animportant limitation to activity increasedstrongly in the year (by 13 percentage points);this fact was particularly evident in the publicworks sub-sector (23 percentage points in-crease).

The high pace of growth of output in con-struction was widespread to the housing build-

ing and the public works sub-sectors. Theslowdown of activity in the second half of 1997was specially due to the latter sub-sector(charts III.32 and III.33). As a matter of fact, ac-tivity in the public works sub-sector had al-ready evidenced an outstanding dynamism inthe same period of the previous year, since therecovery in 1996 was initiated in thissub-sector, rebounding to the housingsub-sector in the last quarter of that year.Finally, worth noting that according to theMonthly Construction Survey, the public



Chart III.31CONSTRUCTION — TOTAL ACTIVITY


Chart III.32CONSTRUCTION — HOUSING


-35

-30

-25

-20

-15

-10

-5

0

5

10


Bala

nc

eo

fre

spo

nd

en

ts

Activity

Employment expectations

-40

-35

-30

-25

-20

-15

-10

-5

0

5


Bala

nc

eo

fre

spo

nd

en

ts Activity


Chart III.33CONSTRUCTION — PUBLIC WORKS


-35

-30

-25

-20

-15

-10

-5

0

5

10

15

20


Bala

nc

eo

fre

spo

nd

en

ts

Activity


Source: INE, “Monthly Construction Survey”.Note: Seasonally adjusted figures.

works sub-sector was the most affected by theadverse weather conditions of the last quarterof 1997.

3.4 Electricity, gas and water

Activity in the electricity, gas and water sec-tor grew 2.2 per cent in 1997, hence exhibiting aslowdown in relation to the previous year (5.2per cent). This behaviour reflects that of the elec-tricity sub-sector where GVA grew 2.4 per cent(6.2 per cent in the previous year). In 1997, pro-duction of this sub-sector increased less than inthe previous year. Furthermore, the share ofelectricityproducedresortingtothermalenergyas the primary energy source, which comparedto hydride energy is more intermediate con-sumption-intensive, increased in 1997. Thisyear, consumption of electricity is estimated tohaveincreased3.3percent(5.6percentin1996).

3.5 Services

Activity in the services sector acceleratedsubstantially in 1997. GVA in this sector ex-cluding imputed output of banking servicesgrew 3.6 per cent in real terms (2.4 per cent inthe previous year). This acceleration wasmostly due to the behaviour of activity in thetrade, hotels and restaurants sub-sector and inthe transports sub-sector. The communicationssub- sector continued to exhibit an outstandinggrowth — above that recorded on average bythe remaining services — though deceleratingin relation to the previous year.

The Monthly Trade Survey indicates thatactivity appraisal improved in relation to 1996in both wholesale and retail trade (chart III.34).However, these sub-sectors exhibited distinctintra-annual patterns. Activity in retail tradegrew at a virtually constant pace over thecourse of the year. This behaviour followed tothe recovery recorded in the second half of1996, which took place alongside the accelera-tion of private consumption. Activity in whole-sale trade recovered strongly in 1997. This sec-tor accelerated sharply over the course of the

first three quarters of the year, stabilising there-after. Worth highlighting the acceleration inthe wholesale trade of intermediate goods, inconsonance with the dynamism evidenced bythe production and foreign trade of goods ineconomic category.

The strengthening of activity in the restau-rants and hotels sub-sector in 1997 reflects therecovery of tourism but also a higher growth ofreal disposable income, given the high incomeelasticity of this class of consumption. Outputacceleration in the transports sector was chieflydue to the behaviour of activity in the terres-trial merchandise transports. This behaviour islinked to the stronger growth of economic ac-tivity in general, and to the increasing level ofopenness of the Portuguese economy. In 1997,activity in the services supplied to companiessub-sector is estimated to have accelerated. In-deed, the Services Supplied to Companies Sur-vey shows an improvement in the turnoverand employment appraisals. The production ofservices rendered by credit institutions also ac-celerated in 1997, among which the contribu-tion of services of intermediation of stock ex-change operations — due to the privatisationoperations carried out throughout the year —should be singled out.



Chart III.34TRADE ACTIVITY


-16

-14

-12

-10

-8

-6

-4

-2

0

2

Jan95 Jan96 Jan97

Bala

nc

eo

fre

spo

nd

en

ts

-35

-30

-25

-20

-15

-10

-5

0

Bala

nc

eo

fre

spo

nd

en

ts

Wholesale trade (left-hand scale)

Retail trade(right-hand scale)

Source: INE, “Monthly Trade Survey”.

4. Labour market

4.1. Overview

The labour market situation in 1997 reflectsabove all the influence of the acceleration ofoutput growth over labour demand. Accord-ing to the Employment Survey of the InstitutoNacional de Estatística, the net change in em-ployment reached 81 thousand workers in1997, which represents a 1.9 per cent increaseand follows a 0.6 per cent increase in 1996 (ta-bles III.18 and III.19). This increase had a par-tial reflex in the reduction of unemployment by19 thousand individuals, thus accounting for a0.6 percentage point reduction in the unem-ployment rate — from 7.3 per cent in 1996 to 6.7per cent in 1997 (tables III.18 and III.19). Theimprovement of labour market conditions was,however, accompanied by an increase in theproportion of long-term unemployed workers

in total unemployment, from 42 to 43.6 per cent(table III.19). Still this behaviour does not seemto indicate any structural change in the labourmarket, but instead the confirmation, with theexpected lag, of the usual cyclical sensitivity ofunemployment duration. Throughout 1997 theparticipation rate of individuals at working age(between 15 and 64) is estimated to have in-creased one percentage point (from 67.5 percent to 68.5 per cent). This development pro-vided a reaction to the changes in the labourmarket conditions, seeming to reflect a behav-iour of labour supply in line with the economiccycle — that is, a pro-cyclical behaviour (tableIII.19).

No relevant change having occurred in theinstitutional framework of labour relations, itcomes as no surprise that the changes in em-ployment, unemployment and non- participa-tion observed in 1997 continue to chiefly reflecta strong sensitivity to the cyclical changes in



Table III.18

SUMMARY OF LABOUR MARKET INDICATORS

Wages per employee (a) Total em-ploy-ment

Wageearners

Unemploy-ment rate(e)

Long-termunemploy-

mentas % of total

Economy as a whole Companies (b)

Nominalterms

Real (c)

termsNominal

termsReal (c)

terms

r.c. r.c. r.c. r.c. r.c. r.c.

1987 . . . . . . . . . . . . . 13.8 3.8 12.7 2.8 2.6 2.2 7.1 47.21988 . . . . . . . . . . . . . 11.6 0.7 9.3 -1.4 2.6 4.3 5.7 42.01989 . . . . . . . . . . . . . 14.1 1.2 12.7 0.0 2.2 3.5 5.0 37.81990 . . . . . . . . . . . . . 17.6 4.9 17.2 4.6 2.3 2.9 4.7 33.91991 . . . . . . . . . . . . . 19.1 6.6 18.8 6.3 3.0 1.4 4.1 30.11992 . . . . . . . . . . . . . 13.8 3.9 11.4 1.7 0.9(d) 0.8(d) 4.1(f) 25.91993 . . . . . . . . . . . . . 8.0 0.8 6.6 -0.5 -2.0 -2.8 5.5 29.31994 . . . . . . . . . . . . . 5.5 -0.1 6.7 1.1 -0.1 -2.0 6.8 34.21995 . . . . . . . . . . . . . 6.9 3.0 6.2 2.3 -0.6 -1.0 7.2 39.31996 . . . . . . . . . . . . . 6.5 3.4 5.1 2.0 0.6 -0.4 7.3 42.01997 . . . . . . . . . . . . . 5.6 3.3 4.7 2.4 1.9 1.4 6.7 43.6

Source: INE, “Contas Nacionais” and “Employment Survey”,and Banco de Portugal.

Notes:

(a) Employee wages; includes wage scales, additional benefits and Social security contributions.

(b) Does not include wages for General Government employees.

(c) Deflated by the Private Consumption deflator.

(d) Given that the results of “Employment Survey” up to 1991 are not comparable with the “Employment Survey” valid from 1992 on-wards, these changes are calculated on the basis of the answers with regard to the situation one year before.

(e) Comprises unemployed people who sought work actively in the 30 day period prior to the survey .

(f) This unemployment rate in not comparable with that recorded in previous years.

R.c.: Rate of change (per cent).

economic activity. This is, in fact, the indicationprovided by the comparison between the ob-served unemployment rate and that estimatedaccording to an Okun’s law relation (chartIII.35). In addition, the comparison of the be-haviour of the growth of output and of em-ployment suggests a strong influence of theformer on the latter (chart III.36).

In Portugal, the impact on the labour mar-ket of cyclical changes in the economy seems toresult more from the quick adjustment ofwages, rather than from the magnitude ofworker flows (lay-offs, hirings, quits, etc). Inother words, the adjustment of the labour mar-ket to demand shocks in the goods marketseems to be made mainly through prices (i.e.,wages) rather than through quantities (amountof employment). This real wage flexibility ap-pears to be a distinctive feature of the Portu-guese labour market when compared to other



Table III.19

POPULATION, EMPLOYMENT AND UNEMPLOYMENT

1995 1996 1997 1995 1996 1997

I II III IV I II III IV I II III IV

In thousands:

Total resident population . . . . . . . . 9357 9372 9382 9348 9353 9359 9366 9367 9370 9374 9377 9375 9379 9384 9391

Labour force (a). . . . . . . . . . . . . . . . . 4551 4583 4645 4554 4556 4529 4563 4586 4577 4589 4579 4608 4635 4669 4668

Total employment . . . . . . . . . . . . . . 4225 4251 4332 4216 4238 4218 4229 4243 4246 4264 4249 4271 4335 4358 4363

Wage earners . . . . . . . . . . . . . . . . . 3040 3027 3070 3036 3050 3042 3033 3021 3023 3036 3030 3036 3085 3082 3087

Unemployment population (a) . . . . 325 332 313 338 318 311 334 343 331 325 330 336 300 311 305

In percentage terms:

Participation rate (b)

Total . . . . . . . . . . . . . . . . . . . . . . . . . 48.6 48.9 49.5 48.7 48.7 48.4 48.7 49.0 48.8 49.0 48.8 49.2 49.4 49.8 49.7

Four labour force (aged 15-64). . 67.2 67.5 68.5 67.3 67.4 66.9 67.1 67.3 67.5 67.6 67.5 68.1 68.3 69 68.8

Men . . . . . . . . . . . . . . . . . . . . . . . . 75.4 75.5 76.4 75.8 75.7 75.3 74.9 75.3 75.5 75.6 75.7 76 76.3 76.9 76.5

Women . . . . . . . . . . . . . . . . . . . . . 59.4 59.9 61.1 59.2 59.6 59.1 59.8 59.8 59.9 60.1 59.9 60.7 60.8 61.5 61.5

Unemployment rate (b)

Total . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 7.3 6.7 7.4 7.0 6.9 7.3 7.5 7.2 7.1 7.2 7.3 6.5 6.7 6.5

Men . . . . . . . . . . . . . . . . . . . . . . . 6.4 6.5 6.1 6.6 6.4 6.3 6.4 6.9 6.3 6.2 6.4 6.5 5.7 5.9 6.1

Women . . . . . . . . . . . . . . . . . . . . 8.0 8.2 7.6 8.5 7.6 7.5 8.4 8.2 8.3 8.1 8.1 8.2 7.3 7.6 7.1

Young people (aged 14-24). . . . . 16.2 16.7 14.8 16.7 15.7 15.0 17.2 17.0 16.8 16.2 16.6 16.1 13.7 14.9 14.5

Source: INE, “Employment Survey”.

Notes:

(a) In a restricted sense only individuals who sought work actively in the 30 days period prior to the survey are included as unemployedwithin the labour force.

(b) In the columns for years, rates are obtained on the basis of averages of quarterly figures.

Source: INE and Banco de Portugal.Note: The unemployment rate was estimated ac-

cording to an Okun’s law equation, which re-lates unemployment rate to the economicactivity level.

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Perc

en

tag

e Estimated

Observed

Chart III.35UNEMPLOYMENT — OBSERVED

AND ESTIMATED RATE



THE WAGE DISTRIBUTION IN THE PERIOD FOLLOWING TO THE ADHESION

Real wages grew strongly in Portugal in the pe-riod following its adhesion to the European Union.According to microdata from the Quadros dePessoal of the Ministério do Trabalho eSolidariedade, the hourly wage of full-time employ-ees is estimated to have grown by 2.9 per cent in an-nual average terms between 1986 and 1995. Thegrowth of wages took place in the whole wage spec-trum, though it was much more evident in the up-per part of the distribution. While wages in the firstdecile grew 2.0 per cent per year, wages in the ninthdecile grew 4.1 per cent. Wages in the intermediatequantiles grew at rates between those two figures(table 1).

This uneven growth naturally yielded an in-crease in wage distribution inequality, chiefly dueto a higher growth of inequality among higherwages. For instance, while a worker in the ninthdecile of the wage distribution earned in 1986 55per cent more than a worker in the third quartile ofthe same distribution, the equivalent value in 1995reached 73 per cent. The same comparison betweenwages in the lower side of the distribution shows that the proportion in which the first quartile wage exceedsthat in the first decile remained virtually constant at 19 per cent.

The changes in the wage distribution are due to changes in both labour demand and supply, occurred inthe decade under scrutiny. The most important development in the demand side consisted of the change inthe structure of labour demand — in the sense of increasing skilled labour demand, in detriment of the de-mand for non-skilled labour, which in fact corresponds to the trend observed in most OECD countries.

Skilled labour supply also rose quite significantly, with schooling levels increasing substantially. Whilein 1986 only around 30 per cent of the employed population had completed the second cycle of basic educa-tion (six schooling years), this proportion rose to over 50 in 1995. During this period, the average number ofschooling years of the employed population rose from 5 to 6, while the proportion of individuals with 11schooling years or more rose from 8 to 17.

These changes seem to have resulted in faster wage increases among the employed population exhibitinghigher education than among workers with average schooling levels. Estimates for schooling return, calcu-lated by using wage regressions confirm this trend. On average, an additional year of schooling, which in1986 accounted for a wage gain around 8 per cent raise, would in 1995 deliver a gain averaging 9 per cent.Here, too, are gains distributed unevenly across schooling levels. The wage gain resulting from an addi-tional schooling year not only is greater for more educated workers, as it recorded a greater increase for theseworkers throughout the decade under scrutiny.

For an employed population exhibiting a virtually constant average age over the course of the decade —as in Portugal — the rise in the average educational level and the resulting later entry in the labour marketleads directly to the observed reduction in he number of years of experience in the labour market and job ten-

Table 1

ANNUAL GROWTH OF WAGES

March 1986-September 1995 (%)

Mean2.9

Quantiles

10 2.025 2.050 2.675 2.990 4.1

Source: Ministério do Trabalho e da Solidariedade andBanco de Portugal

Note: The statistics presented were calculated over samplesof around 5,000 full-time workers. Wages (includingwage scales, diturnities, subsidies and other benefits)were deflated using the CPI. Growth rates presentsfor the wage corresponding to the respective quantilein each quarter.

European countries exhibiting substantiallyhigher levels of unemployment (see box Wagedistributions in the period following the adhesion).In 1997, the nominal rate of change of earningsof wage- earners in companies is estimated tohave reached 4.7 per cent, corresponding to a2.4 per cent real rate of change — 0.4 percent-age points above that recorded in 1996 (tableIII.18 and chart III.37).

4.2 Employment and labour flows

The time series change of aggregate vari-ables such as the number of employed, unem-ployed or out of labour force individuals con-ceals a wide range of dynamics, namely trans-lating the net effect of accounting (gross) in-

flows and outflows of workers. Hence, the be-haviour of employment throughout 1997 re-sults from the combined effect of the exit fromemployment for 11.6 per cent of labour force,compensated by 13.5 per cent of labour forcethat move into employment (chart III.38). Inother words, while 542.9 thousand workers lefttheir job, 631.5 thousand individuals started anew one (chart III.39). In turn, the reduction inthe number of unemployed recorded over thecourse of 1997 corresponds to the inflow of in-dividuals amounting to 4.4 per cent of labourforce into an unemployment situation, com-



ure. These factors were also followed by changes in the pattern of wages towards the reduction in the compo-nent which depends on age and the slight increase in the job tenure bonus.

An additional key change in labour supply in this period was the substantial increase in female partici-pation. Women, which in 1986 accounted for one third of employed population, represented already 40 percent of workers in 1995. Working females have higher schooling levels than men, this difference becomingmore evident throughout the decade. The fact that employed females’ education exceeds that of men shouldnot be surprising, since less educated women frequently opt out of the labour market due to the expectationsof lower wages. Wage differences across gender remained basically stable over the course of the decade,though a slight trend towards an increasing difference is recorded if individual attributes linked to wage de-termination are taken into account.

Chart III.36GDP AND EMPLOYMENT RATES

OF GROWTH

85

86

878889

91

92

93

94

96

97

95

90

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

-2.0 0.0 2.0 4.0 6.0

Change in real GDP

Ch

an

ge

ine

mp

loym

en

t

Chart III.37PRICES AND WAGES

Rates of growth

0

2

4

6

8

10

12

14

16

18

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Perc

en

tag

eWages

Wage scales

CPI

Source: INE, Ministério do Trabalho e daSolidariedade and Banco de Portugal.

Note: The rates of change of wages per employeeand of the wage scale exclude civil servants’wages.

pensated by the exit from unemployment of anamount of workers corresponding to 4.9 percent of labour force (chart III.38). Indeed, while208.1 thousand individuals entered an unem-ployment situation, 238.1 thousand abandonedthis situation (chart III.39). The mobility pat-tern in the Portuguese labour market is re-flected not only in the high average job tenureand average unemployment duration, but alsoin the low average number of jobs per worker(table III.20). In 1997, job tenure averaged 143months, average unemployment duration isestimated at 16.5 months and the average num-ber of jobs per worker is estimated at 2.8. Ad-justing for the cyclical influence of economicactivity, no marked trend seems to characterisethe recent behaviour of these indicators. Thelong-term job (or “job-for-life”) indicator,which measures the proportion ofwage-earners aged 45 or more and whose ten-ure in the current job equals 20 years or more, isestimated at 47 per cent, suggesting a strongjob stability.

The acceleration of economic activity in1997 resulted in an increase in employment forthe second consecutive year. While total em-

ployment increased 1.9 per cent, the number ofwage-earners increased only 1.4 per cent (tableIII.19). Worth noting, however, that this in-crease in the number of wage-earners followsto continuous falls recorded in the last 4 years.This change in 1997 was chiefly due to the 15.7



3.92.8

4.1

3.4

1.0

1.7

Employment

Unemployment Out of labour force

5.4

Chart III.38LABOUR MARKET TRANSITIONSAs a share of labour force

184.7129.9

193.3159.5

45.4

78.2

Employment

Unemployment Out of labour force

253.5

Chart III.39LABOUR MARKET TRANSITIONS

Thousand Individuals

Source: INE and Banco de Portugal.Note: Figures presented are the accumulated quar-

terly flows, and are shown as a proportion oflabour force.

Source: INE and Banco de Portugal.Note: Figures presented are the accumulated quar-

terly flows, and are shown in thousand indi-viduals.

Table III.20

LABOUR MOBILITY

Employment Unemploy-ment

Averagejob

duration

Averagenumber of

jobs

Lon-termemploy-ment (a)

Elapsedaverage un-

employmentduration

In months In months

1994 . . . 148.5 2.6 45.5 12.51995 . . . 145.4 2.7 47.7 14.11996 . . . 144.0 2.8 48.2 15.21997 . . . 143.0 2.8 47.0 16.5

Source: INE, “National Accounts” and “Employment Survey”and Banco de Portugal.

per cent increase in the number of fixed-termworkers, after having increased by 12.1 percent in 1996. The proportion of wage-earnerswith a fixed-term contract in totalwage-earners continued to increase in 1997,reaching 14.8 per cent in annual average terms.The more intensive use of this kind of contractduring the upward swing of the economic cy-cle appears to be a distinctive feature of the cy-clical behaviour of the labour market, and a di-rect consequence of the rigid legal frameworkof open-ended contracting (chart III.40).

The change in total employment, measuredby the number of employed individuals, con-

trasts with the change in working hours, whichincreased solely 0.1 per cent in 1997 (tableIII.21). The lower average duration of theworking schedule is an outcome of the legalframework introduced in July 1996, which es-tablishes cuts in weekly working schedules re-maining above the 40-hours per week thresh-old, but also of the further increase in the num-ber of part-time workers, which in 1997 ac-counted for 10 per cent of employment (tableIII.21).

4.3 Unemployment rate

The reduction in the number of unem-ployed recorded in 1997 reached 5.7 per cent(table III.19). This reduction was sharper in thenumber of first time job-seekers (10.1 per cent)than in the new job-seekers (4.7 per cent). Thisdevelopment confirms the indication of astructural change in the composition of thestock of unemployed, in the sense of increasingin the share of new job-seekers in total unem-ployed.

In consonance with this indication, the re-duction in the unemployment rate was sharperamong the younger population (aged 14 to 24),from 16.7 per cent to 14.8 per cent (table III.19).Broken-down by gender, the unemploymentrate fell from 6.5 to 6.1 per cent for male work-ers, while falling from 8.2 to 7.6 per cent amongwomen.

Throughout 1997, 184.7 thousand unem-ployed workers (3.4 per cent of labour force)found a job and 45.4 thousand (1 per cent of la-bour force) went out of labour force (chartsIII.38 and III.39). Meanwhile, in the same pe-riod, 129.9 thousand workers (2.8 per cent of la-bour force) lost or quit their jobs and becameunemployed, while 78.2 thousand non- partici-pants (1.7 per cent of labour force) started tosearch actively for a job.

The unemployment rate is basically deter-mined by the intensity of the flow of individu-als that enter an unemployment situation andby average unemployment duration. In Portu-gal, empirical evidence suggests that the un-employment rate is determined by the combi-



Chart III.40NUMBER OF EMPLOYEES WITH OPEN-ENDED

AND FIXED-TERM CONTRACTSThousand individuals

2600

2700

2800

1993 1994 1995 1996 1997250

350

450

Permanent (left-hand scale)

Fixed-term (right-hand scale)


Table III.21

EMPLOYMENT AND AVERAGEWORKING HOURS

Totalemployment

Total work-ing hours

Averageworking

hours

Share ofpart-time

workers %Rate of change (%)

1993 . . . . . -2.0 -2.2 -0.3 7.21994 . . . . . -0.1 -0.4 -0.3 7.61995 . . . . . -0.6 -0.3 0.3 7.51996 . . . . . 0.6 -0.1 -0.7 8.71997 . . . . . 1.9 0.1 -1.8 10.0


nation of low intense unemployment inflowswith relatively high average unemploymentdurations (i.e., equally low outflows from un-employment). The observation of a strongcounter-cyclical component in average unem-ployment duration reflects into a strong andstable relationship between the unemploymentrate and the proportion of long-term unem-ployment (chart III.41). The stability of this re-lationship does not suggest that any significantchange in the structural component of the un-employment rates has occurred.

The increase in the share of long-term un-employment (and of average unemploymentduration) in 1997 should not be seen as an in-creased difficulty in finding a job, but insteadas a short-term consequence of the reduction inthe flow of newly unemployed workers (exhib-iting shorter unemployment spells). It is pre-cisely this mechanism that explains the verticalshift of the relationship between the unem-ployment rate and long-term unemploymentevery time the direction of the changes in thelabour market conditions is altered (chartIII.41). This observation is consistent with theindication that both average unemploymentduration and the proportion of long-term un-employment fell sharply in the third and

fourth quarters of 1997 in relation to the previ-ous quarters.

The behaviour in recent years of the numberof unemployed benefiting from the unemploy-ment benefits or from the unemployment so-cial assistance points towards the stabilisationof the structure of subsidised unemployment,after the impact of some changes to the unem-ployment benefits legal framework introduced



Chart III.41UNEMPLOYMENT RATE AND LONG-TERM

UNEMPLOYMENT

8586

87

88

89

90

91

92

97

96

95

94

93

20

25

30

35

40

45

50

3 4 5 6 7 8 9Total unemployment

Un

em

plo

yme

nt

rate

an

dlo

ng

-te

rmu

ne

mp

loym

en

t


Chart III.42UNEMPLOYMENT AND

UNEMPLOYMENT BENEFITS

0

50

100

150

200

250

300

350

400

1990 1991 1992 1993 1994 1995 1996 1997

Unemployed

Total beneficiaries

Unemployment social assistancebeneficiaries

Unemployment insurancebeneficiaries

Source: INE and Instituto de Gestão Financeira daSegurança Social.

Chart III.43NOMINAL WAGE VERSUSUNEMPLOYMENT RATE

97 96

959493

92

91

90

89

88

87

0

2

4

6

8

10

12

14

16

18

20

3.5 4.5 5.5 6.5 7.5Unemployment rate

No

min

alw

ag

eve

rsu

su

ne

mp

loym

en

tra

te

Source: INE and Banco de Portugal

in 1989. The behaviour of the number of unem-ployed workers receiving the unemploymentsubsidy has followed closely the behaviour inthe number of unemployed (chart III.42), whileits seems that the adjustment period caused bythe legal changes to the configuration of this re-gime has already come to an end.

The strong sensitivity of real wages to thelevel of unemployment is one characteristic ofthe Portuguese labour market that has been fre-quently reported. Real wage flexibility favoursa faster adjustment of the labour market tochanges in demand, compensating the rigidityof adjustment via job creation and job destruc-tion flows. Indeed, the existence of a strong andstable relation between nominal wages, the in-flationrateandtheunemploymentratehasbeenevinced. The recent behaviour of the rate ofchange of nominal wages and of the rate of un-employment does not point to the occurrence ofany significant changes in the wage bargainingprocesses, and therefore in wage sensitivity toeventual unfavourable labour market condi-tions, leavingintacttheadjustmentpotentialob-served in the past (chart III.43).

An important element of the labour marketfunctioning is the existence of mechanisms thatfavour the matching of workers’ characteristicsto the job attributes. The existence of barriers tolabour mobility tends not only to raise chronicproductivity problems — since it makes diffi-cult attempts of adaptation of workers to dif-ferent kinds of jobs — but also to maintainopen for longer job vacancies. In the latter case,a share of unemployment would be caused bythe mismatching of the unemployed individu-als’ characteristics to the requirements of thejobs.

A change in the relation between the unem-ployment rate and vacancies can in this contextbe interpreted as a structural deterioration ofthe difficulties in matching unemploymentworkers and job offers. At a first glance, theevolution of the rate of vacancies and of the un-employment rate observed throughout the lastthree years points towards a situation of slightdeterioration, given the increase in the vacan-cies rate for identical levels of unemployment(chart III.44). However, the recent increase inthe number of vacancies available shall haveresulted more from the administrative effect ofactive policies of employment promotionrather than from the sudden increase of themismatch between labour skills and the attrib-utes required by the new jobs.



Chart III.44VACANCIES RATE VERSUS

UNEMPLOYMENT RATE

97

96

9594

93

9089

88

87

86

85

9192

0.0

0.1

0.2

0.3

3.5 4.5 5.5 6.5 7.5 8.5Unemployment rate

Va

ca

nc

ies

rate

Source: INE and Instituto do Emprego e FormaçãoProfissional.

Note: The vacancies rate equals the ratio betweenthe number of job offers to fill and labourforce.

Chart III.45UNEMPLOYMENT RATE BY REGIONS

0 2 4 6 8 10 12 14

Algarve

Alentejo

Lisbon and Vale doTejo

Central Portugal

Northern Portugal

Mainland

Unemployment rate (%)

1997

1996

1995

1994


The suppression of the barriers to labourmobility may reduce substantially the prob-lems arising from the mismatch between work-ers’ qualifications and job attributes. A clear in-dication of the existence of serious obstacles togeographic mobility of workers is provided bythe persistence of significant differences be-tween the unemployment rate of several re-gions in Portugal (chart III.45).

4.4 Wages

In 1997, the nominal rate of change of wagecompensation per employee in the economy asa whole is estimated at 5.6 per cent, to whichcorresponds a 3.3 per cent real rate of change —

similar to that recorded in 1996 (table III.18). Asin 1996, wages in companies increased by moremoderately than in General Government; in-deed, in the former wages increased by 4.7 percent in nominal terms, corresponding to a 2.4per cent real growth.

Average wages in collective agreementsgrew 3.6 per cent in 1997, 0.9 percentage pointsless than in 1996 (table III.22). The rate ofchange of wages scales also reached 3.6 percent for the services sector and for industry, asfor both private and public companies.

The national mandatory minimum wagewas fixed at PTE 51.450 for domestic servantsand 56.700 for all other activities, hence yield-



Table III.23

NATIONAL MANDATORY MINIMUM WAGE

1994 1995 1996 1997 1998

Value Value Nominalwage

Realchange

Value Nominalwage

Realchange

Value Nominalwage

Realchange

Value Nominalwage

(esc.) (esc.) (%) (%) (esc.) (%) (%) (esc.) (%) (%) (esc.) (%)

Overall . . . . . . . . . . . . . .49300 52000 5.5 1.2 54600 5 1.6 56700 3.8 1.6 58900 3.9

Domestic servants. . . . .43000 45700 6.3 2.0 49000 7.2 3.8 51450 5.0 2.8 54100 5.2

Source: Official Gazette (Decree-Laws nos. 79/94, 20/95, 21/96, 38/97 and 25/98).

Table III.22

AVERAGE WAGES IN THE COLLECTIVE WAGE SETTLEMENTS

Rates of change and number of employees comprised (a)

1990 1991 1992 1993 1994 1995 1996 1997

Total excluding GGRate of change . . . . . . . . . . . . . . . . 13.7 14.4 11.2 7.3 5.1 4.8 4.5 3.6Number employees . . . . . . . . . . . . 1167.3 1541.0 1566.3 1157.3 1346.2 1412.8 1483.5 1263

Private-owned sectorRate of change . . . . . . . . . . . . . . . . 13.7 14.4 11.1 7.5 5.2 4.8 4.5 3.6Number of employees . . . . . . . . . 1025.5 1442.7 1404.0 1026.8 1286.1 13335.3 1451.3 1225.8

IndustryRate of change . . . . . . . . . . . . . . . . 13.8 14.4 10.7 7.6 5.2 5.1 4.5 3.6Number of employees . . . . . . . . . 536.1 844.9 809.5 340.3 904.6 580.3 741.5 469

ServicesRate of change . . . . . . . . . . . . . . . . 13.6 14.5 11.9 7.4 4.9 4.6 4.5 3.6Number of employees . . . . . . . . . 432.7 504.7 562.6 610.4 436.1 624.2 529.9 599

Source: Figures calculated by the Banco de Portugal on the basis of data of the Ministério do Emprego e da Solidariedade.

Note:

(a) Number of employees in thousands.

ing 5 and 3.8 per cent nominal raises, respec-tively (table III.23).

Given the behaviour of employment overthe course of 1997, productivity per worker isestimated to have grown by 2.1 per cent, while

hourly productivity shall have grown 3.9 percent (table III.24 and chart III.46).

The rise in unit labour costs in the economyexcluding General Government reached 2.5per cent in 1997, 0.5 percentage points abovethat recorded in 1996 (chart III.47).

For the second year around, the real rate ofchange of wages per worker exceeded that ofapparent labour productivity (chart III.48).



Chart III.46PRODUCTIVITY

-3

-2

-1

0

1

2

3

4

5

6

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Ra

teo

fch

an

ge

(%)

Real GDP Employment Productivity

Table III.24

LABOUR PRODUCTIVITY

Rates of change

Productivity perworker (a)

Productivity perworking hour (b)

1990 . . . . . . . . . . . . . . 2.4 3.11991 . . . . . . . . . . . . . . -0.7 0.91992 . . . . . . . . . . . . . . 1.0 0.71993 . . . . . . . . . . . . . . 0.6 0.81994 . . . . . . . . . . . . . . 2.4 2.81995 . . . . . . . . . . . . . . 3.1 2.71996 . . . . . . . . . . . . . . 3.0 3.71997 . . . . . . . . . . . . . . 2.1 3.9

Source: INE, “Employment Survey”and Banco de Portugal.

Notes:

(a) Ratio between real gross domestic product and total employ-ment.

(b) Ratio between real gross domestic product and total workinghours.


Chart III.47UNIT LABOUR COSTS

-5

0

5

10

15

20

25

1987 1989 1991 1993 1995 1997

Ra

tes

ofc

ha

ng

e(%

)

Wages per employee Productivity Unit labour costs


Chart III.48REAL WAGES AND PRODUCTIVITY

-4

-2

0

2

4

6

8

1987 1989 1991 1993 1995 1997

Perc

en

tag

ep

oin

ts

Source: INE and Banco de Portugal.Note: A positive (negative) value indicates that real

wages grew more (less) than productivity.

Chapter IV

BALANCE OF PAYMENTS

1. Introduction

In 1997, the current account deficit reached1.8 per cent of Gross Domestic Product (GDP)— on a transactions basis and according to theavailable provisional data — compared to 1.4per cent in the previous year(1). This deficit waschiefly financed by the non-official sector of theeconomy. Non-official capital movements —including the value for leads/lags in the settle-ment of operations involving merchandise, aswell as statistical adjustments(2) — recorded apositive balance amounting to about 1.3 percent of GDP in 1997 (1.8 per cent in 1996) (chartIV.1 and table IV.1).

The increase in the current account deficit in1997 resulted from the deterioration of thetrade balance, amounting to 9.3 per cent ofGDP — 0.7 percentage points (p.p.) more thanin the previous year. This deterioration reflects

the higher growth of imports when comparedto that of exports. On the other hand, the sur-plus of unrequited transfers increased from 6.3to 6.6 per cent of GDP, reflecting the growth ofEuropean Union (EU) net transfers and of emi-grants’ remittances. The surplus of services re-mained unchanged at around 1.5 per cent ofGDP, despite the recovery of net tourism re-ceipts.

The non-monetary financial account contin-ued posting a deficit in 1997; this deficit stoodat 0.8 per cent of GDP (3.0 per cent in 1996).Residents’ net foreign investments increased


Balance of payments

(1) The current account data – on a transactions basis – for1995 and 1996 were significantly revised. First, the meth-odology of calculation of the income account balance on atransactions basis was changed – credit of portfolio in-vestment income started to be calculated on an accrualbasis. This income is calculated upon the estimated stockof foreign securities held by residents and the data on therespective yields. This procedure results in a counterpartadjustment in the non-monetary financial account –namely in item “Portuguese portfolio investmentabroad”, in the respective instrument. Recall that this pro-cedure was already used in the calculation of portfolio in-vestment income debit. Second, the utilisation of thedefinitive data on foreign trade in 1996 – meanwhilemade available by the INE – also led to revisions in thecurrent account balance in that year.

(2) In 1997, the item “leads/lags and statistical adjustments”posted again a significant value (PTE -446.9 billion,around 2.5 per cent of GDP).

Chart IV.1BALANCE OF PAYMENTS

Breakdown

-2

-1

0

1

2 A

s a

perc

enta

ge o

f GD

P

1996 1997P

AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA

AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA

AAAAAAAAAAAAAAAAAAAAAA

AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA

AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA

AAAAAAAAAAAAAAAA

AAAA

Current account Non-official financial account(a)Change in net official assets(b)

Notes:(a) Includes leads/lags and statistical adjustments,

and operations currently being classified.(b) A plus (minus) sign indicates a net decrease (in-

crease) of net official reserves.


Balance of payments

Table IV.1

BALANCE OF PAYMENTS — Transactions basis

PTE billion

1996 1997P 1996 1997P

Debit Credit Balance Debit Credit BalanceBalance as a per-centage of GDP

I. Current account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7444.1 7211.8 -232.3 8149.1 7826.9 -322.2 -1.4 -1.8Goods and services . . . . . . . . . . . . . . . . . . . . . . . . . . . 6397.7 5203.7 -1194.0 7079.1 5668.8 -1410.3 -7.2 -7.9

Merchandise f.o.b.(a) . . . . . . . . . . . . . . . . . . . . . . . . 5379.3 3937.0 -1442.3 6009.2 4335.7 -1673.5 -8.6 -9.3Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1018.4 1266.7 248.3 1069.9 1333.1 263.2 1.5 1.5

Transport. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267.3 225.2 -42.1 296.0 232.6 -63.4 -0.3 -0.4Travel and tourism(a). . . . . . . . . . . . . . . . . . . . . . . 351.9 739.1 387.2 379.5 805.3 425.8 2.3 2.4Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49.5 26.4 -23.0 52.0 26.0 -26.0 -0.1 -0.1Other services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302.2 264.3 -37.9 300.8 256.8 -44.0 -0.2 -0.2Government services . . . . . . . . . . . . . . . . . . . . . . . 47.5 11.6 -35.9 41.6 12.4 -29.2 -0.2 -0.2

Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747.4 655.9 -91.5 773.7 687.3 -86.4 -0.5 -0.5Labour income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.9 24.0 11.1 16.4 25.3 8.8 0.1 0.0Investment income (b). . . . . . . . . . . . . . . . . . . . . . . . 694.1 627.9 -66.3 707.3 657.5 -49.8 -0.4 -0.3Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40.3 4.0 -36.3 49.9 4.6 -45.4 -0.2 -0.3

Unrequited transfers . . . . . . . . . . . . . . . . . . . . . . . . . . 299.0 1352.2 1053.2 296.3 1470.8 1174.5 6.3 6.6Official . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232.6 767.5 534.9 243.3 830.3 587.0 3.2 3.3Private . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66.4 584.7 518.3 53.0 640.5 587.4 3.1 3.3

II. Non-official financial account . . . . . . . . . . . . . . . . . 302.3 238.8 1.8 1.3Non-monetary financial account . . . . . . . . . . . . . . . 20776.6 20272.1 -504.4 38108.4 37960.0 -148.4 -3.0 -0.8Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . 766.8 757.9 -8.9 1335.2 1347.8 12.6 -0.1 0.1

Portuguese investment abroad . . . . . . . . . . . . . . 158.3 40.3 -118.0 307.5 17.2 -290.3 -0.7 -1.6Foreign investment in Portugal . . . . . . . . . . . . . 608.5 717.6 109.1 1027.7 1330.6 302.9 0.7 1.7

Portfolio investment(b) . . . . . . . . . . . . . . . . . . . . . . . 12386.4 12111.2 -275.2 24602.6 24815.7 213.0 -1.6 1.2Portuguese investment abroad . . . . . . . . . . . . . . 7517.5 6594.3 -923.1 17422.0 16411.9 -1010.0 -5.5 -5.6Foreign investment in Portugal . . . . . . . . . . . . . . 4869.0 5516.9 647.9 7180.7 8403.7 1223.1 3.9 6.8

External credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3830.3 3704.7 -125.5 3523.5 3502.7 -20.9 -0.8 -0.1Granted to non-residents . . . . . . . . . . . . . . . . . . . 139.6 83.1 -56.5 219.5 202.3 -17.1 -0.3 -0.1Received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3690.7 3621.6 -69.0 3304.1 3300.3 -3.7 -0.4 0.0

Other operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 3793.1 3698.3 -94.7 8647.1 8293.9 -353.1 -0.6 -2.0Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3786.8 3695.1 -91.7 8641.0 8286.9 -354.1 -0.5 -2.0

Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3387.6 3291.2 -96.4 8414.5 8055.8 -358.7 -0.6 -2.0Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399.2 403.9 4.7 226.5 231.1 4.6 0.0 0.0

Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 3.2 -3.0 6.1 7.0 0.9 0.0 0.0

Change in short-term net foreign assets ofbanks(d)(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1248.7 834.2 7.5 4.7

Leads/lags and statistical adjustments(c) . . . . . . . . . -442.0 -446.9 -2.6 -2.5

III. Operations currently being classified . . . . . . . . . . 9.4 14.4 0.1 0.1

IV. Change in net official reserves(e) . . . . . . . . . . . . . . . -79.4 69.0 -0.5 0.4Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -71.1 68.2 -0.4 0.4Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8.4 0.8 -0.1 0.0

Notes:(a) Figures estimated by the Banco de Portugal.(b) Includes adjustments resulting of the accountancy of debits of investment income on a transaction basis.(c) The value of this item includes leads and lags in the settlement of operations involving merchandise and discrepancies at the level of the

systems for gathering statistical information on such operations.(d) The value of this item corresponds to the effect of operations with non-residents on the short-term assets and liabilities of banks, calcula-

ted on the basis of the system for drawing up the balance of payments on a cash basis.(e) A plus (minus) sign indicated a net decrease (net increase) in assets or net increase (net decrease) in liabilities.


Balance of payments

THE PORTUGUESE CURRENT ACCOUNT BETWEEN 1970 AND 1997

The borrowing requirement/ financing capacity ofthe Portuguese economy recorded distinct behavioursbetween 1970 and 1997. In this context, three sub-periods strike out (chart 1)(1). In the early 1970’s, Por-tugal recorded current account surpluses reaching be-tween 0.8 and 3.0 per cent of GDP. In this period, thedynamism of the Portuguese economy translated intoa significant increase in the domestic saving and in-vestment rates.

On the contrary, from the mid-1970’s up to themid-1980’s, the current account almost always postedhigh deficits. In this period the Portuguese current ac-count clearly did not follow a sustainable path, whichresulted in two balance of payments crises. These cri-ses forced to a significant change in the orientation ofeconomic policy — in the context of stabilisationagreements with the International Monetary Fund —which caused a strong slowdown in activity.

The first balance of payments crisis resulted fromthe first oil crisis and from the instability of the post-revolution period. Both events led to a sharp fall in thedomestic saving rate (over 12 percentage points (p.p.)of GDP between 1973 and 1976). The public sector contributed significantly to the fall in the domestic saving rate,passing from a traditional budgetary surplus position to a deficit. The current account exhibited deficits, whichreached a maximum of 8.4 per cent of GDP in 1977. These deficits translated into a significant reduction of net of-ficial reserves. The difficulties in financing external deficits led to the negotiation of an agreement with the IMF,which was put into force between 1977 and 1979. The effects of the stabilisation plan — which included stronglyrestrictive monetary and budgetary measures, as well as a depreciation of the escudo — had fast results. In 1979,the current account was virtually balanced.

However, the second oil crisis in 1979 and the expansionist policies followed by Portugal in this backgroundjeopardised the external balance reached within the IMF stabilisation plan. The decision towards reappreciatingthe escudo in the early 1980’s also contributed to the worsening of the current account balance. The borrowing re-quirement of the Portuguese economy vis-à-vis the rest of the world again increased significantly — reaching 12.9per cent of GDP in 1982 — reflecting a substantial reduction in the domestic saving rate (by 8.4 p.p.), alongsidean increase in the proportion of investment in GDP (by 4.6 p.p. between 1979 and 1982). This new balance of pay-ments crisis led to the second IMF stabilisation programme from 1983 to 1985. The recession that followed, to-gether with the recovery of the world economy, resulted in a current account surplus in 1985.

Since the adhesion of Portugal to the European Economic Community (EEC), the Portuguese current accountbalance has not evidenced a clear trend, maintaining systematically relatively low levels. From 1986 to 1997, thecurrent account was on average balanced. In 1986, the fall in the international oil prices contributed significantly

Chart 1CURRENT ACCOUNT

Balance, investment and domestic saving

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-15

-10

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0

5

10

15

20

25

30

35

40

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-10

-5

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5

10

15

20

25

30

35

40

70 73 76 79 82 85 88 91 94 97P

Domestic saving

Investment

CA

(1) For years comprised in the period 1970-1993, data for the balance of payments were drawn from the “Historical Series for the Por-tuguese Economy”. Data for the period 1994-1997 were subject to recent methodological changes, not encompassed in the Histori-cal Series procedures — namely as regards the calculation of the income account balance on a transactions basis. From 1994onwards, the portfolio investment income debits are calculated on an accrual basis, the same as with the respective credits since1995.


Balance of payments

to the current account surplus recorded that year(3.5 per cent of GDP). In the following years, thecurrent account ranged between a surplus reaching1.5 per cent of GDP, and a deficit of 2.5 per cent ofGDP.

Note that capital inflows recorded in this periodwere quite different from those occurred in the pre-vious period. Between 1979 and 1985, these inflowsconsisted mainly of external credit received, whichresulted in an accumulation of external debt (de-nominated in foreign currency). In contrast, from1986 onwards foreign direct investment and port-folio investment in domestic securities channelledthe bulk of foreign capital inflows to the Portugueseeconomy. An increase in net official reserves andthe redemption of external debt were recorded inthis period as well.

Chart 2 exhibits the behaviour of the main itemsof the Portuguese current account measured as apercentage of GDP. The behaviour of the current account between 1970 to 1997 was chiefly determined by thetrade balance. From 1970 to 1973, the trade deficit amounted to about 7 per cent of GDP on average. Between1974 and 1982, this deficit rose substantially, reaching close to 20 per cent of GDP in 1981 and in 1982. With thesecond stabilisation agreement with the IMF, the deficit was reduced in the following years. In 1986, also reflect-ing the significant gain in terms of trade recorded in the year, the trade deficit reached the lowest level recorded inthe period under scrutiny (6.1 per cent of GDP). The strong growth of the Portuguese economy in the period fol-lowing our integration in the EEC determined some growth of this deficit (which reached 12.6 per cent of GDP in1988). However, since 1993, the trade deficit has remained systematically below 10 per cent of GDP.

The services deficit rendered a surplus in virtually the whole period under analysis, due to the behaviour of thetravel and tourism account. However, after having reached 5 per cent of GDP in 1987, this surplus has come todecrease (1.5 per cent of GDP in 1997). This behaviour is greatly due to the reduction in the tourism surplus(from 5.3 per cent of GDP in 1987 to 2.4 per cent in 1997). In this period, alongside the reduction in the travel andtourism receipts as a share of GDP, a strong growth of Portuguese expenditure on travel and tourism abroad wasrecorded.

The income account recorded a deficit throughout the whole period running from 1970 up to 1997. This defi-cit, which amounted to an average 0.3 per cent of GDP between 1970 and 1973, increased sharply afterwards.This increase was linked to the reduction in the income from net official reserves (which had diminished stronglyduring the first balance of payments crisis) and to the increase of the payment of interest due to external debt(which increased strikingly between 1978 and 1985). The deficit reached a maximum in 1984 (6.2 per cent ofGDP). In the following years, the external debt redemption policy and the increase in net official reserves resultedin a reduction of the income account deficit. Since the early 1990’s this deficit has remained below 1 per cent ofGDP. In 1997, the income account deficit stood at 0.5 per cent of GDP.

In the period running from 1970 up to 1997, the unrequited transfers surplus amounted to around 8 per centof GDP on average. However, this surplus has decreased from the early 1980’s onwards. Up to 1986, these trans-fers consisted mainly of emigrants’ remittances. The progressive loss of importance of private transfers — fromaround 10.0 per cent of GDP in 1980 to 3.3 per cent in 1997 — chiefly results from the reduction in the emigra-tion flows. This reduction has been partly compensated by the behaviour of public transfers, which have grown asa proportion of GDP since the Portuguese integration in the EEC (3.3 per cent of GDP in 1997).

Chart 2CURRENT ACCOUNT

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10

15

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-10

-5

0

5

10

15

70 73 76 79 82 85 88 91 94 97P

CA

Services

Trade

Private transfers

Income

Publictransfers

this year, due to both net placements in depos-its and net purchases of foreign securities.Non-residents’ net investments in Portugalalso increased — mostly due to portfolio in-vestments in domestic securities. Worth notingthe significant increase in non-residents’ de-mand for shares and escudo-denominatedfixed-rate securitised public debt, in a contextof an increasing optimism regarding the Portu-guese economy. In 1997, the Portuguese Statecontinued to issue public debt bonds and com-mercial paper in external markets, which werepurchased by non-residents. As in the previousyears, credits and debits of direct investmentoperations again recorded similar values, withboth inflows and outflows recording strong in-creases in 1997.

2. Current account

In 1997, the borrowing requirement of thePortuguese economy amounted to 1.8 per centof GDP, compared to 1.4 per cent in 1996. Thisreflects the strong acceleration of investmentthis year. Indeed, investment exhibited a muchstronger growth than domestic savings (theshare of investment in GDP increased by about1.5 p.p. in 1997). The private sector accountedfor the greatest share of external saving utilisa-tion, since the progresses in terms of budgetaryconsolidation again translated into a reductionin the borrowing requirement of GG.

The deterioration of the current accountdeficit in 1997 mainly resulted from the in-creased deficit in the merchandise trade ac-count. This deficit increased by 0.7 p.p. in 1997,reaching 9.3 per cent of GDP. This increase waspartly compensated by the growth of unre-quited transfers, from 6.3 to 6.6 per cent of GDP(table IV.1).

In 1997, the increase in the trade accountdeficit (fob-fob) was determined by the devel-opment of both export and import volumes(chart IV.2). The real growth of imports ex-ceeded that of exports, reflecting the greaterdynamism of domestic demand in Portugal,when compared to our leading trade part-ners(3). It should be noted that the change in

terms of trade in the merchandise trade in 1997contributed to a reduction of the deficit.


Balance of payments

Chart IV.2CHANGE IN THE TRADE BALANCE

BREAKDOWN(a)

-250

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-150

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-50

0

50

PT

E b

illio

n

1996 1997 P

Total change(b)

Volumeeffect

Price effect Terms oftrade effect

Source: Banco de Portugal and Direcção-Geral de Re-lações Económicas Internacionais.

Notes:(a) The change in the trade balance can be broken-

down into:— a volume effect: effect of the change of expor-

ted and imported volumes[Xt-1.Vxt.(1+Pxt)]-(Mt-1.Vmt.(1+Pmt)

— a price effect: effect of the average growth ofprices of external trade

(Xt-1.Pt)-(Mt-1.Pt)— a terms of trade effect: effect of relative change

in export and import prices[Xt-1.(Px1-Pt)]-(Mt-1.(Pmt-Pt)]beingXt-1 and Mt-1 - exports and imports of year t-1,at current pricesVxt and Vmt - growth of exports and importsprices, in year tPt = [(Pxt + Pmt)/2] - average growth of exter-nal trade prices in year tNote that the volume effect includes the pri-ce-volume cross effect, hence making that thesum of all three effects add up to total chan-ge. Nevertheless, the cross-effect is not signi-ficant.

(b) A negative change means an increase of the defi-cit of the trade balance.

(3) For a more detailed analysis of the trade between Portu-gal and the rest of the world see chapter III — Prices, de-mand, output and labour market (section 2.4) in this report.

The surplus of services remained un-changed at 1.5 per cent of GDP. The increase inthe travel and tourism surplus was compen-sated by the deficit worsening in the remainingservices. Among these, the transports deficitagain increased in 1997, reflecting an increasein payments to the rest of the world above thatof receipts due to services rendered — namelyin the maritime and land transports segments.The increase in payments reflects the accelera-tion of merchandise imports, since freight andtransport services are mostly contracted in thecountries of origin of merchandise.

The travel and tourism surplus rose from2.3 per cent of GDP in 1996 to 2.4 per cent in1997. This development resulted from a strongrecovery of nominal travel and tourism re-ceipts and from a more moderate increase inPortuguese nominal expenditure abroad (tableIV.2). The acceleration of tourism receipts wascommon to most tourist destinations in Medi-terranean Europe in 1997. This improvementwas in general accompanied by an accelerationof arrivals of foreigners compared to 1996. InPortugal, real indicators point towards a recov-ery of bednights by foreigners in hotels and


Balance of payments

Table IV.2

TRAVEL AND TOURISM

Rates of change

Percentage

1994 1995 1996 1997P

Receipts

Travel and tourism receipts (nominal terms) . . . . . . . . . . . . . . . . . . . . . 4.1 6.8 1.6 9.0Travel and tourism receipts (real terms) . . . . . . . . . . . . . . . . . . . . . . . . . -1.3 3.0 -1.1 7.0

Nominal effective exchange rate(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -4.1 2.0 -0.5 -1.9External income(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 2.6 2.2 3.1

Pour mémoire:Arrival of foreigners(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7 6.0 0.8 3.2Nights spent by foreigners in hotels and similar establishments . . 16.1 8.4 -2.3 3.9

International comparison

Tourism receipts (in national currency) . . . . . . . . . . . . . . . . . . . . . . . . .France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 0.4 5.7 12.6Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.4 9.9 10.3 11.2Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5 16.7 -0.9 10.4Greece . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.7 1.0 6.1 n.d.

Arrival of foreigners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 -2.0 3.8 7.0Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6 0.0 5.0 7.1Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 13.0 6.0 3.8Greece . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.8 -5.4 -11.2 11.0

Expenditure

Travel and tourism expenditure (nominal terms) . . . . . . . . . . . . . . . . -7.5 12.3 11.1 7.8Travel and tourism expenditure (real terms) . . . . . . . . . . . . . . . . . . . . -12.1 11.8 8.5 4.9

Source: WTO, OECD, INE, Direcção-Geral do Turismo and Banco de Portugal.Notes:(a) A positive change means an appreciation of the escudo.(b) Average real growth rate of GDP of the six countries that contribute the most to total foreign visitors, weighted by the relative proporti-

on of number of visitors.(c) 1997 — year-on-year rate of change in the January-May period.

similar establishments. Tourism receipts areestimated to have grown by 7.0 per cent in realterms, following a 1.1 per cent decrease in 1996.The recovery of receipts reflects the increase ineconomic growth in the European economies— the main countries of origin of foreign visi-tors. The accumulated appreciation of the Ster-ling is also estimated to have had a favourableimpact over tourism receipts, given the highshare of British tourists in total foreign visitors.Portuguese expenditure on travel and tourismgrew by 4.9 per cent in real terms, thus account-ing for a slowdown in relation to 1995 and 1996(table IV.2). This development is possiblylinked to some deviation from consumptionexpenditure abroad to Portugal.

In 1997, the income deficit on a transactionsbasis remained unchanged at 0.5 per cent ofGDP(4). While the deficit of other income wors-ened, the investment income deficit decreased.The lower deficit of the investment income ac-count is due to the reduction in net payments ofincome from credit operations, and to the in-crease in net receipts of portfolio investmentincome (chart IV.3). The loss of importance ofcredits received from abroad as a means of fi-nancing the economy explains the trend of re-duction of net payments due to these opera-

tions. On the contrary, portfolio investmentflows have gained importance, determining asharp increase in both income paid and incomereceived. The surplus recorded in this segmentchiefly reflects the fact that the stock of foreignsecurities held by residents — including in-vestments in foreign securities by the Banco dePortugal — continued to be greater than thestock of domestic securities held by non-residents. Regarding income from deposit op-erations, a small deficit was recorded in 1997,following the continuing reduction in sur-pluses recorded in previous years. This devel-opment is compatible with the reduction inbanks’ net foreign assets — mainly deposits —in recent years.

In 1997, unrequited transfers reached 6.6per cent of GDP, which compares to 6.3 percent in 1996. Both net public and net privatetransfers received increased this year. Nettransfers from the EU — which account forclose to 95 per cent of total public transfers —grew by around 8.5 per cent. This growth waspartly due to lags in 1996 receipts. Indeed, re-ceipts associated to the Cohesion Fund in-creased from PTE 37.6 billion in 1996 to PTE116.0 billion in 1997. As a result the publictransfers balance amounted to 3.3 per cent ofGDP. Private transfers also reached 3.3 per centof GDP, 0.2 p.p. more than in 1996. The growthof emigrants’ remittances in 1997 — 12.6 percent growth when measured in escudos — waspartly determined by the appreciation of theUS and Canadian dollars, and of the Sterling.

3. Non-official capital movements

In 1997, the non-official financial account —which comprises non-monetary financialmovements, changes in short-term net foreignassets of banks and leads/lags and statisticaladjustments — posted a surplus amounting to1.3 per cent of GDP (table IV.1). The non-monetary financial account recorded a deficitreaching 0.8 per cent of GDP in 1997, against3.0 per cent in 1996. The greatest non-monetaryfinancial inflows and outflows in 1997 werethose corresponding to portfolio investments(chart IV.4). Indeed, investment of non-


Balance of payments

Chart IV.3INVESTMENT INCOME: BREAKDOWN

Balance on a transactions basis

-1

-0.5

0

0.5

1

As

a pe

rcen

tage

of G

DP

1996 1997 P

fromdirectinvest-ment

fromportfolioinvest-ment

fromcredits

fromdeposits

OthersInvestmentincome

(4) See footnote 1.

residents in national securities almost multi-plied twofold in relation to 1996, reflecting thefavourable conditions in the financial and for-eign exchange markets. Both inflows and out-flows of direct investment also increased in1997. Finally, the increase in residents’ invest-ments in deposits abroad should also be noted.As in the previous year, the current accountand the non-monetary financial account defi-cits recorded in 1997 were chiefly reflected in areduction in net foreign assets held by Portu-guese banks, amounting to 4.7 per cent of GDP(7.5 per cent in 1996).

Non-monetary financial movements be-tween Portugal and abroad recorded signifi-cant changes throughout the last decade. Theseresulted from the increasing integration of the

Portuguese economy in the international finan-cial trends and from the liberalisation of capitalmovements (chart IV.4). From 1987 up to 1992,the greatest capital inflows consisted of foreigndirect investment; the sharp growth of this seg-ment was induced by the Portuguese adhesionto the European Community and by the strongexpansion of the Portuguese economythroughout this period. From 1993 onwards,when the process of liberalisation of capitalmovements was completed, a strong growth ofnon-residents’ portfolio investments in Portu-gal was recorded. Thereafter, portfolio invest-ments became the main vehicle of non-monetary capital inflows in the economy (seeBox: Some aspects of the Portuguese financial inte-gration, Chapter VII). Non-monetary financialoutflows also recorded a significant increase inthe period. Residents took profit from the in-vestment opportunities abroad created by theliberalisation of capital movements. Residents’portfolio investment abroad also became themain segment of non-monetary financial out-flows. The diversification of residents’ interna-tional portfolio also translated into new depos-its abroad. Finally, the internationalisation ef-fort carried out by Portuguese firms should bementioned. This effort was reflected in thegrowth of direct investment abroad in the pe-riod.

Direct investment

In 1997, the amounts of foreign direct in-vestment in Portugal and of Portuguese directinvestment abroad increased significantly.However, as in the two previous years, bothamounts were quite similar, resulting in an in-expressive surplus in the direct investment ac-count (0.1 per cent of GDP in 1997, against a 0.1per cent deficit in 1996).

Foreign direct investment received by thePortuguese economy reached 1.7 per cent ofGDP in 1997 (0.7 per cent in 1996). Excludingshort-term loans and additional capital fromtotal foreign direct investment — which have avirtually null impact on the balance — the bulkof foreign direct investment net inflows in 1997is explained by a strong increase in gross in-


Balance of payments

Chart IV.4NON-MONETARY FINANCIAL ACCOUNT

Residents’ investment abroad

-10

-8

-6

-4

-2

0

2

4

As

a pe

rcen

tage

of G

DP

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997P

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AAAADeposits

Direct investment Portfolio investment

(-) Net outflows of capital

(+) Net inflows of capital

Foreign investment in Portugal

-4

-2

0

2

4

6

8

10

As

a pe

rcen

tage

of G

DP

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997P

Credit received Direct investment Portfolio investment

(-) Net outflows of capital

(+) Net inflows of capital

vestment. This year, foreign direct investmentwas received in virtually equal parts by thewholesale and retail trade, restaurants and ho-tels sector, the financial sector and the trans-ports, storage and communications sector. Aconsiderable proportion of total investmentwas due to privatisation operations (around 40per cent of total investment). Investment fromthe European Union countries accounted for63.3 per cent of total foreign direct investmentin Portugal in 1997, among which those fromSpain and Germany should be singled out (26.0and 12.9 per cent of total investment, respec-tively). Direct investment from the USA is alsoworth noting (26.6 per cent of total direct in-vestment).

Portuguese direct investment abroad in-creased significantly, from 0.7 per cent of GDPin 1996, to 1.6 per cent in 1997. This increase —resulting from a strong growth of gross invest-ment and from a reduction in disinvestments— was favoured by the strong dynamism of

domestic activity. Both the acquisition of eq-uity capital and the strengthening of invest-ments continued to be the forms preferred byPortuguese companies to internationalise.Countries outside the OECD — with particularevidence to Brazil — continued receiving a sig-nificant share in total Portuguese direct invest-ment abroad (around 48 per cent), although be-low that recorded in 1996. A significant part ofinvestment in Brazil was concentrated inmanufacturing. Investment in the EU countriesaccounted for 49.1 per cent of total investment(29.9 per cent in 1996). In this context, invest-ments in Ireland — especially those suppliedby the Portuguese financial sector — and inSpain — by the transports, storage and com-munications sector — should be highlighted.

Portfolio investment and deposits

In 1997, portfolio investment operationswith abroad recorded a surplus. On a transac-


Balance of payments

Table IV.3

PORTFOLIO INVESTMENT

On a transactions basis

PTE billion

1996 1997P 1996 1997P

Debit Credit Balance Debit Credit BalanceBalance as a

percentage of GDP

Portfolio investment(a) . . . . . . . . . . . . . . . . . . . . . . . . 12386.4 12111.2 -275.2 24602.6 24815.7 213.0 -1.6 1.2From Portugal abroad . . . . . . . . . . . . . . . . . . . . . . . . 7517.5 6594.3 -923.1 17422 16411.9 -1010.0 -5.5 -5.6

Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182.0 176.9 -5.0 529.3 419.4 -109.9 0.0 -0.6Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4222.5 3456.1 -766.4 14310.7 13212.2 -1098.4 -4.6 -6.1Short-term securities(b). . . . . . . . . . . . . . . . . . . . 1986.7 1972.4 -14.3 483.3 699.7 216.4 -0.1 1.2Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . 1126.2 988.8 -137.4 2098.7 2080.6 -18.1 -0.8 -0.1

Foreign investment in Portugal . . . . . . . . . . . . . . 4869.0 5516.9 647.9 7180.7 8403.7 1223.1 3.9 6.8Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 778.8 1079.1 300.3 2846.0 3297.9 451.9 1.8 2.5Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3739.2 4156.9 417.7 3756.9 4479.4 722.5 2.5 4.0of which:Public debt bonds issued in thedomestic market . . . . . . . . . . . . . . . . . . . . . . 2915.3 3008.3 93.0 2347.8 2691.2 343.4 0.6 1.9

Fixed-rate . . . . . . . . . . . . . . . . . . . . . . . 960.7 1001.8 41.1 1264.9 1552.1 287.1 0.2 1.6Indexed-rate . . . . . . . . . . . . . . . . . . . . . 1954.6 2006.5 51.9 1082.9 1139.1 56.2 0.3 0.3

Public debt bonds issued in externalmarkets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153.9 436.4 282.5 129.8 528.2 398.4 1.7 2.2

Short-term securities(a). . . . . . . . . . . . . . . . . . . . 336.8 272.4 -64.3 548.6 602.7 54.1 -0.4 0.3of which:

Commercial paper issued by thePortuguese State . . . . . . . . . . . . . . . . . . . . . 131.9 65.0 -66.8 207.3 233.9 26.6 -0.4 0.1

Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . 14.2 8.4 -5.7 29.2 23.7 -5.5 0.0 0.0

Notes:(a) Includes adjustments resulting of the accountancy of portfolio investment income on a transaction basis.(b) Includes Treasury bills, commercial paper, deposit certificates and other short-term securities of maturity up to one year.

tions basis, this surplus reached 1.2 per cent ofGDP (comparing to a 1.6 per cent deficit in1996) (table IV.3). This surplus was determinedby the strong growth of non-residents’ net in-vestments in domestic securities, amounting to6.8 per cent of GDP (3.9 per cent in the previousyear). Residents’ net investments in foreign se-curities increased by less than the former, from5.5 to 5.6 per cent of GDP. Transactions of secu-rities between residents and non-residents —purchase and sale operations — almost multi-plied twofold in relation to 1996, reaching quitesignificant amounts, in line with the recent de-velopments in these flows.

The increase in non-residents’ net portfolioinvestments was common to most domestic se-curities; in this context, the strong increase innet investment in both shares and public bondsshould be highlighted. Net investment in do-mestic shares reached 2.5 per cent of GDP,against 1.8 per cent in 1996. The greatest net in-vestments of non-residents in the PortugueseStock Market continued being associated toprivatisation operations. Among these, pur-chases in June (PTE 112.3 billion), in October(PTE 125.4 billion) and in November (36.3 bil-lion) should be singled out. Non-residents’ in-terest has also been stimulated by the increasein the market capitalisation — resulting fromthe rise in share prices as from the listing ofnew shares — and in the liquidity of the Portu-guese Stock Market. In 1997, the domesticshare market received international recogni-tion as being a developed market; the leadingshares listed in the Lisbon Stock Exchange nowintegrate the Morgan Stanley Capital Interna-tional indexes for the developed markets. Thepressure of demand conducted by the non-resident investors shall have contributed to thesignificant rise in the Lisbon Stock Exchangeshare price index between the end of 1996 andthe end of 1997.

In 1997, non-residents’ net investment inpublic debt bonds issued in the domestic mar-ket (in escudos) was clearly greater than in theprevious year. This increase reflects the growthof net investment in fixed-rate bonds, which inturn indicates a greater optimism regardingthe Portuguese economy, in a context of in-

creasing yields in this segment. Regardingindexed-rate bonds, non-residents’ invest-ments maintained the same level of 1996; op-erations on these bonds continued exhibiting ahigh volatility. Net purchases of foreigncurrency-denominated public debt bonds bynon-residents increased. This development re-flects the growth of the State’s issuing of securi-tised debt abroad(5). The Portuguese State alsocontinued issuing commercial paper in foreigncurrency. These securities were fully pur-chased by non-residents.

At the end of 1997, the stock of domestic se-curities held by non-residents reached 29.4 percent of GDP (18.8 per cent at the end of 1996).The stock of shares as a percentage of GDP rosefrom 5.9 to 12.7 per cent. This development wasdue to both the investment made in the year,and the significant rise in share prices through-out the whole year. As a result, the proportionof shares in non-residents’ portfolio increasedfrom around 30 per cent to over 40 per cent.The stock of domestic bonds held by non-residents also increased from 12.5 per cent ofGDP in 1996 to 16.0 per cent at the end of 1997,chiefly due to investments made throughoutthe year. Both the stock of foreign currency-denominated bonds and the stock of escudo-denominated public debt securities increasedin 1997. It should be noted that the growth ofthe latter was limited to fixed-rate bonds, sincethe value of the stock of indexed-rate securitiesdecreased. All non-resident investing sectorsincreased their stocks of domestic securities be-tween the end of 1996 and the end of 1997. Inparticular, foreign banks’ securities portfoliosdoubled; as a result, the share of foreign banksin total non-residents’ portfolio rose fromabout 50 per cent to around 60 per cent.

The portfolio investment by residentsabroad amounted to 5.6 per cent of GDP in1997. Residents continued to invest basically inbonds (table IV.3). In this segment, investors


Balance of payments

(5) Issuing in April (PTE 89.4 billion, denominated in Frenchfrancs), September (PTE 72.9 billion, denominated in lira)and November (PTE 126.0 billion, in Deutsche marks andUS dollars) are worth being singled out.

continued to prefer escudo-denominatedbonds issued by non-resident entities (around85 per cent). Resident banks, investment funds,and to a lesser extent, insurance companies andpension funds accounted for these invest-ments. As regards short-term securitiesabroad, a net disinvestment was recorded in1997, determined by the performance of do-mestic investment funds. Residents also car-ried net investments in shares, a segment usu-ally given little importance in residents’ portfo-lio of foreign securities. On the other hand,residents decreased their net investment in in-vestment trusts settled abroad, mainly escudodenominated.

According to estimates of the Banco de Por-tugal, the stock of residents’ portfolio of for-eign securities amounted to 25.0 per cent ofGDP at the end of 1997, comparing to 18.1 percent at the end of 1996(6). These investmentsconcentrated in long-term debt securities(around 77 per cent). Short-term securities ac-counted for 12.0 per cent of total portfolio in-vestment abroad, although these investmentshave come to lose importance. On the otherhand, equity investment — shares and invest-ment trust units — have increased as a propor-tion of residents’ total portfolio investment inforeign securities (around 10 per cent at the endof 1997).

In addition to the purchase of securities,non-bank residents also invested in deposits in1997. As a percentage of GDP, net investmentsin deposits reached 2.0 per cent of GDP (0.6 percent in 1996). The rise in escudo-denominateddeposits surpassed that of deposits denomi-nated in foreign currency. Worth noting thatthe overall amounts transacted in these ac-counts — constitution of deposits and with-drawals — increased significantly in 1997.

External credit

In 1997, credit operations between residentsand non-residents gave rise to a capital outflowlower than in 1996 (amounting to 0.1 and 0.8per cent of GDP, respectively). Credits grantedto the rest of the world recorded an inexpress-ive value. External credit received by the Por-

tuguese economy in 1997 recorded a small netrepayment, resulting from a virtual compensa-tion of short-term credit constitution by long-term credit repayment (chart IV.5). In thelong-term credit segment, net credit constitu-tion by the General Government (GG) and bynon-financial public enterprises (NFPE) fellshort of credit repayments carried out by theremaining resident sectors. Net credit constitu-tion in the short-term credit segment was de-


Balance of payments

(6) This estimate was obtained from the accumulation of theflows of residents’ portfolio investment abroad; the re-sulting stocks were adjusted for price and exchangechanges. Worth noting that this stock does not include theinvestment of the Banco de Portugal in foreign securities.

Chart IV.5EXTERNAL CREDITS RECEIVED

Balance by main borrowing sectorsLong-term

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

As

a pe

rcen

tage

of G

DP

Net credit constitution (+)

Net credit repayment (-)

GG BanksandNBFI

NFPE ONFPETotal

Short-term

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

As

a pe

rcen

tage

of G

DP

1996 1997 P

Net credit constitution (+)

Net credit repayments (-)

NBFI NFPE ONFPETotal

termined by the resident non-financial publicenterprises (NFPE).

The stock of external credit received by thePortuguese economy decreased from 15.2 percent of GDP to 14.5 per cent, between the end of1996 and the end of 1997. The reduction wouldhave been greater if exchange fluctuations —which rose the value of escudo-denominateddebt — had not occurred.

Change in bank’s short-term net externalposition

In 1997, as in recent years, the deficits result-ing from current and capital operations be-tween the domestic non-monetary sector andthe rest of the world had, as a counterpart, a re-duction in bank’s short-term net foreign assets.This year, domestic banks’ short-term foreignliabilities recorded a stronger increase thanbanks’ short-term foreign assets. The increase

in net liabilities chiefly resulted from time de-posits — in foreign currency as in escudos —and external credit received — basically in es-


Balance of payments

Chart IV.6CHANGE IN THE SHORT-TERM

NET FOREIGN ASSETS OF BANKS

-800

-600

-400

-200

0

200

400

600

800

PT

E b

illio

n

Jan95 Apr Jul Oct Jan96 Apr Jul Oct Jan97 Apr Jul Oct

Change in short-term net foreignassets of banks

Non-residents' investment inpublic debt bonds issued indomestic market

(+) Capital inflows

(-) Capital outflows

Table IV.4

NET OFFICIAL RESERVES(a)

End-of-period outstanding amounts

PTE billion USD million

1995 1996 1997 1995 1996 1997

I. Net official reserves (II - III)With gold at book value . . . . . . . . . . . . . . . . . . . . . . . . . . . 3095.8 3226.5 3438.0 20719 20633 18754With gold at market price. . . . . . . . . . . . . . . . . . . . . . . . . . 3243.8 3338.8 3377.8 21710 21351 18426

II. AssetsWith gold at book value . . . . . . . . . . . . . . . . . . . . . . . . . . 3137.3 3259.6 3473.0 20997 20844 18945With gold at market price. . . . . . . . . . . . . . . . . . . . . . . . . 3285.4 3371.9 3412.9 21988 21562 18617Gold (b)

At book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 775.3 780.9 598.5 5189 4993 3265At market price . . . . . . . . . . . . . . . . . . . . . . . . . . . 923.4 893.1 538.4 6180 5711 2937

Foreign currencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1955.4 2034.6 2367.3 13088 13010 12913Official ECU. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321.4 350.2 405.1 2151 2239 2210Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85.1 93.9 102.1 569 602 557

III. Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41.5 33.1 35.0 278 211 191

Pour mémoire:Gold in thousand troy ounces (c) . . . . . . . . . . . . . . . . . . . . . . . 20082 20084 20085 20082 20084 20085

of which: goldswaps with EMI . . . . . . . . . . . . . . . . . . . . . 4016 4017 4017 4016 4017 4017Official ECU (millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1678 1803 2004 1678 1803 2004

Notes:(a) Assets and liabilities of Monetary Authorities (Banco de Portugal and Treasury).(b) From May 1988 onwards the book value of gold is USD 323 per troy ounce. Since December 1986 the market price is determined fol-

lowing the valorisation principle of the European Monetary Cooperation Fund (EMCF)/European Monetary Institute (IME) average ofthe two daily quotations on the London market in the last six months, every time this average is lower than the average of quotations onthe months.

(c) Includes the gold allocated to swap operations.

cudos. As in previous years, the increase in netliabilities was particularly sharp in escudos in1997. This year, the change in domestic banks’short-term net foreign assets was determinedby the reduction of banks’ net external assetsvis-à-vis foreign banks.

Throughout the year, the behaviour ofbanks’ short-term net foreign assets continuedto be greatly linked to portfolio operations —specially on bonds issued in the domestic mar-ket — carried out between resident banks andnon-resident entities. Chart IV.6 depicts thesymmetric relationship between non-residents’ portfolio investment in public debtbonds issued in escudos and the change in theshort-term foreign assets of banks in recentyears.

4. Official reserves

The stock of net official reserves, measuredin escudos and with gold at book value, de-creased from 19.3 to 19.2 per cent of GDP be-tween the end of 1996 and the end of 1997.However, net official reserves increased byPTE 211.4 billion in value terms, mainly reflect-ing an increase in liabilities denominated inforeign currency, due to the appreciation of theUS dollar (table IV.4). Total net official reservesdenominated in US dollars diminished USD1,879 million, to USD 18,757 million at the endof 1997.


Balance of payments

Table IV.5

NET EXTERNAL POSITION

End-of-period outstanding amounts

PTE billion As a percentage of GDP

1995 1996 1997 P 1995 1996 1997P

I. Net external position (II - III) . . . . . . . . . . . . . . . . . . . 1249.4 1768.2 2274.6 8.0 10.6 12.7II. Net foreign assets . . . . . . . . . . . . . . . . . . . . . . . . 10559.4 12156.4 16684.8 67.2 72.8 93.1III. Foreign liabilities. . . . . . . . . . . . . . . . . . . . . . . . 9310.1 10388.2 14410.2 59.3 62.2 80.4

Non-monetary sector . . . . . . . . . . . . . . . . . . . . . . . . . . . -2367.8 -1540.4 -1037.3 -15.1 -9.2 -5.8Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2054.9 3032.3 4483.9 13.1 18.2 25.0

Deposits (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1119.7 1412.3 2142.3 7.1 8.5 12.0Securities held by residents(b) . . . . . . . . . . . . . 935.2 1620.0 2341.6 6.0 9.7 13.1

Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4422.7 4572.7 5521.2 28.2 27.4 30.8Included in the debt . . . . . . . . . . . . . . . . . . . . . 2513.4 2453.1 2562.8 16.0 14.7 14.3Securities held by non-residents(b) . . . . . . . . . 1909.4 2119.6 2958.4 12.2 12.7 16.5

Monetary sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3617.2 3308.6 3311.9 23.0 19.8 18.5Monetary authority . . . . . . . . . . . . . . . . . . . . . . . . . . . 3095.8 3226.5 3438.0 19.7 19.3 19.2

Assets(c). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3137.3 3259.6 3473.0 20.0 19.5 19.4Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41.5 33.1 35.0 0.3 0.2 0.2

Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 521.4 82.1 -126.0 3.3 0.5 -0.7Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -216.9 -1041.0 -1632.3 -1.4 -6.2 -9.1

Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4280.9 4357.9 5534.5 27.3 26.1 30.9Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4497.9 5398.9 7166.8 28.6 32.3 40.0

Medium and long-term . . . . . . . . . . . . . . . . . . . . . . . 738.3 1123.1 1506.3 4.7 6.7 8.4Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1086.3 1506.5 3193.4 6.9 9.0 17.8Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348.0 383.5 1687.1 2.2 2.3 9.4

Pour mémoire:Net foreign assets of the monetary sector (d) . . . . . . . 2878.8 2185.6 1805.7 18.3 13.1 10.1

Notes:(a) Residents’ deposits in non-resident credit institutions (Source: BIS).(b) Long-term debt securities and short-term securities.(c) Assets of the Banco de Portugal and Treasury, with gold at book value.(d) Net external position of the Monetary Authority and short-term net foreign assets of banks.

5. Net external position

According to the available data, the Portu-guese economy remained as a net creditor vis-à-vis the rest of the world in 1997. Net externalposition amounted to 12.7 per cent of GDP(7)

(table IV. 5).The net external debtor position of the non-

monetary domestic sector decreased from 9.1per cent of GDP to 5.8 per cent. Worth notingthat both assets and liabilities in this sector ex-hibited significant changes: residents’ foreignassets in the form of deposits increased strik-

ingly (from 8.5 to 12.0 per cent of GDP). Bothdomestic securities in non-residents’ portfolioand foreign securities held by the residentnon-banking sector also increased strongly(8),reaching respectively 16.5 and 13.1 per cent ofGDP in 1997 (12.7 and 9.7 per cent in 1996). Asregards other liabilities, external credit re-ceived by the non-monetary sector decreasedfrom 14.7 to 14.3 per cent of GDP.

The reduction in banks’ short-term net for-eign assets in 1997— that continued the trendobserved in previous years — was partly offsetby an increase in medium- and long-term netforeign assets — namely foreign securities.Nevertheless, this sector became a debtor vis-à-vis the rest of the world, equivalent to 0.7 percent of GDP at the end of 1997 (as against acreditor position amounting to 0.5 per cent ofGDP at the end of 1996). The net external posi-tion of the monetary authority also decreasedslightly as a percentage of GDP, from 19.3 to19.2 per cent.

Portugal continued to be one of the fewcountries of the European Union exhibiting anet creditor position vis-à-vis the rest of theworld in 1997(9) (chart IV.7).


Balance of payments

(7) Note, however, that there is a set of assets and liabilitieswhich is not taken into account in the net external posi-tion analysed. Particularly, there is no available data onthe outstanding amounts resulting of direct investmentoperations in Portugal and abroad.

(8) The portfolio considered in the net external position onlycomprise long-term debt securities and short-term secu-rities (therefore not including equity investment).

(9) See footnote (7). Scandinavian countries were not in-cluded in the chart. In 1997, Denmark, Finland and Swe-den were net debtors vis-à-vis the rest of the world by23.1, 45.7 and 47.1 per cent of the respective GDP.

Chart IV.7NET EXTERNAL POSITION(a)

INTERNATIONAL COMPARISONEnd-of-period

-20

-10

0

10

20

30

As

a pe

rcen

tage

of G

DP

Portugal SPA GRE AUS ITA FRA GER UK NL BEL

1995 1996 1997 P

Source: Banco de Portugal and European MonetaryInstitute.

Note:(a) Position of international investment as defined

by the International Monetary Fund, or similarly.

Chap ter V

PUBLIC FINANCE(1)

1. In tro duc ti on

In 1997, budg et ary defi cits de creased in allEuro pean Un ion (EU) Mem ber States, ex ceptfor Lux em bourg. Pub lic defi cit reached onav er age 2.4 per cent of GDP (4.2 per cent in1996) (ta ble V.1). Den mark, Ire land and Lux -em bourg even reached sur pluses. The ref er -ence value, fixed at 3 per cent of GDP, was onlysur passed by Greece (chart V.1). For the firsttime in the 1990’s, the pub lic debt ra tio de -creased in the EU as a whole, from 73 to 72.1per cent of GDP. Ex cept for France, Ger manyand Lux em bourg, all of which stand close oreven be low the re spec tive ref er ence value (60per cent of GDP), all Mem ber States had theirpub lic debt ra tios re duced in 1997 (ta ble V.1).How ever, Bel gium, It aly and Greece con tinueto ex hibit debt ra tios over 100 per cent of GDP.Por tu gal re corded a defi cit (as a per cent age ofGDP) quite close to the EU av er age, and a debtra tio clearly be low the EU av er age.

Fol low ing the rec om men da tions of theEuro pean Com mis sion — based on the Con -ver gence Re ports of the Com mis sion it self andthe Euro pean Mone tary In sti tute (dis closed on25 March 1998) — the Ecofin Coun cil of 1 May1998 de cided that only Greece pre sented an ex -ces sive defi cit situa tion.

The Gen eral Gov ern ment defi cit in Por tu -gal, on a Na tional Ac counts ba sis, stood at PTE


Public finance

Chart V.1FISCAL CONVERGENCEEuropean Union 1997

40

60

80

100

120

140

-1 0 1 2 3 4 5 6 7GG overall deficit

(as a percentage of GDP)

Pub

lic d

ebt

(as

a pe

rcen

tage

of G

DP

)

Den

Ire

Bel

Fin

Net

Ger

Gre

Fra

Ita

Por

AusSwe

UK

EUSpa

Sour ce: Eu ro pean Commis si on.Note: Lu xem bourg was not in clu ded.

Chart V.2FISCAL CONVERGENCE

Portugal 1993-1997

40

60

80

0 1 2 3 4 5 6 7GG overall deficit


Pub

lic d

ebt

(as

a pe

rcen

tage

of G

DP

)

95

94 939697

Sour ce: Mi nis té rio das Fi nan ças and Ban co de Por tu gal.

(1) Ex cep ting men tions otherwi se, the Ge ne ral Go vernmentNa ti o nal Ac counts — in clu ding no mi nal GDP in le vels —and the pu blic debt sta tis tics used in this chap ter are tho se that suppor ted the Por tu gue se offi ci al no ti fi ca ti on to theEu ro pean Commis si on on 28 Fe bruary 1998. The main ex -cep ti on is in for ma ti on on fis cal de ve lopments in the Eu ro -pean Union, who se sour ce is the Eu ro pean Commis si on.

435.1 bil lion, reach ing 2.5 per cent of GDP (5.7and 3.2 per cent in 1995 and 1996, re spec tively)(ta ble V.2 and Charts V.2 and V.3). This fig ure

falls short of the budg et ary pro jec tion, by 0.4per cent age points. This de vel op ment partly re -flects the more fa vour able mac roeconomic en -


Public finance

Ta ble V.1

FISCAL CONVERGENCE

Eu ro pean Union 1996-1999

As a per cen ta ge of GDP

Ge ne ral Go vernment ba lan ce Pu blic debt

1996 1997(b) 1998(c) 1999(d) 1996 1997(b) 1998(c) 1999(d)

Belgium . . . . . . . . . . . . . . . . . . . . . -3.2 -2.1 -1.7 -1.4 126.9 122.2 118.1 114.2Denmark(a) . . . . . . . . . . . . . . . . . . -0.7 0.7 1.1 1.7 70.6 65.1 59.5 55.3Germany . . . . . . . . . . . . . . . . . . . . -3.4 -2.7 -2.5 -2.2 60.4 61.3 61.2 60.7Greece . . . . . . . . . . . . . . . . . . . . . . -7.5 -4.0 -2.2 -2.0 111.6 108.7 107.7 104.5Spain . . . . . . . . . . . . . . . . . . . . . . . -4.6 -2.6 -2.2 -1.9 70.1 68.8 67.4 65.8France . . . . . . . . . . . . . . . . . . . . . . -4.1 -3.0 -2.9 -2.6 55.7 58.0 58.1 58.2Ireland(a) . . . . . . . . . . . . . . . . . . . . -0.4 0.9 1.1 1.9 72.7 66.3 59.5 52.6Italy . . . . . . . . . . . . . . . . . . . . . . . . -6.7 -2.7 -2.5 -2.0 124.0 121.6 118.1 114.3Luxembourg(a) . . . . . . . . . . . . . . . 2.5 1.7 1.0 0.6 6.6 6.7 7.1 7.6Netherlands . . . . . . . . . . . . . . . . . -2.3 -1.4 -1.6 -1.2 77.2 72.1 70.0 67.7Austria . . . . . . . . . . . . . . . . . . . . . . -4.0 -2.5 -2.3 -2.2 69.5 66.1 64.7 63.6Portugal . . . . . . . . . . . . . . . . . . . . . -3.2 -2.5 -2.2 -1.9 65.0 62.0 60.0 58.0Finland. . . . . . . . . . . . . . . . . . . . . . -3.3 -0.9 0.3 0.6 57.6 55.8 53.6 52.3Sweden . . . . . . . . . . . . . . . . . . . . . -3.5 -0.8 0.5 0.9 76.7 76.6 74.1 70.0United Kingdom . . . . . . . . . . . . . -4.8 -1.9 -0.6 -0.3 54.7 53.4 52.3 50.9European Union. . . . . . . . . . . . . . -4.2 -2.4 -1.9 -1.6 73.0 72.1 70.5 68.9

Sour ce: Eu ro pean Commis si on (1998 Spring Fo re casts).No tes:(a) A plus sign in di ca tes a sur plus.(b) Es ti ma te.(c) Fo re cast.(d) Pro jec ti on, as su ming un chan ged po li ci es.

Ta ble V.2

GENERAL GOVERNMENT ACCOUNTS BALANCES

PTE billi on

1994 1995 1996 1997(a) 1998(b)

Overall balance . . . . . . . . . . . . . . . . . . . . . . . . -881.8 -906.3 -545.1 -435.1 -477.2 (as a percentage of GDP) . . . . . . . . . . . . . . -6.0 -5.7 -3.2 -2.5 -2.5

Primary balance (c) . . . . . . . . . . . . . . . . . . . . . -59.4 2.1 184.5 259.9 163.1 (as a percentage of GDP) . . . . . . . . . . . . . . -0.4 0.0 1.1 1.5 0.9

Inflation-adjusted balance(d) . . . . . . . . . . . . . -481.2 -731.7 -276.0 -248.5 -240.2 (as a percentage of GDP) . . . . . . . . . . . . . . -3.3 -4.6 -1.6 -1.4 -1.3

Sour ce: Mi nis té rio das Fi nan ças and Ban co de Por tu gal.No tes:(a) Es ti ma te.(b) Fo re cast.(c) Ove rall ba lan ce ex clu ding net ex pen di tu re on in te rest.(d) This ba lan ce ad justs the ove rall ba lan ce for the effect of ero si on of do mes tic debt real va lue due to in fla ti on. Its cal cu la ti on re -

sults from sub trac ting the ave ra ge ba lan ce of GG do mes tic debt, mul ti plied by the ave ra ge rate of in fla ti on (mea su red by theCPI) to the ove rall ba lan ce.

vi ron ment, and the lower in ter est ex pen di ture.The ap praisal of this re sult is not af fected when the im pact of tem po rary ef fects on the defi cit,as well as the Euro stat de ci sions con cern ing in -ter est re cord ing(2) are brought into ac count. Infact, both ef fects vir tu ally off set one an other:the trans fer of the Banco Na cional Ul tra marinoto the Caixa Geral de Aposen tações (civil ser -vants’ pen sion sys tem) in creased capi tal reve -nue by 0.3 per cent of GDP; other tem po rary ef -fects with an im pact on the defi cit rose pub liccon sump tion by 0.1 per cent of GDP; and Euro -stat de ci sions in creased in ter est ex pen di tureby 0.2 per cent of GDP.

The pri mary bal ance as a per cent age ofGDP, ex clud ing net ex pen di ture on in ter est,rose 0.4 per cent age points, reach ing 1.5 percent (0.0 and 1.1 per cent in 1995 and 1996, re -spec tively).

Ac cord ing to es ti mates by the Banco de Por -tu gal, the over all bal ance ad justed for cy cli calchanges re corded in 1997 a de crease of 0.4 per -cent age points of GDP, stand ing at 2.2 per cent(2.6 per cent of GDP in 1996). Mean while, thead justed pri mary bal ance re mained at 1.8 percent. As a re sult, the cy cli cal ef fects con trib uted 0.4 per cent age points to the in crease in the ac -tual pri mary bal ance.

As in the pre vi ous year, Por tu gal ful filledthe golden rule of pub lic fi nance in 1997, sincepub lic in vest ment ex ceeded pub lic defi cit by1.8 per cent of GDP.

The GG size rela tive to the econ omy,meas ured both by reve nue as by ex pen di ture,in creased in 1997. In deed, to tal GG reve nuerose from 43.1 to 44.2 per cent of GDP (ta -bleV.3). Mean while, to tal ex pen di ture in -creased from 46.3 to 46.6 per cent of GDP. Pri -mary ex pen di ture in creased by 0.8 per cent agepoints, amount ing to 42.3 per cent of GDP.Capi tal ex pen di ture reached 6.3 per cent ofGDP (6.2 per cent in 1996).

The si mul ta ne ous growth of pub lic reve nueand ex pen di ture as a per cent age of GDP in there cent past must be ana lysed with pru dence.


Public finance

Chart V.3GENERAL GOVERNMENT PRIMARY AND

OVERALL BALANCESRevenue and expenditure excluding interest

32

34

36

38

40

42

44

86 87 88 89 90 91 92 93 94 95 96 97Year

As

a pe

rcen

tage

of G

DP

Expenditure excluding interest

Revenue excluding interest

Primary balance

Net expenditure on interest

0

2

4

6

8

10

86 87 88 89 90 91 92 93 94 95 96 97Year

As

a pe

rcen

tage

of G

DP

(2) De ci si ons re gar ding the tre atment of ca pi ta li sa ti on bonds and de po sits, and re a li sed ca pi tal gains from is sues of li -ne ar bonds.

-4

-2

0

2

4

86 87 88 89 90 91 92 93 94 95 96 97Year

As

a pe

rcen

tage

of G

DP

Overall balance

-8

-6

-4

-2

0

86 87 88 89 90 91 92 93 94 95 96 97

Year

As

a pe

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of G

DP



Public finance

Ta ble V.3

GENERAL GOVERNMENT

Size re la ti ve to the eco nomy


1994 1995 1996 1997(a) 1998(b)

Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 39.6 40.7 43.1 44.2 43.8Total expenditure . . . . . . . . . . . . . . . . . . . . . . . . 45.7 46.4 46.3 46.6 46.3Expenditure excluding public debt interest . . 39.5 40.0 41.5 42.3 42.7Gross direct public debt . . . . . . . . . . . . . . . . . . 63.8 65.9 65.0 62.0 60.7

Sour ce: Mi nis té rio das Fi nan ças and Ban co de Por tu gal.No tes:(a) Es ti ma te.(b) Fo re cast.

Ta ble V.4

GENERAL GOVERNMENT NATIONAL ACCOUNTS

PTE billi on

1996 1997(a)

Cen tral Go vernment Lo caland

Re gi o nal Go vern-

ment

So ci alSe cu rity

To tal Cen tral Go vernment Lo caland

Re gi o nalGo vern-

ment

So ci alSe cu rity

To tal

Sta te Au to no-mous

Funds andSer vi ces

Sta te Au to no -mous Fundsand Ser vi ces

1.Current revenue . . . . . . . . . . . . . . . . . . . . 3937.2 1222.1 608.9 2415.1 6721.4 4303.8 1300.6 661.4 2625.4 7322.3

Taxes on income and wealth . . . . . . . . . 1537.3 0.0 143.4 - 1680.6 1702.8 0.0 157.8 - 1860.5

Social contributions . . . . . . . . . . . . . . . . . - - - 1947.0 1947 - - - 2114.4 2114.4

Taxes on goods and services . . . . . . . . . . 2081.9 53.8 183.0 94.6 2413.3 2210.4 60.1 189.7 91.1 2551.3

Other current revenue . . . . . . . . . . . . . . . 318.1 1168.2 282.5 373.6 680.5 390.6 1240.5 313.9 419.9 796.1

(of which: transfers from other

subsectors) . . . . . . . . . . . . . . . . . . . . . . . 5.3 966.5 159.5 330.6 3.4 1032.1 177.3 356.3

2.Current expenditure . . . . . . . . . . . . . . . . 4155.7 1215.5 562.7 2262.1 6734.1 4350.3 1325.9 610.7 2432.9 7150.7

Public consumption . . . . . . . . . . . . . . . . . 1680.3 819.6 466.1 78.9 3045.0 1796.3 914.2 511.7 88.0 3310.2

Compensation of employees . . . . . . . . 1452.3 577.3 300.7 48.6 2378.8 1563.8 641.9 330.0 54.6 2590.3

Purchases of goods and services . . . . . 228.0 242.3 165.4 30.4 666.1 232.5 272.3 181.7 33.4 719.9

Subsidies. . . . . . . . . . . . . . . . . . . . . . . . . . . 95.4 14.8 9.5 0.0 119.8 89.2 5.7 10.4 0.0 105.3

Interest on public debt . . . . . . . . . . . . . . . 770.1 5.4 34.4 0.9 810.8 726.1 4.3 34.6 0.0 765.0

Current transfers . . . . . . . . . . . . . . . . . . . . 1609.8 375.7 52.7 2182.3 2758.6 1738.7 401.7 54.0 2344.9 2970.3

(of which: transfers to other subsectors) 1376.7 21.9 0.9 62.4 1482.5 24.2 0.9 61.3

3.Current savings. . . . . . . . . . . . . . . . . . . . . -218.4 6.6 46.2 153.0 -12.7 -46.5 -25.3 50.8 192.6 171.6

4.Capital revenue. . . . . . . . . . . . . . . . . . . . . 51.5 520.5 245.6 138.7 508.7 50.2 631.5 255 159.4 517.7

(of which: transfers from other subsectors). . . . . . . . . . . . . . . . . . . . . . . . 3.5 295.9 144.5 3.7 3.5 407.1 163.1 4.8

5.Capital expenditure . . . . . . . . . . . . . . . . . 525.3 503.1 318.5 141.8 1041.1 558.2 543.3 368.0 233.3 1124.5

GFCF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124.6 259.3 281 14.6 679.5 128.9 295.6 326.8 16.0 767.3

Capital transfers . . . . . . . . . . . . . . . . . . . . 400.7 243.8 37.5 127.2 361.6 429.3 247.8 41.2 217.3 357.2

(of which: transfers to other subsectors) . . 375.7 7.5 0.7 63.7 401.6 12.0 1.8 163.1

8.Overall balance. . . . . . . . . . . . . . . . . . . . . -692.3 24.0 -26.7 149.9 -545.1 -554.5 62.9 -62.2 118.7 -435.1

Sour ce: Mi nis té rio das Fi nan ças.Note:(a) Es ti ma te.

In deed, among other as pects, it should benoted that the State trans fer to Caixa Geral deAposen tações cal cu lated on a Na tional Ac counts ba sis en tails a dou ble count ing prob lem. Sincethe trans fer has grown by more than GDP, such dou ble count ing alone con trib utes to wards anin crease in the share of Gen eral Gov ern mentreve nue and ex pen di ture on GDP.

The pub lic debt to GDP ra tio de creased forthe sec ond year around, amount ing to 62.0 percent at the end of 1997 (65.9 and 65.0 per cent ofGDP in 1995 and 1996, re spec tively) (ta ble V.3). The change in pub lic debt in 1997 stood clearlybe low the Gen eral Gov ern ment defi cit, namely due to the high amount of reve nue from pri va -ti sa tion al lo cated to pub lic debt re demp tion(3.6 per cent of GDP).

2. Pu blic re ve nue

To tal Gen eral Gov ern ment reve nue, on aNa tional Ac counts ba sis, reached 44.2 per centof GDP in 1997 (43.1 per cent in 1996). The in -crease in reve nue re sulted firstly from the im -prove ment of the cy cli cal po si tion of the econ -omy — which is es ti mated to have con trib uted0.4 per cent age points of GDP to the growth ofreve nue — and sec ondly, from an in crease ofthe non- cyclical com po nent of reve nue (by anes ti mated 0.7 per cent age points). The lat terchiefly re sulted from the greater ef fec tive nessin tax ad mini stra tion.

Cur rent reve nue stood PTE 67.6 bil lionabove the ini tial fore casts based on the Budget,grow ing by 8.9 per cent vis- à- vis the 1996 exe -cu tion. As a whole, cur rent reve nue in creasedits share in GDP by 1.2 per cent age points,reach ing 41.2 per cent of GDP. On its turn, capi -tal reve nue grew 1.8 per cent, de creas ing itsshare in GDP (by 0.1 per cent age points).

Tax reve nue in creased by 8 per cent,amount ing to 36.8 per cent of GDP (36.0 percent in 1996).

Taxes on in come and wealth reached 10.5per cent of GDP, in creas ing by 10.7 per centvis- à- vis the pre vi ous year. How ever, per sonalin come tax (IRS) and the cor po rate in come tax

(IRC) ex hib ited quite dis tinct per form ances,trans lated into growth rates of 6.1 and 20.3 percent, re spec tively. The be hav iour of the IRSreve nue is worth be ing sin gled out, since it was nega tively af fected by the re duc tion in nomi nal in ter est rates and by the up date above in fla tion of the lim its of some tax brack ets and other taxpa rame ters. On its turn, cor po rate in come taxin creased sig nifi cantly, ba si cally as a re sult ofthe strong growth of the eco nomic ac tiv ity inboth 1996 and 1997.

Con tri bu tions to So cial Se cu rity in creasedby 8.6 per cent, reach ing 11.9 per cent of GDP(11.6 per cent in 1996). This in crease was sig -nifi cantly in flu enced by the growth of the Statetrans fer to the Caixa Geral de Aposen tações (civilser vants pen sion sys tem) by 14.3 per cent in1997.

The reve nue due to taxes on goods and serv -ices re mained un changed as a pro por tion ofGDP (14.4 per cent), in creas ing 5.7 per cent.These reve nues fell short of the es ti mates based on the 1997 State Budget by a quite smallamount. To tal VAT reve nue (in clud ing thereve nue of the State, the Autono mous Re gions,So cial Se cu rity and the tour ism re gions) in -creased by 12.1 per cent. How ever, VAT reve -nue cal cu lated on a Na tional Ac counts ba sis in -creased by only 7.8 per cent. This dif fer ence re -


Public finance

Chart V.4CHANGES IN THE STRUCTURE OF

GENERAL GOVERNMENT REVENUE

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

94-93 95-94 96-95 97-96

As

a pe

rcen

tage

of G

DP

Taxes on income and wealthSocial contributionsTaxes on goods and servicesOther current revenue


sults from the re duc tion in the ad just ment ofVAT due to the shift from a cash ba sis to a Na -tional Ac counts ba sis. The reve nue of the tax on oil prod ucts (ISP) de creased by 0.4 per cent,mostly due to the re duc tion in the ISP tax rate— car ried out to ab sorb the im pact of price in -creases in the in ter na tional oil mar kets.

The re main ing taxes on goods and serv icesthat con sti tute the State’s reve nue stood PTE13.3 bil lion above the budg eted fig ure. The 3.5per cent growth of the stamp tax reve nueshould be sin gled out, as it ex ceeded the budg -eted fig ure by PTE 12.9 bil lion, de spite the re -duc tions in the tax rate on loans in ter est and,from Oc to ber on wards, the cut in the tax rateon re ceipt stamps. The car tax (IA) grew by 8.1per cent, stand ing slightly be low the StateBudget ini tial pro jec tion.

Other cur rent reve nue of Gen eral Gov ern -ment as a whole rose by 17.0 per cent in 1997,

amount ing to 4.5 per cent of GDP (4.1 per centin 1996). This be hav iour was mostly due to the62 per cent in crease in the prop erty in come re -ceived by the State, de spite the sharp fall in in -ter est reve nue.

To tal Gen eral Gov ern ment capi tal reve nuein creased by only 1.8 per cent in 1997. As a per -cent age of GDP, capi tal reve nue de creased by0.1 per cent age points. This re duc tion was dueto a fall in trans fers from the EC to Gen eralGov ern ment bod ies, only partly off set by thetrans fer from the Banco Na cional Ul tra marino(BNU) to the Caixa Geral de Aposen tações (civilser vants pen sion sys tem). The be hav iour of to -tal capi tal reve nue was fa voura bly af fected bythe in crease in capi tal reve nue of autono mousbod ies, namely due to the PTE 100 bil liontrans fer of So cial Se cu rity to the Fundo de Es ta -bi li zação Fi nanceira da Se gurança So cial (FEFSS).


Public finance

Ta ble V.5

GENERAL GOVERNMENT

Growth ra tes and struc tu re of re ve nue

Growth ra tesPer cen ta ge

Struc tu reAs a per cen ta ge of GDP

1994 1995 1996 1997(a) 1998(b) 1994 1995 1996 1997(a) 1998(b)

Current revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.0 11.1 10.9 8.9 5.9 37.3 38.3 40.0 41.2 41.0 Tax revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 10.7 10.6 8.0 6.3 33.7 34.5 36.0 36.8 36.7 Taxes on income and wealth . . . . . . . . . . . . . . . 5.6 11.7 14.4 10.7 8.7 9.0 9.3 10.0 10.5 10.7 of which: Personal income tax (IRS) . . . . . . . . . . . . . . . . 5.0 5.6 8.4 6.1 7.2 6.1 6.0 6.1 6.2 6.2 Corporate income tax (IRC) . . . . . . . . . . . . . . 2.4 35.4 32.4 20.3 7.3 2.0 2.5 3.1 3.6 3.6 Social Security contributions . . . . . . . . . . . . . . . 10.1 11.8 9.0 8.6 5.1 10.9 11.3 11.6 11.9 11.8 Taxes on goods and services . . . . . . . . . . . . . . . 13.6 9.3 9.5 5.7 5.7 13.8 13.9 14.4 14.4 14.3 of which: Value added tax (IVA) . . . . . . . . . . . . . . . . . . . 21.9 18.4 12.6 7.8 5.5 6.4 7.0 7.4 7.6 7.5 Tax on oil products (ISP) . . . . . . . . . . . . . . . . 5.8 7.3 4.8 -0.4 3.1 2.8 2.8 2.7 2.6 2.5 Other current revenue. . . . . . . . . . . . . . . . . . . . . -16.3 14.0 13.2 17.0 2.2 3.6 3.8 4.1 4.5 4.3

Capital income . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23.5 8.4 37.2 1.8 0.0 2.3 2.3 3.0 2.9 2.7

Overall revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 10.9 12.4 8.4 5.5 39.6 40.7 43.1 44.2 43.8


3. Pu blic ex pen di tu re

To tal Gen eral Gov ern ment ex pen di turegrew by 6.4 per cent in 1997, reach ing 46.6 percent of GDP (46.3 per cent in 1996). The growthof to tal ex pen di ture re flects the growth of bothcur rent ex pen di ture (by 0.2 per cent age pointsof GDP) and capi tal ex pen di ture (which in -creased by 0.1 per cent age points). Pri mary ex -pen di ture grew by 7.8 per cent in 1997,amount ing to 40.7 per cent of GDP (39.9 percent in 1996).

Cur rent ex pen di ture in 1997 stood at 40.3per cent of GDP (40.1 per cent in 1996). This in -crease re sulted from the growth of both pub liccon sump tion and trans fers, which con tin uedto in crease as a share of GDP. On its turn, in ter -est ex pen di ture and sub si dies de creased as aper cent age of GDP.

The growth of pub lic con sump tion (by 0.5per cent age points of GDP) was due to the in -crease in com pen sa tion of em ploy ees (by 0.4per cent age points of GDP) and in ex pen di tureon goods and serv ices (0.1 per cent age points ofGDP).

The growth of com pen sa tion of em ploy eeswas chiefly due to three fac tors: the sub stan tialgrowth of State trans fers to the Caixa Geral deAposen tações (civil ser vants pen sion sys tem)(14.3 per cent); some spe cific changes in wages,be yond those of the civil serv ice gen eral wagescale (namely in the health and edu ca tion sec -


Public finance

Ta ble V.6

GENERAL GOVERNMENT

Growth ra tes and struc tu re of ex pen di tu re

Growth ra tesPer cen ta ge

Struc tu reAs a per cen ta ge of GDP

1994 1995 1996 1997(a) 1998(b) 1994 1995 1996 1997(a) 1998(b)

Current expenditure . . . . . . . . . 8.2 9.8 4.5 6.2 5.0 40.1 40.7 40.1 40.3 39.8 Compensation of employees . 4.4 9.1 8.2 8.9 7.7 13.8 13.9 14.2 14.6 14.8 Goods and services . . . . . . . . . 12.7 8.3 11.6 8.1 0.6 3.8 3.8 4.0 4.1 3.8 Subsidies. . . . . . . . . . . . . . . . . . -14.2 7.4 8.7 -12.1 8.1 0.7 0.7 0.7 0.6 0.6 Interest on public debt . . . . . . 8.3 12.0 -20.1 -5.6 -9.8 6.2 6.4 4.8 4.3 3.7 Current transfers . . . . . . . . . . . 12.0 10.1 9.3 7.7 7.5 15.7 16.0 16.4 16.7 16.9

Capital expenditure . . . . . . . . . -17.7 10.1 16.5 8.0 10.0 5.5 5.7 6.2 6.3 6.5 GFCF . . . . . . . . . . . . . . . . . . . . . -3.0 10.6 11.9 12.9 7.4 3.8 3.8 4.0 4.3 4.4 Capital transfers . . . . . . . . . . . -37.5 9.0 26.3 -1.2 15.5 1.8 1.8 2.2 2.0 2.2

Total expenditure . . . . . . . . . . . 4.2 9.8 6.0 6.4 5.7 45.7 46.4 46.3 46.6 46.3


Chart V.5CHANGES IN THE STRUCTURE OF

GENERAL GOVERNMENT EXPENDITURE

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

94-93 95-94 96-95 97-96

As

a pe

rcen

tage

of G

DP

StaffInterest on public debtCurrent transfersCapital expenditure


tors); lastly, the growth of the number of civilser vants.

Ex pen di ture on goods and serv ices grew by8.1 per cent as a whole, amount ing to 4.1 percent of GDP. How ever, the Gen eral Gov ern -ment sub sec tors ex hib ited dis tinct growthrates — rang ing from 2.0 per cent in the State,to 12.4 per cent in the autono mous bod ies. Thissharper in crease was greatly due to the be hav -iour of this item of ex pen di ture in the Na tionalHealth Serv ice (SNS).

In ter est on pub lic debt ex pen di ture de -creased by 5.6 per cent, stand ing at 4.3 per centof GDP (4.8 per cent in 1996). This re duc tionwas due to the fall in in ter est rates and in thepub lic debt ra tio.

Gen eral Gov ern ment cur rent trans fers in -creased by 7.7 per cent, ac count ing for 16.7 percent of GDP (16.4 per cent in 1996). This be hav -iour was de ter mined by the growth in thenumber of pen sion ers, the rise of the av er ageold- age pen sion, and the gen er ali sa tion of themini mum guar an teed in come scheme. On theother hand, un em ploy ment bene fits de creased, partly re flect ing the lower un em ploy mentlevel due to the im prove ment of the cy cli cal po -si tion of the econ omy.

Capi tal ex pen di ture in creased by 0.1 per -cent age points of GDP, reach ing 6.3 per cent.The in crease of capi tal ex pen di ture as a per -cent age of GDP re flects an 8.0 per cent risecom par ing with the 1996 level. Gen eral Gov -ern ment Gross Fixed Capi tal For ma tion(GFCF) reached 4.3 per cent of GDP, 0.3 per -cent age points more than in 1996. Worth not ing that, ex cept for Lux em bourg, Por tu gal ex hib itsthe high est rela tive share of Gen eral Gov ern -ment in vest ment in the Euro pean Un ion. Capi -tal trans fers de creased by 1.2 per cent, due tode lays in trans fers to the fi nal re cipi ents of theCom mu nity funds chan nelled through Gen -eral Gov ern ment.

4. Pu blic debt(3)

Gen eral Gov ern ment con soli dated grossdebt amounted to PTE 11,007.3 bil lion at theend of 1997, PTE 104.6 bil lion more than in thepre vi ous year. Ta ble V.7 ex hib its the main vari -


Public finance

Ta ble V.7

GENERAL GOVERNMENT DEFICIT AND CHANGE IN PUBLIC DEBT

PTE billi on

1994 1995 1996 1997

General Government deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 881.8 906.3 545.1 435.1Financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12.3 57.6 0.0 72.1Debt settlements by the Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210.8 170.5 169.9 43.0Revenue from privatisation allocated to public debt . . . . . . . . . . . . . . . . . . . -30.0 -122.8 -290.3 -635.0Adjustment – complementary period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -81.1 -152.5 75.6 15.9Adjustment – VAT(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14.9 -26.1 65.0 18.0Adjustment Social Security(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.1 40.4 54.0 12.4Adjustment – other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -109.0 -100.0 -56.8 -76.2Valuation changes(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -27.0 -40.5 -53.4 101.8Change in GG deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77.6 358.5 -59.5 64.7Change in net foreign assets held by the Treasury . . . . . . . . . . . . . . . . . . . . . -36.8 6.9 16.7 9.6Statistical adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -68.3 -12.0 19.0 43.2Change in GG gross consolidated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 833.9 1086.3 485.4 104.6

Sour ce: Mi nis té rio das Fi nan ças and Ban co de Por tu gal.No tes:(a) In year t, es ti ma te for the diffe ren ce betwe en re ve nue in year t+1 re sul ting from tran sac tions car ri ed out in year t, and re ve nue

in year t due to tran sac tions made in year t-1.(b) Con tri bu tui ons due mi nus con tri bu tions ac tually paid, as to appro xi ma te the de fi cit to a cash ba sis.(c) Effect on debt de no mi na ted in fo reign cur rency, mea su red in es cu dos.

(3) Ge ne ral Go vernment con so li da ted gross debt, ac cor dingto the de fi ni tions and ru les es ta blished in the Coun cil Re -gu la ti on (CE) no. 3605/93.

ables ac count ing for the dif fer ence be tween the Gen eral Gov ern ment defi cit and the change incon soli dated gross debt. The debt to GDP ra tiofell by 3 per cent age points in 1997 (chart V.6).This be hav iour was due to a posi tive pri marybal ance (1.5 per cent of GDP) and to theamount of reve nue from pri va ti sa tion al lo -cated to debt re demp tion (3.6 per cent of GDP).The im pact of these fac tors was partly off set bya nega tive dif fer en tial be tween the nomi nalrate of growth of GDP and the in ter est rate im -plicit in pub lic debt. Also the ef fect of ad verseex change rate fluc tua tions on for eignexchange- denominated pub lic debt, and thegrowth of Gen eral Gov ern ment de pos its af -fected nega tively the be hav iour of the debt ra -tio.

As re gards the break down of to tal debt by in -stru ments, three de vel op ments are worth not -ing. Firstly, the in crease in the av er age ma tur ityof pub lic debt both at is sue and re sid ual. In deed, debt with ma tur ity at is sue over 1 year rose from72.1 to 74.9 per cent of to tal Gen eral Gov ern ment debt, while debt with re sid ual ma tur ity over 1year in creased its share in to tal State debt from57.8 to 66.9 per cent. Sec ondly, the sig nifi cantgrowth of debt de nomi nated in for eign cur -rency, from 18.9 to 23.6 per cent of to tal Gen eralGov ern ment debt. Worth not ing, how ever, thataf ter swaps, about 75 per cent of this debt is de -nomi nated in cur ren cies of the Mem ber Stateswhich will in te grate the third stage of the Eco -nomic and Mone tary Un ion from 1 Janu ary 1999on wards. Lastly, the in crease in the share offixed- rate in stru ments in to tal pub lic debtshould be sin gled out.

With re spect to the break down of pub licdebt by bor row ing sec tors, the re duc tion ofdebt held by the do mes tic sec tors — spe ciallythe bank ing sec tor — is worth be ing high -lighted. On the other hand, debt held by non- residents rose sig nifi cantly, from 21.9 to 29 percent of to tal pub lic debt at the end of 1997. Thisbe hav iour re sulted from the high amount ofnet ex ter nal credit — de nomi nated in both for -eign cur rency and in es cu dos — due to the netsup ply to non- residents of pub lic debt se cu ri -ties is sued in the do mes tic mar ket, and to the


Public finance

Chart V.6BREAKDOWN OF CHANGES IN GENERAL GOVERNMENT DEBT

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

1994 1995 1996 1997

As

a pe

rcen

tage

of G

DP

Relative importance of interest

Primary balance

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

1994 1995 1996 1997

As

a pe

rcen

tage

of G

DP

Privatisation revenue Debt assumption Other changes

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

1994 1995 1996 1997

As

a pe

rcen

tage

of G

DP

Change in net debt Change in deposits

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

1994 1995 1996 1997

As

a pe

rcen

tage

of G

DP

Change in gross debt


Public finance

Ta ble V.8

PUBLIC DEBT

Broken- down by ins tru ment

PTE billi on

1994 1995 1996 1997

Money and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1235.2 1390.1 1520.2 1595.6 of which: Saving certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1190.7 1343.9 1472.2 1545.1

Short-term securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1324.2 1429.1 1438.1 1112.0 of which: Treasury bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1324.2 1335.3 1411.8 1056.6

Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6194.6 6987.5 7303.3 7596.6 of which: Public Investment Funds (FIP)(a) . . . . . . . . . . . . . . . . . . . . . . . . 1643.2 1527.5 884.2 27.0 Automatic Capitalisation Bonds (OCA)(a) . . . . . . . . . . . . . . . . 238.0 59.0 30.0 0.0 Fixed rate Treasury bonds(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1698.4 2191.4 2763.8 3811.0 Floating-rate Treasury bonds (OTRV)(a) . . . . . . . . . . . . . . . . . 200.0 711.5 1192.6 1312.4

Other short-term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102.6 80.8 88.2 56.9Other medium- and long-term loans . . . . . . . . . . . . . . . . . . . . . . . . . 474.4 529.8 552.9 646.2

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9331.0 10417.3 10902.7 11007.3

Memo items:Debt issued in the domestic market . . . . . . . . . . . . . . . . . . . . . . . . . . 7901.0 8514.8 8846.4 8931.3Debt issued in external markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1430.0 1902.5 2056.3 2596.8General Government deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1111.0 1472.9 1424.1 1488.8

Sour ce: Mi nis té rio das Fi nan ças and Ban co de Por tu gal.Note:(a) Non- con so li da ted fi gu res, i.e., non- ad jus ted for the va lue of pu blic debt se cu ri ties held by Ge ne ral Go vernment ins ti tu tions.

Ta ble V.9

PUBLIC DEBT

Broken- down by hol ding sec tors

PTE billi on

1994 1995 1996 1997

Domestic sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7400.2 8163.7 8515.5 7818.1 Banco de Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289.9 297.8 249.5 227.0 Other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4121.8 4169.8 3942.6 3521.1 Other domestic sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . 2988.5 3696.2 4323.3 4070.0

Non-residents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1930.8 2253.6 2387.3 3189.2 of which: Debt issued in the domestic market . . . . . . . . . . . . . 500.8 351.1 331.0 592.4

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9331.0 10417.3 10902.7 11007.3


ef fect of ex change rate fluc tua tions on thevalue of for eign cur rency is sued debt con -verted into es cu dos.

5. Fi nan ci al flows with the Eu ro pean Union

In 1997, net fi nan cial flows from the Euro -pean Un ion reached PTE 535.5 bil lion, re main -ing vir tu ally un changed as a share of GDP (3.0per cent). Trans fers to the Euro pean Un ionreached PTE 214.6 bil lion, in creas ing in re la -tion to 1995 and 1996. How ever, this fig ure stillfalls short of the 1994 level. The 3.0 per centgrowth re corded by trans fers to the Euro peanUn ion in 1997 chiefly re sulted from the growthof cus toms and ag ri cul tural lev el ling du ties.

Reve nue from the Euro pean Un ion grew by5.7 per cent, amount ing to PTE 750.1 bil lion(PTE 709.9 bil lion in 1996). How ever, fi nan cial


Public finance

Ta ble V.10

FINANCIAL FLOWS WITH THE EUROPEAN UNION(a)

PTE billi on

1994 1995 1996 1997

1. Expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247.4 196.2 208.4 214.6 Financial contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206.9 155.6 181.9 183.8 Customs and levelling duties . . . . . . . . . . . . . . . . . . . . . . . . 39.9 40.2 26.5 30.7 Other payments (or refunds) . . . . . . . . . . . . . . . . . . . . . . . . 0.5 0.3 0.1 0.1

2. Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507.9 715.1 709.9 750.1 Refunds of financial contributions. . . . . . . . . . . . . . . . . . . . 0.0 25.7 37.6 0.8 EAGGF - Guarantee(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139.7 138.5 126.4 129.4 EAGGF- Guidance(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52.3 56.8 67.9 63.7 ERDF(d). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220.9 299.2 304.2 345.4 ESF (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53.7 108.7 127.9 82.5 SPDPI-Specific budgetary line (f) . . . . . . . . . . . . . . . . . . . . . 5.6 0.0 0.0 0.0 Cohesion Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33.7 82.5 37.6 116.0 Other receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 3.7 8.3 12.3

3. Balance (2)-(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260.5 519.0 501.5 535.5 (as a percentage of GDP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8 3.3 3.0 3.0

Sour ce: Di recção- Ge ral do Te sou ro.No tes:(a) Cash ba sis fi gu res.(b) Eu ro pean Agri cul tu ral Gui dan ce and Gua ran tee Fund – Gua ran tee Sec ti on.(c) Eu ro pean Agri cul tu ral Gui dan ce and Gua ran tee Fund – Gui dan ce Sec ti on.(d) Eu ro pean Re gi o nal De ve lopment Fund.(e) Eu ro pean So ci al Fund.(f) Spe ci fic Pro gram for the De ve lopment of Por tu gue se In dus try – Spe ci fic Bud ge tary Line.

Chart V.7FINANCIAL FLOWS WITH THE

EUROPEAN UNION

0.0

1.0

2.0

3.0

4.0

5.0

1987 1989 1991 1993 1995 1997Year

As

a pe

rcen

tage

of G

DP

Revenue

Expenditure


flows from the European Union net of refundsrose by 24.4 per cent. This increase was mostlydue to the increase in transfers from the Cohe-sion Fund and from the European Regional De-velopment Fund (EFDR). Indeed, revenuefrom the former more than multiplied three-fold, while EFDR transfers grew by 13.5 percent. The growth of transfers from the Cohe-sion Fund are, to a great extent, explained bythe fact that a significant share of the funds

concerning 1996 execution were transferredonly in January 1997. Transfers from the Euro-pean Agricultural Guidance and GuaranteeFund — Guarantee Section and Other receiptsalso increased in 1997.

On the other hand, transfers from the Euro-pean Social Fund fell by 35.5 per cent. Alsoworth noting the reduction in transfers fromthe European Agricultural Guidance andGuarantee Fund-Guidance Section.


Public finance

THE GENERAL GOVERNMENT AND SOCIAL SECURITY BUDGETS FOR 1998

The projected General Government National Accounts, prepared by the Ministry of Finance, and basedupon the State and the Social Security Budgets for 1998, point towards an overall deficit amounting to 2.5per cent of GDP (2.5 per cent in 1997). This figure meets the objective of the Convergence, Stability andGrowth Programme for 1998, but does not reflect the last data on 1997 execution. According to the budgetfigures, primary balance is expected to reach 0.9 per cent of GDP (1.5 per cent in 1997). The debt to GDPratio is expected to decrease for the third year around.

The Budget report estimates that revenue from privatisation allocated to debt redemption and debt set-tlements by the Treasury will amount to PTE 180 billion and PTE 100 billion, respectively (PTE 635 and45 billion in 1997).

According to the budgetary projections, total General Government revenue and expenditure shall de-crease as a share of GDP. Total revenue is expected to decrease from 44.2 to 43.8 per cent of GDP, while to-tal expenditure (excluding financial assets) shall be reduced from 46.6 to 46.3 per cent. However, expendi-ture excluding interest expenditure is expected to rise from 42.3 to 42.7 per cent of GDP. The tax revenue toGDP ratio shall remain virtually unchanged.

The 1998 State Budget implies a growth of revenue from taxes on income and wealth amounting to 8 percent. The corporate income tax shall record a slightly higher growth rate than the personal income tax: 9.1and 8.7 per cent, respectively.

The adjustment of the personal income tax brackets was differentiated, decreasing with income, between2.9 and 2.1 per cent. The limit of the specific deduction for employees’ income was updated by 3.7 per cent.The limits of most allowances on taxable income were updated between 0 and 2.7 per cent. The deductionsfrom tax collection were increased between 1.9 and 2.1 per cent.

The 1998 State Budget includes two other legal measures concerning the personal income tax: the firstallows for the overall or partial transformation of the actual allowances on taxable income into deductionsfrom tax collection, in principle without increasing the tax burden; the second measure increases thenumber of tax brackets and tax rates, aiming at the reduction of the tax burden for lower incomes.

In early 1998, two important legal measures concerning the corporate income tax were implemented:the first cuts the tax rate from 36 to 34 per cent, affecting income earned in 1997; the second creates a newprepayment equalling the difference between the value of 1 per cent of turnover (from a minimum of PTE100 thousand, and up to a maximum of PTE 300 thousand) and the value of the prepayments carried out inthe previous year.


Public finance

So cial Se cu rity con tri bu tions are ex pected to in crease by 5.1 per cent in 1998.Ac cord ing to the 1998 Budget fore casts, reve nue from taxes on goods and serv ices will rec ord a 5.7 per

cent growth. VAT reve nue shall grow 5.5 per cent, on a Na tional Ac counts ba sis.The car tax rate on light 4x4 and vans was in creased. Both kinds of ve hi cles are now sub ject to the same

rates of light com mer cial ve hi cles de rived from de light pas sen ger ve hi cles. In ad di tion, spe cific rates in alltax scales were raised by 2 per cent.

Re gard ing mu nici pal taxes, the scales of the mu nici pal tax on real es tate trans ac tions were up dated be -tween 2.3 and 2 per cent. The mu nici pal con tri bu tion reve nue is ex pected to rec ord a sig nifi cant in crease in1998, fol low ing the up date, in the 1997 Budget, of the maxi mum rate on ur ban real es tate, from 1 to 1.3 percent.

Ac cord ing to the Budget for 1998 fore casts, pub lic ex pen di ture shall grow 5.7 per cent (7.3 ex clud ing in -ter est ex pen di ture). Cur rent and capi tal ex pen di ture are es ti mated to grow by 5.0 and 10.0 per cent, re spec -tively.

Civil ser vants’ com pen sa tion shall rec ord a strong growth in 1998: 7.7 per cent. Four fac tors ba si callyac count for this be hav iour:

• the civil serv ice wage scale up date by 2.75 per cent;• the re struc tur ing of ca reers in the civil serv ice gen eral re gime;• some spe cific changes in wages in the edu ca tion sec tor;• the sharp growth in the State trans fer to the Caixa Geral de Aposen tações (civil ser vants’ pen sion sys -

tem).

Cur rent trans fers — mainly from So cial Se cu rity to house holds — will grow by 7.5 per cent. Gen eral re -gime pen sions were on av er age up dated by 3.9 per cent, while civil ser vants’ pen sions re corded an in creaseequal to that of the wage scale.

Ac cord ing to the budg eted fig ures for 1998, ex pen di ture in pub lic debt in ter est will fall by 9.8 per cent.The Gen eral Gov ern ment con soli dated ac count for 1997, on a Na tional Ac counts ba sis, was sig nifi -

cantly re vised be tween the ex ces sive defi cit pro ce dure no ti fi ca tions dated August 1997 and Feb ru ary 1998.As a whole, those changes re sulted in a re duc tion of the pub lic defi cit, from 2.9 to 2.5 per cent of GDP. How -ever, budg et ary fore casts for 1998 im plicit in the Feb ru ary 1998 no ti fi ca tion are still based upon the Budgetfor 1998, point ing to wards a defi cit amount ing to 2.5 per cent of GDP.

The re vi sion of the 1997 exe cu tion makes plau si ble a re duc tion of the pub lic defi cit in 1998, in par ticu larif it stands as the main ob jec tive of the authori ties re spon si ble for budg et ary pol icy. From this point of view,the Euro pean Com mis sion Spring 1998 eco nomic fore casts es ti mated that the Por tu guese Gen eral Gov ern -ment defi cit will amount to 2.2 per cent of GDP in 1998. Ac cord ing to the same source, the debt to GDP ra tio at the end of 1998 will stand at 60 per cent, clearly be low the fig ure re ported by the Por tu guese authori ties inFeb ru ary 1998 (60.7 per cent of GDP). The Euro pean Com mis sion Spring fore casts also pre dict that, un derthe as sump tion of an un changed budg et ary pol icy, the Por tu guese pub lic defi cit and debt ra tio will con tinueto de crease in 1999.


Public finance

Ta ble 1

GENERAL GOVERNMENT NATIONAL ACCOUNTS PROJECTION FOR 1998

PTE billi on

1998

Cen tral Go vernment

Sta te Au to no -mous

Funds andSer vi ces

Lo caland

Re gi o nalGo vern-

ment

So ci alSe cu rity

To tal

1.Current revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4591.9 1425.2 705.0 2745.0 7753.4

Taxes on income and wealth . . . . . . . . . . . . . . . . . . 1848.0 2.9 170.6 0.0 2021.5

Social contributions. . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 0.0 0.0 2222.7 2222.7

Taxes on goods and services. . . . . . . . . . . . . . . . . . . 2332.8 63.4 202.7 96.9 2695.9

Other current revenue . . . . . . . . . . . . . . . . . . . . . . . 411.1 1358.9 331.6 425.5 813.4

(of which: transfers from other subsectors). . . . . . 24.4 1107.2 188.9 393.1

2.Current expenditure. . . . . . . . . . . . . . . . . . . . . . . . . 4570.4 1375.8 634.3 2644.9 7511.7

Public consumption . . . . . . . . . . . . . . . . . . . . . . . . . 1937.3 936.5 544.3 95.7 3513.8

Compensation of employees . . . . . . . . . . . . . . . . 1700.6 679.9 349.6 59.3 2789.4

Purchases of goods and services . . . . . . . . . . . . . 236.7 256.5 194.7 36.4 724.3

Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92.0 11.4 10.3 0.0 113.8

Interest on public debt . . . . . . . . . . . . . . . . . . . . . . . 664.0 3.4 20.0 2.9 690.3

Current transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1877.0 424.6 59.7 2546.3 3193.9

(of which transfers to other subsectors) . . . . . . . . . 1600.5 38.3 1.1 73.9

3.Current saving. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.5 49.4 70.7 100.1 241.7

4.Capital revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62.8 564.9 296.2 142.6 517.6


5.Capital expenditure . . . . . . . . . . . . . . . . . . . . . . . . . 620.7 588.8 381.5 194.5 1236.5

GFCF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160.8 294.4 346.4 22.2 823.9

Capital transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459.8 294.4 35.1 172.3 412.7


6.Overall balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -536.3 25.5 -14.6 48.2 -477.2

Sour ce: Mi nis té rio das Fi nan ças, ba sed on 1998 Sta te Bud get.


Public finance

FISCAL CONSOLIDATION IN THE EUROPEAN UNION: 1993-1997

The rati fi ca tion of the Euro pean Un ion Treaty in1993 trans formed the ful fil ment of the con ver gencecri te ria — nec es sary con di tion to a Mem ber State’spar tici pa tion in the Third Stage of the Eco nomic andMone tary Un ion — into a key ob jec tive of Mem berState’s eco nomic pol icy. As shown in chart 1, allcoun tries car ried out since 1993 a budg et ary con soli -da tion pro cess, aim ing at ful fill ing the pub lic defi citand pub lic debt cri te ria. In 1997, Greece stood as thesin gle Mem ber State to post a defi cit clearly above 3per cent of GDP. In the Euro pean Un ion as a wholethe defi cit was re duced by 3.1 per cent age points in the pe riod 1993-1997. Swe den, It aly, Greece, Fin landand United King dom re corded in de creas ing or der the sharp est cuts in the defi cit to GDP ra tio, all above 4per cent age points of GDP (ta ble 1).

The re duc tion of budg et ary defi cits was linked to a sig nifi cant re duc tion in the cy cli cally ad justed defi -cits. In deed, in the Euro pean Un ion as a whole, thedefi cit ad justed for cy cli cal changes fell by 3.2 per -cent age points of GDP, in the pe riod un der scru tiny.The most sig nifi cant falls — over 4 per cent age pointsof GDP — were re corded by Greece, Swe den, It aly,Bel gium, Spain and Por tu gal (ta ble 1). The fall in thenon- cyclical com po nent of the defi cit should, how -ever, be in ter preted with cau tion, since this com po -nent may re flect tem po rary changes in budg et ary pol -icy — whether of a one- off or a self- reversing na ture.In 1997, the im pact of these meas ures on the Euro -pean Un ion Mem ber States ranged be tween 0.1 and 1per cent of GDP.

Ta ble 2 ex hib its the pub lic reve nue and ex pen di -ture of the EU Mem ber States (ex cept for Lux em -bourg) be tween 1993 and 1997. As shown, the pub licreve nue to GDP ra tio re mained vir tu ally un changedin the Euro pean Un ion as a whole. Only in Por tu gal,Greece, United King dom and Swe den did the pub licreve nue to GDP ra tio grow above 2 per cent agepoints.

Pub lic ex pen di ture in the Euro pean Un ion hasde creased since 1993. This year, ex pen di ture reacheda maxi mum of 52.5 per cent of GDP. In 1997, thepub lic ex pen di ture to GDP ra tio amounted to 48.9per cent of GDP. This fall chiefly re flects the re duc -tion in sev eral items of pri mary ex pen di ture, in bothits cur rent and capi tal com po nents (chart 2). Thesharp est falls in the pub lic ex pen di ture to GDP ra tio

Chart 1FISCAL CONSOLIDATION IN THE EUROPEAN

UNION1993

40

60

80

100

120

140

-2 0 2 4 6 8 10 12 14 16GG overall deficit


Pub

lic d

ebt

(As

a pe

rcen

tage

of G

DP

)

Ire

Gre

Swe

Itl

Spa

Por

Fra

EU

NetDen

Bel

Fin

UKGer

Aus

40

60

80

100

120

140


(As a percentage of GDP)

Pub

lic d

ebt

(As

a pe

rcen

tage

of G

DP

)

Aus

UE

FinPor

UKFra

Ger

Den

IreNet

Spa

Swe

BelItl

Gre

1995

1997

40

60

80

100

120

140


(As a percentage of GDP)

Pub

lic d

ebt

(As

a pe

rcen

tage

of G

DP

)

Aus

EU

Fin

Por

UK

FraGer

DenIre

Net

Spa

Swe

BelItl

Gre

Sour ce: Eu ro pean Commis si on.


Public finance

were re corded in Swe den, Fin land, Greece, It aly, the Neth er lands, Spain and Den mark, all with falls not lowerthan 5 per cent age points of GDP.

Ta ble 1

PUBLIC DEFICITS: ACTUAL AND CYCLICALLY ADJUSTED VALUES

Ac tu al de fi cit Cycli cally- ad jus ted de fi cit Cycli cal com po nent

1993 1997 Chan ge 1993 1997 Chan ge 1993 1997 Chan ge

Belgium . . . . . . . . . . . . . . . . . 4.9 2.1 -2.8 6.1 1.5 -4.6 -1.2 0.6 1.8Denmark . . . . . . . . . . . . . . . . 2.8 -0.7 -3.5 0.9 -0.7 -1.6 1.9 0.0 -1.9Germany . . . . . . . . . . . . . . . . 2.4 2.7 0.3 3.2 2.1 -1.1 -0.8 0.6 1.4Greece. . . . . . . . . . . . . . . . . . . 10.0 4.0 -6 13.0 3.5 -9.4 -3.0 0.5 3.5Spain . . . . . . . . . . . . . . . . . . . . 6.3 2.6 -3.7 6.0 1.7 -4.3 0.3 0.9 0.6France . . . . . . . . . . . . . . . . . . . 5.8 3.0 -2.7 4.8 2.3 -2.4 1.0 0.7 -0.3Ireland . . . . . . . . . . . . . . . . . . 1.7 -0.9 -2.6 0.0 0.1 0.0 1.6 -1.0 -2.6Italy . . . . . . . . . . . . . . . . . . . . . 9.2 2.7 -6.5 8.5 2.0 -6.5 0.7 0.7 0.0Netherlands . . . . . . . . . . . . . . 3.8 1.4 -2.4 2.6 1.1 -1.6 1.2 0.3 -0.9Austria . . . . . . . . . . . . . . . . . . 5.0 2.5 -2.5 4.2 2 -2.2 0.7 0.5 -0.2Portugal . . . . . . . . . . . . . . . . . 6.0 2.5 -3.6 6.1 1.9 -4.3 -0.1 0.6 0.7Finland . . . . . . . . . . . . . . . . . . 6.4 0.9 -5.5 2.1 1.2 -0.8 4.3 -0.3 -4.6Sweden. . . . . . . . . . . . . . . . . . 10.3 0.8 -9.5 8.1 0.0 -8.1 2.2 0.8 -1.4United Kingdom. . . . . . . . . . 6.8 1.9 -4.9 5.9 2.2 -3.7 0.9 -0.3 -1.2European Union . . . . . . . . . . 5.4 2.4 -3.1 5.1 1.9 -3.2 0.3 0.5 0.1

Sour ce: Eu ro pean Commis si on.Note: Ne ga ti ve fi gu res in di ca te a bud ge tary sur plus.

Ta ble 2

PUBLIC REVENUE AND PUBLIC EXPENDITURE IN THE EUROPEAN UNION

To tal re ve nue To tal ex pen di tu re Pri mary ex pen di tu re

1993 1997 Chan ge 1993 1997 Chan ge 1993 1997 Chan ge

Belgium. . . . . . . . . . . . . . 48.7 49.9 1.2 55.8 52.0 -3.9 45.1 44.0 -1.1Denmark. . . . . . . . . . . . . 60.1 58.6 -1.5 63.0 57.9 -5.0 55.1 52.2 -2.9Germany . . . . . . . . . . . . 46.3 45.2 -1.2 49.9 48.0 -1.9 46.6 44.2 -2.3Greece . . . . . . . . . . . . . . . 35.0 37.9 2.9 48.8 41.9 -6.9 36.0 32.3 -3.7Spain . . . . . . . . . . . . . . . . 42.3 40.8 -1.5 49.2 43.4 -5.8 44.0 38.8 -5.1France . . . . . . . . . . . . . . . 49.6 50.9 1.3 55.4 54.0 -1.4 52.0 50.3 -1.7Ireland. . . . . . . . . . . . . . . 37.6 36.3 -1.2 40.3 35.4 -4.9 33.9 31.1 -2.8Italy . . . . . . . . . . . . . . . . . 47.4 47.9 0.5 56.9 50.6 -6.4 44.8 41.1 -3.7Netherlands . . . . . . . . . . 53.3 49.2 -4.1 56.5 50.5 -6.0 50.2 45.2 -5.0Austria . . . . . . . . . . . . . . 50.7 50.8 0.1 54.9 53.2 -1.7 50.6 49.1 -1.5Portugal . . . . . . . . . . . . . 37.9 41.2 3.4 44.0 43.7 -0.3 37.7 39.4 1.6Finland . . . . . . . . . . . . . . 53.8 53.5 -0.3 61.8 54.5 -7.3 57.2 49.1 -8.2Sweden . . . . . . . . . . . . . . 60.1 62.6 2.5 72.3 63.4 -8.9 66.1 57.2 -8.9United Kingdom . . . . . . 35.8 38.4 2.6 43.7 40.4 -3.4 40.9 36.9 -4.0European Union . . . . . . 46.3 46.3 0.0 52.5 48.7 -3.8 47.0 43.7 -3.3



Public finance

In 1997, eleven of the fif teen Mem ber States ful filled the “golden rule of pub lic fi nance”, which in 1993 wasonly at tained by Lux em bourg (chart 3). Worth not ing that budg et ary con soli da tion in the pe riod 1993-1997 wasin most cases im ple mented through meas ures other than those im ply ing a sub stan tial re duc tion in in vest ment ex -pen di ture.

De spite the budg et ary con soli da tion prog ress from 1993 on wards, the debt to GDP ra tio in the Euro pean Un -ion as a whole did not be gin its down ward path be fore 1997 (ta ble 3). This year, for the first time since the late1980’s, the debt ra tio in the EU de creased, from 73.0 to 72.1 per cent of GDP. From 1993 up to 1997, the Mem berStates re cord ing the strong est re duc tions in the debt ra tio — ex ceed ing the 10 per cent age points thresh old —were Ire land, Den mark and Bel gium.

Chart 2CHANGE IN PUBLIC EXPENDITURE IN THE EU

1994-1997

-2

-1.5

-1

-0.5

0

0.5

1994 1995 1996 1997Year

As

a pe

rcen

tage

of G

DP

Current transfers InterestStaff Goods and servicesCapital expenditure Other expenditureTotal expenditure


Chart 3GOLDEN RULE

1993-1997

-12

-10

-8

-6

-4

-2

0

2

4

6

8

Luxe

mbo

urg

Irel

and

Den

mar

k

Por

tuga

l

Fin

land

Net

herla

nds

Sw

eden

Spa

in

Aus

tria

Italy

Fra

nce

Bel

gium

Gre

ece

Ger

man

y

Uni

ted

Kin

gdom

Member State

As

a pe

rcen

tage

of G

DP

1997 1993


Ta ble 3

PUBLIC DEBT IN THE EUROPEAN UNION


1993 1996 1997 Chan ge 1993-1997

Chan ge 1996-1997

Belgium . . . . . . . . . . . . . . . 135.2 126.9 122.2 -13.0 -4.7Denmark . . . . . . . . . . . . . . 81.6 71.6 66.1 -15.5 -5.5Germany . . . . . . . . . . . . . . 48.0 60.4 61.3 13.3 0.9Greece . . . . . . . . . . . . . . . . 111.6 111.6 108.7 -2.9 -2.9Spain . . . . . . . . . . . . . . . . . 60.0 70.1 68.8 8.8 -1.3France . . . . . . . . . . . . . . . . 45.3 55.7 58.0 12.7 2.3Ireland . . . . . . . . . . . . . . . . 96.3 72.7 66.3 -30.0 -6.4Italy . . . . . . . . . . . . . . . . . . 119.1 124.0 121.6 2.5 -2.4Netherlands . . . . . . . . . . . 81.2 77.2 72.1 -9.1 -5.1Austria. . . . . . . . . . . . . . . . 62.7 69.5 66.1 3.4 -3.4Portugal. . . . . . . . . . . . . . . 63.1 ´65.0 62.0 -1.1 -3.0Finland . . . . . . . . . . . . . . . 58.0 57.6 55.8 -2.2 -1.8Sweden . . . . . . . . . . . . . . . 75.8 76.7 76.6 0.8 -0.1United Kingdom . . . . . . . 48.5 54.7 53.4 4.9 -1.3European Union. . . . . . . . 65.9 73.0 72.1 7.1 -0.9



Public finance

STABILITY AND GROWTH PACT

In the Third Stage of the Eco nomic and Mone tary Un ion (EMU), the budg et ary pol icy shall con tinue tobe guided ex clu sively by the Mem ber States. This task shall be car ried out in the frame work es tab lished bythe Euro pean Un ion Treaty and by the Sta bil ity and Growth Pact, which de fine rules and pro ce dures re -gard ing Mem ber States’ pub lic fi nances.

From the Third Stage of EMU on wards, ar ti cle 104 c (1) of the Euro pean Un ion Treaty im poses to theMem ber States the le gal ob li ga tion of avoid ing ex ces sive budg et ary defi cits(1). The non- compliance to thisduty sub jects the Mem ber States to sanc tions men tioned in the Treaty, among other con se quences. With theen dorse ment of the Sta bil ity and Growth Pact, Mem ber States com mit to re spect a medium- term budg et aryob jec tive of po si tions close to bal ance or in sur plus. This is a per ma nent char ac ter is tic of the EU eco nomic re -gime, in par ticu lar in the euro area. In ad di tion, the Pact strength ens the mul ti lat eral sur veil lance pro ce -dure de fined in the Treaty, and clari fies the im ple men ta tion of the ex ces sive defi cit pro ce dure.

In sti tu tional back ground

The Sta bil ity and Growth Pact aims to pro mote sound pub lic fi nances as a key ele ment for mac -roeconomic sta bil ity. Budg et ary poli cies lead ing to low lev els of in debt ed ness have a posi tive ef fect on thecredi bil ity of mone tary pol icy, on the sta bil ity of fi nan cial sys tems and on long- term in ter est rates.

The con cern with sound pub lic fi nances is shared by de vel oped coun tries as a whole, and is in cluded inthe rec om men da tions of the lead ing in ter na tional eco nomic or gani sa tions. There fore, the budg et ary ob jec -tive of the Sta bil ity and Growth Pact col lects gen eral agree ment.

The Sta bil ity and Growth Pact en com passes a reso lu tion of the Am ster dam Euro pean Coun cil, and twoCoun cil Regu la tions. Euro pean Coun cil Reso lu tion 97/C 236/01, of 17 June 1997, re flects the po liti cal com -mit ment to the im ple men ta tion of the Sta bil ity and Growth Pact. In deed, this reso lu tion es tab lishes a set ofori en ta tions to sev eral par ties in the pro ce dure (Mem ber States, Coun cil and Com mis sion) to wards thestrict and timely exe cu tion of the Pact Coun cil Regu la tion (CE) no. 1466/97, of 7 July 1997, com pletes themul ti lat eral sur veil lance pro ce dure fore seen in Ar ti cle no. 103 of the Euro pean Un ion Treaty with an earlywarn ing sys tem. This sys tem es tab lishes that Mem ber States pres ent sta bil ity pro grammes (if coun triespar tici pate in the euro area) or con ver gence pro grammes (oth er wise), which in clude the medium- term ob jec -tive of a budg et ary po si tion close to bal ance or in sur plus, as well as the ad just ment path to wards the ob jec -tives fixed for the budg et ary bal ance and the pub lic debt ra tio. These pro grammes will al low for the regu larmoni tor ing and evalua tion of Mem ber States’ eco nomic poli cies — and of pub lic fi nances in par ticu lar. Inthe pres ence of a sig nifi cant shift of the budg et ary situa tion away from the medium- term ob jec tive, theCoun cil shall pres ent a rec om men da tion to the Mem ber State, in vit ing the lat ter to adopt the nec es sary ad -just ment meas ures. Coun cil regu la tion (EC) no. 1467/97, of 7 July 1997, es tab lishes an in te grated set ofnorms aim ing at speed ing up and clari fy ing the im ple men ta tion of the ex ces sive defi cit pro ce dure, de scribedin the Euro pean Un ion Treaty Ar ti cle 104 c.. In par ticu lar, the Regu la tion de fines the con di tions un derwhich a budg et ary defi cit over 3 per cent of GDP may be con sid ered “ex cep tional” and “tem po rary”(2). TheRegu la tion also de fines a cal en dar for the ap pli ca tion of the vari ous stages in the ex ces sive defi cit pro ce dure,

(1) This is an obli ga ti on to all Mem ber Sta tes ex cep ting the Uni ted King dom (un til this coun try mo ves to the Third Sta ge of theEMU). Whi le the Uni ted King dom does not no tify the Coun cil of its in ten ti on to move to the Third Sta ge, the Uni ted King domwill con ti nue to be obli ged to en dea vour to avoid ex ces si ve bud ge tary de fi cits, ac cor ding to Ar ti cle 109E (4) of the Eu ro peanUnion Tre aty.

(2) If the bud ge tary de fi cit ex cee ding 3 per cent of GDP is con si de red ex cep ti o nal, tem po rary, and the de fi cit to GDP ra tio re mainsclo se to 3 per cent, then the de fi cit will not be con si de red as being ex ces si ve.


Public finance

and de fines the re gime of sanc tions (in clud ing their amount) to carry out in case the ex ces sive defi cit per -sists.

The de tail that char ac ter ises the Sta bil ity and Growth Pact does not in hibit the Coun cil’s re spon si bil ityin the de ci sions per tain ing to the ex ces sive defi cit pro ce dure. Si mul ta ne ously, the Sta bil ity and Growth Pact grants the Com mis sion and the Coun cil with some flexi bil ity in in ter pret ing the Pact it self. For in stance, inde cid ing whether an ex ces sive defi cit ex ists or not, the Coun cil de lib er ates “af ter an over all as ses se ment’(3).An other ex am ple is that the evalua tion of the ef fec tive ness of meas ures adopted by the Mem ber States in re -sult of a Coun cil rec om men da tion (which may im ply the ab ro ga tion or re in state ment of the ex ces sive defi citpro ce dure) may fully de pend on the Coun cil’s opin ion.

Im pli ca tions of the Sta bil ity and Growth Pact on na tional budg et ary poli cies

The Sta bil ity and Growth Pact obliges each Mem ber State to aim at medium- term budg et ary ob jec tive ofpo si tions close to bal ance or in sur plus. Con se quently, the mini mum re quire ment re gard ing budg et ary defi -cits en com passed in the Euro pean Un ion Treaty — 3 per cent of GDP — will not con sti tute, sub stan tially,an ac tive re stric tion in the medium- run. The pre cise budg et ary ob jec tive shall be de fined by each Mem berState, bear ing in mind its na tional speci fic ity, namely as re gards the sen si tiv ity of budg et ary reve nue andex pen di ture to the eco nomic cy cle(4). The demo graphic evo lu tion in the EU coun tries, and the re sult ing pres -sure set upon the na tional So cial Se cu rity sys tems and health ex pen di ture pro grammes, pro vide ad di tionalele ments point ing to the need for a fast budg et ary con soli da tion in the vari ous Mem ber States, to wards abal anced or in sur plus budg et ary po si tion.

A re cent re search on the ret ro spec tive ap pli ca tion of the Sta bil ity and Growth Pact(5) con cludes that,start ing from a bal anced budget in the the medium- run budg et ary pol icy will have enough room of ma noeu -vre to let auto matic sta bi lis ers op er ate, with out in cur ring in an ex ces sive defi cit situa tion(6). The EU coun -tries ex pe ri ence of the last three dec ades shows that the ini tial budg et ary po si tion in flu ences the budg et aryre ac tion to the eco nomic cy cles. In deed, in this pe riod, coun tries ex hib it ing lower defi cit and debt lev els wereable to leave their auto matic sta bi lis ers fully work, which did not hap pen in coun tries with greater pub lic fi -nance im bal ances.

Most Mem ber States will not ful fil the Sta bil ity and Growth Pact req ui sites by the be gin ning of theThird Stage of the EMU. The above- referred re search con cludes that, un der such cir cum stances, and in theevent of a re ces sion, sev eral coun tries would in cur in ex ces sive defi cits. This pos si bil ity points to wards theneed for a fast con ver gence to the budg et ary ob jec tives agreed in the Sta bil ity and Growth Pact.

(3) Si mul ta neous ly, some room of ma noeuvre is left for in ter pre ting the bud ge tary de fi cit and pu blic debt cri te ria (see Ar ti cle 104 c (2) of the Eu ro pean Union Tre aty), na mely in ex pres si ons like “clo se to the re fe ren ce va lue” and “ra tio has de cli ned subs tan ti ally andcon ti nu ous ly” (in the go vernment de fi cit cri te rion), and “ra tio is suffi ci ently di mi nishing and appro a ching the re fe ren ce va lue ata sa tis fac tory pace” (in the pu blic debt cri te rion).

(4) Ac cor ding to the cal cu la tions of the Eu ro pean Union, the coun tries exhi bi ting gre a ter sen si ti vity of the bud ge tary ba lan ce to theeco no mic cycle are Swe den, the Nether lands and Denmark. The oppo si te case is that of Gree ce.

(5) M. Buti, D. Fran co and H. On ge na, 1997, “Bud ge tary Po li ci es in Se ve re Re ces si ons- Les sons from the Post- War Pe riod for theSta bi lity Pact”, Eu ro pean Commis si on, Eco no mic Pa pers No. 121.

(6) Ex cept in ca ses of deep and las ting re ces si on.

Chap ter VI

MONETARY AND EXCHANGE RATE SITUATION

1. Monetary and exchange rate policy in1997

1.1 In tro duc ti on

In 1997, mone tary pol icy con tin ued to beguided to wards the in ter me di ate ob jec tive ofex change rate sta bil ity, as a means of achiev ingthe fi nal ob jec tive of price sta bil ity. Tak ing intoac count the per spec tives of ex change rate sta -bil ity and the de vel op ments in terms of wagesand in ter na tional prices, the Banco de Por tu galan nounced as the rele vant ref er ence for thecon duct ing of mone tary pol icy an an nual av er -age rate of change of the Har mo nised In dex ofCon sumer Prices(1) (HICP) not greater than2.25 per cent by the end of 1997.

The rate of in fla tion, meas ured by the an -nual av er age rate of change of the HICP, stoodat 1.9 per cent in 1997, which is com pati ble with price sta bil ity, and is 0.35 per cent age points be -low the thresh old an nounced by the Banco dePor tu gal. At the same time, Por tu guese in fla -tion strength ened its con ver gence to wards EUlev els ex hib it ing the best per form ance in thisarea. In deed, from mid- 1997 on wards, the an -nual av er age rate of change of the HICP stoodbe low the rele vant ref er ence value(2) for the ap -pli ca tion of the re spec tive con ver gence cri te -rion. In De cem ber 1997, the an nual in fla tionrate stood 0.8 per cent age points be low thisvalue.

Por tu guese long- term in ter est rates con tin -ued to de crease through out 1997, in te grat ing agen er al ised trend of con ver gence be tween theEU coun tries. In De cem ber 1997, the 10- yearyields for in vest ments in es cu dos reached 5.7per cent, thus ac count ing for a 1.3 per cent agepoints re duc tion in re la tion to late 1996. As in1996, the an nual av er age long- term in ter estrate in Por tu gal re mained be low the ref er encevalue(3) of the re spec tive cri te rion (chart VI.1).

Through out 1997, the Ex change RateMecha nism of the Euro pean Mone tary Sys tem(ERM-EMS) was char ac ter ised by the main te -nance of sta bil ity. Ex cept ing the Irish pound,most cur ren cies con cen trated close to the re -spec tive bi lat eral cen tral rates, while ex hib it ing


Monetary and exchange rate situation

(1) The Har mo nised In dex of Con sumer Prices uses har mo -nised cri te ria in cal cu lat ing price changes for all Euro -pean Un ion coun tries.

(2) This is the av er age of the three low est in fla tion rates in the EU (meas ured by the an nual av er age rate of change of theHICP), plus 1.5 per cent age points.

Chart VI.1DIFFERENTIAL OF PORTUGAL VIS-À-VIS

THE REFERENCE VALUES

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0

Long-term interest rates

Inflation rate

Dec 95

Dec 96

Dec 97

(3) The ref er ence value con sists of the av er age of the an nualav er age rates ex hib it ing the best per form ance re gard ingprice sta bil ity, plus 2 per cent age points.

lower vola til ity(4). These de vel op ments tookplace in an in ter na tional back ground char ac -ter ised by a strong ap pre cia tion of the US dol -lar, in a con text where the im pact of this cur -ren cy’s fluc tua tions on the ex change rates ofthe cur ren cies in the ERM-EMS was, gen er allyspeak ing, smaller than in the pre vi ous year.The be hav iour of the cur ren cies in the ex -change rate mecha nism was chiefly due to pro -gresses in nomi nal con ver gence and budg et ary con soli da tion pro cesses, to gether with the sus -tain abil ity of these re sults. At the political- institutional level, the de ter mi na tion of na -tional authori ties in the pro cess of crea tion ofthe Eco nomic and Mone tary Un ion (EMU) also

con trib uted to the ex change rate situa tion in1997, since mar ket ex pec ta tions re gard ing theadop tion of a sin gle cur rency on the ex pecteddate, with the par tici pa tion of a large numberof coun tries, were re in forced (see Chap ter II —In ter na tional back ground and Euro pean in te gra -tion). In this con text, the de ci sion to wards an -nounc ing the bi lat eral ex change rates that willde ter mine the euro con ver sion rates should besin gled out. This de ci sion was made at the in -for mal Ecofin meet ing held in Mon dorf inmid- September, and was con firmed by theLux em bourg Euro pean Coun cil in De cem ber.On 3 May 1998, it was an nounced that the cur -rent ERM bi lat eral cen tral rates of par tici pat ing cur ren cies will be used in de ter min ing the euro ir revo ca ble con ver sion rates (see box Bi lat eralrates of con ver sion in the euro area).



BILATERAL RATES OF CONVERSION IN THE EURO AREA

On 3 May, the Coun cil, meet ing in the com po si tion of the Heads of State or Gov ern ment, an nounced thegroup of coun tries that will in te grate the euro area from 1 Janu ary 1999 on wards. Si mul ta ne ously, the Min is tersand Gov er nors of Cen tral Banks of the Mem ber States adopt ing the euro, to gether with the Euro pean Com mis -sion and the Euro pean Mone tary In sti tute (EMI), in formed that the cur rent bi lat eral cen tral pari ties of the par -tici pat ing cur ren cies shall be used in cal cu lat ing the ex change rates of the of fi cial ECU on 31 De cem ber 1998. The rates of con ver sion at which the euro will sub sti tute the par tici pat ing cur ren cies shall only be known on that date. In deed, the Treaty req ui site ac cord ing to which the de ter mi na tion of con ver sion rates “does not al ter the ex ter nalvalue of the ECU” im plies the con ti nu ity (i.e., the one- to- one con ver sion) be tween the of fi cial ECU and the euro.Since the value of the of fi cial ECU is daily de ter mined by the mar ket rates of the cur ren cies in the bas ket, and since the ECU bas ket in cludes cur ren cies from coun tries which will ini tially be out side the euro area, the of fi cial valueof the ECU — and there fore the rates of con ver sion in euro — can only be known on 31 De cem ber 1998.

In the daily cal cu la tion of the of fi cial value for the ECU, cen tral banks of the Euro pean Un ion (EU) Mem berStates com mu ni cate among them selves the ex change rates of the re spec tive cur rency vis- à- vis the US dol lar(USD). These ex change rates are within the range of the bid/ask mar ket prices, be ing the mid- point the most fre -quently used value. The Euro pean Com mis sion then uses these pari ties to cal cu late the ex change rates of the of fi -cial ECU. The ex change rate vis- à- vis the US dol lar is ob tained by add ing the amounts of the vari ous na tionalcur ren cies in the ECU bas ket, val ued at the re spec tive ex change rates vis- à- vis the dol lar which were com mu ni -cated to the Com mis sion. The of fi cial ex change rates vis- à- vis the EU cur ren cies equal the USD/ECU ex changerate times the re spec tive ex change rates vis- à- vis the dol lar. For ex am ple, take the fol low ing cal cu la tion of the ex -change rates of the ECU (ta ble 1).

Up to 30 De cem ber 1998 the mar ket ex change rates may not equal the bi lat eral cen tral pari ties. On 31 De -cem ber, how ever, the com pati bil ity of mar ket rates with the bi lat eral cen tral pari ties must be en sured.

The an nounce ment in May of the bi lat eral rates of con ver sion is ex pected to con trib ute to re duce the risk inthe for eign ex change mar kets of the par tici pat ing coun tries. The an nounce ment in May of the bi lat eral rates ofcon ver sion is ex pected to con trib ute to avoid in sta bil ity in the for eign ex change mar kets of par tici pat ing coun -tries, re duc ing un cer tainty about the ex change rate lev els that na tional authori ties shall en sure.

(4) In what con cerns to the vola til ity of ex change rates of thecur ren cies in the ERM, ex cep tion also made for the Fin -nish cur rency.

Over the course of 1997, the in fla tion ratein the EU as a whole re mained within the in -ter val con sid ered com pati ble with price sta bil -ity (0 to 2 per cent). Mean while, the in fla tiondif fer en tials be tween the EU coun tries nar -

rowed in the year. In terms of mone tary pol -icy, the lev els of Euro pean of fi cial in ter estrates con verged; as a re sult, the dif fer en tialamongst EU in ter est rates nar rowed. The EUof fi cial in ter est rates con ver gence re sulted



Ad mit ting that the an nounce ment is credi ble, with the ap proxi ma tion to the end of the year the vari ous na -tional cur ren cies of the coun tries par tici pat ing in the euro area will be in creas ingly seen as pre cur sors of the sin -gle cur rency, strength en ing the cor re la tion be tween these cur ren cies’ be hav iour. Mar ket pari ties shall tend to em -body this idea, both in terms of bi lat eral re la tions (among pairs of par tici pat ing cur ren cies) as in mul ti lat eralterms (be tween par tici pat ing and non- participating cur ren cies). For each par tici pat ing cur rency, mar ket rateswill tend to stand quite close to the cen tral pari ties vis- à- vis the other cur ren cies. We can even fore see a re duc tionin the mar ket ask- bid spreads, since the size of these shall be ba si cally de ter mined by the mag ni tude of op era tionalcosts of the for eign ex change mar ket op era tions.

Nev er the less, and as to pre vent ex cep tional cir cum stances, Mem ber States guar an teed that the re spec tivecen tral banks will en sure, through ade quate mar ket tech niques, that the mar ket ex change rates will be such thatthe an nounced con ver sion rates will be come ef fec tive.

Ta ble 1

EXAMPLE OF THE CALCULATION OF THE ECU EXCHANGE RATES

Step 1 Step 2 Step 3

Units of na ti o nalcur rency in the

ECU basket

Ex chan ge ratevis- à- vis the

US dollar 31 Dec 97

US dollar equi va lent of the amount of

Na ti o nal cur rency

ECU ex chan ge ra tes

Exam ple

(a) (b) (c) = (a) : (b) (d) = (USD/ECU) x (b)

Mi USD/i USD/ECU ECU/i

DEM . . . . . . . . . . . . . . . . 0.6242 1.7898 0.348754 1.97632

BEF . . . . . . . . . . . . . . . . . 3.301 36.92 0.089410 40.7675

DKK . . . . . . . . . . . . . . . . 0.1976 6.8175 0.028984 7.52797

FRF . . . . . . . . . . . . . . . . . 1.332 5.9881 0.222441 6.61214

IEP . . . . . . . . . . . . . . . . . 0.008552 1.4304 0.012233* 0.771961

NLG . . . . . . . . . . . . . . . . 0.2198 2.0172 0.108963 2.22742

ITL . . . . . . . . . . . . . . . . . 151.8 1758.75 0.086311 1942.03

ESP . . . . . . . . . . . . . . . . . 6.885 151.59 0.045419 167.388

GBP. . . . . . . . . . . . . . . . . 0.08784 1.6561 0.145472* 0.666755

PTE . . . . . . . . . . . . . . . . . 1.393 183.06 0.007610 202.137

GDR . . . . . . . . . . . . . . . . 1.44 282.59 0.005096 312.039

LUF. . . . . . . . . . . . . . . . . 0.13 36.92 0.003521 40.7675

FIM . . . . . . . . . . . . . . . . . 5.4222 5.98726

ATS. . . . . . . . . . . . . . . . . 12.59 USD/ECU 1.10421 13.9020

SEK . . . . . . . . . . . . . . . . . 7.9082 8.73234

* The dol lar ex change rate vis- à- vis the Ster ling and Irish Pounds is the number of dol lars per unit of these cur ren cies. Asa re sult, for these cur ren cies, (c) = (a)x(b), and (d) = (USD/ECU)/(b).

from dis tinct mone tary poli cies in Europe in1997. In deed, in a first group of coun tries —Spain, It aly and Por tu gal — of fi cial in ter estrates were gradu ally cut through out 1997, re -flect ing the achieve ments of the con ver gencepro cesses car ried out by these econo mies. Asec ond group of coun tries in creased their of fi -cial in ter est rates in the sec ond half of 1997 —Ger many, Aus tria, Bel gium, Den mark, Fin -land, France and the Neth er lands — due tosigns of in fla tion ary pres sures.

In 1997, the exe cu tion of Por tu guese mone -tary pol icy was char ac ter ised by the grad ualre duc tion of the Banco de Por tu gal in ter ven -tion rates, in a con text of ex change rate sta bil -ity and of fa vour able per spec tives re gard ingthe be hav iour of in fla tion. The cuts in the in -ter ven tion rates passed through short- term in -ter est rates, which in turn con tin ued thedown ward path re corded since mid- 1995. Asa re sult, the in ter est rate dif fer en tial vis- à- visGer many nar rowed in the year.

In the first half of 1997, in a con text of ex -ces sive li quid ity in the money mar ket, theBanco de Por tu gal re turned to the is su ing ofMoney In ter ven tion Cer tifi cates (TIM), an in -stru ment that had not been used since April1994. In the sec ond half of 1997, the mar ket ex -hib ited a gen eral situa tion of li quid ity short -age. As a re sult, the Banco de Por tu gal in ter -vened, car ry ing out a net sup ply of funds. Nofur ther TIM auc tions were held up to the endof the year.

In 1997, the Banco de Por tu gal started ac -cept ing pri vate debt se cu ri ties as a coun ter -part in li quid ity in jec tion op era tions, con sid er -ing the prepa ra tion of the Third Stage of theEMU. This de ci sion in te grates a set of meas -ures adopted in re cent years by the Banco dePor tu gal, with the ob jec tive of ren der ing amore flexi ble in ter ven tion in the money mar -ket, and of con verg ing the op era tional frame -work of the Por tu guese mone tary pol icy to the one to be adopted by the fu ture Euro peanCen tral Bank (see boxes Mone tary and ex changerate re gime in the pe riod 1986-1997. The ad ap ta -tion of the Banco de Por tu gal to the Euro pean Sys -tem of Cen tral Banks and The TARGET sys tem).

1.2Execution of monetary and exchange ratepolicy

The be hav iour of the es cudo in 1997 tookplace in the above de scribed scen ery ofstrength en ing co he sion among the ERM-EMScur ren cies, in the con text of a strong US dol larap pre cia tion. The do mes tic mac roeconomicback ground was marked by the con tinua tionof the dis in fla tion ary pro cess, and by sig nifi -cant achieve ments in terms of con ver gence ofthe Por tu guese econ omy. In this con text, thees cudo con tin ued to be traded within a nar rowin ter val vis- à- vis the Deut sche mark, and ac -com pa nied the weak en ing of most cur ren ciespar tici pat ing in the ex change rate mecha nismvis- à- vis the US dol lar and the Ster ling — and,there fore, in nomi nal ef fec tive terms.

The be hav iour of the In dex of Ef fec tive Ex -change Rate (EER) of the es cudo through out1997 was chiefly de ter mined by the gen er al ised ap pre cia tions of the US dol lar and the Ster -ling(5), in a con text where the be hav iour of thees cudo and of the re main ing coun tries in theERM vis- à- vis third cur ren cies pre sented somere sem blance. In re la tion to 1996, the es cudo de -pre ci ated on av er age 1.9 per cent in nomi nal ef -fec tive terms. This be hav iour was sharper inthe first eight months of 1997, af ter which theEER re mained fairly sta ble — partly re flect ingthe tem po rary in ver sion in the dol lar and Ster -ling ap pre cia tions (charts VI.2 and VI.3). Con -sid er ing endof- period fig ures(6), the es cudode pre ci ated about 16 per cent vis- à- vis the Ster -ling and the dol lar, and 3.6 per cent in nomi nalef fec tive terms.

Con trast ing with its be hav iour in nomi nalef fec tive terms, the es cudo re mained vir tu allysta ble in the ERM. In 1997, the es cudo ap pre ci -ated on av er age 1.0 per cent vis- à- vis the set ofcur ren cies par tici pat ing in the mecha nism,though ex hib it ing an un even intra- annual be -hav iour. In deed, in early 1997 the es cudo ap -



(5) The re main ing cur ren cies con sti tut ing the REER are theyen, the Swiss franc, the Nor we gian and Swed ish kronaand seven cur ren cies par tici pat ing in the ERM-EMS.

(6) End- of- period changes are the change be tween the De -cem ber 1997 av er age and the De cem ber 1996 av er age.



MONETARY AND EXCHANGE RATE REGIME IN THE PERIOD 1986-1997

In the pe riod prior to the ad he sion of Por tu gal to the Euro pean Com mu nity (EC), the mone tary re gime wasbased on ad min is tra tive mecha nisms: credit ceil ings, in ter est rates set ad min is tra tively and con straints to in ter -na tional capi tal flows. The ex change rate re gime was char ac ter ised by the main te nance of a crawling- peg re gimefor the es cudo, de signed to ac com mo date in fla tion dif fer en tials be tween Por tu gal and its lead ing trade part ners.

The ac ces sion of Por tu gal to the EC in 1986 rep re sented an op tion to wards an eco nomic re gime where themar ket is the main mecha nism of re source al lo ca tion. Si mul ta ne ously, the adop tion of poli cies ori ented to wardsmac roeconomic sta bil ity has al ready been rec og nised as a nec es sary con di tion to achieve sus tained eco nomicgrowth. This new frame work of the Por tu guese mone tary pol icy led to a re for mu la tion of the mone tary and ex -change rate re gimes both re gard ing the in stru ments and the fi nal ob jec tives.

1. Re for mu la ti on of the mo ne tary and ex chan ge rate re gi mes af ter the adhe si on to the EC

The pro cess of fi nan cial lib er ali sa tion, in the con text of the sin gle Euro pean mar ket, im plied the sub sti tu tionof the mone tary con trol sys tem based on ad min is tra tive mecha nisms by a con trol based on mar ket mecha nisms.The tran si tion to the new mone tary con trol sys tem re quired the ful fil ment of some pre vi ous con di tions, namely:(i) the lib er ali sa tion of in ter est rates, a key vari able in en sur ing money mar ket equi lib rium and the trans mis sionof the in ter ven tions by the Banco de Por tu gal to the fi nan cial sys tem, and from the lat ter to real eco nomic ac tiv -ity; (ii) the de vel op ment of the in ter bank money and ex change rate mar kets, to al low for the ade quate in ter ven tion po ten tial of the Banco de Por tu gal in these mar kets.

The grad ual lib er ali sa tion of in ter est rates was ini ti ated in 1984, with the sup pres sion of lim its to most bor -row ing in ter est rates, and was vir tu ally com pleted with the elimi na tion of the in ter est rate ceil ing on lend ing op -era tions in Sep tem ber 1989, ex cept for credit to hous ing. In March 1989 and in May 1992 the re main ing lim its to lend ing and bor row ing in ter est rates were elimi nated. Along side the pro cess of in ter est rate lib er ali sa tion, spotand for ward ex change rate in ter bank mar kets were setup (in Oc to ber 1985 and Feb ru ary 1987, re spec tively).Jointly with the money mar ket, these mar kets were sub ject to suc ces sive im prove ments (the di ver si fi ca tion of therange of in stru ments avail able, the ex ten sion of the term of op era tions, the free ne go tia tion of prices and quan ti -ties and the sig nifi cant im prove ment of com mu ni ca tion sys tems). In the con text of lib er ali sa tion of the Por tu -guese fi nan cial sys tem and of in ter na tional capi tal move ments, the mone tary con trol based on credit ceil ings be -came pro gres sively less ef fec tive.

The sup pres sion of the maxi mum lim its to credit took place in two stages. In March 1990, com pul sory lim itsto credit were sus pended, hav ing been sub sti tuted by in dica tive rec om men da tions re gard ing the growth of thisag gre gate. From Janu ary 1991 on wards, re stric tions or cen tral rec om men da tions to the growth of credit grantedby the bank ing sys tem were elimi nated. In the pe riod run ning from the sup pres sion of credit ceil ings to the ef fec -tive elimi na tion, im por tant steps were taken to wards the func tion ing of the sys tem of mone tary con trol based onmar ket mecha nisms. In this con text, we should sin gle out the re for mu la tion of the mini mum re serve re quire mentre gime, in the sense of adapt ing it to be come an in stru ment of mone tary pol icy. Af ter the de ci sion of im pos ing asin gle re serve co ef fi cient (17 per cent) in March 1989, the mini mum re serve re quire ment re gime was ad di tion -ally re vised twice — in 1990 and in 1991 — to achieve a greater uni form ity re gard ing the in sti tu tions sub ject tothe re gime, the in ci dence ba sis and the re gime of re serve re mu nera tions.

At the in sti tu tional level the new Or ganic Law of the Banco de Por tu gal(1) at trib utes greater auton omy to theBanco de Por tu gal re gard ing the con duc tion of mone tary pol icy, through the pro hi bi tion of fi nanc ing to the Gen -eral Gov ern ment by the Banco de Por tu gal.

Fi nally, the drain ing of ex ces sive li quid ity ac cu mu lated in the bank ing sys tem was seen as nec es sary to pre -pare the money mar ket for the exe cu tion of the new method of mone tary con trol. A large op era tion of li quid ity ab -sorp tion was ac corded be tween the Banco de Por tu gal and the Gov ern ment in De cem ber 1990. This op era tionwas car ried out in two stages (De cem ber 1990 and March 1991), con sist ing of the is su ing of pub lic debt placed in

(1) Decree- Law no. 337/90 of Oc to ber 30, pub lished in the Of fi cial Ga zette, I se ries, no.251 of 30.10.1990 (See box The Adap ta tion ofthe Banco de Por tu gal to the Euro pean Sys tem of Cen tral Banks).



the bank ing sys tem — sub sti tut ing these in sti tu tions’ time de pos its in the Banco de Por tu gal. Part of this loanwas al lo cated to the an tici pated re demp tion of ex ter nal pub lic debt, while the re main der was al lo cated to the re -demp tion of pub lic debt se cu ri ties in the Banco de Por tu gal porto fo lio.

With this fi nan cial op era tion, the in dis pen sa ble con di tions to the shift to the new method of mone tary con trolwere met. In this con text, from April 1991 on wards, mone tary pol icy was based upon the in ter ven tion of theBanco de Por tu gal in the money mar ket through three dis tinct pro ce dures: (i) regu lar in ter ven tions, com pris ingop era tions of both ab sorp tion and sup ply of li quid ity for the pe riod of mini mum re serve re quire ment con sti tu tion,in which the re spec tive in ter est rates lead very short- term in ter est rates in nor mal mar ket con di tions; (ii) oc ca -sional in ter ven tions, cor re spond ing to li quid ity ab sorp tion and sup ply op era tions tak ing place dur ing the re servecon sti tu tion pe riod, and aim ing at mar ket sta bi li sa tion; (iii) over night credit fa cil ity, which al lows for the ac cessto funds on the last day of the re serve con sti tu tion pe riod, af ter the mar ket has been closed (sub ject to a pen altyrate).

The Por tu guese ac ces sion to the EC marked the be gin ning of the pro cess of lib er ali sa tion of capi tal flows. Atthat mo ment, capi tal con trols were chiefly lim it ing to cur rent trans ac tions that origi nated capi tal out flows, andto capi tal trans ac tions them selves. The strat egy of grad ual lib er ali sa tion of capi tal move ments de fined in theTreaty of ac ces sion gave pri or ity to capi tal trans ac tions di rectly linked to for eign trade of goods and serv ices, andto the right of es tab lish ment. In 1990 and 1991, this pro cess was tem po rar ily sus pended in or der to avoid mas sivecapi tal in flows, bound to jeop ard ise the ef fec tive ness of mone tary pol icy. How ever, this in ter rup tion was a tem po -rary one, and bar ri ers to in ter na tional capi tal flows were fully elimi nated in De cem ber 1992.

The suc cess of the in te gra tion of the Por tu guese econ omy in the Euro pean mar ket was par tially de pend ent onauthori ties’ abil ity to re duce the in fla tion rate to Euro pean lev els. In this con text, it be came nec es sary to adopt aless ac co mo da tive ex change rate pol icy than that im plicit in the crawling- peg re gime en forced since 1977. First,the rate of monthly de pre cia tion of the es cudo within the crawling- peg re gime was gradu ally re duced, as to onlypar tially ac com mo date the in fla tion dif fer en tial be tween Por tu gal and the ex te rior. In late 1990, the “crawling- peg” re gime was sub sti tuted by a pol icy based on a con fined fluc tua tion of the es cudo vis- à- vis the five lead ingcur ren cies of the Ex change Rate Mecha nism of the Euro pean Mone tary Sys tem (ERM-EMS). On 6 April 1992,the es cudo joined the ex change rate mecha nism.

2. Mo ne tary and ex chan ge rate re gi mes in the 1990’s

The ac ces sion of the es cudo to the ERM-EMS in April 1992 changed the mone tary pol icy frame work, by ex -plic itly as sum ing the com mit ment to wards the prose cu tion of the in ter me di ate ob jec tive of ex change rate sta bil ityas a means of achiev ing the fi nal ob jec tive of price sta bil ity(2). There af ter, the Banco de Por tu gal in tro duced neweco nomic pol icy in stru ments, and an nounced new forms of in ter ven tion in the money mar ket, as to en sure greater flexi bil ity and sig nal ling of mone tary pol icy meas ures.

In this con text, the daily credit fa cil ity was cre ated in July 1993. This fa cil ity cor re sponds to li quid ity sup plyop era tions at a pre- announced rate, with ma tur ity on the first work ing day fol low ing the trans ac tion day(3). In the sec ond half of 1994, the Banco de Por tu gal be gan to an nounce the daily fa cil ity for li quid ity ab sor tion at fixed ratedur ing the re serve con sti tu tion pe riod, while start ing to carry out regu lar li quid ity sup ply op era tions at auc tionrates. The ab sor tion rate and the daily credit fa cil ity rate be gan to de fine the range for the repo rate — which innor mal mar ket con di tions be came the key rate in de ter min ing the be hav iour of money mar ket in ter est rates. InNo vem ber 1994, the Banco de Por tu gal again re de fined the mini mum re serve re quire ment re gime. The ma jorchange in re la tion to the pre vi ous re gime con sisted of the re duc tion in the re spec tive co ef fi cient, from 17 to 2 percent, and the con se quent li quid ity ster ili sa tion achieved through the is su ing of De posit Cer tifi cates by the Banco

(2) The prose cu tion of the fi nal ob jec tive of price sta bil ity, tak ing into ac count the over all eco nomic pol icy of the Gov ern ment, wasmade ex plicit in the amend ment to the Or ganic Law of the Banco de Por tu gal, dated Sep tem ber 1995.

(3) This is an auto matic fa cil ity — i.e., it de pends on banks’ ini tia tive. At a first stage, each in sti tu tion had a lim ited ac cess (share) inthe form of a per cent age of the over all amount. This per cent age was de fined as a pro por tion of the val ues of mini mum re serve re -quire ment rela tive to the four con secu tive pe ri ods to the 18th of the pre vi ous month. These shares were abol ished in May 1996.

pre ci ated vis- à- vis most cur ren cies in the ERM. This move ment was in verted af ter a pe riodwhere the es cudo re mained fairly sta ble, be -tween late Janu ary and early May. In endof- period terms, the es cudo de pre ci ated 1.4 percent vis- à- vis the set of cur ren cies par tici pat ingin the ERM. This de vel op ment re flects the

move ment of the es cudo to wards its bi lat eralcen tral pari ties in the EMS mecha nism.

In 1997, the es cudo ap pre ci ated on av er age1.4 per cent vis- à- vis the Deut sche mark inend- of- period terms. In De cem ber 1997, the es -



de Por tu gal. This re vi sion was led by the need to ap proxi mate the Por tu guese re gime to those of most Mem berStates, while con trib ut ing to a greater com peti tive ness of Por tu guese fi nan cial in sti tu tions com pared to the Euro -pean ones – since these changes im ply a grad ual re duc tion of taxa tion on the fi nan cial sys tem im plicit in theformer mini mum re serve re quire ment re gime.

More re cently, in 1996, the last stage of the in tro duc tion of the Great Trans ac tions Pay ment Sys tem was con -cluded. In this con text, regu lar li quid ity sup ply started to take place on the last day of re serves count ing pe riod,with value date on the first work ing day fol low ing the pe riod, given the op era tive re quire ments of the sys tem.Mean while, the Banco de Por tu gal started to an nounce the rate of li quid ity sup ply at oc ca sional auc tions, as tosig nal its in ter est rate in ten tions in the mar ket.

Since July 1997, the Banco de Por tu gal ac cepts pri vate debt se cu ri ties as a guar an tee in li quid ity sup ply op -era tions, bear ing in mind the prepa ra tion of the Third Stage of the Eco nomic and Mone tary Un ion. The eli gi bleas sets should be listed in the Lis bon Stock Ex change and re gard cer tain un der ly ing risk (meas ured ac cord ing tothe rat ing ro ta tion) and li quid ity cri te ria. The Banco de Por tu gal has the right to ref use se cu ri ties if the bor row ershave a rec ord of credit or cheque in ci dents. Se cu ri ties is sued or guar an teed by the in sti tu tion pro pos ing their utili -sa tion, or by en ti ties be long ing to the same eco nomic and fi nan cial group are also re fused.

The Or ganic Law of the Banco de Por tu gal was again re vised in early 1998, to al low for the full in te gra tion ofthe bank in the Euro pean Sys tem of Cen tral Banks.

The re for mu la tion of the in stru ments and of the form of in ter ven tion of the Banco de Por tu gal in the moneymar ket oc curred through out the 1990’s trans lated into an op era tional frame work for the Por tu guese mone tarypol icy quite simi lar to that to be adopted by the fu ture Euro pean Cen tral Bank.

Chart VI.2EFFECTIVE EXCHANGE RATE INDEX AND

ERM – EXCHANGE RATE INDEXAugust 1993 = 100

97

98

99

100

101

102

103

Jan96 May Sep Jan97 May Sep97

98

99

100

101

102

103

EER

EER/ERM

Chart VI.3INDICES OF THE ESCUDO EXCHANGE RATEVIS-À-VIS THE DEUTSCHE MARK, PESETA,FRENCH FRANC, ITALIAN LIRA, STERLING

AND DOLLARAugust 1993 = 100

85

90

95

100

105

110

115

Jan96 May Sep Jan97 May Sep85

90

95

100

105

110

115USD

ITL

DEM

FRF

ESP

GBP



THE ADAPTATION OF THE BANCO DE PORTUGAL TO THE EUROPEAN SYSTEM OF CENTRAL BANKS

1. The Eu ro pean Sys tem of Cen tral Banks

The Euro pean Sys tem of Cen tral Banks (ESCB) was es tab lished on 1 July 1998, com pris ing the Euro peanCen tral Bank (ECB) and the na tional cen tral banks of the Mem ber States of the Euro pean Un ion. From 1 Janu ary1999 on wards — the start ing date of the Third Stage of the Eco nomic and Mone tary Un ion (EMU) — mone tarypol icy in the euro area (1) shall be de fined by the ECB and im ple mented by the ESCB. Sin gle mone tary pol icy shalltake the main te nance of price sta bil ity as its main ob jec tive. The ESCB will also be ac count able for the exe cu tion ofthe ex change rate pol icy in the euro area(2) and for the pro mo tion of the good func tion ing of the pay ments sys tems.The in sti tu tional frame work in which the ESCB will play its at tri bu tions is de fined in the Stat ute of the ESCB and of the ECB (the Stat ute that takes the form of the Pro to col an nexed to the Treaty in sti tut ing the Euro pean Com -mu nity.

The ESCB will be con ducted by the de ci sion bod ies of the ECB. The ECB shall en com pass two de ci sion bod ies:the “Ex ecu tive Board” and the “ECB Gov ern ing Coun cil”. The ex ecu tive Com mis sion will be con sti tuted by thePresi dent and the Vice- President of the ECB, plus four other mem bers. On its turn, the ECB Coun cil will com -prise the mem bers of the Ex ecu tive Com mis sion and the gov er nors of the cen tral banks of the euro area Mem berStates(3). The Gov ern ing Coun cil will be ac count able for the defi ni tion of a sin gle mone tary pol icy, as well as thees tab lish ment of the guide lines nec es sary to its im ple men ta tion. Each Gov ern ing Coun cil mem ber will hold avote, be ing most de ci sions made through a sim ple ma jor ity. The Ex ecu tive Board will be re spon si ble for the con -duc tion of mone tary pol icy, ac cord ing to the guid ance and de ci sion de fined by the Gov ern ing Coun cil. For this,the Ex ecu tive Board shall give the re quired in struc tions to na tional cen tral banks.

The ESCB will en joy a high de gree of in de pend ence in per form ing its at tri bu tions(4). The in de pend ence prin ci -ple re sults from a set of dis po si tions of the Treaty and of the Stat ute, com pris ing four di men sions:

In sti tu tional in de pend ence — in per form ing its author ity and in com pli ance with its at tri bu tions and du tiesbe stowed by the Treaty and the Stat ute, the ECB, na tional cen tral banks or any mem ber of the re spec tive de ci sionbod ies can not re quire or be granted any in struc tions from com mu nity in sti tu tions or bod ies, from Mem ber States’ Gov ern ments, or from any other en tity (Ar ti cle no. 107 of the Treaty and Ar ti cle no. 7 of the Stat ute).

Per sonal in de pend ence—the man date of the na tional cen tral bank Gov er nors can not be shorter than fiveyears, and the Gov er nor can only be dis missed if the nec es sary req ui sites to the per form ance of his func tions are nolonger ful filled, or if a ma jor in frac tion has been com mit ted. In case of dis missal, the Gov er nor can re fer to theEuro pean Com mu nity Court of Jus tice (Ar ti cle no. 14.2 of the Stat ute).

Func tional in de pend ence — bear ing in mind the pur suit of the main ob jec tive to wards main tain ing price sta -bil ity, the ECB will in de pend ently de lib er ate over the sin gle mone tary pol icy in stru ments and strat egy.

Fi nan cial in de pend ence — for the per form ance of its at tri bu tions, the ECB will have its own capi tal and its re -serve as sets in for eign cur rency (Ar ti cle no. 28 and 30 of the Stat ute). In ad di tion, the mone tary fi nanc ing of ex -ces sive defi cits is for bid den (Ar ti cle no. 104 of the Treaty and Ar ti cle no. 21.1 of the Stat ute).

Dur ing the Sec ond Stage of the eco nomic and mone tary un ion, and up to the date of es tab lish ment of theESCB, the Euro pean Un ion Mem ber States car ried out the nec es sary changes to en sure the com pati bil ity of na -

(1) The “euro area” is con sti tuted by the fol low ing 11 Mem ber States: Bel gium, Ger many, Spain, France, Ire land, It aly, Lux em bourg,the Neth er lands, Aus tria, Por tu gal and Fin land.

(2) The defi ni tion of the ex change rate re gime and of even tual ex change rate pol icy guide lines is due to the Ecofin Coun cil.(3) The ESCB in cludes a third de ci sion body un til the mo ment all Mem ber States are par tici pat ing in the euro area. This body — the

ECB Gen eral Coun cil — is con sti tuted by the Presi dent and the Vice- President of the ECB and by the Gov er nors of the cen tralbanks of the fif teen Euro pean Un ion Mem ber States. Among other at tri bu tions, the Gen eral Coun cil shall in herit those of the ex -tinct Euro pean Mone tary In sti tute, which due to the ex is tence of Mem ber States not par tici pat ing in the euro area, should still becar ried out in the Third Stage of the Eco nomic and Mone tary Un ion.

(4) The stat utes of the ESCB take the form of a pro to col an nex to the Treaty in sti tut ing the Euro pean Com mu nity, which con sti tutesan im por tant ele ment of in de pend ence. In deed, any amend ment to the dis po si tions re gard ing the ob jec tives, at tri bu tion and in de -pend ence clauses of the ESCB re quire the una nim ity of all Euro pean Un ion Mem ber States (there fore in clud ing those not par tici -pat ing in the euro area), as well as the rati fi ca tion by the re spec tive na tional Par lia ments.



tional leg is la tion, in clud ing the stat ute of the re spec tive na tional cen tral bank, with the dis po si tions of the Euro -pean Un ion Treaty and the ESCB stat ute. The fol low ing sec tion de scribes the pro cess of ad ap ta tion of the Or ganicLaw of the Banco de Por tu gal, to al low for its in te gra tion in the ESCB.

2. Adap ta ti on of the Or ga nic Law of the Ban co de Por tu gal

The ad ap ta tion of the Or ganic Law of the Banco de Por tu gal to the req ui sites linked to the Por tu guese par tici -pa tion in the EMU was car ried out in three stages.

In Oc to ber 1996, in the con text of a shift to a mone tary con trol sys tem based on mar ket mecha nisms, the newOr ganic Law of the Banco de Por tu gal(5) was ap proved. Ac cord ing to this Or ganic Law, the Banco de Por tu galshall “pro vide for do mes tic mone tary sta bil ity and for the ex ter nal sol vency of the es cudo”(Ar ti cle no. 3), be ingpar ticu larly in cum bent on the bank to “co- operate in the for mu la tion and to im ple ment the mone tary and ex -change rate pol icy”(Art no. 18). The prin ci ple of pro hi bi tion on fi nanc ing to the pub lic sec tor was es tab lished, ex -cep tion made for the con tinua tion of a free cur rent ac count of the State, the cur rent ac counts of the Autono mousRe gions(6) and the pos si bil ity of the Banco to hold Treas ury Bills un der con di tions agreed with the Min isté rio dasFi nanças (Art. no. 26 and 27). The hold ing of Treas ury Bills was in ter rupted in July 1991. On its turn, the State’s cur rent ac count was closed in De cem ber 1992(7).

In Sep tem ber 1995, the Or ganic Law of 1990 was re vised(8), in the sense of es tab lish ing as the main at tri bu -tion of the Banco de Por tu gal the main te nance of “price sta bil ity, tak ing into ac count the over all eco nomic pol icyof the Gov ern ment” (Art. no. 3) and of grant ing the Banco the re quired com pe tence to con duct the mone tary pol -icy(9). In ad di tion, the pro hi bi tion to pro vide over draft fa cili ties, as well as the pro hi bi tion to the di rect pur chase ofpub lic debt in stru ments was for mally es tab lished(10).

In Janu ary 1998, the Or ganic Law was sub ject to a new re vi sion(11), as to en sure, with im me di ate ef fects, thefull auton omy of the Banco de Por tu gal and its full in te gra tion in the ESCB from 1 Janu ary 1999 on wards.

In or der to en sure the in te gra tion of the Banco de Por tu gal in the ESCB, the fol low ing dis po si tions should behigh lighted:• the Ban co de Por tu gal is ex press ly qua li fied as an in te grant part of the ESCB, pur suing the ob jec ti ves and par -

ti ci pa ting in the re a li sa ti on of its attri bu tions, and ac ting in con for mity with the gui de li nes and ins truc tions ofthe ECB;

• the ex clu si ve right to bankno te is suing shall re main, but li mi ted to tho se de no mi na ted in es cu dos up to the mo -ment the se bankno tes lose le gal ten der — though de pen dent in any case on autho ri sa ti on gran ted by the ECB;

• the mo ne tary and ex chan ge rate po licy attri bu tions of the Ban co de Por tu gal shall be car ri ed out with no pre ju -di ce to the con tin gen ci es re sul ting from its par ti ci pa ti on in the ESCB.

(5) Decree- Law no.337/90 of 30 Oc to ber.(6) The Pro to col re gard ing Por tu gal, an nex to the Treaty in sti tut ing the Euro pean Com mu nity, fore saw the pos si ble main te nance of

the cur rent ac counts of the Azores and Ma deira Autono mous Re gions in the Banco de Por tu gal. The Law of Fi nance of theAutono mous Re gions (Law no 13/98 of 24 Feb ru ary) fore sees the clos ing of these ac counts, as well as the set tle ment of the re spec -tive bal ances un til 31 De cem ber 2000.

(7) Law no 2/92. The set tle ment of the cur rent ac count bal ance was car ried out through the place ment in the Banco de Por tu gal of theRe pay ing In ter nal Loan amount ing to PTE 248.4 bil lion. This loan has a 10- year ma tur ity, with an in ter est rate equal to 10 percent of the an nual base rate in the first year, ris ing up to 100 per cent of that rate in the last year.

(8) Decree- Law no. 231/95 of 12 Sep tem ber.(9) It be came in cum bent upon the Banco de Por tu gal to “con duct the mone tary pol icy”, while main tain ing the at tri bu tion of “co-

operating in the for mu la tion and im ple ment ing the ex change rate pol icy”.(10)In prac tice, these op era tions were al ready for bid den since the be gin ning of the Sec ond Stage of the EMU (on 1 Janu ary 1994), af ter

the com ing into force of Ar ti cle no.104 of the Euro pean Un ion Treaty and of the re spec tive ap pli ca tion Regu la tion (Regu la tion no.3603/93 of the Coun cil of 13.12.1993 that speci fies the defi ni tions nec es sary to the ap pli ca tion of the pro hi bi tions in di cated in Ar ti -cle no.104 and in Ar ti cle no.104 - B no.1 of the Treaty).

(11)Law no. 5/98 of 31 Janu ary 1998.

cudo re turned to val ues close to those re corded in Sep tem ber 1996 (chart VI.4). Within the ERM of the EMS, the es cudo was al ways tradedabove the cen tral par ity vis- à- vis the Deut schemark, as has hap pened since Sep tem ber 1996.The de pre cia tion re corded by the es cudo fromMay 1997 on wards trans lated into a move ment of this cur rency to wards its cen tral par ity vis- à- vis the Deut sche mark. The spread be tweenthe mar ket and the cen tral rates ranged from amaxi mum of 2.5 per cent in Janu ary, to a mini -

mum of 0.3 per cent in late 1997 (1.6 per cent inDe cem ber 1996). The vola til ity of the es cudovis- à- vis the Deut sche mark re mained at lowlev els, close to those ob served in 1996. Mar ketex pec ta tions(7) re gard ing the 3- month for wardex change rate of the es cudo vis- à- vis the Deut -sche mark con firm the re duc tion in the vola til -



THE TARGET SYSTEM

On 1 Ja nu ary 1999 the TARGET sys tem (i.e., the Trans- Eu ro pean Real- Ti me Gross Settle ment Ex pressTrans fer Sys tem) will start its ac ti vity. The sys tem will com prise one RTGS (Real- Time Gross Set tle mentSystem) in each coun try of the euro area and an “In ter link ing” mecha nism. The TARGET will en able cross-border payments to be car ri ed out with a speed and sa fety iden ti cal to tho se of do mes tic sys tems, which cons ti tu tes a keyas pect to the effi ci ent con duct of mone tary po licy ope ra tions of the Eu ro pean Sys tem of Cen tral Banks (ESCB). The uti li sa ti on of the TARGET is only com pul sory for payments re sul ting from the exe cu ti on of the sin gle mo ne tarypo licy. The functioning of the TARGET stands as an es sen ti al con di ti on to the sin gle ness of mo ne tary po licy in the euro area.

Cross-border payments car ri ed out through the TARGET will have two settle ment agents: the na ti o nal cen tral bank (NCB) of the origi na tor of the payment which car ries out the de bit of the res pec ti ve ac count, and the NCB ofthe bene fi ci ary of the payment that takes the cre dit. The nor mal ope ra ting sche du le of the TARGET ran ges from 7a.m. to 6 p.m. Eu ro pean Cen tral Bank (ECB) time; howe ver, for na ti o nal rea sons the NCBs may open their RTGSbe fo re that time. Un der nor mal con di tions, the sys tem in ter rupts the ac cep tan ce of payment or ders from the cus to -mers of the banking sys tem by 5 p.m., des pi te ac cep ting in ter bank payments un til 6 p.m. This ti me ta ble en su res acon sid er able overlap betwe en the func ti o ning of the TARGET and that of the payment sys tems of the major fi nan -ci al cen tres of North Ame ri ca and Asia, hence supporting the efforts of the in ter na ti o nal banking commu nity to -wards lim it ing cross- currency set tle ment risk. The NCBs will have to await the autho ri sa ti on of the ECB, whichwill check the re con ci li a ti on of the endof- day amounts outs tan ding to clo se the res pec ti ve sys tems. Ex cept for theweekends, Christmas day and the New Years day, the TARGET is always open. On na ti o nal bank ho li days, theNCBs may clo se the res pec ti ve sys tems whe ne ver re qui red by the law or by the banking sys tem.

The NCBs shall grant in tra- daily li qui dity to the par ti ci pants in the payments sys tems, al lowing for the uti li -sa ti on of fully co la te ra li sed overdrafts or the ce le bra ti on of in tra- daily re pur cha se agre e ments.

A sin gle fee will be char ged over cross-border trans fers. This fee will stand betwe en 1.50 and 3.00 euro (the pre -ci se fi gu re shall be de fi ned by the ECB Gov ern ing Coun cil). The pri ce of trans fers in euro in the RTGS will con ti -nue to be de fi ned at the na ti o nal le vel, ac cor ding to the prin ci ple that the pri ce of do mes tic and trans na ti o nal trans -fers should not differ si gni fi cantly – as to pre ser ve the mo ney market sin gle ness in the euro area. The pos si bi lity ofde fi ning dif fer ent fee struc tu res for the TARGET par ti ci pants ac cor ding to the res pec ti ve uti li sa ti on of the sys temis cur rently un der dis cus si on. Howe ver, this kind of so lu tion may not be avai la ble by early 1999.

The RTGS of the non- euro Eu ro pean Union coun tries may be con nec ted to the TARGET to carry out trans fersin euro. The ECB Coun cil shall de li be ra te over the pos si bi lity of the ESCB gran ting in tra- daily cre dit to the non- euro NCBs, also de ci ding which the me cha nisms to be used to pre vent in tra day credit from spill ing over into over -night credit.

(7) Risk- neutral ex pec ta tions in ferred from op tions on thees cudo ex change rate vis- à- vis the Deut sche mark, with a call price that equals the 3- month for ward rate.

ity of this par ity, and re flect the grad ual prob -abil ity granted to the con fine ment of the es -cudo ex change rate to a nar row in ter valaround the cen tral par ity vis- à- vis the Deut -sche mark (chart VI.5).

In a con text of ex change rate sta bil ity and offa vour able ex pec ta tions re gard ing the dis in fla -tion ary pro cess, the Banco de Por tu gal againcut its in ter ven tion rates through out 1997(chart VI.6 and ta ble VI.1). The rate of li quid itydrain ing was cut by 1.3 per cent age points inthe year as a whole, amount ing to 4.9 per centfrom mid- November on wards. Mean while, the emer gency lend ing rate and the repo rate were

both cut by 1.4 per cent age points in 1997 as awhole, stand ing at 6.9 and 5.3 per cent re spec -tively, from mid- November on wards. The re -duc tion in the in ter ven tion rates of the Bancode Por tu gal re sulted in a nar rower dif fer en tialof the rate of regu lar li quid ity in jec tion vis- à- vis the cor re spond ing Ger man rate, from 3.7per cent age points in late 1996 to 2 per cent agepoints in late 1997.

Re flect ing the be hav iour of the in ter ven tionrates, the in ter bank money mar ket short- termin ter est rates con tin ued their down ward path,which re sulted in a down ward shift of the yield curve up to one year (chart VI.7). De spite thefact that the re duc tion in the money mar ket in -ter est rates was sharper in shorter ma turi ties,the yield curve con tin ued to ex hibit a nega tiveslope, which in di cates the per sis tence of ex pec -ta tions of fur ther re duc tions of in ter est rates intheir ma turi ties.

The es cudo 3- month in ter est rate fell by 1.4per cent age points in 1997, stand ing at 5.0 percent in De cem ber 1997. The re duc tion in theshort- term in ter est rates of the es cudo led to asig nifi cant nar row ing of the dif fer en tial be -tween these rates and the cor re spond ing Ger -man rates, from 3.3 per cent age points in De -cem ber 1996 to 1.4 per cent age points in late1997 (chart VI.8). As in 1996, the es cudo 3-



Chart VI.4EVOLUTION OF THE ESCUDO VIS-À-VIS THE

DEUTSCHE MARK

80

85

90

95

100

105

110

115

120Jan96 Apr Jul Oct Jan97 Apr Aug Nov

Inve

rted

sca

le

Bilateral central exchange rate(DEM/PTE 102.505)

Upper limit 15 % band of the ERM

Lower limit 15 % band ofthe ERM

DEM/PTE

Chart VI.5PROBABILITY DENSITY FUNCTIONS OF THE

3-MONTH FORWARD PTE/DEM RATE

0.00

0.02

0.04

0.06

0.08

0.10

0.12

97 98 99 100 101 102 103 104 105 106

PTE/DEM

Pro

babi

lity

dens

ity P

TE

/DE

M

31-Dec-97

31-Dec-96

30-Jun-97

Chart VI.6INTERVENTION INTEREST RATES OF THE

BANCO DE PORTUGAL AND OVERNIGHTINTEREST RATE IN THE INTERBANK

MONEY MARKET

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

Jan97 Feb Mar Apr May Jul Aug Sep Oct Nov

Per

cent

age

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

Per

cent

age

Repo rate

Emergency lending rate

Absorption rate

Overnight rate

month in ter est rates stood sys tem ati cally be -low the rate of li quid ity in jec tion of the Bancode Por tu gal.

Li quid ity con di tions in the money mar ketchanged over the course of 1997. Be tween Janu -ary and mid- May 1997, the Por tu guese moneymar ket re vealed ex ces sive li quid ity, con trast -ing with the situa tion pre vail ing since 1994.This situa tion was chiefly due to the re demp -tion of pub lic debt se cu ri ties, and to the pay -ment of in ter est of Treas ury bonds in early1997. Li quid ity con di tions in the pe riod werealso in flu enced by the fact that the first trancheof De posit Cer tifi cates (DS) of the Banco dePor tu gal came into ma tur ity in late 1996. Thein ter ven tion of the Banco de Por tu gal in themoney mar ket in this pe riod was char ac ter isedby the net drain ing of funds — namely through the is su ing of Money In ter ven tion Cer tifi cates(TIM). These se cu ri ties were is sued at in ter estrate auc tions for ma turi ties of four and nineweeks. The pe rio dic ity of these auc tions var iedac cord ing to the mar ket’s li quid ity con di tions.In deed, in Feb ru ary and March, two auc tions



Ta ble VI.1

INTERVENTION INTEREST RATES AND RETURN ON DEPOSIT CERTIFICATES OF THE BANCO DE PORTUGAL

Per cen ta ge

Li qui dity in jec ti on Li qui dity ab sorp ti on

Re mu ne ra ti on of de po sitcer ti fi ca tes in the

Ban co de Por tu gal(c)Re gu lar ope ra tions(a)

Daily cre dit fa ci lity(b)

1996 04 Nov. . . . . . . . . . . . . 6.3 19 Dec . . . . . . . . . . . . . 6.7 8.3 6.2

1997 13 Jan . . . . . . . . . . . . . . 6.5 04 Feb . . . . . . . . . . . . . 5.6 14 Apr . . . . . . . . . . . . . 6.3 7.8 5.8 04 May. . . . . . . . . . . . . 5.2 12 May. . . . . . . . . . . . . 6.0 7.7 5.7 14 Jul . . . . . . . . . . . . . . 5.7 7.4 5.4 04 Aug. . . . . . . . . . . . . 5.0 19 Aug. . . . . . . . . . . . . 5.5 7.2 5.2 04 Nov. . . . . . . . . . . . . 4.7 19 Nov. . . . . . . . . . . . . 5.3 6.9 4.9

Notes:(a) Operations which started on the first working day of the reserve maintenance period and expire on the first working day of the

following period.(b) Liquidity injection operations, at a rate announced in advance, which expire on the working day immediately following that of

the transaction. Use of this facility is automatic, that is to say, it depends solely on a decision by the banks.(c) Rate of remuneration of series B deposit certificates (with terms between 4 and 10 years) issued by the Banco de Portugal within

the minimum cash reserves scheme. Rate announced by the Banco de Portugal for the following three months.

4.5

5.0

5.5

6.0

6.5

7.0

O/N Week F/N Month 3Months

6Months

1 Year

Per

cent

age

4.5

5.0

5.5

6.0

6.5

7.0

Per

cent

age

Dec - IV - 96

Dec - IV - 97

Chart VI.7YIELD CURVE

Interbank money market

took place for each ma tur ity, at the be gin ningof each re serve main te nance pe riod. Af ter -wards, up to mid- June, TIM auc tions were car -ried out on the days pre ced ing the ma tur ity ofse cu ri ties pre vi ously is sued. Av er age rates ofplac ing of the 4- week TIM stood in gen eralabove the rate of li quid ity ab sorp tion, whilethe 9- week TIM stood slightly be low that rate.Both rates fol lowed the re duc tion in the in ter -ven tion rates through out the first half of 1997(ta ble VI.2), sys tem ati cally reach ing val ues be -low those of the LISBOR rates for the same ma -turi ties.

From mid- May on wards, the money mar ket re turned to a situa tion of fre quent li quid ityshort age. In this con text, the last TIM auc tionstook place in mid- June, the live bal ance of these se cu ri ties be ing an nulled in mid- July. Theover night in ter est rate, which had stood closeto the rate of li quid ity drain ing since early1997, shifted to wards val ues close to the rate ofli quid ity in jec tion.

In early No vem ber 1997, the sec ond trancheof de posit cer tifi cates (DC) of the Banco de Por -tu gal, cor re spond ing to the li quid ity ab sorp -tion op era tions fol low ing the ap pli ca tion of the new cash re serve scheme (3- year A se ries,non- remunerated) came into ma tur ity. Thema tur ity of the de posit cer tifi cates re sulted in a tem po rary li quid ity sur plus in the money mar -ket through out No vem ber — which was partly in verted in late 1997 due to the greater de mand for funds of a sea sonal char ac ter. In fact, inearly 1998 the money mar ket again re cordedex ces sive li quid ity, as in early 1997.

The Por tu guese long- term in ter est ratesmain tained their down ward trend in 1997, re -flect ing the achieve ments of the pro cess ofnomi nal con ver gence of the Por tu guese econ -omy, as well as of the budg et ary con soli da tionpro cess. The im proved ex pec ta tions re gard ingthe crea tion of the euro on 1 Janu ary 1999, spe -cially af ter the in for mal ECOFIN meet ing heldin Mon dorf in mid- September, also con trib -uted to the re duc tion of the es cudo long- termin ter est rates. In De cem ber 1997, the 10- yearbond yields of the es cudo av er aged 5.7 percent, 1.3 per cent age points less than in late1996. On its turn, the long- term dif fer en tialvis- à- vis Ger many nar rowed 0.8 per cent agepoints, stand ing at 0.4 per cent age points in De -cem ber 1997 (chart VI.9). Through out 1997, thean nual av er age long- term in ter est rate con tin -ued to stand be low the ref er ence value of there spec tive con ver gence cri te rion. The nega tivedif fer en tial be tween these rates wid ened from0.6 per cent age points in De cem ber 1996 to 1.6per cent age points in late 1997 (chart VI.10).

The fact that the re duc tion in in ter est ratesin the shorter and in the longer terms was vir -tu ally the same re sulted in the main te nance ofan up ward yield curve, meas ured by the dif fer -



Chart VI.8A SHORT-TERM INTEREST RATES

3- month

2

3

4

5

6

7

8

9

10

11

Jan96 Apr Jul Oct Jan97 Apr Jul Oct

Per

cent

age

2

3

4

5

6

7

8

9

10

11

Per

cent

age

DEM

PTE

ESP

SEK

ITL

Chart VI.8BDIFFERENTIALS OF SHORT-TERM INTERESTRATES VIS-À-VIS THE DEUTSCHE MARK

3- month

0

1

2

3

4

5

6

7


Per

cent

age

poin

ts

0

1

2

3

4

5

6

7

Per

cent

age

poin

ts

PTE

ESP

SEK

ITL

en tial be tween 10- year bond yields and 3- month in ter est rates (chart VI.11). At the end of1997, this dif fer en tial amounted to 0.6 per cent -

age points, close to the value re corded in late1996.



Chart VI.10CONVERGENCE OF LONG-TERM INTEREST

RATES OF THE ESCUDO

-4

-2

0

2

4

6

8

10

12

14

Dec95 Mar96 Jun Sep Dec96 Mar97 Jun Sep Dec97

Per

cent

age

-4

-2

0

2

4

6

8

10

12

14

Per

cent

age

Portugal

Average reference l

Differential pp. (right-hand scale)

Ta ble VI.2

ABSORPTION RATES, AVERAGE RATES OF PLACEMENT OF MONETARY INTERVENTION CERTIFICATES AND LISBOR RATES

Per cen ta ge

Ab sorp ti on ra tes

Ave ra ge ra tes of pla ce ment of mo ne tary in ter ven ti on cer ti fi ca tes(a)

In ter bank mo ney market ra tes LISBOR

Da tes 4 weeks 9 weeks 1 Month 2 Month

1997 04 Feb. . . . . . . . . . . 6.20 6.23 6.18 6.33 6.20 12 Feb. . . . . . . . . . . 6.20 6.23 6.16 6.31 6.20 19 Feb. . . . . . . . . . . 6.20 6.25 6.20 6.35 6.26 26 Feb. . . . . . . . . . . 6.20 - - 6.32 6.26 04 Mar . . . . . . . . . . 6.20 - - 6.37 6.32 12 Mar . . . . . . . . . . 6.20 6.24 - 6.32 6.30 19 Mar . . . . . . . . . . 6.20 6.24 - 6.30 6.27 26 Mar . . . . . . . . . . 6.20 - - 6.29 6.28 08 Apr . . . . . . . . . . 6.20 6.20 6.12 6.22 6.17 16 Apr . . . . . . . . . . 5.80 5.85 5.81 5.87 5.82 23 Apr . . . . . . . . . . 5.80 5.90 5.84 5.90 5.88 28 Apr . . . . . . . . . . 5.80 - - 5.99 5.90 05 May . . . . . . . . . . 5.80 - - 6.01 5.92 12 May . . . . . . . . . . 5.70 5.79 5.75 5.80 5.76 19 May . . . . . . . . . . 5.70 5.77 5.70 5.80 5.70 09 Jun . . . . . . . . . . . 5.70 - - 6.00 5.90 17 Jun . . . . . . . . . . . 5.70 5.85 - 6.03 5.92

Note:

(a) Dates for which no interest rates indicated stand for auctions with no replacement.

Chart VI.9LONG-TERM INTEREST RATES

10-year

0

1

2

3

4

5

6

7

8

9

10

11


Per

cent

age

0

1

2

3

4

5

6

7

Per

cent

age

DEM

Differential pp. (left-hand scale)

PTE

2. MONETARY SITUATION IN 1997

2.1 Mo ne tary aggre ga tes and coun ter parts ofmo ney cre a ti on

From the sec ond quar ter of 1997 on wards,li quid ity ag gre gate L– (net as sets of the non- financial resi dent sec tor) in verted the ac cel era -tion trend re corded through out 1996. In De -cem ber 1997, the rate of growth(8) of this ag gre -gate stood at 6.2 per cent, which com pares with 8.8 per cent in De cem ber 1996 and 9.4 per centin March 1997 (chart VI.12).

The change in the do mes tic li quid ity of thePor tu guese econ omy in 1997 chiefly re flectedthe slow down of quasi- money (mainly con sti -tuted by time de pos its), since ag gre gate M 1

(money cir cu la tion and de mand de pos its) con -tin ued the ac cel era tion trend ex hib ited sincemid- 1996. In deed, the ag gre gate M 1 re cordedhigh growth rates through out 1997, reach ing apeak of 20.7 per cent in No vem ber. At the endof the year, the year- on- year rate of change of M 1 de creased to 13.8 per cent, still 3.5 per cent -age points more than in De cem ber 1996. On the

other hand, the year- on- year rate of change ofquasi- money stood at 2.8 per cent in De cem ber1997, 5.6 per cent age points less than one yearbe fore.

The be hav iour of M 1 in 1997 can be ex -plained in a dis in fla tion con text, since the re -duc tion in the in fla tion rate leads to a lower op -por tu nity cost of hold ing money, in duc ing afall in the re spec tive cir cu la tion ve loc ity. Inpar al lel, the high rates of growth re corded by M 1 in June, Sep tem ber and No vem ber 1997, aswell as the nega tive cor re la tion be tween thegrowth of this ag gre gate and quasi- money inthese months, may be re lated to pri va ti sa tionop era tions. In deed, funds were trans ferredfrom time de pos its — in cluded in quasi- money — to de mand de pos its des tined to the set tle -ment of se cu ri ties pur chased dur ing the pri va -ti sa tion op era tions.

Fur ther more, the be hav iour of quasi- money re flected ad just ments in eco nomic agents’port fo lio, as so ci ated to the main te nance of thedown ward trend of in ter est rates on time de -pos its, in line with the be hav iour of moneymar ket in ter est rates. In re la tion to 1996, in ter -est rates on time de pos its fell be tween 0.9 per -cent age points for 91 to 180- day de pos its, and1.3 per cent age points for 31 to 90- day de pos itsand for the 181- day up to 1 year ma turi ties(chart VI.13). In ter est rates for shorter ma turi -ties (31 to 90 days and 91 to 180 days) stood at



Chart VI.11DIFFERENTIAL OF THE ESCUDO SHORT-TERM

INTEREST RATES IN RELATION TO LONG-TERM INTEREST RATES

0

1

2

3

4

5

6

7

8

9

10

11


Per

cent

age

0

1

2

3

4

5

Per

cent

age

Differential pp. (Left-hand

Long-term interest rate (10-year)

Short-term interest rates (3-month)

Chart VI.12MONETARY AND LIQUIDITY AGGREGATES


0

2

4

6

8

10

12

14

16

18

20

22


Per

cent

age

0

2

4

6

8

10

12

14

16

18

20

22

Per

cent

age

L-

M1-

Quasi-money

(8) Ex cept where oth er wise men tioned, the re ferred growthrates cor re spond to the per cent age change in re la tion tothe same pe riod of the pre vi ous year.

4.6 per cent in De cem ber 1997, while longer- term in ter est rates (180 day to 1 year and over 1year) fell to 4.1 per cent. As in 1996, the dif fer -en tial be tween the in ter est rate on time de pos -its over 1 year and the rate of de pos its from 31to 90 days con tin ued to be nega tive through out

1997. This re flects the nega tive slope of the in -ter bank money mar ket yield curve.

The re duc tion in in ter est rates on time de -pos its made al ter na tive in vest ments more at -trac tive; in deed, in the port fo lio of the non- banking resi dent sec tor money as sets en com -passed in L– were sub sti tuted by do mes tic se -cu ri ties (mostly shares) and for eign se cu ri ties— namely bonds is sued in es cu dos by non- residents (chart VI.14). Mean while, non- banking resi dents’ in vest ments in Por tu guesepub lic debt se cu ri ties con tin ued to de crease in1997. In deed, in vest ment in these se cu ri ties bythe non- banking resi dent sec tor amounted toPTE 200 bil lion, ac count ing for a PTE 243.3 bil -lion de crease in non- monetary credit to Gen -eral Gov ern ment in 1997.

In 1997, to tal do mes tic credit re mained asthe main source of money crea tion (chartVI.15). The change in do mes tic li quid ity re -flected the in crease in bank ing credit to com -pa nies and in di vidu als, since net credit toGen eral Gov ern ment (GG) con tin ued to de -crease in 1997 (ta ble VI.3). The for eign coun -ter part con tin ued to ac count for a nega tivecon tri bu tion to money crea tion in 1997, mostly due to the re duc tion in banks’ net ex ter nal po -si tion. Worth not ing, how ever, that the con tri -bu tion of the for eign coun ter part to li quid itycrea tion was less nega tive than in 1996, re -



Chart VI.13INTEREST RATES ON TIME DEPOSITS

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5


Per

cent

age

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

Per

cent

age

31 to 90 days

91 to 180 days

181 to 1 year

More than 1 year

Chart VI.14FINANCIAL AGGREGATES

Annual flows *

-1000

-500

0

500

1000

1500


PT

E b

illio

n

-1000

-500

0

500

1000

1500

PT

E b

illio

n

(a) (b) (c) (d) (e)

(a) L—.(b) In vestments of other fi nan ci al in ter me dia ri es and

fi nan ci al au xi liary and in su ran ce com pa nies andpen si on funds in banks and Trea sury bills andCLIP.

(c) In vestments in pu blic debt se cu ri ties of the non- banking sec tor.

(d) In vestments in other do mes tic se cu ri ties of thenon- banking sec tor.

(e) In vestments’ of the non- banking sec tor abroad.* Cal cu la ted on endof- month fi gu res.

Chart VI.15COUNTERPARTS OF CHANGE IN L—


-10

-5

0

5

10

15

20

25


Per

cent

age

-10

-5

0

5

10

15

20

25

Per

cent

age

Other domestic counterparts External counterparts

Change in L-

flect ing a lower re duc tion in banks’ short- term net for eign as sets.

2.2 Cre dit aggre ga te

In De cem ber 1997, the growth of to tal do -mes tic credit stood at 9.7 per cent, as against12.0 per cent in De cem ber 1996 (chart VI.16).The be hav iour of this ag gre gate re flected onthe one hand the re duc tion in net credit to Gen -eral Gov ern ment — spe cially in the five lastmonths of 1997 — and on the other hand thestrong growth of credit to com pa nies and in di -vidu als. The fall in net bank ing credit to GGwas due to the re duc tion of this sec tor’s bor -row ing re quire ment, linked to the budg et arycon soli da tion pro cess and to the pri va ti sa tion,but also to greater use made of fi nanc ingsources other than bank credit (see Chap ter V— Pub lic Fi nance).

Bank credit to com pa nies and in di vidu alscon tin ued its ac cel era tion trend re corded sinceMarch 1996. The be hav iour of this ag gre gate in1997 re flected the dy na mism of eco nomic ac -tiv ity — spe cially of in vest ment — and the fallin in ter est rates. Given this back ground, therate of growth of credit to com pa nies and in di -

vidu als rose from 17.5 per cent in De cem ber1996 to 20.5 per cent in De cem ber 1997. The ac -cel era tion of this ag gre gate re sulted from thein crease in the rate of growth of credit to non- financial com pa nies and in di vidu als — from14.6 per cent in De cem ber 1996 to 23.7 per centin late 1997 — since credit to non- banking fi -nan cial in sti tu tions re corded a slow down in1997 (chart VI.17). Worth not ing that the par -ticu larly low value re corded by the year- on-



Ta ble VI.3

COUNTERPARTS OF CHANGE OF L–

PTE Billi on

1996 1997

Year 1st half 2nd half Year 1st half 2nd half

Sources of changes in domestic liquidity:1. Total domestic credit . . . . . . . . . . . . . . . . . . . . . . . . . . . 1758.2 587.0 1171.1 1602.0 707.2 894.8 1.1 General Government . . . . . . . . . . . . . . . . . . . . . . . . -194.3 -89.0 -105.3 -1089.0 -495.1 -593.8 1.2 Companies and individuals . . . . . . . . . . . . . . . . . . 1952.5 676.0 1276.4 2691.0 1202.3 1488.6 1.2.1 Non-financial companies and individuals . 1404.7 578.7 826.0 2614.7 1247.7 1367.0 1.2.2 Non-banking financial institutions. . . . . . . . 547.8 97.3 450.5 76.2 -45.4 121.62. Other domestic counterparts . . . . . . . . . . . . . . . . . . . . -255.6 94.8 -350.4 -578.7 -257.9 -320.83. (=1.+2.) Domestic counterparts . . . . . . . . . . . . . . . . . 1502.6 681.9 820.7 1023.3 449.3 574.04. Net official reserves of the Banco de Portugal. . . . . . -46.3 96.8 -143.1 -26.2 -134.1 107.95. External net position of banks . . . . . . . . . . . . . . . . . . . -442.1 -550.6 108.5 -212.6 -192.1 -20.56. (= 4.+5.) External counterparts . . . . . . . . . . . . . . . . . . -488.5 -453.9 -34.6 -238.8 -326.1 87.47. (=3.+6.) Change in L . . . . . . . . . . . . . . . . . . . . . . . . . . 1014.1 228.0 786.1 784.6 123.2 661.4

Note: Net official reserves of the Banco de Portugal exclude flutuations, results and interest on exchange rate operations.

Chart VI.16DOMESTIC BANK CREDIT AGGREGATES


6

8

10

12

14

16

18

20


Per

cent

age

6

8

10

12

14

16

18

20

Per

cent

age

91 to 180 days

Over 5 years

181days to 1 year

year rate of change of this ag gre gate in De cem -ber 1997 (3.7 per cent, as against 20.7 per cent in the pre vi ous quar ter) chiefly re flects an arith -metic ef fect linked to the strong growth ofcredit to these in sti tu tions in late 1996 (35.5 percent), due to op era tions be tween in sti tu tionsbe long ing to the same fi nan cial groups. In fact,in an nual flows, credit to fi nan cial in sti tu tionsin creased (by PTE 77 bil lion).

Bank credit to non- financial com pa nies ac -cel er ated strongly over the course of 1997. Theyear- on- year rate of change of this ag gre gaterose from 7.1 per cent in De cem ber 1996 to 21.0

per cent in De cem ber 1997 (see Chap ter VIII —Bank ing sys tem). A key fac tor in ex plain ing thebe hav iour of credit to non- financial com pa nieswas the con tinua tion of the down ward trendex hib ited by lend ing in ter est rates, since theseren dered no longer a bind ing con straint to in -vest ment de ci sions. When com pared to 1996,the re duc tion in in ter est rates on lend ing tonon- financial com pa nies and on com mer cialpa per — in gen eral sharper than the re duc tionex hib ited by the in ter bank money mar ket in -ter est rates — was more sig nifi cant in in ter estrates on loans and ad vances (91 to 180 days),which fell 2.6 per cent age points in 1997 as awhole (chart VI.18). In De cem ber 1997, this rate stood at 8.4 per cent. In ter est rates on com mer -cial pa per (85 to 95 days) and on com mer cialport fo lio (91 to 180 days) fell by 1.5 and 1.4 per -cent age points, re spec tively, stand ing at 5.3and 10.7 per cent in late 1997.

Bank credit to in di vidu als con tin ued togrow at a high pace in 1997. The year- on- yearrate of change of this ag gre gate amounted to27.1 per cent in De cem ber 1997, which com -pares to 25.5 per cent in late 1996. In ter est rateson lend ing to in di vidu als also de creased in1997, as in the pre vi ous year (chart VI.19). There duc tion in these rates was par ticu larly sharpin the 91 to 180- day ma tur ity. In this ma tur ity,the in ter est rate fell from 14.9 per cent in De -cem ber 1996 to 11.4 per cent in De cem ber 1997



Chart VI.17DOMESTIC BANK CREDIT TO COMPANIES

AND INDIVIDUALSYear-on-year rates of change

0

5

10

15

20

25

30

35

40

Mar96 Jun Sep Dec Mar97 Jun Sep Dec

Per

cent

age

0

5

10

15

20

25

30

35

40

Per

cent

age

Total

Non-financial companies

Individuals

Non-banking financial companies

Chart VI.18INTEREST RATES ON BANK CREDIT TO

PRIVATE NON-FINANCIAL COMPANIES AND ON COMMERCIAL PAPER

4

5

6

7

8

9

10

11

12

13

14

15


Per

cent

age

4

5

6

7

8

9

10

11

12

13

14

15

Per

cent

age

Commercial portfolio (91 to 180 days)

Loans and advances(91to 180 days)

Commercial paper(85 to 95 days)3-month LISBOR

interest rate

6

8

10

12

14

16

18

20


Per

cent

age

6

8

10

12

14

16

18

20

Per

cent

age

91 to 180 days

Over 5 years

181 days to 1 year

Chart VI.19INTEREST RATES ON BANK CREDIT

TO INDIVIDUALSLoans and advances

— thus ac count ing for a 3.5 per cent age pointsre duc tion. The in ter est rate on loans and ad -vances to in di vidu als in the 181- day up to 1year ma tur ity fell 2.4 per cent age points in 1997, stand ing at 10.2 per cent in De cem ber. Mean -

while, the in ter est rate on credit to in di vidu alsat more than 5 years — usu ally taken as a proxy for the in ter est rate on credit to hous ing pur -chase — stood at 8.0 per cent in late 1997, 3.0per cent age points less than in De cem ber 1996.



Chap ter VII

SECURITIES MARKETS

1. Ge ne ral background

In 1997, the Por tu guese stock mar ket ex -hib ited a sig nifi cant dy na mism in its vari ousseg ments. In the stock mar ket, three fac torscon trib uted to an ideal set ting for the growthof the mar ket: firstly, the con tinua tion of thedown ward path of in ter est rates, in line withthe per spec tives of ex change rate and pricesta bil ity; sec ondly, the in crease in com pa -nies’ ob served and ex pected re sults, ac com -pa ny ing the ac cel era tion of eco nomic ac tiv -ity; thirdly, the fa vour able back ground mo ti -vated by the rise in prices in the EU and USAstock mar kets. As a re sult, the Lis bon StockEx change (LSE) Gen eral In dex, the LSE-30 In -dex and PSI-20 rose sharply (65.2, 74.7 and71.1 per cent, re spec tively), above the in -creases re corded in the lead ing in ter na tionalstock mar kets.

De spite the out stand ing growth of prices in1997, and the fact that the value of the in dexesmore than dou bled in the last three years (witha growth of 109.6 per cent in the LSE Gen eralin dex), the growth of the Por tu guese stockmar ket since 1995 did not dif fer sig nifi cantlyfrom that of the lead ing in ter na tional mar kets,when meas ured in a same cur rency.

The be hav iour of stock prices in Por tu galwas also due to the in ter na tional pro jec tion ofthe Por tu guese stock mar ket, re sult ing fromthe in te gra tion of the lead ing shares listed inthe LSE in the Mor gan Stan ley Capi tal In ter na -tional (MSCI) in dexes, and the con se quent in -crease of for eign par tici pa tion in the do mes ticmar ket (see box Some as pects of the Por tu guese fi -nan cial in te gra tion).

An ad di tional key fac tor in ex plain ing thein crease in stock prices and the in ter na tion ali -sa tion of the Por tu guese mar ket was the con -tinua tion of the pri va ti sa tion pro cess, which al -lowed for the list ing of com pa nies with highcapi tali sa tion, as was the case of EDP and Brisa, as well as the list ing of ad di tional shares of Por -tu gal Tele com fol low ing the third stage of thepri va ti sa tion of this com pany. The pri va ti sa -tion of these com pa nies, to gether with thegrowth of prices and the list ing in the stock ex -change of new shares re sult ing from other Pub -lic Of fers of Sale, re sulted in an in crease in thecapi tali sa tion of the LSE stock mar ket, by about 87 per cent in 1997, reach ing PTE 7,161.7 bil lionat the end of the year.

Re gard ing the in ter na tional back ground,1997 was marked by the fall in prices in theAsian share mar kets, with in ten sity, char ac ter -is tics and con se quences never seen be fore. Thenega tive change in the do mes tic cur rency-de nomi nated in dexes of the most af fected mar -kets — Thai land, Ma lay sia, South Ko rea andIn do ne sia — reached be tween 40 and 60 percent.

Un like in re cent fi nan cial cri ses, the eventsin the Asian mar kets in 1997 did not re sult from the wors en ing of the main mac roeconomicvari ables. In deed, the ori gin of the Asian cri siscan be found in the be hav iour of prices in thestock and real es tate mar kets which, af ter ris -ing ex ces sively, fell sharply.

The con ta gion of these ef fects was mag ni -fied by the im pact in the do mes tic bank ing sys -tems, which re sorted to in ade quate pro ce dures


Securities markets

in valu ing fi nan cial and real es tate as sets, in acon text of an in ade quate su per vi sion and ofmoral haz ard re sult ing from the im plicit gov -ern ment pro tec tion granted to the fi nan cial in -sti tu tions.

In ad di tion, due to the strong par tici pa tionof non- residents in the mar ket, the fall in stockprices was linked to the sig nifi cant de pre cia -tion of na tional cur ren cies in the af fected coun -tries. Fur ther more, the high pro por tion of fi -nanc ing in for eign cur rency led to the wors en -ing of qual ity of the loans of in ter na tional fi -nan cial in sti tu tions more ex posed to risks con -cen trated in the Asian mar kets.

In Por tu gal, the cri sis in these mar kets pro -voked an in crease in the vola til ity of the stockprices, al though by the end of the year price lev -els had al ready reached new his tori cal maxi -mum. There fore, un like what oc curred fol low -ing the Mexi can cri sis in De cem ber 1994, the Por -tu guese se cu ri ties mar ket ac com pa nied the de -vel op ments in the lead ing Euro pean mar kets,and rap idly re cov ered its up ward path. This factpro vides an evi dence for the ex pec ta tions re -gard ing the Por tu guese par tici pa tion in thethird stage of the EMU from Janu ary 1999 on -wards, as well as the achieved level of fi nan cialin te gra tion be tween the po ten tial par tici pants.

In the bond mar ket, the LSE-ORF and LSEORF-OT3 price in dexes also rose in 1997 — by5.4 and 3.6 per cent, re spec tively. The con comi -tant de crease in long- term in ter est rates was re -lated to the down ward re vi sion of ex pectedshort- term in ter est rates, tak ing into ac count thecon soli da tion of the dis in fla tion and pub lic fi -nance, which in turn re sulted in an in creasedprob abil ity at trib uted to the Por tu guese par tici -pa tion in the third stage of the EMU.

Also worth not ing the in ter na tional pro jec -tion of the Por tu guese bond mar ket — namelythe in te gra tion of the Gov ern ment debt in the JPMor gan’s Gov ern ment Bond In dex Broad, andthe an nounce ment in late No vem ber that Por tu -gal ful filled the cri te ria for en ter ing the Solo monBroth ers’ World Gov ern ment Bond In dex(WGBI).

The cri sis in the Asian fi nan cial mar kets also con trib uted to the de crease in long- term in ter -

est rates, namely due to the flow of funds toGov ern ment debt se cu ri ties is sued by EUMem ber States, as well as to the crea tion of ex -pec ta tions of lower in creases in short- term in -ter est rates through out 1998 due to the po ten -tial nega tive ef fect on eco nomic ac tiv ity in theAsian coun tries and, con se quently, on eco -nomic growth in the EU and in the USA.

Prof it ing from the fa vour able situa tion ofthe stock mar ket, non- financial pri vate com pa -nies re sorted in creas ingly to fi nanc ing throughthe stock and bond mar kets. This be hav iourcon trasts with that of the Gen eral Gov ern ment— which re corded a re duc tion in bond is su ing— and of fi nan cial in sti tu tions — where theamount of share is sues also de creased. As a re -sult, ac tiv ity in the pri mary mar ket in 1997stood be low that re corded in the pre vi ous year.

With re spect to changes in the le gal frame -work, the Banco de Por tu gal ap proved,through the No tice no. 1/97, the repo con tract,al low ing the launch ing of the repo mar ket on14 April 1997, within the Oporto De riva tivesEx change. The en force abil ity of dis clo sure ofquar terly in for ma tion by so cie ties with listedshares should also be sin gled out; this dis clo -sure con cerns busi ness, re sults and the eco -nomic and fi nan cial situa tion of com pa nies. Fi -nally, it is worth high light ing the new leg is la -tion on Se cu ri ties In vest ment Funds for the em -ploy ees of pri va tised com pa nies.

2. Short- term debt markets

In the short- term debt mar kets, the most no -tice able as pect con tin ued to be the fall in Treas -ury bill (T- bill) and com mer cial pa per in ter estrates, though less marked than in 1996. Re gard -ing T- bills, av er age in ter est rates in the pri mary mar ket fell by about 1.4 per cent age points inthe 91- day ma tur ity, and around 1.2 per cent -age points in ma turi ties from 182 to 364 days,re spec tively to 5.0 and 4.8 per cent at the end of1997.

These rates stood fre quently be low theLISBOR rates and the in ter ven tion rates of theBanco de Por tu gal. This re flects the nega tiveslope of the yield curve in shorter ma turi ties


Securities markets

and the oc cur rence of sev eral auc tions ex hib it -ing low per cent ages of bids ac cepted (chartVII.1)(1).

This Treas ury pro ce dure was linked to there duc tion of the Pub lic Sec tor bor row ing re -quire ment, as well as to the sub sti tu tion ofshort- term debt by me dium- and long- termdebt — de nomi nated in es cu dos or in for eigncur rency — lead ing to a PTE 353.8 bil lion re -duc tion in the value of T- bills is sued in 1997. As a re sult, de spite the ab sence of dis tur bances inthe money mar kets, the ra tio of the over allamount is sued to the over all amount an -nounced fell from 91 per cent in 1996, to 76 percent in 1997.

As an out come of the lower amount of T- bills is sued, the out stand ing amounts of theGov ern ment debt in this kind of in stru mentde creased by PTE 331.3 bil lion, be tween De -cem ber 1996 and the same month in 1997. Thepro por tion of T- bills in the to tal Gov ern mentdebt nar rowed from 12.6 to 9.5 per cent. On the

other hand, the out stand ing amounts of com -mer cial pa per de nomi nated in for eign cur -rency is sued by the Gov ern ment in creased PTE 26.6 bil lion in 1997.

Av er age in ter est rates in the do mes tic com -mer cial pa per mar ket ac com pa nied the be hav -iour of the in ter bank money mar ket rates, hav -ing con tin ued to de crease. Av er age in ter estrates of is sues with ma tur ity be tween 85 and 95 days and be tween 180 and 190 days fell by 1.5and 1.4 per cent age points, re spec tively, to 5.2and 5 per cent at the end of 1997. The dif fer en -tial vis- à- vis the in ter est rates of 91- and 182- day T- bills also nar rowed, from re spec tively 35 and 48 ba sis points in De cem ber 1996, to 26 and 18 ba sis points in De cem ber 1997(2).

Re gard ing com mer cial pa per is sued bynon- financial pri vate com pa nies, the in ter estrate dif fer en tial vis- à- vis T- bills for ma turi tiesaround 3 months also nar rowed in this pe riod,from 45 to 36 ba sis points (chart VII.2). This be -hav iour re flected the re duc tion of the av er agecredit risk of non- financial pri vate is su ers ofcom mer cial pa per.


Securities markets

Chart VII.1WEIGHTED AVERAGE INTEREST

RATES OF TREASURY BILL PRIMARY MARKETAND INTERVENTION RATES OF THE

BANCO DE PORTUGAL

4.5

5.0

5.5

6.0

6.5

7.0

7.5

Sep96 Dec Mar97 Jun Sep Dec

Per

cent

age

Liquidity draining Liquidity injection TB91 TB364

(1) In 1997, 22 auc tions took place with no place ment (against 3 auc tions in 1996). Longer ma turi ties re corded the great -est rate of re jec tion of pro pos als. In 1997, the Treas ury is -sued a greater pro por tion in the 182- day ma tur ity (37 percent of to tal amount is sued); the av er age ma tur ity ofTreas ury bills rose from 195 days in 1996 to 209 days in1997.

(2) For the 91- day ma tur ity, we con sid ered the in ter est ratesof the com mer cial pa per is sued in the 85 to 95- day ma tur -ity range; for the 182- day ma tur ity, the in ter est rates of the com mer cial pa per is sued with ma tur ity from 180 to 190days were taken into ac count.

Chart VII.2COMMERCIAL PAPER AND TREASURY BILLS

3-month interest rates of commercial paper and spread vis-à-vis Treasury bills

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0


Inte

rest

rat

es (

perc

enta

ge)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Spr

ead

(per

cent

age

poin

ts)

Spread Total Com.Paper-TB NFPComp.Com.Paper-TBTotal Com. Paper NFPComp. Com.PaperTB

In ter est rates ob tained by the non- financialpri vate is su ers of com mer cial pa per re mainedsub stan tially be low those of non- securitisedbank ing credit, though with a nar rower dif fer -en tial than in 1996 as re gards loans and ad -vances granted to that sec tor. Hence, this dif -fer en tial for ma turi ties around 3 months fellfrom 4.2 to 3.1 per cent age points be tween De -cem ber 1996 and the same month in 1997. Onthe con trary, the dif fer en tial vis- à- vis in ter estrates of dis counts of com mer cial bills, for thesame ma tur ity and in sti tu tional cate gory, in -creased from 5.3 to 5.4 per cent age points in that pe riod (chart VII.3).

De spite the de crease in short- term in ter estrates, in debt ed ness through com mer cial pa perdid not in crease in 1997. In fact, net is su ing ofthese se cu ri ties was nega tive this year (PTE-137 bil lion); con se quently, the out stand ingamount of com mer cial pa per fell from PTE612.1 to 475.2 bil lion. This re duc tion chiefly re -flected the de crease in the out stand ing amountof com mer cial pa per is sued by other fi nan cialin ter me di ar ies and aux il ia ries, which had is -sued sig nifi cant amounts in late 1996, in thecon text of fi nan cial op era tions of bank inggroups.

The in debt ed ness of non- financial com pa -nies through com mer cial pa per is su ing also de -

creased, from PTE 399.4 bil lion in 1996 to 387.5bil lion in 1997; as a re sult, the rela tive share ofthis kind of fi nanc ing in the to tal bank ing loanswith ma tur ity up to one year de creased from11.9 to 10 per cent.

Since the size re quire ments for com mer cialpa per is su ing are, in gen eral, set above thosefor bank ing loans, the re duc tion in the ra tio ofcom mer cial pa per is sued by non- financialcom pa nies to bank ing loans to this sec tor in di -cates that, in a con text of sharp falls in nomi nalin ter est rates — and con se quently the re duc -tion in li quid ity con straints — smaller com pa -nies had to opt for bank credit.

“Other fi nan cial in ter me di ar ies and aux il ia -ries” and “in sur ance com pa nies and pen sionfunds” gained a greater pro por tion in to talcom mer cial pa per by hold ing sec tor. At theend of 1997, these two sec tors held 38.3 and 8.4per cent of the to tal out stand ing amounts re -spec tively (18.6 and 6.8 per cent in late 1996). Inthis con text, it is also worth not ing that Se cu ri -ties In vest ment Funds’ port fo lio of com mer cialpa per is sued in Por tu gal in creased from PTE113.6 bil lion in 1996, to PTE 179.4 bil lion in1997. Mean while, the pro por tion of banks’port fo lio in to tal com mer cial pa per out stand -ing amounts fell from 73.4 to 52.1 per cent.

De spite the re duc tion in to tal com mer cialpa per out stand ing amounts, in 1997 to talamounts is sued in es cu dos rose by PTE 348.4bil lion vis- à- vis 1996. This de vel op ment sug -gests that the re duc tion in in ter est rates led to ahigher fre quency of com mer cial pa per is su ing;the re duc tion in ma turi ties re flects is su ers’ ex -pec ta tions re gard ing the con tinua tion of thefall in short- term in ter est rates through out1997.

3. Medium- and long-term securities: primary market

Prof it ing from the growth of the stock mar -ket, non- financial pri vate com pa nies re sortedin creas ingly to the Por tu guese se cu ri ties mar -ket in 1997; in deed, the to tal amount of se cu ri -ties is sued by these com pa nies (net of re demp -tions) grew by 48.2 per cent in 1997 (ta ble VII.1).


Securities markets

Chart VII.3COMMERCIAL PAPER AND BANKING LOANS TO NON-FINANCIAL PRIVATE COMPANIES

3-month interest rates

0

2

4

6

8

10

12

14

16

18

20


Inte

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0

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Spr

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Spread Discount C. bills Spread loansCommercial paper Discount C. billsLoans

This be hav iour trans lated into a 22.5 per centin crease in shares is sued by non- financial pri -vate com pa nies, while bonds is sued (net of re -demp tions) also in creased strongly, af ter thefall re corded in the pre vi ous year. There fore,bonds is sued achieved a value close to that of1995 (ta bles VII.3 and VII.5).

How ever, in over all terms, the amount ofme dium- and long- term se cu ri ties is sued in1997 fell by 17 per cent, mainly re flect ing thelower use made by the Pub lic Sec tor (in clud ingboth state- owned com pa nies and Gen eral Gov -ern ment) of the bond mar ket, and the re duc -tion in shares is sued by fi nan cial in sti tu tions(ta bles VII.1 and VII.5)(3). As re gards bonds, al -though the net amount of bonds is sued by fi -nan cial in sti tu tions and by non- residents in -creased from 1996 to 1997 (by 10.5 and 17 per

cent, re spec tively), the re duc tion in the netamounts is sued by the Gen eral Gov ern mentre sulted in a 10.1 per cent fall in the net over allamount of bonds is sued in 1997 (ta ble VII.3).

Net is su ing by the Gen eral Gov ern mentwas nega tive for the first time in the 1990’s,given the re demp tion of all ac crued in ter estbonds (OCA) and of vir tu ally all FIP, Fam ilyTreas ury Bonds and other ex ist ing bonds — fi -nanced only par tially by is su ing Treas urybonds (ta ble VII.2). The de crease in the Gen eral Gov ern ment in debt ed ness through the is su ingof me dium- and long- term bonds in the do -mes tic mar ket was made pos si ble by the higher in debt ed ness through se cu ri ties is sued in for -


Securities markets

Ta ble VII.1

TOTAL ISSUING OF MEDIUM- AND LONG-TERM SECURITIES NET OF REDEMPTIONS(a)

By ins ti tu ti o nal sec tors

PTE billi on(b)

1995 1996 1997

General Government. . . . . . . . . . . . . . . 608.9 230.7 -66.5

Monetary financial institutions (c) . . . . 263.8 520.4 461.1

Non-monetary financial institutions(d) . . . . . . . . . . . . . . . . . . . . 141.1 150.3 84.2

Non-financial state-owned companies 200.5 180.2 128.7

Non-financial private companies . . . . 426.8 246.5 365.2

Non-resident entities. . . . . . . . . . . . . . . 412.5 380.5 445.3

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2053.6 1708.6 1418.0

Sources: In sti tuto de Gestão do Crédito Púb lico (IGCP), LSE,fi nan cial in sti tu tions and ma jor na tional news pa -pers (within the terms of the Decree- Lawno. 142-A/91 of April 10).

Notes:(a) Does not in clude sav ing cer tifi cates and for eign currency-

denominated se cu ri ties.(b) Amounts in volved in trans ac tions. Shares are meas ured in

gross terms (winding- up and re duc tions ig nored).(c) In cludes banks and other deposit- taking credit in sti tu -

tions.(d) In cludes other credit in sti tu tions, fi nan cial com pa nies and

aux il ia ries and in sur ance com pa nies.

(3) The re serve in cor po ra tion oc curred in EDP, be fore its pri -va ti sa tion, was li able for the sig nifi cant in crease of theamount of shares is sued by re serve in cor po ra tion.

Ta ble VII.2

TOTAL ISSUING OF MEDIUM- AND LONG-TERMSECURITIES NET OF REDEMPTIONS(a)

Broken- down by ins tru ment

PTE billi on(b)

1995 1996 1997

Shares. . . . . . . . . . . . . . . . . . . . . 742.5 517.8 370.7Participating bonds . . . . . . . . . -40.1 -2.7 -25.7Public debt securities. . . . . . . . 608.9 230.7 -66.5 Family Treasury bonds . . . . . 90.5 -74.8 -189.3 FIP . . . . . . . . . . . . . . . . . . . . . . -115.7 -643.2 -857.2 Accrued interest bonds . . . . . -179.8 -29.0 -30.0 Treasury bonds - fixed rate. . 543.1 618.9 1087.6 Treasury bonds - indexed rate . . . . . . . . . . . . . . . . . . . . . 511.9 481.4 120.8 Other bonds . . . . . . . . . . . . . . -241.1 -122.6 -198.4“Classic” bonds . . . . . . . . . . . . 173.2 117.0 182.0Cash bonds . . . . . . . . . . . . . . . . 37.0 279.7 303.0Bonds of non-residents entities. . . . . . . . . . . . . . . . . . 412.5 380.5 445.3Convertible bonds . . . . . . . . . . 1.8 -2.2 -2.5Subordinated bonds . . . . . . . . 113.3 120.4 206.0Mortgage bonds . . . . . . . . . . . . - 47.0 10.0Participants bonds . . . . . . . . . . 4.5 -2.8 -4.3Bonds with warrant . . . . . . . . . - 23.2 -

Total . . . . . . . . . . . . . . . . . . . . . . 2053.6 1708.6 1418.0Pour mémoire:Saving certificates (net) . . . . . . 102.3 74.1 4.9

Sources: IGCP, LSE, fi nan cial in sti tu tions and ma jor na tionalnews pa pers (within the terms of the De cree Lawno. 142-A/91 of April 10).


denominated se cu ri ties.(b) Amounts in volved in trans ac tions. Shares are meas ured in

gross terms (winding- up and re duc tions ig nored).

eign cur rency. The is su ing, net of re demp tions,of the former reached PTE 375.4 bil lion(4). Thisde vel op ment was also made pos si ble by the in -crease in the reve nues from pri va ti sa tion op -era tions (PTE 849.8 bil lion, as against PTE 465.3 bil lion in 1996), PTE 635 bil lion of which wereal lo cated to debt re demp tion (PTE 290.3 bil lionin 1996).

The change in the struc ture of Gen eral Gov -ern ment fi nanc ing, char ac ter ised by a greaterre sort to fixed- rate Treas ury bonds, along side a lower is su ing of indexed- rate me dium- andlong- term se cu ri ties, ac counted for the fact that fixed- rate bonds were, for the first time in an -nual terms, more sig nifi cant than indexed- rateis su ing, with val ues of PTE 1,605 and 1,355.5bil lion, re spec tively (PTE 1,024 and 1,706.1 bil -lion, re spec tively, in 1996) (ta ble VII.4). Is su ingof fixed- rate bonds by non- residents also in -creased, with to tal fixed- rate is su ing ris ingfrom 21 to 38 per cent of to tal is su ing by thissec tor.

On the other hand, the pri vate sec tor con tin -ued to is sue mainly indexed- rate bonds. It isworth not ing, how ever, that an in creas ingnumber of bonds were in dexed on the PSI-20, a fea ture only started in 1996, when the OportoDe riva tives Ex change be gan its ac tiv ity. Theamount of PSI- 20- indexed bonds reached PTE35.3 bil lion in 1997. This fact is linked to thecrea tion of new fi nan cial prod ucts by banks —namely those re lated to the is su ing of cashbonds, the re spec tive net amounts is sued in -creas ing from PTE 37 bil lion in 1995 to PTE 303bil lion in 1997 (ta bles VII.2 and VII.4).

Bonds in dexed to stock in dexes di ver sifythe range of sav ing in stru ments, of fer ing moreat trac tive ex pected in come than tra di tionalbank de pos its, and lower risk than in vest mentin shares. Fur ther more, these in stru ments al -low for banks to par tially hedge mar ket risksas sumed in their port fo lio, since these bondsin clude call- options on shares, whose pre miamay com pen sate for the ef fect of changes in the prices of those shares.

4. Stock markets

4.1 Lis bon Stock Ex chan ge

The most no tice able de vel op ment in the Lis -bon Stock Ex change in 1997 was the strik ingprice in crease of most shares listed. The Por tu -guese stock mar ket bene fited from an in ter na -tional con text char ac ter ised by the fa vour ablebe hav iour of the main Euro pean and USA mar -


Securities markets

Ta ble VII.3

BOND ISSUES(a)

By ins ti tu ti o nal sec tor

PTE billi on

1995 1996 1997

Bond issues . . . . . . . . . . . . . . . . . . . . . . . . . 2527.1 2730.1 2960.5

By public subscription . . . . . . . . . . . . . . . 1548.5 1615.1 1609.9

General Government . . . . . . . . . . . . . . . 1460.0 1372.7 1451.0

Monetary financial institutions(b). . . . . 51.9 152.7 133.9

Non-monetary financial institutions(c) 2.0 15.0 -

Non-financial state-owned companies - 50.0 -

Non-financial private companies. . . . . 34.6 24.7 25.0

Non-resident entities . . . . . . . . . . . . . . . - - -

By private subscription . . . . . . . . . . . . . . 978.6 1115.0 1350.6

General Government . . . . . . . . . . . . . . . 40.4 37.1 26.3

Monetary financial institutions(b). . . . . 144.1 280.1 375.0

Non-monetary financial institutions(c) 61.5 77.1 106.8



Non-resident entities . . . . . . . . . . . . . . . 460.0 490.7 536.4

Net issues. . . . . . . . . . . . . . . . . . . . . . . . . . . 1351.2 1193.5 1073.0

General Government . . . . . . . . . . . . . . . 608.9 230.7 -66.5

Monetary financial institutions(b). . . . . . 111.0 383.7 390.7

Non-monetary financial institutions(c) 0.2 38.0 75.3



Non-resident entities . . . . . . . . . . . . . . . 412.5 380.5 445.3

Sources: IGCP, LSE, fi nan cial in sti tu tions and ma jor na tionalnews pa pers (within the terms of the De cree Lawno. 142-A/91 of April 10).


denominated se cu ri ties.(b) In cludes banks and other deposit- taking credit in sti tu -

tions.(c) In cludes other credit in sti tu tions, fi nan cial com pa nies and

aux il ia ries and in sur ance com pa nies.

(4) The Gov ern ment debt de nomi nated in for eign cur rencyin cludes com mer cial pa per. How ever, net is su ing of for -eign currency- denominated com mer cial pa per in 1997reached only PTE 26.6 bil lion, clearly be low the change inGov ern ment debt de nomi nated in for eign cur rency.

kets, along side a fa vour able back ground re -lated to the con tinua tion of eco nomic growth— re sult ing into the growth of divi dendsabove that re corded in 1995(5) — and the con -tinua tion of both the re duc tion in in fla tion andin in ter est rates, and of ex change rate sta bil ity,hence ris ing ex pec ta tions re gard ing the par tici -pa tion of Por tu gal in the third stage of the EMU from Janu ary 1999 on wards.

The bond mar ket was marked by the per sis -tent fall in long- term yields, and by thestrength en ing of con ver gence to wards the low -est lev els re corded in the EU. Hence, the Por tu -guese 10- year in ter est rate spread vis- à- visGer many nar rowed from 100 ba sis points inlate 1996 to 25 ba sis points in late 1997 (chartVII.4).


Securities markets

Ta ble VII.4

BOND ISSUES

By type of rate

PTE billi on

Pu blic debt Pri va te deb t- re si dents Non- re si dents To tal

1995 1996 1997 1995 1996 1997 1995 1996 1997 1995 1996 1997

Fixed rate. . . . . . . . . . . 783.3 845.3 1330.2 10.5 74.4 71.3 55.9 104.3 203.5 849.7 1024.0 1605.0

Indexed rate . . . . . . . . 717.1 564.5 147.1 556.2 755.2 875.5 404.1 386.4 332.9 1677.4 1706.1 1355.5

Annual base rate (a) . 11.4 4.5 - - - - - - - 11.4 4.5 -

Lisbor 3-month rate . 164.8 46.0 - 75.6 226.2 317.6 138.2 96.7 10.0 378.6 368.9 327.6

Lisbor 6-month rate . 540.9 514.0 147.1 453.6 414.1 436.8 263.9 287.7 298.8 1258.4 1215.8 882.7

PSI-20 . . . . . . . . . . . . . - - - - 13.5 33.3 - - 2.0 - 13.5 35.3

Others(b) . . . . . . . . . . . - - - 27.0 101.4 87.8 2.0 2.0 22.1 29.0 103.4 109.9

Total . . . . . . . . . . . . . . . 1500.4 1409.8 1477.3 566.7 829.6 946.8 460.0 490.7 536.4 2527.1 2730.1 2960.5

Sources: IGCP, LSE, fi nan cial in sti tu tions and ma jor na tional news pa pers (within the terms of the De cree Law no. 142-A/91 ofApril 10).

Notes:(a) Ef fec tive an nual av er age rate on the last twelve al lo ca tions of Treas ury bills re gard less of ma tur ity, weighted ac cord ing to the

cor re spond ing amounts.(b) Com prises indexed- rate bonds, namely those in dexed to in ter na tional stock ex change in dexes, 1- year Lis bor, is su ers’ re sults,

bank ing loans in ter est rates, for eign in ter est rates or ex change rates.

Ta ble VII.5

SHARE ISSUES

PTE billi on (a)

1995 1996 1997P

By public subscription . . . . . . . . . . . . . . . 226.0 74.6 113.9

Monetary financial institutions(b) . . . . . 80.3 23.3 53.9

Non-monetary financial institutions (c) 71.1 38.1 0.0


Non-financial private companies . . . . . 74.6 13.2 60.0

By private subscription . . . . . . . . . . . . . . 516.5 443.2 256.8

Monetary financial institutions(b) . . . . . 75.3 114.5 16.5

Non-monetary financial institutions(c). 69.8 74.2 8.9


Non-financial private companies . . . . . 246.6 204.4 206.6

Total(d). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 742.5 517.8 370.7

Pour mémoire:By reserve incorporation . . . . . . . . . . . . . 122.3 30.8 494.8

Sources: LSE, fi nan cial in sti tu tions and ma jor na tional news -pa pers (within the terms of the De cree Lawno. 142-A/91 of April 10).

Notes:(a) Value of trans ac tions, ex cept re serve in cor po ra tion, at the

re spec tive nomi nal value.(b) In cludes banks and other deposit- taking credit in sti tu -

tions.(c) In cludes other credit in sti tu tions, fi nan cial com pa nies and

aux il ia ries and in sur ance com pa nies.(d) Does not in clude shares is sued by re serve in cor po ra tion.

(5) Con sid er ing a sam ple of 68 com pa nies listed in the Lis bon Stock Ex change mar kets, that paid divi dends in 1996 or1997, the change of the over all value of gross divi dendspaid be tween 1996 and 1997 stood around 10 per cent. The change be tween 1995 and 1996, con sid er ing a sam ple of 60 com pa nies listed in the Lis bon Stock Ex change, and thatpaid divi dends in 1994 or in 1995, reached about 2 percent.

At the end of 1997, the Por tu guese yieldcurve con tin ued to ex hibit a slightly posi tiveslope and a con vex shape in ma turi ties up tofour years, while pre sent ing a nega tive slopeup to two- year ma tur ity. The shape of theshorter sec tion of the curve sug gests the per sis -tence of ex pec ta tions of fur ther in ter est rate re -duc tions, up to the be gin ning of the third stageof the EMU. 6- month for ward in ter est rates fell1.4 per cent age points be tween De cem ber 1996and De cem ber 1997, stand ing at 5.3 per cent on30 De cem ber. 10- year spot in ter est rates de -creased 1.3 per cent age points, amount ing toabout 5.7 per cent at the end of 1997 (chartVII.5).

Im plicit for ward in ter est rates with set tle -ment on 1 Janu ary 1999 shifted down wards,and the 6- month for ward rate fell from 6.1 to4.7 per cent be tween 1996 and 1997. This yieldcurve be came closer to that of Ger many, withthe re spec tive spread in the 6- month ma tur itynar row ing from 1.3 per cent age points at theend of 1996 to 0.3 per cent age points in 1997(chart VII.6). This de vel op ment is a sign of thegrow ing like li hood at trib uted by fi nan cialmar kets to the Por tu guese par tici pa tion in theEuro area from its be gin ning.

The changes re corded by long- term in ter estrates late in 1997 were re lated to the ef fects thecri sis in the Asian mar kets trig gered in Europeand in the USA — namely the shift of funds in -

vested in those mar kets to sov er eign bonds inthe lead ing west ern mar kets, as well as the at -tenua tion of ex pec ta tions of in creases in short- term in ter est rates in Europe and in the USA.

In line with the rise in bond prices, mar ketcapi tali sa tion of this seg ment of the Lis bonStock Ex change in creased from PTE 6,712.5 bil -lion to PTE 7,112.7 bil lion (ta ble VII.6). Sincethe growth of trans ac tions was less ex pres sive,the turn over ra tio(6) in the bond mar ket de -creased, from 33.5 to 32.2 per cent. The pro por -tion of the pri vate debt seg ment in the to tal


Securities markets

Chart VII.4SPOT INTEREST RATES

4

5

6

7

8

9

10

11

Jan96 Apr Jul Oct Jan97 Abr Jul Oct Dec

Inte

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es (

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0

0.5

1

1.5

2

2.5

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3.5

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4.5

5

5.5

6

Spr

ead

(per

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10-year spread Portugal - Germany (21 day moving average)3-month10-year

Chart VII.5YIELD CURVES

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

0 1 2 3 4 5 6 7 8 9 10Term to maturity (in years )

Inte

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-2

-1

0

1

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1997

/199

6 ch

ange

(per

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Change 30.12.1996 30.12.1997

Chart VII.6IMPLICIT PORTUGUESE YIELD CURVE

FOR 1 JANUARY 1999 AND SPREAD VIS-À-VIS GERMANY

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8 9 10Term to maturity (in years)

Inte

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rat

es (

perc

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0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Spr

ead

(per

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Spread on 30.12.1996 Spread on 30.12.1997

Forward curve on 30.12.1996 Forward curve on 30.12.1997

(6) Ra tio of traded vol ume to the stock capi tali sa tion.

bond mar ket re mained low, at 12.3 and 2.7 percent re gard ing, re spec tively, mar ket capi tali sa -tion and trans ac tions in the of fi cial mar ket.

In 1997, prices in the stock mar ket rose sig -nifi cantly, es pe cially in the first eight months of the year. In deed, the LSE-30 and LSE- Generalin dexes grew 74.7 and 65.2 per cent, re spec -tively, com par ing to 34.8 and 32.6 per cent inthe pre vi ous year.

Stock prices rose in most sec tors of ac tiv ity,ex cept in the food prod ucts and bev er agemanu fac tur ing sec tor. The post age and tele -com mu ni ca tions sec tor re corded the great estin crease (95.8 per cent in 1997). Other sec torsgrow ing close to or above the av er age mar ketgrowth were fi nan cial in ter me dia tion (65.6 percent), in sur ance and pen sion funds (67.6 percent) and serv ices sup plied to com pa nies (66.8per cent). The non- metallic min eral prod uctsand the con struc tion sec tors re corded lower in -creases — 0.2 and 7.5 per cent, re spec tively(chart VII.7).

The rises in the LSE stock price in dexes werethe high est in the Euro pean Un ion in 1997 as awhole, also ex ceed ing those in the USA (chartVII.8). Meas ured in US dol lars, the growth of thePor tu guese mar ket ex ceeded that of the lead ingmar kets, hav ing the LSE Gen eral in creased 41per cent, which com pares to the 28 per cent


Securities markets

Ta ble VII.6

SECONDARY BOND MARKET:BREADTH AND ACTIVITY

1995 1996 1997

BREADTH Number of bond issuances listed . . . . 431 365 321

Official market . . . . . . . . . . . . . . . . . 342 250 187

Public debt(a) . . . . . . . . . . . . . . . . . 96 93 82

Sundry . . . . . . . . . . . . . . . . . . . . . . 246 157 105

Second market. . . . . . . . . . . . . . . . . . 75 107 132

Unlisted market . . . . . . . . . . . . . . . . 14 8 2

Number of listed oustanding bonds (million units). . . . . . . . . . . . . . . . . . . 1 739.4 1753.7 1891.3

Official market . . . . . . . . . . . . . . . . . 1 609.4 1583.6 1581.7

Public debt(a) . . . . . . . . . . . . . . . . . 824.2 890.5 923.4

Sundry . . . . . . . . . . . . . . . . . . . . . . 785.2 693.1 658.3

Second market. . . . . . . . . . . . . . . . . . 124.0 166.2 308.2

Unlisted market . . . . . . . . . . . . . . . . 6.0 3.9 1.4

Value of listed oustanding bonds (PTE billion). . . . . . . . . . . . . . . . . . . . 5 953.2 6712.5 7112.7

Official market . . . . . . . . . . . . . . . . . 5 692.9 6339.9 6558.2

Public debt(a) . . . . . . . . . . . . . . . . . 4904.1 5599.7 5750.1

Sundry . . . . . . . . . . . . . . . . . . . . . . 788.7 740.2 808.1

Second market. . . . . . . . . . . . . . . . . . 256.9 372.0 553.5

Unlisted market . . . . . . . . . . . . . . . . 3.5 0.6 1.0

ACTIVITY Number of bonds traded (million units) . . . . . . . . . . . . . . . . 1 232.0 1587.6 1591.5

On the stock exchange . . . . . . . . . . . . 341.3 338.8 294.7

Official market . . . . . . . . . . . . . . . . . 277.4 285.7 252.1

Public debt(a) . . . . . . . . . . . . . . . . . 180.1 216.6 214.6

Sundry . . . . . . . . . . . . . . . . . . . . . 97.3 69.1 37.5

Second market . . . . . . . . . . . . . . . . . 63.4 52.5 40.5

Unlisted market . . . . . . . . . . . . . . . . 0.5 0.6 0.2

Special sessions . . . . . . . . . . . . . . . . - - 1.9

Special market for wholesale transactions . . . . . . . . . . . . . . . . . . . 770.3 1161.9 1209.1

Public debt(a) . . . . . . . . . . . . . . . . . . 708.1 1094.5 1127.1

Sundry . . . . . . . . . . . . . . . . . . . . . . . 62.2 67.4 82.0

Over-the-counter market . . . . . . . . . . 120.4 86.9 87.7

Listed . . . . . . . . . . . . . . . . . . . . . . . . . 30.4 13.3 10.6

Non-tradable . . . . . . . . . . . . . . . . . . 90.0 73.6 77.1

Value of bonds traded (PTE billion) . 7223.5 12802.2 14719.4

On the stock exchange . . . . . . . . . . . . 2142.7 2251.4 2292.9

Official market . . . . . . . . . . . . . . . . . 1657.6 1971.3 2175.7

Public debt(a) . . . . . . . . . . . . . . . . . 1478.9 1884.0 2117.0

Sundry . . . . . . . . . . . . . . . . . . . . . . 178.7 87.3 58.7

Second market . . . . . . . . . . . . . . . . . 484.5 279.4 102.1

Unlisted market . . . . . . . . . . . . . . . . 0.6 0.8 0.2

Special sessions . . . . . . . . . . . . . . . . - - 14.9

Special market for wholesale transactions. . . . . . . . . . . . . . . . . . . . 4704.9 10226.4 12231.0

Public debt(a) . . . . . . . . . . . . . . . . . . 4559.0 10122.2 12087.0

Sundry . . . . . . . . . . . . . . . . . . . . . . . 145.9 104.2 144.0

Over-the-counter market . . . . . . . . . . 375.9 324.4 195.5

Listed . . . . . . . . . . . . . . . . . . . . . . . . . 148.6 97.2 86.7

Non-tradable . . . . . . . . . . . . . . . . . . 227.3 227.2 108.8

Source: Lis bon Stock Ex change.Note:(a) In cludes other pub lic funds and equiva lents.

Chart VII.7STOCK INDEXES

Lisbon Stock Exchange

750

1000

1250

1500

1750

2000

Jan97 Mar May Jul Sep Nov

31.1

2.19

96=

1000

750

1000

1250

1500

1750

2000

LSE general LSE non-metallic min. productsLSE construction LSE financial intermediationLSE services to companies LSE postage and comunic.

Sour ce: Lis bon Stock Ex chan ge.

growth ex hib ited by the Stan dard & Poors 100in dex (chart VII.9). Con cern ing to the in dexescal cu lated by Mor gan Stan ley Capi tal In ter na -tional, the in dex for the Por tu guese stock mar ket achieved the highest- growth among the na -

tional in dexes, meas ured in US dol lars (with a43.8 per cent growth in 1997).

As in most in ter na tional fi nan cial mar kets,the Por tu guese stock mar ket was ini tially af -fected by the cri sis of the Asian mar kets in Oc -to ber — with stock prices fal ling and in creas -ing their vola til ity. This in crease in vola til ity isevi denced by the be hav iour of the daily rate ofchange of the LSE Gen eral in dex; the an nu al -ised weekly stan dard de via tion of the dailyrates of change of this in dex in creased from 49to 69 per cent be tween 22 and 31 Oc to ber (chartVII.10).

The fall in stock prices in late Oc to ber wereof a tem po rary na ture — as in the main west ern mar kets — hav ing stock in dexes reached newhis tori cal maxima by the end of the year. Thefall in stock prices pro ceeded in the Asian mar -kets. Ac cord ingly, from 17 Oc to ber to 31 De -cem ber, stock in di ces in Ma lay sia, In do ne sia,Thai land and South Ko rea fell be tween 22 and36 per cent. The re turns of the in vest ments inthese mar kets were also af fected by the de pre -cia tion of the re spec tive do mes tic cur ren cies.As a re sult, those in dexes meas ured in US dol -lars fell be tween 37 and 65 per cent in the re -ferred pe riod (chart VII.11).


Securities markets

Chart VII.8CHANGE IN STOCK INDEXES 1997/1996

In domestic currency

-60

-40

-20

0

20

40

60

80

100

120

140

RU

S

PO

R

SW

I

ITA

GR

E

ME

X

IRE

GE

R

BR

A

DE

N

SP

A NL

FIN

FR

A

NO

R

US

A

BE

L

UK

LUX

SW

E

AU

S

JAP

H.K

.

SIN

IND

KO

R

MA

L

Per

cent

age

Sour ces: Da tas tream and LSE.

Chart VII.9SHARE INDEXES

In USD

200

400

600

800

1000

1200

1400

1600

Jan97 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

31.1

2.19

96=

1000

Portugal USA JapanThailand Hong-Kong Korea

Sour ces: Da tas tream, LSE and Ban co de Por tu gal.Note: In di ces in do mes tic cur ren ci es were used:

LSE- Ge ne ral, Stan dard and Po ors 100,Nikkei 500, Thai land- DS Market, Hang Sengand Ko rea S.E. Com po si te, res pec ti vely forPor tu gal, USA, Ja pan, Thai land, Hong- Kong and South Ko rea.

Chart VII.10ANNUALISED WEEKLY STANDARD

DEVIATION OF THE RATES OF CHANGE OF LSE-GENERAL

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

Jan96 Mar May Jul Sep Nov Jan97 Mar May Aug Oct Dec

Per

cent

age

Sour ce: LSE.

1997 was also char ac ter ised by a sub stan tialin crease in trans ac tions in the LSE eq uity seg -ment mar ket. In deed, to tal amounts traded innor mal ses sions reached PTE 3,670.6 bil lion,which ac counts for an in crease of PTE 232.9 bil -lion in re la tion to 1996 (ECU 233.9 thou sand)(ta ble VII.7). This was the high est growth re -corded among the de vel oped Euro pean stockmar kets (chart VII.12).

To tal trans ac tions in the eq uity seg ment ofthe LSE ex ceeded for the first time, in an nualfig ures, the value of bonds traded in nor malses sions of the stock mar ket, cor re spond ing toa daily av er age amount of PTE 14.9 bil lion(PTE 4.5 bil lion in 1996). The growth in trans ac -tions led to a rise in the turn over in dex of theeq uity seg ment of the of fi cial mar ket, from 28.7 per cent in 1996 to 51.3 per cent in 1997.

Trans ac tions in spe cial ses sions al most dou -bled in 1997, reach ing PTE 426.1 bil lion (PTE214 bil lion in 1996). This de vel op ment re flectsthe pri va ti sa tion of some large com pa nies, aswell as the dis per sion of the capi tal of some pri -vate com pa nies, which bene fited from the fa -vour able be hav iour of the mar ket. From the to -tal value traded in spe cial ses sions, PTE 405.6bil lion re ferred to Pub lic Of fers of Sale, PTE

397.9 bil lion of which re gard the six pri va ti sa -tion op era tions that took place in the stock ex -change ses sions (chart VII.13)(7).

Pub lic Of fers of Sale car ried out in the con -text of pri va ti sa tion op era tions in volv ing the


Securities markets

Chart VII.11IMPACT OF THE ASIAN CRISIS ONINTERNATIONAL STOCK MARKETS

-70

-60

-50

-40

-30

-20

-10

0

10

20

USA POR GER SPA UK GRE JAP MAL INDO SIN THAI KOR H.K. MEX BRA RUS

Per

cent

age

Change between 17 Oct. and 28 October (*) - in domestic currencyChange between 17 Oct. and 31 December - in domestic currencyChange between 17 Oct. and 31 December - in USD

Sour ces: Da tas tream and LSE.* For Ameri can coun tries the change was cal cu -

lated be tween 17 and 27 Oc to ber, since the mostsig nifi cant price falls took place on the 27th andnot on the 28th.

Ta ble VII.7

SECONDARY EQUITY MARKET:BREADTH AND ACTIVITY

1995 1996 1997

BREADTH Number of companies with Listed shares . . . . . . . . . . . . . . . . . 169 158 148

Official market . . . . . . . . . . . . . . . . 78 73 75

Second market . . . . . . . . . . . . . . . . 15 17 12

Unlisted market . . . . . . . . . . . . . . . 76 68 61

Number of listed shares (million units) . . . . . . . . . . . . . . . 1 471.1 1641.2 1901.8

Official market . . . . . . . . . . . . . . . . 1 269.9 1428.7 1754.1

Second market . . . . . . . . . . . . . . . . 46.8 48.3 24.7

Unlisted market . . . . . . . . . . . . . . . 154.3 164.2 123.0

Value of shares listed (PTE billion) . . . . . . . . . . . . . . . . . . 2 743.1 3828.4 7161.7

Official market . . . . . . . . . . . . . . . . 2 499.4 3599.3 7008.0

Second market . . . . . . . . . . . . . . . . 65.2 75.2 44.4

Unlisted market . . . . . . . . . . . . . . . 178.5 153.8 109.3

ACTIVITY Number of shares traded (million units) . . . . . . . . . . . . . . . . 1 032.1 1052.2 1720.6

On stock exchanges. . . . . . . . . . . 466.9 596.9 1165.4

Official market. . . . . . . . . . . . . . 235.3 451.5 1001.0

Second market . . . . . . . . . . . . . . 3.6 6.6 5.0

Unlisted market (a) . . . . . . . . . . . 44.8 59.6 20.4

Special sessions . . . . . . . . . . . . . 183.2 214.0 139.0

Over-the-counter. . . . . . . . . . . . . 565.2 455.3 555.2

Listed . . . . . . . . . . . . . . . . . . . . . 103.6 52.0 43.3

Non-tradable . . . . . . . . . . . . . . . 461.6 403.3 511.9

Value of shares traded (PTE billion) . . . . . . . . . . . . . . . 2 074.0 2212.0 5662.9

On stock exchanges. . . . . . . . . . . 1 106.3 1316.7 4096.7

Official market. . . . . . . . . . . . . . 594.7 1034.3 3598.6

Second market . . . . . . . . . . . . . . 5.3 12.0 26.3

Unlisted market (a) . . . . . . . . . . . 34.1 56.4 45.7

Special sessions . . . . . . . . . . . . . 472.2 214.0 426.1

Over-the-counter. . . . . . . . . . . . . 967.6 895.3 1565.8

Listed (a). . . . . . . . . . . . . . . . . . . . 260.7 50.9 95.3

Non-tradable . . . . . . . . . . . . . . . 706.9 844.4 1470.5

Fonte: LSE.Note: (a) In cludes share rights and scrips.

(7) In clud ing Pub lic Of fers of Sale by the Gov ern ment and byState- owned com pa nies, ex cept ing the IPE hold ing. Onlycom prises pri va ti sa tion op era tions held in spe cial mar ketses sions. As re ferred, the to tal value of pri va ti sa tion op -era tions in 1997 reached PTE 849.8 bil lion (PTE 464.4 bil -lion in 1996).

great est amounts were the sales of about 97.4,17.2 and 11.7 mil lion shares — re spec tively ofEDP, Por tu gal Tele com and Brisa — cor re -spond ing to around 16.2, 9.0 and 19.4 per centof those com pa nies’ eq uity capi tal. In these op -era tions, trans ac tions reached PTE 211.1, 125.6and 55 bil lion, re spec tively(8). The high estvalue traded in a Pub lic Of fer of Sale in the pri -vate sec tor was that of the sale of 1.7 mil lionshares of So nae Imo biliária, amount ing to PTE3.4 bil lion.

Re gard ing ac tiv ity in the over all sec on darymar ket, the growth of trans ac tions in the eq -uity and bond seg ments re sulted in a 35 percent growth in the trans ac tions of listed se cu ri -

ties. The pro por tion of stock ex change trans ac -tions car ried out in the global sec on dary mar -ket rose from around 26 to 34 per cent (chartVII.14).

The rise in stock prices, in par al lel with thelist ing of new shares (namely those of EDP andPor tu gal Tele com) led to an in crease in stockcapi tali sa tion in the eq uity seg ment (87.1 percent). The in crease in stock capi tali sa tion in this seg ment sur passed that re corded in the main


Securities markets

Chart VII.12TRANSACTIONS IN NORMAL STOCK SESSIONS:

CHANGE IN TURNOVER1997/1996

233.9208.3

202.8138.7

95.986.8

72.967.8

53.852.051.851.2

45.444.342.8

37.331.2

0 50 100 150 200 250

POR

GRE

IRE

ITA

SPA

FIN

NL

FRA

LUX

GER

SWI

BEL

NOR

SWE

DEN

AUS

UK

Percentage

Sour ce: Fe de ra ti on of Eu ro pean Stock Ex chan ges.Note: Mea su red in ECU, con si de ring the most re -

pre sen ta ti ve stock ex chan ges in each coun -try. An nu al tran sac tions are the sum ofmonthly tran sac tions, con ver ted at the endof- month ex chan ge rate. For Por tu gal, theBan co de Por tu gal in di ca ti ve ex chan ge ratewas used. Due to dis tinct methods of ac coun tancy oftran sac tions, only the fol lowing coun triesare com pa ra ble with Por tu gal: Gree ce, Bel -gium, Fin land, Lu xem bourg, Spain, Fran ceand Aus tria. The re mai ning coun tries arecom pa ra ble among themsel ves.

(8) The fig ures men tioned re fer solely to op era tions held inspe cial ses sions.

Chart VII.13PRIVATISATION

Traded value in specialstock exchange sessions

111.0

206.7

65.7 69.0

197.1

234.5

397.9

0

50

100

150

200

250

300

350

400

450

1991 1992 1993 1994 1995 1996 1997

PT

E b

illio

nSour ce: LSE.

Chart VII.14TRANSACTIONS IN THE GLOBAL

SECONDARY MARKETRelative weights

0

10

20

30

40

50

60

70

80

90

100

1992 1993 1994 1995 1996 1997

Per

cent

age

Stock exchange Over-the-counter SMWT

Sour ce: LSE.

Euro pean mar kets. Con se quently, the Por tu -guese capi tali sa tion to GDP ra tio con verged to -wards the EU av er age (charts VII.15 andVII.16). As in what con cerns amounts traded,

also mar ket capi tali sa tion in the eq uity seg -ment ex ceeded, for the first time in the endof- year fig ures, that of the bond mar ket.

The growth of capi tali sa tion in the eq uityseg ment con trib uted de ci sively to the growthof the mar ket capi tali sa tion of the Lis bon StockEx change, by about 35 per cent. The pro por tion of the eq uity seg ment in the mar ket capi tali sa -tion rose from 36 to 50 per cent. The growth ofmar ket trans ac tions, above the growth of mar -ket capi tali sa tion, im plied an in crease in theturn over ra tio of the Lis bon Stock Ex change,from 33.8 in 1996 to 44.8 per cent in 1997.

4.2 Opor to De ri va ti ves Ex chan ge

The de vel op ments in the Por tu guese fi nan -cial de riva tives mar ket fol lowed the path of the spot mar kets. There fore, prices of stock, bondand in ter est rate fu tures in creased in 1997. TheOporto De riva tives Ex change con tin ued to ex -pand its range of con tracts, hav ing started totrade fu tures con tracts on shares of Por tu galTele com and EDP, on 20 June and 1 Sep tem ber1997, re spec tively(9).

Turn over in the fu tures mar ket in creasedstrik ingly — es pe cially in the stock seg ment.This mar ket ne go ti ated around 1.6 mil lion con -tracts in 1997, which com pares to 244 thou sandin the six months of ac tiv ity in 1996(10). The ac -cel era tion of de mand for ne go ti ated con tractsis high lighted by the fact that, on 13 Augustand on 29 Oc to ber, the number of con tracts ne -go ti ated sur passed the 1 and 1.5 mil lion thresh -olds, re spec tively, while only on 14 April hadthe 500 thou sand thresh old been reached.

This de vel op ment was mostly due to thegrowth in the trad ing of PSI-20 fu tures — spe -cially in Oc to ber, and in con tracts ex pir ing in thelast quar ter of the year — re flect ing the growthof de mand for in stru ments cov er ing stock price


Securities markets

Chart VII.15CHANGE IN EQUITY MARKET CAPITALISATION

1997/1996

87.1

79.6

68.5

55.4

55.2

51.8

45

43.5

41.1

39.9

33.7

33.4

33.3

32

27.3

24.4

20.9

0 10 20 30 40 50 60 70 80 90 100

POR

IRE

GRE

SWI

ITA

DEN

NL

GER

FIN

SPA

NOR

AUS

BEL

FRA

SWE

UK

LUX

Percentage

Sour ce: Fe de ra ti on of Eu ro pean Stock Ex chan ges.Note: Va lued in ECU, con si de ring the ma jor stock

ex chan ges of each coun try.

Chart VII.16MARKET CAPITALISATION

As a percentage of GDP 1997/1996

0

20

40

60

80

100

120

140

160

180

UK NL SWE IRE FIN DEN BEL SPA FRA GER POR ITA GRE AUS

Per

cent

age

0

20

40

60

80

100

120

140

160

180

Per

cent

age

1996 1997 EU-1996(*) EU-1997(*)

Sour ce: Fe de ra ti on of Eu ro pean Stock Ex chan ges,LSE, Eu ro pean Commis si on and Ban co dePor tu gal.

Note: Va lued in ECU, con si de ring the ma jor stockmarket of each coun try, ex cept for Por tu gal(in this case, market ca pi ta li sa ti on is mea su -red in es cu dos).

* Ex clud ing Por tu gal.(9) EDP and PT fu tures con tracts have 100 shares as the un -

der ly ing as set and a tick (mini mum price change) of PTE100 (PTE 1 for each share). The maxi mum change in theprice of con tracts was fixed at 200 and 90 ticks, re spec -tively; ini tial mar gins were fixed at PTE 60 thou sand andPTE 25 thou sand, re spec tively.

(10)The mar ket be gan its ac tiv ity on 20 June 1996.

risk, fol low ing the in sta bil ity which by thenchar ac ter ised spot mar kets (chart VII.17). Thegreater amount of PSI-20 fu tures traded and thecrea tion of PT and EDP fu tures con tracts in -duced a rise in the weight of stock fu tures in to talfu tures mar ket turn over, up to 77.3 per cent (34.1 per cent in 1996), among which PSI-20 fu turesshould be sin gled out (ta ble VII.8).

Open po si tions at the end of 1997 reached25,485 (4,482 at the end of 1996), and evi dencedthe greater de mand for fu tures as so ci ated toeq uity mar ket risks — namely PSI-20 and EDPfu tures. In this con text, the de mand for EDP fu -

tures should be high lighted: de spite hav ingbeen traded from Sep tem ber on wards only, atthe end of 1997 this con tract re corded the sec -ond high est number of open po si tions (ta bleVII.8 and chart VII.18). The over all amount offu tures con tracts traded in 1997 reached PTE12,835.3 bil lion (PTE 2,670.9 bil lion in 1996), 93per cent of which was due to in ter est rate fu -tures(11).

Prices rose in most fu tures con tracts, in linewith the be hav iour of prices in the stock mar -ket and with the down ward shift of the yieldcurve in 1997. In ter est rate ex pec ta tions im -plicit in the prices of 3- month LISBOR fu turescon tracts de creased around 1 per cent age pointbe tween the end of 1996 and 1997 (chartVII.19). As re gards long- term in ter est rates, theyields im plicit in the prices of OT-10 con tractsex pir ing in next March de creased from 7.1 percent in late 1996, to 5.8 per cent in late 1997(chart VII.20)(12).

Also in the Oporto De riva tives Ex change,on 14 April be gan the ac tiv ity of the Repo Mar -


Securities markets

Chart VII.17NUMBER OF FUTURES CONTRACTS TRADED

0

20

40

60

80

100

120

140

160

180

200

Jan97 Mar May Jul Sep Nov

Tho

usan

d un

its

0

20

40

60

80

100

120

140

160

180

Tho

usan

d un

itsOT-10 Lisbor PSI PT EDP

Chart VII.18OPEN POSITIONS

IN THE FUTURES MARKET

0

2

4

6

8

10

12

14

16

18

20

Jan97 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Tho

usan

d un

its

OT-10 Lisbor PSI PT EDP

Ta ble VII.8

TRANSACTIONS AND OPEN POSITIONS INFUTURES CONTRACTS:

OPORTO DERIVATIVES EXCHANGE

1996 1997

Contracts traded. . . . . . . . . . . 243938 1591181 PSI-20 . . . . . . . . . . . . . . . . . . 82820 1036868 PT. . . . . . . . . . . . . . . . . . . . . . - 114148 EDP . . . . . . . . . . . . . . . . . . . . - 78750 OT-10. . . . . . . . . . . . . . . . . . . 149896 271095 3-month Lisbor . . . . . . . . . . 11222 90320Open positions . . . . . . . . . . . . 4482 25485 PSI-20 . . . . . . . . . . . . . . . . . . 2177 10577 PT. . . . . . . . . . . . . . . . . . . . . . - 898 EDP . . . . . . . . . . . . . . . . . . . . - 6908 OT-10. . . . . . . . . . . . . . . . . . . 705 2434 3-month Lisbor . . . . . . . . . . 1600 4668Value of contracts (PTE billion) . . . . . . . . . . . . 2670.9 12835.3 PSI-20 . . . . . . . . . . . . . . . . . . 39.8 787.8 PT. . . . . . . . . . . . . . . . . . . . . . - 85.8 EDP . . . . . . . . . . . . . . . . . . . . - 25.1 OT-10. . . . . . . . . . . . . . . . . . . 1508.9 2904.6 3-month Lisbor . . . . . . . . . . 1122.2 9032.0

Source: Oporto De riva tives Ex change.

ket, sup ply ing in te grated serv ices of reg is tra -tion, com pen sa tion and the set tle ment of op -era tions, in de pend ently of the Oporto De riva -tives Ex change As so cia tion be ing or not thecoun ter part of such op era tions. In the first yearof ac tiv ity, op era tions in this mar ket reachedPTE 778.7 bil lion, mostly car ried out as for -ward and spot op era tions(13), ac count ing re -

spec tively for 48.4 and 45.8 per cent of the to talamount of re ports reg is tered.

The repo mar ket has re corded a greateramount of op era tions in ma turi ties up to 7days, which rep re sented 76 per cent of to tal op -era tions. In ter est rates in these op era tions de -creased through out the year, in line with themoney mar ket rates. In deed, in ter est rates inre pos for 1- and 31- day ma turi ties fell from, re -spec tively, 5.8 and 5.7 per cent in the first trans -ac tions car ried out in these terms (on 15 Apriland 16 May, re spec tively) to 5.3 and 5.2 percent at the end of the year.

5. In vestment funds

The above de scribed be hav iour of the se cu -ri ties mar ket in 1997 again bene fited the per -form ance of in vest ment funds. The global port -fo lio of Se cu ri ties In vest ment Funds grew 48.5per cent, reach ing PTE 3,932.4 bil lion in De -cem ber 1997. This cor re sponds to an in creasefrom 15.9 of GDP in 1996, to 22.1 per cent in


Securities markets

Chart VII.19INTEREST RATES IMPLICIT IN THE

3-MONTH LISBOR FUTURES PRICES

4.0

4.2

4.4

4.6

4.8

5.0

5.2

5.4

5.6

5.8

6.0

Mar97 Jun Sep Dec Mar98 Jun Sep Dec

Maturity months

Per

cent

age

31.12.199631.12.1997

(11)The to tal value of con tracts cor re sponds to the value ofun der ly ing trans ac tions (pur chases of Treas ury bonds,pur chases of shares or the con sti tu tion of a de posit), hence equal ling the number of con tracts ne go ti ated, times theprice of the un der ly ing as set re sult ing from the pric ing ofthe fu tures con tract. Fu tures on in ter est rates ex hibit ahigh value due to the fact that the un der ly ing as set is, inthe case of the 3- month Lis bor Fu tures con tract, a PTE 100mil lion in ter bank de posit and 1,000 Treas ury bonds witha nomi nal value of PTE 10 thou sand in the case of OT-10Fu tures con tracts. The un der ly ing as sets of the PT, EDPand PSI-20 Fu tures con tracts are re spec tively 100 shares of Por tu gal Tele com, 100 shares of EDP and the PSI-20 (witha mone tary value equal ling the value of the in dex timesPTE 100), whose nomi nal value is sig nifi cantly lower.

(12)Re call that the speci fi ca tions of the 3- month Lis bor Fu -tures and OT-10 Fu tures con tracts were re vised in 1997.Re gard ing the former, the 3- month Lis bor sub sti tuted the3- month Lis fra as the ref er ence in ter est rate, while the ini -tial mini mum mar gin was low ered from PTE 300 thou -sand to PTE 150 thou sand on 4 De cem ber af fect ingcon tracts ex pir ing De cem ber 1997 on wards. As re gardsthe lat ter, the cou pon rate of the no tional Treas ury bondwas re duced from 8 to 6.5 per cent, with ef fects from 14August on wards on con tracts ex pir ing De cem ber 1997on wards.

(13)A for ward op era tion has set tle ment on the day af ter thefirst day of set tle ment im me di ately fol low ing the re spec -tive reg is tra tion, while a spot op era tion has set tle ment inthe first day im me di ately fol low ing the re spec tive re cord -ing. The repo set tle ment takes place when the seller de liv -ers se cu ri ties to the pur chaser, while the lat ter hands outfunds to the former.

Chart VII.20INTEREST RATES IMPLICIT IN THE TB-10

FUTURES PRICES

5.5

5.7

5.9

6.1

6.3

6.5

6.7

6.9

7.1

7.3

7.5

Jan97Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Per

cent

age

5.5

5.7

5.9

6.1

6.3

6.5

6.7

6.9

7.1

7.3

7.5

Per

cent

age

Mar97 Jun Sep Dec Mar98

1997. If in clud ing Real Es tate In vest mentFunds, the value of in vest ment funds’ port fo lio as a per cent age of GDP in creased from 18.6 in1996 to 24.9 per cent in 1997 (chart VII.21).

The rela tive im por tance of Se cu ri ties In vest -ment Funds in sav ing also in creased sharply in1997; the ra tio of to tal port fo lio in vest ment inSe cu ri ties In vest ment Funds to to tal bank de -pos its rose from 23.6 to 33.9 per cent(14). Also in -clud ing Real Es tate In vest ment Funds, theport fo lio of in vest ment funds as a per cent ageof bank de pos its rose from 27.7 per cent in 1996to 38.5 per cent in 1997 (chart VII.21).

The de vel op ments in the eq uity seg ment ofthe stock mar ket in duced an in crease in the de -mand for in vest ment fund units; to gether withthe rise in share prices, this fact led to a 200 percent growth in the over all value of in vest mentsof do mes tic Se cu ri ties In vest ment Funds inshares(15), to PTE 309.5 bil lion. On its turn, theport fo lio of shares of all Se cu ri ties In vest mentFunds rose from PTE 178.4 bil lion in 1996 toPTE 481.6 bil lion in 1997, ac count ing for 12.2per cent of the over all value of funds’ port fo lio(6.7 per cent in 1996). The port fo lio of do mes ticshares reached PTE 351 bil lion — rep re sent ing4.9 per cent of to tal stock mar ket capi tali sa tion(2.8 per cent in 1996).

Pen sion funds also in creased their in vest -ment in shares, from PTE 163.2 bil lion in De -cem ber 1996, to PTE 304.6 bil lion in De cem ber1997. The port fo lio of fund units of in vest mentfunds with port fo lio mainly com pris ing sharesin creased from PTE 21.9 to 52.3 bil lion in thesame pe riod.

The be hav iour of eq uity funds re sulted inan in crease of the re spec tive pro por tion in to talSe cu ri ties In vest ment Funds in 1997, from 3.9per cent in 1996 to 9.9 per cent in 1997, whilethe pro por tion of the port fo lio of bond funds in to tal SIF port fo lio de creased. Nev er the less,

those fig ures are still among the low est re -corded in the EU, as the port fo lio of eq uityfunds in the re main ing Euro pean Un ion coun -tries ac counts on av er age for 30 per cent of to tal SIF port fo lio. Due to the growth in the rela tiveshare of SIF in the Por tu guese econ omy, the ra -tio of se cu ri ties in vest ment funds port fo lio toGDP was in De cem ber 1997 al ready one of thegreat est in the Euro pean Un ion (ex clud ingcoun tries with fi nan cial mar kets with fa vour -able tax re gimes — namely Lux em bourg and


Securities markets

Chart VII.21RELATIVE IMPORTANCE OF INVESTMENT FUNDS

Portfolio value as a percentage of bank deposits

(14)Bank de pos its con sid ered in clude de posit cer tifi cates andre pur chase agree ments, and do not in clude de pos its of in -vest ment funds in do mes tic and for eign in sti tu tions.

(15) Se cu rity in vest ment funds that in vested mostly in sharesis sued by Por tu guese com pa nies. At the end of 1997, these in vest ments ac counted for 85.4 per cent of the to tal port fo -lio of those funds.

0

5

10

15

20

25

30

35

40

1992 1993 1994 1995 1996 1997

Per

cent

age

SIF REIF

Portfolio value as a percentage of GDP

0

5

10

15

20

25

1992 1993 1994 1995 1996 1997

Per

cent

age

SIF REIF

Sour ce: Por tu gue se As so ci a ti on of In vestment FundMa na ge ment Com pa nies.

Ire land), stand ing close to the av er age value ofthe re main ing coun tries of the Euro pean Un ion (24.7 per cent) (chart VII.22).

The in crease in share and bond prices in theLis bon Stock Ex change pro vided in vest mentfunds with the pos si bil ity of reach ing higheryields — spe cially in the case of funds with in -vest ments mostly in do mes tic eq uity. There -fore, do mes tic eq uity funds and sav ing eq uityfunds reached an nual yields close to thegrowth ex hib ited by the stock in dexes (57 and63.4 per cent, re spec tively).

On the con trary, in ter na tional eq uity fundsscored lower av er age yields (22.8 per cent),with funds spe cial ised in the Asian mar ketreach ing nega tive yields.


Securities markets

Chart VII.22SECURITIES INVESTMENT FUNDS PORTFOLIO

As a percentage of GDP in December 1998

23

14

8

3

37

7

22

1817

22

35

2120

0

5

10

15

20

25

30

35

40

AUS BEL DEN FIN FRA GER GRE ITA NL POR SPA SWE UK

Per

cent

age

Sour ces: Eu ro pean Fe de ra ti on of In vestment Fundsand So cie ties, Por tu gue se As so ci a ti on of In -vestment Fund Ma na ge ment, Ban co de Por -tu gal and Eu ro pean Commis si on.


Securities markets

SOME ASPECTS OF THE PORTUGUESE FINANCIAL INTEGRATION

Fi nan cial in te gra tion pro vides a more ef fi cient al lo ca tion of dis pos able sav ing to in vest ment op por tu ni -ties, and in creased pos si bili ties in port fo lio di ver si fi ca tion. One of the most rele vant pro cesses of fi nan cial in -te gra tion world wide was the crea tion of the Sin gle Fi nan cial Serv ices Mar ket in the Euro pean Un ion. Thismar ket had its great est im pulse in 1992, with the sup pres sion of bar ri ers to capi tal move ments be tweenMem ber States and the con se cra tion of the lib erty of es tab lish ment and pro vi sion of serv ices at the level ofcredit in sti tu tions.

In Por tu gal, fi nan cial in te gra tion was an es sen tial step to wards the con soli da tion of the eco nomic in te -gra tion pro cess, trig gered by the Por tu guese ad he sion to the EEC in 1986; this pro cess has been char ac ter -ised by the grad ual abol ish ment of sev eral con straints to in ter na tional capi tal flows, ini ti ated with the de -regu la tion of capi tal flows as so ci ated to the in ter na tional trade of goods and serv ices and to the right of freees tab lish ment.

At the end of 1992, short- term capi tal move ments were to tally lib er al ised. This de vel op ment fol lowed thein te gra tion of the es cudo in the Ex change Rate Mecha nism of the Euro pean Mone tary Sys tem in April 1992, the changes in the mone tary pol icy re gime oc curred in 1990 and in 1991 — i.e., the tran si tion to mone tarycon trol founded on open- market pro ce dures — the prog ress in nomi nal con ver gence and the loss of ef fec tive -ness of ad min is tra tive con trols to capi tal in flows re lated to the profit- taking from in ter est rate dif fer en tials.

The Por tu guese fi nan cial in te gra tion cre ates new in vest ment and fund rais ing op por tu ni ties to eco -nomic agents. How ever, the im pact on pri vate com pa nies’ fi nanc ing has yet not been sig nifi cant. This fact ispos si bly due to the small av er age size of Por tu guese com pa nies, and to the char ac ter is tics of in for ma tionmade avail able for risk credit analy sis, which in turn makes more dif fi cult the ac cess to in ter na tional fi nan -cial in ter me di ar ies and capi tal mar kets. Fur ther more, the scarce use of ex ter nal fi nanc ing also re flects theim por tance of ex change risk and of costs re quired to hedge this risk — sug gest ing that the Eco nomic andMone tary Un ion may im prove the con di tions un der which Por tu guese com pa nies raise funds.

The im pact of fi nan cial in te gra tion has been more evi dent as re gards the de mand for escudodenominated li abili ties by non- residents — through the is su ing of bonds — as well as re gard ing the greater ex ter nal visi -bil ity of se cu ri ties listed in the Por tu guese fi nan cial mar ket — which is evi denced by the in crease in non- residents’ port fo lio of escudodenominated se cu ri ties is sued by resi dents, and by the in clu sion of the Por tu -guese mar ket in the main in ter na tional stock and bond in dexes.

The im pact of in ter na ti o nal ca pi tal flows li be ra li sa ti on

In Por tu gal, the lib er ali sa tion of capi tal flows was ini ti ated with the ad he sion to the Euro pean Eco nomicCom mu nity in 1986. This year, com mer cial credit op era tions in volv ing resi dents and non- residents, thepur chase of listed shares and bonds by non- residents and for eign di rect in vest ment (FDI) were lib er al ised.As a re sult, capi tal in flows rose sig nifi cantly, due to the es tab lish ment of for eign com pa nies in Por tu gal af ter 1986; FDI move ments, which re corded in ex press ive amounts prior to 1986, gave rise to a maxi mum net an -nual in flow of about 4 per cent of GDP in 1990 (chart 1).

From 1995 on wards, for eign di rect in vest ment, as a per cent age of GDP, de creased to lev els close to thosere corded in the first years fol low ing the Por tu guese ad he sion to the Euro pean Eco nomic Com mu nity — be -tween 0.7 and 1.7 per cent. In more re cent years, the growth of Por tu guese di rect in vest ment abroad is alsoworth not ing, reach ing since 1995 val ues simi lar to those of net FDI. These de vel op ments in di cate an ef fortof Por tu guese com pa nies’ to wards the in ter na tion ali sa tion of their busi ness.

Fol low ing the re in tro duc tion of con straints to resi dents’ ex ter nal bor row ing and to the pur chase by in -ter na tional in ves tors of escudodenominated floating- rate se cu ri ties in dexed to money mar ket rates, in 1990


Securities markets

and in 1991, as to lessen li quid ity cre ated by the in -flow of capi tals, de ci sive steps were taken in 1992to wards fi nan cial in te gra tion. These con sisted ofthe in te gra tion of the es cudo in the ex change ratemecha nism of the EMS, the abol ish ment of still ex -ist ing con straints to short- term capi tal flows, andthe trans po si tion of EC di rec tives re gard ing thecrea tion of the sin gle bank ing mar ket.

As a re sult, in ter na tional fi nan cial trans ac -tions — spe cially those in volv ing the pur chase ofbonds — rose sub stan tially im me di ately af ter1992. Even since, due to the fi nan cial na ture ofthese trans ac tions, flows of port fo lio in vest menthave reached much higher val ues than fi nan cialmove ments re lated to di rect in vest ment.

The growth of in ter na tional bond trans ac tionswas si mul ta ne ously due to non- residents’ in vest -ment in bonds is sued by resi dents and to resi dents’in vest ment in bonds is sued by non- residents.These flows rose from -1.8 and 0.4 per cent of GDPin 1992, to 4.1 and 6.2 per cent in 1997, re spec -

tively (chart 2).It is worth not ing that bonds is sued by non- residents in es cu dos (the “Caravela” mar ket) con trib uted to a

great ex tent to the in crease in the net value of bonds is sued by non- residents pur chased by resi dents (chart3). As a re sult, the be hav iour of fi nan cial flows re lated to resi dents’ port fo lio in vest ments in bonds is sued bynon- residents al lowed for a greater di ver si fi ca tion of credit risk, with lower ef fects con cern ing to the ex po -sure to ex change rate risk.

Net flows of shares pur chased in Por tu gal by non- residents and abroad by resi dents have also in creased— with par ticu lar buoy ancy from 1995 on wards — reach ing re spec tively 2.5 and 0.6 per cent of GDP in1997 (-0.2 and 0.1 per cent in 1995, re spec tively) (chart 4).

Chart 1DIRECT INVESTMENT

Net flows as a percentage of GDP

-2

-1

0

1

2

3

4

5

6

7

1965

1970

1975

1980

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

Foreign direct investment Direct investment abroad

Chart 2PORTFOLIO INVESTMENT IN BONDSNet flows as a percentage of GDP

-2

-1

0

1

2

3

4

5

6

7

1965

1970

1975

1980

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

Non-residents' investment in Portugal Portuguese investment abroad

Chart 3NON-RESIDENTS’ ISSUING IN ESCUDOS AND RESIDENTS’ INVESTMENT IN BONDS

ISSUED BY NON-RESIDENTSAmounts net of redemptions

as a percentage of GDP

-2

-1

0

1

2

3

4

5

6

7

1990 1991 1992 1993 1994 1995 1996 1997

Non-residents' issuing in EscudosInvestment in foreign bonds


Securities markets

The lib er ali sa tion of fi nan cial trans ac tions with abroad was com pleted in 1994, with the lib er ali sa tion ofbond is su ing in es cu dos by non- residents other than sov er eign or su pra na tional en ti ties, and of resi dents’ is -su ing abroad of bonds in for eign cur rency. This year, the tax ex emp tion on non- residents’ in come fromfixed- rate Treas ury bonds was also im ple mented.

Fi nan cing in fo reign cur rency

De spite the lib er ali sa tion of some fi nan cial trans ac tions with the ex ter nal sec tor fol low ing the ad he sion to the EEC, the need for re duc ing in fla tion — with out how ever an ex ces sive ap pre cia tion of the es cudo — led tothe per sis tence and rais ing of new con straints to fi nanc ing in for eign cur rency up to 1992. Hence, the Treas -ury re duced sub stan tially the debt de nomi nated in for eign cur rency, from 15.7 per cent of GDP in 1986, to4.1 per cent in 1992 (chart 5).

Fol low ing the lib er ali sa tion of the capi tal flows in 1992, the Treas ury re turned to fund ing in for eignmar kets. Pub lic debt in for eign cur rency was then in creased to 14.5 per cent of GDP at the end of 1997. How -ever, it should be noted that around 75 per cent of this debt, af ter cur rency swaps, con sists of li abili ties de -nomi nated in cur ren cies which will in te grate the euro, and there fore will in volve no ex change rate risk.

The re turn of the Treas ury to fund rais ing in ex ter nal mar kets was mainly car ried out through bond is su -ing in yens, Deut sche marks and US dol lars. Af ter wards, fi nanc ing was ex tended to a wider range of cur ren -cies — namely is su ing in ECU, Ster ling, Ital ian li ras, Dutch guild ers and French francs — and also to awider va ri ety of in stru ments, now also com pris ing com mer cial pa per. At the end of 1997, the Deut schemark, the French franc and the Japa nese yen were the most rep re sen ta tive cur ren cies, ac count ing re spec -tively for 32, 19 and 16 per cent of to tal debt is sued in for eign cur rency.

The share of pub lic debt is sued in for eign cur rency has in creased since 1992, from 7 per cent of the ag gre -gate debt in De cem ber 1992 to 23.6 per cent in De cem ber 1997, reach ing around PTE 2,600 bil lion. The1997 per cent age stands close to those re corded by sev eral small econo mies in the EU.

By the end of 1997 pub lic debt held by non- residents al ready amounted to about 29 per cent of to tal pub lic debt (21 per cent in 1995). This de vel op ment re sults from the fact that pub lic debt is sued in for eign cur rency

Chart 4PORTFOLIO INVESTMENT IN SHARESNet flows as a percentage of GDP

-2

-1

0

1

2

3

4

5

6

7

1965

1970

1975

1980

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

Non-residents' investment in Portugal Portuguese investment abroad

Chart 5PUBLIC DEBT ISSUED

IN FOREIGN CURRENCYAs a percentage of GDP and of total public debt

0

5

10

15

20

25

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

Per

cent

age

Share in GDP Share in public debt


Securities markets

has been chiefly held by non- residents, and that non- residents’ port fo lio of pub lic debt is sued in es cu dos hasin creased since 1995.

Si mul ta ne ously, the Treas ury prof ited from the im prove ment in the rat ing of debt de nomi nated in for -eign cur rency; in deed, in 1993 the Stan dard & Poors rat ing rose from A+ to AA-, while in 1997 the Moody’s rat ing im proved from A1 to Aa1. The re duc tion in sov er eign credit risk and the ac cess to the en larged euromar ket will pro vide im por tant con tri bu tions to the di ver si fi ca tion of in stru ments and mar kets for fi nanc ingPor tu guese com pa nies.

The Ca ra ve la market: re cent de ve lopments

In ad di tion to the greater de mand for funds abroad by the Treas ury, fi nan cial in te gra tion is also evi dentin non- residents’ fi nanc ing through bond is su ing in es cu dos.

Fol low ing the open ing of the Caravela mar ket to pri vate en ti ties in 1994, amounts is sued (net of re demp -tions) rose sub stan tially, from 0.8 to 2.5 per cent of GDP (chart 3). At the same time, the pro por tion of sov er -eign is su ers and of su pra na tional fi nan cial en ti ties(1) has de creased, mainly re flect ing the greater amount ofis su ing car ried out by for eign banks.

104 in sti tu tions have al ready par tici pated in the Caravela mar ket. In 1997, this mar ket re corded 51 is su -ing en ti ties, 27 of which is sued for the first time (in 1993 only 6 in sti tu tions had is sued in the Caravela mar -ket). Due to the par tici pa tion of new in sti tu tions in this mar ket, con cen tra tion has de creased. In 1997, thethree and the five lead ing is su ers ac counted for only 23.5 and 31.9 per cent of to tal is su ing, re spec tively (72and 92.8 per cent in 1993). This be hav iour re veals that the mar ket for bonds is sued in es cu dos has be comesig nifi cant, and is re quested by a wider range of is su ers.

The im por tance of the Caravela mar ket in the mar ket for escudodenominated bonds rose in the last fiveyears. In deed, be tween 1992 and 1997, the pro por tion of gross is su ing by non- residents in to tal is su ing in -creased from 3.5 to 18.1 per cent. The in creased rele vance of this mar ket is even more evi dent when net is su -ing is taken into ac count — be tween 1992 and 1997, the share of the Caravela mar ket in the mar ket for bonds is sued in es cu dos rose from 4.7 to 41.4 per cent, along side the re duc tion in net is su ing by the Gen eral Gov -ern ment since 1995.

The in ter na ti o na li sa ti on of portfo lio in vestment

The sup pres sion of bar ri ers to capi tal move ments, the mod erni sa tion of the stock ex change and the list ing of new com pa nies — namely due to pri va ti sa tion op era tions — gave rise to the rec og ni tion of the Por tu guese mar ket as a de vel oped one, which in turn stimu lated non- residents’ port fo lio in vest ment.

1997 was marked by the in te gra tion of Por tu gal in the MSCI (Mor gan Stan ley Capi tal In ter na tional)stock in dex for de vel oped mar kets, and in the Global Dow Jones stock in dexes.

The bond mar ket also prof ited from in ter na tional rec og ni tion, with Por tu guese pub lic debt in te grat ingthe JP Mor gan in dex in March, and the an nounce ment in late No vem ber that Por tu gal ful filled the cri te riafor en ter ing the World Gov ern ment Bond In dex (WGBI) of Solo mon Broth ers.

In te gra tion in these in dexes makes the in cluded se cu ri ties more re quired by in ter na tional in ves tors,since the com po si tion of the in dexes is taken as a bench mark for con sti tut ing global port fo lios. Hence, de spite the mea gre share of the 19 se cu ri ties se lected from the Lis bon Stock Ex change (0.2, 0.18 and 0.65 per cent inthe MSCI, Global Dow Jones and Euro pean Dow Jones in dexes, re spec tively), the en hanced visi bil ity of thePor tu guese mar ket made pos si ble by its in te gra tion in in ter na tional in dexes, to gether with the mac -

(1) Namely the EIB, the KFW and the IFC.


Securities markets

roeconomic en vi ron ment, led to a no tice able in -crease in for eign de mand for se cu ri ties is sued byresi dents, right af ter the an nounce ment of the de ci -sion re gard ing the MSCI com po si tion(2).

This in crease in de mand, in par al lel with the in -crease in the price of se cu ri ties, led to a sig nifi cantgrowth of non- resident’s in vest ments in se cu ri tiesis sued by resi dents — spe cially do mes tic shares,but also Treas ury bonds is sued in for eign cur rency. In 1997, the port fo lio value of non- residents, as aper cent age of GDP, vir tu ally dou bled in re la tion to1996, reach ing 12.7 per cent in De cem ber (5.9 percent in the same month of 1996) (chart 6). Theshares in this port fo lio value rep re sented 32 percent of mar ket capi tali sa tion in the eq uity seg mentof the Lis bon Stock Ex change (26 per cent in 1996).

Re gard ing non- residents’ port fo lios of Por tu -guese pub lic debt bonds is sued in es cu dos, the mostsig nifi cant growth was also re corded be tween 1996

and 1997, with an in crease from 2 to 3.3 per cent of GDP. At the end of 1997, non- residents’ port fo lio ofbonds is sued by resi dents, ex clud ing bonds is sued by the Treas ury in for eign cur rency, ac counted foraround 10 per cent of mar ket capi tali sa tion in the bond seg ment (7 per cent in 1996)

(2) The an nounce ment was made on 30 April, while the in te gra tion of the 19 Lis bon Stock Ex change se cu ri ties took place on 2 De -cem ber.

Chart 6NON-RESIDENTS’ PORTFOLIO

INVESTMENT IN PORTUGALEnd-of-period portfolios, as a percentage of GDP

0

2

4

6

8

10

12

14

1993 1994 1995 1996 1997

Shares

Public debt in foreign currency Other bonds

Chap ter VIII

BANKING SYSTEM

1. In tro duc ti on

This chap ter de scribes and analy ses thebank ing sys tem in 1997. Ex cept ing men tionsoth er wise, the analy sis to be de vel oped re fersonly to banks(1), the Caixa Geral de Depósi tosand the Caixa Económica Mon tepio Geral(Co- operative sav ings bank), ac cord ing to theclas si fi ca tion of the Gen eral Re gime for CreditIn sti tu tions and fi nan cial com pa nies (ap -proved by De cree Law no 298/92, of 31 De -cem ber). The analy sis util ises data on over allbusi ness of in sti tu tions taken in di vidu ally(2).Ex cluded from the analy sis are the re main ingcredit in sti tu tions: other sav ings banks, ag ri -cul tural credit co- operatives, in vest ment fi -nanc ing com pa nies, leas ing com pa nies, fac tor -ing com pa nies and con sumer credit com pa -nies.

Net in come for the year of banks op er at ingin Por tu gal grew strongly in 1997 (35.7 percent, com par ing to 15.2 per cent in 1996). Thisde vel op ment en sured a sig nifi cant rise in there turn on eq uity in the sec tor (ta ble VIII.1).The in creased re turn on eq uity re sultedchiefly from the higher growth of fi nan cial as -

sets — with par ticu lar evi dence for those witha higher mar gin (e.g., credit to cli ents), as wellas the fa vour able de vel op ments in the stockmar ket, re flected in a sub stan tial rise in com -mis sions and in hold ing gains from variable- income se cu ri ties.

To tal as sets of the bank ing sys tem grewstrongly in 1997, mostly as an out come of therise in credit to cli ents. The de mand for bankcredit rose again in 1997, due to the ac cel era -tion of eco nomic ac tiv ity — spe cially of in vest -ment — and the sig nifi cant re duc tion in nomi -nal in ter est rates, made pos si ble by the ac com -plish ment of the nomi nal con ver gence pro cess.

The level of dif fer en tia tion of dis tri bu tionchan nels in the bank ing sec tor has in creased,ac cord ing to the sev eral targetmarkets in sti -tu tions iden tify. Ac qui si tions in re cent years,though hav ing not re sulted into the merger ofthe in sti tu tions in volved, di namised im por -tant re or gani sa tions in bank ing groupsformed through this means — by ra tion al is ing op er at ing struc tures and by con cen trat ing ac -tiv ity seg ments in spe cial ised in sti tu tions. Inad di tion to pro mot ing the cen trali sa tion of op -era tions with ma jor cli ents and in vest mentbank ing op era tions, this pro cess also strength -ened the pres ence of branches di rected to -wards ren der ing spe cial ised serv ices — which join com pe ten cies of coun sel ling in seg mentslike house pur chase fi nance, fi nanc ing to small firms, fi nan cial plan ning and sav ing schemes.Fur ther more, remotely- delivered or self- service serv ices have played an in creas ingrole, sup ported by tech no logi cal in no va tion in the in for ma tion and com mu ni ca tions area.


Banking system

(1) The pres ent analy sis com prises the banks sub ject to su -per vi sion by the Banco de Por tu gal (i.e., in sti tu tions hav -ing their head of fice in Por tu gal, sub sidi ar ies of for eignbanks and branches of non- European Un ion credit in sti -tu tions) and branches of banks hav ing their head of fice inother Euro pean Un ion Mem ber States which are sub jectto the con trol of home coun try su per vi sory authori ties.

(2) The over all ac tiv ity en com passes to tal do mes tic ac tiv ityof banks op er at ing in Por tu gal, the ac tiv ity of branches lo -cated in off- shores ar eas and the ac tiv ity of the branchesabroad. Ex cept when men tioned oth er wise, each in sti tu -tion is taken in di vidu ally and not in a group per spec tive.

2. Des crip ti on of the struc tu re

Eleven banks — four do mes tic and sevennon- domestic — en tered into ac tiv ity in 1997,rais ing to 62 the number of ac tive bank ing in -sti tu tions at the end of the year (chart VIII.1).As in pre vi ous years, most of the new com ers in

busi ness do not sup ply re tail serv ices. In stead,these op er ate in the capi tal mar kets and de -velop other ac tivi ties in the in vest ment bank -ing seg ment.

Af ter two years of sig nifi cant rises in busi -ness con cen tra tion, 1997 was char ac ter ised by a re duc tion in the mar ket share of ma jor banks.


Banking system

Ta ble VIII.1

BANKING SYSTEM SITUATION — SYNTHESIS

PTE billi on

1996 1997 Chan ge

Dez Dez Ab so lu te Per cen ta ge

Assets (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33461.2 39588.6 6127.4 18.3Credit granted, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12027.5 14535.2 2507.7 20.9Overdue credit and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 620.2 583.7 -36.6 -5.9

Overdue credit and interest/Credit granted (percentage) . . . . . . . . . . 5.2 4.0 -1.2p.p. -

Provisions for the year (replacements deducted) . . . . . . . . . . . . . . . . . . . 157.8 195.5 37.7 23.9 of which: Overdue credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105.9 100.5 -5.4 -5.1 Doubtful credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4 7.7 -5.7 -42.5 Country risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 13.0 9.7 294.0 Securities (investment portfolio) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0.6 10.6 11.2 - General risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.0 27.2 8.2 43.1Provisions for credit (accumulated). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 583.7 593.7 10.0 1.7 Overdue credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411.6 390.5 -21.1 -5.1 Doubtful credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.4 31.7 4.3 15.7 Country risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8 8.9 3.1 53.4 General risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138.9 162.6 23.7 17.0Provisions for losses on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54.8 60.0 5.2 9.4

Total credit provisions/overdue credit and interest (percentage) . . . . . 94.1 101.7 7.6p.p. -

Specific provisions/overdue credit (percentage) . . . . . . . . . . . . . . . . . . . 70.5 72.1 1.5p.p. -

Resources from clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17919.0 19815.0 1896.1 10.6Equity capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2134.1 2364.0 229.9 10.8

Pro fit and loss ac count

1996 1997 Chan ge

Ab so lu te Per cen ta ge

Net interest income (financial margin) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 653.8 746.4 92.6 14.2 Interest income and equivalent(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2573.0 2603.3 30.3 1.2 Interest cost and equivalent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1919.2 1856.8 -62.3 -3.2Other current results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339.9 409.0 69.1 20.3 Income from securities(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.6 50.1 7.5 17.6 Commissions (net). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.6 145.5 44.9 44.6 Profits on financial operations (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135.6 140.3 4.7 3.5 Other current income (net). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61.0 73.1 12.1 19.8Banking product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 993.7 1155.4 161.7 16.3Staff costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354.9 386.2 31.3 8.8Other administrative costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206.2 226.0 19.7 9.6Operating cash-flow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432.6 543.2 110.7 25.6Extraordinary income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.3 41.5 13.2 46.7Cash-flow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460.9 584.8 123.9 26.9

Allocation: Provisions for the year (net of replacement of provisions) . . . . . . . . . . 157.8 195.5 37.7 23.9 Depreciation for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73.7 78.8 5.1 6.9 Tax on income for the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48.1 64.4 16.3 33.9 Net income for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181.4 246.1 64.7 35.7 Solvency ratio (on a consolidated basis) (Cooke ratio)(c) . . . . . . . . . . . . 11.4 11.5 - -

Notes:(a) In cludes in ter est from fixed- income se cu ri ties.(b)Variable- income se cu ri ties.(c) See sec tion 5, Prof it abil ity and sol vency.

This de vel op ment greatly re sulted from thegrowth above the sec tor av er age, of somemedium- size re tail banks. The mar ket share ofthe five ma jor bank ing groups as re gards funds raised from cli ents de creased from 84.9 percent in De cem ber 1996 to 82.8 per cent in De -cem ber 1997, while in credit to cli ents the sharenar rowed to 77.1 per cent in De cem ber 1997(79.4 per cent in late 1996). Mean while, theshare of the five lead ing bank ing groups in to -tal net in come for the year de creased from 93.1per cent in 1996 to 85.4 per cent in 1997 (ta bleVIII.2).

3. Ba lan ce- sheet de ve lopments

Banks’ to tal vol ume of busi ness, whenmeas ured by to tal net as sets, ac cel er ated againin 1997 (18.3 per cent growth, com pared to 14.0per cent in 1996). As in the pre vi ous year, in -vest ments in credit in sti tu tions and credit tocli ents ex plain the bulk of this growth (ta blesVIII.3 and VIII.4).

To tal in vest ments in credit in sti tu tions —in clud ing De posit Cer tifi cates is sued by theBanco de Por tu gal — grew 27.4 per cent be -tween De cem ber 1996 and the same month in1997, ac count ing for 33.6 per cent of to tal as setsof the bank ing sys tem (31.2 per cent in De cem -ber 1996). This de vel op ment is greatly linked to op era tions within na tional bank ing groups;since the ana lysed fig ures re fer to the sum of

each in sti tu tions’ non- consolidated ac counts,these re sult in in creases of in vest ments and ofin ter bank re sources.

Gross credit granted to cli ents by banksgrew 20.9 per cent in 1997, which con sti tutesthe third con secu tive year of ac cel era tion ofthis item. This de vel op ment chiefly re sultedfrom the re duc tion in nomi nal in ter est ratesand the ac cel era tion of eco nomic ac tiv ity.

The evo lu tion of bank ing credit re flects to alarge ex tent the higher pace of growth of (live)credit to resi dent cli ents, from 13.6 per cent inDe cem ber 1996 to 23.3 per cent in De cem ber1997. Credit to non- residents, though also ac -cel er at ing in 1997 (growth rate of 10.8 per cent,which com pares to 8.9 per cent in 1996) con tin -ued to shrink as a share of to tal as sets, from 2.8per cent in De cem ber 1996 to 2.6 per cent in De -cem ber 1997.

The sig nifi cant in crease in the pace ofgrowth of bank ing credit(3) in 1997 was due tothe strong ac cel era tion of credit to non- financial com pa nies (21.8 per cent in De cem ber 1997, as against 6.6 and 4.0 per cent in late 1996and 1995, re spec tively) and to the main te nanceof a high pace of growth of credit to in di vidu -


Banking system

Chart VIII.1NUMBER OF BANKS

42

45

48

51

62

30

35

40

45

50

55

60

65

70

1993 1994 1995 1996 1997

Ta ble VIII.2

MARKET SHARE OF THE FIVE MAJOR BANKING GROUPS

As sets Funds fromcli ents

Cre ditto cli ents

Net in co mefor the year

1993 . . . . . . . . 67.7 72.4 71.9 79.41994 . . . . . . . . 68.8 71.8 69.7 87.81995 . . . . . . . . 77.6 80.6 76.0 90.31996 . . . . . . . . 83.0 84.9 79.4 93.11997 . . . . . . . . 78.0 82.8 77.1 85.4

Note:(a) Sum of the mar ket shares of in sti tu tions be long ing to the five lead -

ing bank ing groups, in each of the vari ables con sid ered and on anon- consolidated ba sis.

(3) The fol low ing analy sis of the break down of credit to resi -dents by sec tor re fers ex clu sively to the do mes tic ac tiv ityof banks op er at ing in Por tu gal. Hence, un like in the rest of this chap ter, the ac tiv ity of branches abroad or branchesin off- shores ar eas is not in cluded. Also the fi nanc ing ofcom pa nies via the bank ing sys tem’s pur chase ofcompany- issued se cu ri ties is not in cluded in the credit ag -gre gates re ferred to non- financial com pa nies.

als, in a con text of in creas ing de mand for credit (ta ble VIII.5). The strong growth of credit tonon- financial com pa nies for in vest ment pur -poses should be sin gled out (24.4 per cent in -crease in De cem ber 1997, com pared to 15.9 percent one year be fore), in line with the be hav -iour of eco nomic ac tiv ity (ta ble VIII.2). The rate of growth of bank ing credit to non- financialcom pa nies for pur poses other than in vest mentalso in creased through out the year, reach ing20.9 per cent in De cem ber 1997, which com -pares with 4.0 per cent in De cem ber 1996.

Ta ble VIII.5 ex hib its the rates of growth andab so lute changes of do mes tic bank lend ingbroken- down by ac tiv ity sec tor, be ing worthno tice the wide spread in crease in the growthrate of credit among sec tors.

The ac cel era tion of bank credit in 1997 waspar ticu larly strong in the manu fac tur ing in -dus tries (11.6 per cent growth). Re call thatbank lend ing to this sec tor had fallen in thethree pre vi ous years (6.6, 1.9 and 6.4 per centre duc tions in 1994, 1995 and 1996, re spec -tively). Bank lend ing to the con struc tion andpub lic works sec tor and to the serv ices sec torre corded rates of growth above that of to talcredit to non- financial com pa nies. In deed,bank credit to com pa nies in the former sec torgrew 23.3 per cent in 1997 (which com pareswith 14.6 per cent in 1996), while credit granted to the lat ter rose by 28.0 per cent in 1997, asagainst 15.2 per cent in 1996. It also should benoted that these fig ures could be over es ti mat -ing the growth of credit to the serv ices sec tor


Banking system

Ta ble VIII.3

BALANCE SHEETPTE billi on

1993 1994 1995 1996 1997

Dec Dec Dec Dec Dec

Assets 1. Cash and liquid assets in central banks . . . . . . . . . . . . . . . . . . . . . . 2177.4 434.3 386.4 517.8 582.9 2. Liquid assets in credit institutions . . . . . . . . . . . . . . . . . . . . . . . . . . 484.3 546.0 582.9 616.4 747.5 3. Deposit Certificates issued by the Banco de Portugal . . . . . . . . . . 0.0 1710.7 1721.8 1414.7 1084.4 4. Other credits over credit institutions(a) . . . . . . . . . . . . . . . . . . . . . . 4354.1 5748.0 7018.5 9046.1 12243.1 4.1. Investments in credit institutions(b). . . . . . . . . . . . . . . . . . . . . . 1569.7 1925.5 2589.7 3911.1 4738.1 4.2. Investments in credit institutions abroad(b) . . . . . . . . . . . . . . . 2756.2 3821.3 4437.4 5148.7 7534.5 5. Live credit to clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8549.6 8987.8 10076.5 11407.3 13951.5 5.1. Credit to residents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7566.4 8019.8 9227.1 10482.3 12926.8 5.2. Credit to non-residents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 983.2 968.0 849.5 925.0 1024.7 6. Overdue credit and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 634.1 629.0 634.4 620.2 583.7 7. Provisions for overdue credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -343.4 -367.8 -416.3 -411.6 -390.5 8. Security investment(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5058.5 5955.9 6510.2 6941.9 6888.1 9. Financial fixed assets (participations)(c). . . . . . . . . . . . . . . . . . . . . . 561.3 641.0 815.7 945.7 1112.910. Non-financial fixed assets (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 632.2 657.4 647.2 674.8 708.511. Other investment(c) and sundry accounts . . . . . . . . . . . . . . . . . . . . . 1126.9 1159.7 1374.3 1687.8 2076.4

12. Total assets 23235.0 26102.0 29351.6 33461.2 39588.6

Liabilities1. Resources from domestic credit institutions . . . . . . . . . . . . . . . . . . 2170.6 2616.9 3448.1 4220.1 4839.52. Resources from foreign credit institutions . . . . . . . . . . . . . . . . . . . . 3239.0 4255.3 5080.2 6529.3 7932.93. Resources from clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13812.7 15270.4 16797.4 17919.0 19815.03.1. Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13588.7 14964.5 16429.0 17510.4 19241.8 of which: 3.1.1. General Government . . . . . . . . . . . . . . . . . . . . . . 547.6 576.4 738.1 818.6 924.8

3.1.2. Other residents. . . . . . . . . . . . . . . . . . . . . . . . . . . 9743.6 10872.3 11809.5 12597.3 13710.0 3.1.3. Emigrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2355.7 2360.3 2584.5 2581.5 2553.6 3.1.4. Other non-residents . . . . . . . . . . . . . . . . . . . . . . 855.2 1066.8 1198.3 1408.9 1940.0

4. Liabilities represented by securities. . . . . . . . . . . . . . . . . . . . . . . . . . 564.3 425.1 480.7 793.1 2244.55. Other payables and sundry accounts . . . . . . . . . . . . . . . . . . . . . . . . 1034.3 942.0 940.0 995.3 1300.66. Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 454.4 445.4 319.5 254.1 253.87. Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231.5 275.7 368.8 616.2 838.38. Equity capital(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1728.3 1871.2 1917.0 2134.1 2364.0 8.1. of which: Net income for the year. . . . . . . . . . . . . . . . . . . . . . . . 172.3 145.6 157.4 181.4 246.1

9. Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23235.0 26102.0 29351.6 33461.2 39588.6

Notes:(a) In cludes over due cred its de ducted of over due credit pro vi sions.(b) Does not in clude over due credit nor de ducts over due credit pro vi sions.(c) Net of pro vi sions.(d) In cludes capi tal, re serves, re tained re sults and net re sults for the year.

while un der es ti mat ing the growth of credit tothe re main ing sec tors of the econ omy, sincecredit granted to (non- financial) na tionalgroups is in creas ingly raised through the re -spec tive hold ing com pa nies — which are in -cluded among the item “other serv ices” for sta -tis ti cal pur poses. Bank lend ing to the “otherserv ices” sec tor grew 35.3 per cent in De cem -ber 1997, clearly sur pass ing the growth of lend -ing to non- financial com pa nies as a whole.

Mean while, credit to in di vidu als con tin uedto rec ord the strong growth ex hib ited in pre vi -ous years (27.1 per cent growth in De cem ber1997, com pared to 25.5 per cent in De cem ber1996 and 28.6 per cent in De cem ber 1995).Lend ing to in di vidu als for hous ing pur poses

grew 26.3 per cent in 1997, cor re spond ing to aflow net of re demp tions of PTE 982.6 bil lion.These fig ures com pare to growth rates of 26.4per cent in 1996 and 25.8 per cent in 1995, towhich cor re sponded net flows of PTE 780.0and 606.2 bil lion, re spec tively. This de vel op -ment re flected the im proved ac cess of Por tu -guese house holds to credit for house pur chase,made pos si ble by the con tinu ing re duc tion inin ter est rates on resi den tial mort gage credit(see box An in di ca tor for house holds’ ac cess tocredit for hous ing in Chap ter III — Prices, de -mand, out put and la bour mar ket).

The rate of growth of bank lend ing to in di -vidu als for pur poses other than hous ing edgedup from 22.8 per cent in 1996 to 29.6 per cent in


Banking system

Ta ble VIII.4

BALANCE SHEET

Struc tu re and ra tes of growth

Per cen ta ge

Struc tu re Year- on- year ra tes of chan ge

1993 1994 1995 1996 1997 1994 1995 1996 1997

Dec Dec Dec Dec Dec Dec Dec Dez Dez

Assets

1. Cash and liquid assets in central banks . . . . . . . . . . . . . . . . . . . 9.4 1.7 1.3 1.5 1.5 -80.1 -11.0 34.0 12.6 2. Liquid assets in credit institutions . . . . . . . . . . . . . . . . . . . . . . . 2.1 2.1 2.0 1.8 1.9 12.7 6.8 5.7 21.3 3. Deposit Certificates issued by the Banco de Portugal . . . . . . . 0.0 6.6 5.9 4.2 2.7 0.0 0.6 -17.8 -23.3 4. Other credits over credit institutions(a) . . . . . . . . . . . . . . . . . . . 18.7 22.0 23.9 27.0 30.9 32.0 22.1 28.9 35.3 4.1. Investments in credit institutions(b) . . . . . . . . . . . . . . . . . . 6.8 7.4 8.8 11.7 12.0 22.7 34.5 51.0 21.1 4.2. Investments in credit institutions abroad(b). . . . . . . . . . . . 11.9 14.6 15.1 15.4 19.0 38.6 16.1 16.0 46.3 5. Live credit to clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.8 34.4 34.3 34.1 35.2 5.1 12.1 13.2 22.3 5.1. Credit to residents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.6 30.7 31.4 31.3 32.7 6.0 15.1 13.6 23.3 5.2. Credit to non-residents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 3.7 2.9 2.8 2.6 -1.5 -12.2 8.9 10.8 6. Overdue credit and interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7 2.4 2.2 1.9 1.5 -0.8 0.9 -2.2 -5.9 7. Provisions for overdue credit . . . . . . . . . . . . . . . . . . . . . . . . . . . -1.5 -1.4 -1.4 -1.2 -1.0 7.1 13.2 -1.2 -5.1 8. Security investment(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.8 22.8 22.2 20.7 17.4 17.7 9.3 6.6 -0.8 9. Financial fixed assets (participations)(c) . . . . . . . . . . . . . . . . . . 2.4 2.5 2.8 2.8 2.8 14.2 27.2 15.9 17.710. Non-financial fixed assets (net) . . . . . . . . . . . . . . . . . . . . . . . . . 2.7 2.5 2.2 2.0 1.8 4.0 -1.6 4.3 5.011. Other investments(c) and sundry accounts . . . . . . . . . . . . . . . 4.8 4.4 4.7 5.0 5.2 2.9 18.5 22.8 23.0

12. Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0 100 12.3 12.4 14.0 18.3

Liabilities1. Resources from domestic credit institutions . . . . . . . . . . . . . . . 9.3 10.0 11.7 12.6 12.2 20.6 31.8 22.4 14.72. Resources from foreign credit institutions . . . . . . . . . . . . . . . . . 13.9 16.3 17.3 19.5 20.0 31.4 19.4 28.5 21.53. Resources from clients. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59.4 58.5 57.2 53.6 50.1 10.6 10.0 6.7 10.63.1. Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58.5 57.3 56.0 52.3 48.6 10.1 9.8 6.6 9.9 of which: 3.1.1. General Government . . . . . . . . . . . . . . . . . . 2.4 2.2 2.5 2.4 2.3 5.3 28.1 10.9 13.0

3.1.2. Other residents . . . . . . . . . . . . . . . . . . . . . . . 41.9 41.7 40.2 37.6 34.6 11.6 8.6 6.7 8.8 3.1.3. Emigrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1 9.0 8.8 7.7 6.5 0.2 9.5 -0.1 -1.1 3.1.4. Other non-residents . . . . . . . . . . . . . . . . . . . 3.7 4.1 4.1 4.2 4.9 24.8 12.3 17.6 37.7

4. Liabilities represented by securities . . . . . . . . . . . . . . . . . . . . . . 2.4 1.6 1.6 2.4 5.7 -24.7 13.1 65.0 183.05. Other payables and sundry accounts . . . . . . . . . . . . . . . . . . . . . 4.5 3.6 3.2 3.0 3.3 -8.9 -0.2 5.9 30.76. Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 1.7 1.1 0.8 0.6 -2.0 -28.3 -20.5 -0.17. Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 1.1 1.3 1.8 2.1 19.1 33.8 67.1 36.08. Equity capital(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 7.2 6.5 6.4 6.0 8.3 2.4 11.3 10.8 8.1. Net income for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7 0.6 0.5 0.5 0.6 -15.5 8.1 15.2 35.7

9. Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0 100.0 12.3 12.4 14.0 18.3

Notes:(a) In cludes over due cred its de ducted of over due credit pro vi sions. (b) Does not in clude over due credit nor de ducts over due credit pro vi sions.(c) Net of pro vi sions.(d) In cludes capi tal, re serves, re tained re sults and net re sults for the year.

1997, still rep re sent ing about 25 per cent of to -tal lend ing to in di vidu als.

In 1997, the re duc tion in to tal credit and in -ter est over due reached 5.9 per cent, a strongerfall than in the pre vi ous year (2.2 per cent re -duc tion). This de vel op ment re sulted from thewrite- off of sig nifi cant amounts of un col lecti -

ble cred its, as from the re duc tion of new de -faults on loans. Since banks’ port fo lios ac cu -mu lated sig nifi cant amounts of new credit —as so ci ated to the up ward stage of the eco nomiccy cle in 1997 — credit port fo lios ex hib ited alower de lin quency rate. In deed, the capi talcom po nent of credit to resi dent cli ents, over -due for less than one year, again de creased in1997 (by 1.9 per cent), though by less than in the three pre vi ous years — which re corded sub -stan tial re duc tions (20.5 per cent in De cem ber1994, 20.9 per cent in De cem ber 1995 and 13.9per cent in De cem ber 1996). This item ac -counted for 1.0 per cent of gross credit to resi -dent cli ents in De cem ber 1997, which com pares with 1.2 per cent in De cem ber 1996 and 1.6 percent in De cem ber 1995 (charts VIII.3 andVIII.4). As a re sult, the ra tio of to tal credit andin ter est over due to (gross) credit to cli entsagain de clined, from 5.2 per cent in De cem ber1996 to 4.0 per cent in 1997 (5.9 per cent in De -cem ber 1995).

Pro vi sion ing for loan losses de creased 5.1per cent in 1997, fol low ing the re duc tion inover due credit and in ter est. This de vel op ment


Banking system

Ta ble VIII.5

NON-SECURITISED BANK LENDING BROKEN-DOWN BY DOMESTIC SECTOR

Len ding to non- fi nan ci al com pa nies Len ding to in di vi du als

of which:

Non-fi nan ci al

com pa niesTo tal

Agri cul-ture, fo res-try hunt-ing andfishe ries

Ma nu-fac tur-

ing

Cons truc-tion andpu blicworks

Ser vi ces(a) Tra de,res tau rantsand ho tels

Other ser vi ces

To tal Hou sing Otherpur po ses

1993 Dec

Y-on-y rate of change. . 1.9 -5.5 0.3 2.0 9.2 3.3 28.6 27.8 21.5 52.7 Change (PTE billion) . . 85.8 -8.1 5.8 10.9 165.2 36.2 132.8 542.2 333.5 208.7

1994 Dec

Y-on-y rate of change. . -0.8 -4.6 -6.6 7.9 4.8 6.1 -3.1 22.3 24.5 15.6 Change (PTE billion) . . -36.5 -6.3 -111.8 44.1 94.5 68.7 -18.6 556.5 462.1 94.4

1995 Dec

Y-on-y rate of change. . 4.0 -17.6 -1.9 9.4 12.1 10.9 28.9 28.6 25.8 38.1 Change (PTE billion) . . 187.7 -23.3 -30.5 56.7 246.8 129.8 166.9 872.9 606.2 266.6

1996 Dez

Y-on-y rate of change. . 6.6 8.3 -6.4 14.6 15.2 12.5 28.3 25.5 26.4 22.8 Change (PTE billion) . . 322.3 9.0 -98.9 96.1 347.7 164.9 211.0 1000.2 780.0 220.2

1997 Dez

Y-on-y rate of change. . 21.8 2.2 11.6 23.3 28.0 27.4 35.4 27.1 26.3 29.6 Change (PTE billion) . . 1127.0 2.6 168.1 176.1 740.2 406.4 338.6 1333.2 982.6 350.6

Note:(a) In cludes “trade, res tau rants and ho tels”, “trans port, ware hous ing and com mu ni ca tions” and “other serv ices”.Y- on-y — Year- on- year.

Chart VIII.2ECONOMIC ACTIVITY AND CREDIT FOR

INVESTMENT PURPOSESYear-on-year rates of change

-2

-1

0

1

2

3

4

5

Sep91 Sep92 Sep93 Sep94 Sep95 Sep96 Sep97

Per

cent

age

-14

-7

0

7

14

21

28

35

Per

cent

age

Coincident indicator (left-hand scale)

Credit to investment (right-hand scale)

re sulted in a slight in crease in the cov er age ofover due credit by loan loss pro vi sions, from66.4 per cent in De cem ber 1996 to 66.9 per cent.Mean while, the ra tio of over due credit and in -ter est net of pro vi sions for loan losses to creditgranted (also net of pro vi sions) also de creased,from 1.9 per cent in De cem ber 1996 to 1.4 percent at the end of 1997. The lower need for pro -vi sion ing for loan losses also re sulted from the

fact that pro vi sions for “older” cred its weresuf fi cient (ac tu ally, pro vi sions for these cred itsre duced through the write- off of un col lecti blecred its, which are usu ally 100 per cent pro vi -sioned), to gether with the sig nifi cant growth of new cred its — whose de lin quency level is stillun cer tain.

The dy na mism of banks’ lend ing ac tiv ityalso re flected in sig nifi cant changes in the com -po si tion of banks’ as sets — namely to wards the in creased share of credit to the non- financialpri vate sec tor, along side the re duc tion in fi -nanc ing to Gen eral Gov ern ment, spe cially asre gards banks’ in vest ment in pub lic debt se cu -ri ties.

In 1997, in vest ments in se cu ri ties de creased0.8 per cent, fol low ing the con tinu ing re duc -tion in the rate of growth of these in vest mentsre corded since 1994 (growth rates of 17.7, 9.3and 6.6 per cent, re spec tively in 1994, 1995 and1996). The re duc tion in the over all value of in -vest ments in se cu ri ties chiefly re sulted fromthe 23.1 per cent re duc tion in the port fo lio ofPor tu guese pub lic debt se cu ri ties. This de vel -op ment took place in a con text of a de creas ingover all sup ply of these se cu ri ties(4), along sidebanks’ profit- taking on pub lic debt se cu ri ties,which in volved mas sive sell ing of these in stru -ments, taken in great ex tent by non- residents.In deed, non- residents’ port fo lio of long- termPor tu guese pub lic debt se cu ri ties in creasedPTE 776.5 bil lion in 1997.

Re sour ces from cli ents, 97.1 per cent of which are de po sits, ac ce le ra ted in 1997 (10.6 per cent,which com pa res to 6.7 per cent in 1996). Thisfun ding sour ce ac coun ted for the gre a test sha rein the growth of the banking sys tem’s lia bi li ties.Analysing the breakdown of de po sits by ins ti tu -ti o nal sec tor, the 37.7 per cent in crea se in de po -sits of non- re si dent non- bank cli ents (ex clu ding emi grants) should be highlighted (17.6 per centin 1996). The de cli ne in the sha re of re sour cesfrom cli ents in the ba lan ce sheet of banks re flects


Banking system

Chart VIII.3AVERAGE RISK OF CREDIT TO CLIENTS

2.2

3.1

2.3

1.61.2 1.0

6.1

6.96.5

5.9

5.2

4.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Dec92 Dec93 Dec94 Dec95 Dec96 Dec97

Per

cent

age

Credit to residents overdue for less than one year/domestic creditTotal(a)

Note:(a) Ra tio betwe en cre dit and in te rest over due in ope -

ra tions with cli ents and the gross va lue of cre ditto cli ents.

Chart VIII.4CREDIT RISK AND ECONOMIC ACTIVITY

-1

0

1

2

3

4

5

6

Mar90 Mar91 Mar92 Mar93 Mar94 Mar95 Mar96 Mar97

Per

cent

age

0

0.5

1

1.5

2

2.5

3

3.5

Per

cent

age

(a)

(b)

No tes:(a) Cre dit to re si dent cli ents over due for less than

one year as a per cen ta ge of to tal cre dit to re si dent cli ents (right- hand sca le).

(b) Co in ci dent in di ca tor of ac ti vity, year- on- year(le ft- hand sca le).

(4) In 1997, the Treas ury car ried out net re demp tion of pub licdebt, partly as an out come of the al lo ca tion of a sig nifi cant pro por tion of reve nue from pri va ti sa tion to this end (seechap ter VII - Se cu ri ties market for fur ther de vel op ments onthis is sue).

the in crea sed in te rest of the pu blic for in -vestments other than time de po sits — e.g., sha -res and in vestment trust units — in a con text ofsharp re duc tions in no mi nal in te rest ra tes, andof a high dyna mism in stock markets (see Chap -ter IX — Fi nan cing the eco nomy). In deed, the ra tioof both real es ta te and se cu ri ties in vestmentsfunds’ in vestments to banking de po sits rosefrom 27.7 per cent in late 1996 to 38.5 per cent inDe cem ber 1997 (see Chap ter VII — Se cu ri tiesmarket).

In 1997, in ter bank fi nanc ing grew at a ratesimi lar to that of the bank ing sys tem’s as sets(18.8 per cent). This de vel op ment in ter ruptsthe strong trend to wards the in crease in theshare of in ter bank fi nanc ing in banks’ to talfund ing sources(5), re corded since 1993.

The growth of li abili ties rep re sented by se -cu ri ties was linked to the es tab lish ment in Por -tu gal of an in sti tu tion whose main fund ingsource con sists of is su ing se cu ri ties in the fi -nan cial mar kets. Fur ther more, the dy na mismex hib ited by non- subordinated cash bondspro grammes since 1996, as a means for banksto raise funds, also con trib uted to the be hav -iour of li abili ties rep re sented by se cu ri ties.

Sub or di nated debt grew 36.0 per cent in1997, due to the growth of is su ing of sub or di -nated cash bonds. As a re sult, sub or di nateddebt ac counted for 2.1 per cent of the li abili tiesside of the bal ance sheet, as against 1.8 per centin 1996. In 1997, the growth of sub or di nateddebt ac counted for al most half of the in creasein the ag gre gate “sub or di nated debt and eq -uity capi tal” (49.2 per cent), thus in vert ing thesitua tion re corded in 1995 and 1996 — wheresub or di nated debt ac counted for the great estshare in the growth of that ag gre gate.

4. Re sults

Ta ble VIII.6 ex hib its the endof- year val uesfor the main items of the profit and loss ac -count, while ta ble VIII.7 pres ents less- detaileditems of the profit and loss ac count as a per -cent age of av er age to tal as sets, as well as the re -spec tive year- on- year changes.

In 1997, the fi nan cial mar gin wid ened 14.2per cent, re flect ing the rise in in ter est re ceived

(rep re sented in ta ble VIII.6 by the item “in ter -est in come and equiva lent”), and to the re duc -tion in in ter est paid by banks (“in ter est costsand equiva lent”). This de vel op ment in vertsthe nar row ing of the fi nan cial mar gin re corded from 1993 on wards. The in crease in the fi nan -cial mar gin in 1997 was chiefly due to the in -crease in the vol ume of busi ness and to a slightin crease in the dif fer en tial be tween the av er age rate of re turn on interest- earning as sets (fi nan -cial as sets) and that on interest- bearing li abili -ties (fi nan cial li abili ties), al though the re duc -tion in nomi nal in ter est rates and in the dif fer -ence be tween interest- earning as sets andinterest- bearing li abili ties con tin ued to con -trib ute to the nar row ing of the fi nan cial mar gin (see box Break down of the changes in the fi nan cialmar gin: 1992-1997).

The wid en ing of the spread be tween theinterest- earning as sets and interest- earing li -abili ties is closely linked to the re demp tion of apor tion of the De posit Cer tifi cates is sued bythe Banco de Por tu gal. In ad di tion, the rise inthe share of de mand de pos its in to tal bank de -pos its re sulted in a lower av er age re turn ofbanks’ interest- earing li abili ties, con trib ut ingto the in creased dif fer en tial be tween the ratesof re turn of interest- earning as sets andinterest- earing li abili ties. In De cem ber 1997,de mand de pos its ac counted for 33.9 per cent ofto tal de pos its, com pared to 30.3 per cent in De -cem ber 1996(6).

In 1997, the dif fer en tial be tween banks’ in -ter est rates on lend ing and bor row ing op era -tions with the non- financial pri vate sec tor nar -rowed. Hence, the spread be tween the in ter est rate on the dis count of com mer cial bills tonon- financial com pa nies be tween 91 and 180days, and the rate on time de pos its (91 to 180days) nar rowed from 6.6 p.p. in De cem ber1996 to 6.1 p.p. in De cem ber 1997. The dif fer -en tial be tween the in ter est rate on loans and


Banking system

(5) As men tioned above, when re fer ring to the de vel op mentpath of in vest ments in credit in sti tu tion, the be hav iour ofthis item is par tially de ter mined by op era tions car ried out be tween in sti tu tions be long ing to the same bank inggroup.

(6) These fig ures re fer solely to the ac tiv ity of the resi dentbranches of the Por tu guese bank ing sys tem.

ad vances to non- financial com pa nies (91 to180 days) and the same rate for time de pos itsalso nar rowed, from 5.5 p.p. in De cem ber 1996 to 3.8 p.p. in the same month in 1997. Mean -while, the spread be tween the in ter est rate onloans and ad vances to in di vidu als with ma tur -ity over 5 years, and the in ter est rate on de pos -its from 6 months up to 1 year also nar rowed,to 3.9 p.p. in late 1997 (5.6 p.p. in De cem ber1996) (chart VIII.5).

De spite the sig nifi cant growth of the fi nan -cial mar gin in ab so lute val ues, fi nan cial mar -gin as a per cent age of av er age to tal as setsagain de creased in 1997, reach ing 2.03 per cent (2.12 per cent in 1996). As in pre vi ous years,this de vel op ment chiefly re sulted from thesharp growth of the bal ance sheet ac tivi tieswhich ex hibit a lower mar gin — for in stance,in ter bank op era tions, which con trib uted sig -nifi cantly to the growth of to tal as sets butyield no sig nifi cant in crease in the fi nan cialmar gin (ta ble VIII.7). In di ca tors re lat ing the fi -nan cial mar gin to a meas ure of vol ume ofbusi ness ad justed for in ter bank op era tions


Banking system

Ta ble VIII.6

PROFIT AND LOSS ACCOUNTPTE billi on

1993 1994 1995 1996 1997

Income and gains 1. Interest income and equivalent . . . . . . . . . . . . . . . . . . . . . . . 2478.1 2441.8 2619.3 2573.0 2603.3 2. Income from securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.8 11.0 35.7 42.6 50.1 3. Commissions receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102.9 104.1 107.9 121.4 169.0 4. Profits on financial operations . . . . . . . . . . . . . . . . . . . . . . . . 338.9 413.7 540.6 649.8 950.6 5. Other income and profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.4 52.2 60.0 80.1 87.9 6. Extraordinary gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63.4 74.3 61.3 58.0 82.6

A. Total income and gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3038.6 3097.0 3424.8 3524.8 3943.5

Costs and losses 7. Interest costs and equivalent . . . . . . . . . . . . . . . . . . . . . . . . . 1773.9 1748.8 1954.1 1919.2 1856.8 8. Commissions payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.9 14.3 18.1 20.8 23.5 9. Losses on financial operations . . . . . . . . . . . . . . . . . . . . . . . . 246.2 357.6 469.7 514.2 810.3 10. Staff costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296.9 309.9 333.3 354.9 386.2 11. Other administrative costs . . . . . . . . . . . . . . . . . . . . . . . . . . 150.0 162.0 180.7 206.2 226.0 12.Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 4.8 5.3 6.4 6.5 13. Other costs and losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 7.6 7.2 12.6 8.414.Extraordinary losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.8 37.4 30.2 29.6 41.1

B. Total costs and losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2515.0 2642.3 2998.7 3063.9 3358.7

C. Cash-flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 523.5 454.7 426.1 460.9 584.8D. Depreciation for the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73.5 75.2 73.9 73.7 78.8E. Provisions for the year (net of replacement provisions) . . . . . 231.5 193.8 153.9 157.8 195.5F. Income before taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218.5 185.7 198.3 229.4 310.5G. Tax on income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46.2 40.2 40.9 48.1 64.4H. Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172.3 145.6 157.4 181.4 246.1

I. Net interest income (financial margin) . . . . . . . . . . . . . . . . . . . . 704.2 693.0 665.2 653.8 746.4J. Other current results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226.6 196.7 243.8 339.9 409.0L. Banking product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 930.8 889.7 909.0 993.7 1155.4M. Operating costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 446.9 471.8 514.0 561.0 612.2N.Operating cash-flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 483.9 417.9 395.0 432.6 543.2O. Extraordinary income (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39.7 36.8 31.1 28.3 41.5

Chart VIII.5 DIFFERENTIAL BETWEEN BANKS’ LENDING

AND DEPOSIT INTEREST RATES

2.5

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5

Jan92 Jan93 Jan94 Jan95 Jan96 Jan97 Jan98

(a)

(b)

(c)

No tes:(a) Dis count of commer ci al bills to non- fi nan ci al pri -

va te com pa nies, 91 to 180 days — time de po sits,91 to 180 days.

(b) Loans and ad van ces to non- fi nan ci al pri va tecom pa nies, 91 to 180 days — time de po sits 91 to180 days.

(c) Loans and ad van ces to in di vi du als with ma tu rity over 5 years — time de po sits, 180 days up to 1year.


Banking system

BREAKDOWN OF THE CHANGES IN THE FINANCIAL MARGIN 1992-1997

The fi nan cial mar gin — i.e., the dif fer ence be tween in ter est re ceived and in ter est paid in to tal busi -ness — is for the bank ing sys tem, in its tra di tional busi ness, the ma jor source of reve nue. This is par -ticu larly true as re gards Por tu guese banks, for which the fi nan cial mar gin rep re sented 64.6 per cent ofthe bank ing prod uct in 1997. As the fi nan cialmar gin re sults from the ac tiv ity of fund rais ingand in vest ing, its be hav iour is marked by theevo lu tion of the dif fer en tial be tween rates of re -turn of bal ance sheet as sets and li abili ties(1), bychanges in the vol ume and struc ture of banks’busi ness, and by the changes in the level of mar -ket in ter est rates.

Ta ble 1 sum ma rises a frame work de signed toex plain the evo lu tion of the fi nan cial mar gin ofthe bank ing sys tem as a whole. Here, the fi nan -cial mar gin de pends on the dif fer en tial be tweenav er age rates of re turn on fi nan cial as sets and li -abili ties (rAF - rPF), on the vol ume of busi ness(meas ured by av er age fi nan cial as sets, AF), onthe in ter est rate level (rep re sented by the av er age rate of re turn im plicit in fi nan cial li abili ties, rPF)and on the dif fer ence be tween the av er age vol -ume of fi nan cial as sets and li abili ties(2) (AF-PF).

The con tri bu tion of each of these fac tors to the change in the fi nan cial mar gin in con secu tive yearswas in di vidu ally cal cu lated “ce teris pari bus”. We fol low to il lus trate these cal cu la tions con sid er ing the sub- period 1992-1993: given av er age fi nan cial as sets in 1992, the 0.41 p.p. re duc tion in the dif fer en tialbe tween av er age rates of re turn on as sets and li abili ties would ren der a re duc tion in the fi nan cial mar -gin, by about PTE 70 bil lion; for the dif fer en tial be tween the 1992 lend ing and bor row ing in ter est rates, the PTE 2,397.1 bil lion in crease in av er age fi nan cial as sets from 1992 to 1993 would re sult in a wid en -ing of the fi nan cial mar gin, by about PTE 79 bil lion; if hold ing con stant for 1993 the dif fer ence be tween fi nan cial as sets and li abili ties re corded in 1992 (PTE 1 365.8 bil lion), the 1.47 p.p. re duc tion in the av -er age rate of re turn of the li abili ties be tween 1992 and 1993 would lead to a fi nan cial mar gin re duc tionclose to PTE 20 bil lion; fi nally, for a level of the av er age rate of re turn of the li abili ties equal to that of1992, the PTE 23.4 bil lion in crease in the dif fer ence be tween fi nan cial as sets and li abili ties would al low for an in crease in the fi nan cial mar gin of about PTE 2.5 bil lion (ta ble 2, head ing 7 for the dif fer en tials,and head ings 11 and 12, re spec tively for the evo lu tion of fi nan cial as sets and the dif fer ence be tween fi -nan cial as sets and li abili ties).

Chart 1 plots the break down of the change in the fi nan cial mar gin of the over all Por tu guese bank ingsys tem be tween 1992 and 1997, re sult ing from the above pre sented frame work. To these vari ables we

(1) This dif fer en tial de pends at each mo ment on a set of fac tors, namely: the le gal frame work (e.g., cash re serves, de posit guar an teefund), com pe ti tion in the credit and de pos its mar kets, the struc ture of in vest ments and re sources, slope of the yield curve and credit risk.

(2) The off- balance sheet ac tiv ity (namely guar an tees, av als and some de riva tives con tracts) can also give rise to in come/costs equiva -lent to in ter est. These flows were con sid ered a sun dry item in our analy sis, and in cluded in item RES in ta ble 1.

Ta ble 1

BALANCE

Fi nan ci al as sets(FA)

Fi nan ci al lia bi li ties (FL)

Other as sets Other lia bi li ties

Fi nan ci al mar gin can be broken- down as fol lows:

FM r FA r FL RES r r FA r FLt FA t FL t t FA FL t FLt t t t t( ) t tRES

whe re FM is the fi nan ci al mar gin, rAF and rPF stand res pec ti vely

for the ave ra ge im pli cit rate of re turn of fi nan ci al as sets and lia -

bi li ties, and RES the net in te rest on bu si ness not di rectly ac -

coun ta ble to the ba lan ce sheet ac ti vity (off- ba lan ce sheet). The

chan ge in the fi nan ci al mar gin (can be writ ten as fol lows:

FM r r FA FA r r r FAt FA FL t t t FA FL t FL t( ) ( ) (1 1 t tFL1 1)

( )FA FL r RESt FL tt 1 Unex plai ned chan ge,

whe re stands for the chan ge betwe en con se cu ti ve years.


Banking system

added the net in ter est in come on off- balance sheet op era tions, and the part of the change in the fi nan cialmar gin which is not ex plained by any of the ef fects con sid ered.

Be tween 1992 and 1996, the in crease in the vol ume of busi ness and the nar row ing of the dif fer en tial be tween the im plicit av er age re turns on lend ing and bor row ing op era tions ren dered the great est im -pacts on the fi nan cial mar gin, though in op po site di rec tions: the former to wards its in crease, and thelat ter to wards its nar row ing.

In 1997, the slight wid en ing of the dif fer en tial be tween the av er age im plicit re turn on fi nan cial as -sets and li abili ties strength ened the al ready sig nifi cant con tri bu tion of the in crease in the vol ume ofbusi ness to the in crease in the fi nan cial mar gin. This wid en ing of the dif fer en tial be tween the av er agerates of re turn in to tal ac tiv ity re sulted from the in crease in the spread of the rates of re turn on in ter -bank op era tions by about 0.3 p.p., as so ci ated to the re demp tion of the se ries A of the De posit Cer tifi cates is sued by the Banco de Por tu gal (di vided in two tranches of about PTE 300 bil lion each, in No vem ber1996 and in No vem ber 1997). In deed, funds in vested by banks in these se cu ri ties, non- remunerated,be came avail able to other in vest ments af ter the re spec tive set tle ment. Mean while, the dif fer en tial of the

Ta ble 2

IMPLICIT AVERAGE RATES OF RETURN(a)

Ave ra ge rate of re turn Per cen ta ge of ave ra ge as sets

1992 1993 1994 1995 1996 1997 1992 1993 1994 1995 1996 1997

1. Interbank assets (b) . . . . . . . . . . 9.47 8.30 7.10 7.07 5.77 5.20 26.3 28.2 31.2 33.1 33.7 36.72. Non-interbank assets . . . . . . . . 15.69 13.68 11.41 10.63 9.42 8.07 66.9 64.7 61.2 59.2 57.9 54.8 2.1. Credit (gross) . . . . . . . . . . 16.3 14.73 12.42 11.53 10.19 8.86 41.7 41.6 38.3 36.3 36.6 36.0 2.2. Fixed-rate securities (gross) . . . . . . . . . . . . . . . . 15.35 12.31 10.15 9.90 8.62 6.84 23.7 21.6 21.5 21.1 19.7 17.5 2.3. Other assets . . . . . . . . . . . . 4.09 4.20 3.67 1.57 1.20 2.90 1.5 1.5 1.5 1.9 1.6 1.3

3. Financial assets . . . . . . . . . . . . 13.93 12.05 9.96 9.36 8.07 6.92 93.2 92.9 92.4 92.3 91.6 91.5

4. Interbank liabilities . . . . . . . . . 8.83 8.27 7.39 7.69 6.32 5.38 19.0 20.9 25.0 27.0 29.4 32.65. Non-interbank liabilities . . . . . 11.15 9.44 7.25 6.83 5.81 4.47 66.8 65.4 62.1 61.2 59.5 57.6 5.1. Deposits . . . . . . . . . . . . . . 10.81 9.25 7.09 6.66 5.67 4.14 59.9 60.3 57.7 56.3 54.6 49.3 5.2. Securities (non- subordinated). . . . . . . . 15.7 13.76 10.98 9.45 7.51 6.87 3.0 2.5 2.1 1.9 1.9 4.5 5.3.Subortinated debt. . . . . . . 13.00 11.93 10.77 9.98 7.83 6.63 0.7 0.9 1.1 1.2 1.4 1.9 5.4. Other resources . . . . . . . . 12.71 8.58 5.40 6.99 6.74 5.38 3.1 1.7 1.3 1.9 1.6 1.9

6. Financial liabilities . . . . . . . . . 10.63 9.16 7.29 7.09 5.98 4.80 85.8 86.3 87.0 88.3 89.0 90.2

Differentials:7. Financial assets-financial liabilities . . . . . . . . . . . . . . . . . 3.30 2.89 2.67 2.27 2.10 2.128. Interbank assets-interbank liabilities . . . . . . . . . . . . . . . . . 0.64 0.03 -0.29 -0.62 -0.55 -0.189. Non-interbank assets - non-interbank liabilities . . . . 4.55 4.24 4.17 3.81 3.61 3.59 10. Credit-deposits . . . . . . . . . . . . 5.48 5.48 5.33 4.86 4.53 4.72

Memo:

PTE billion average values11. Financial assets . . . . . . . . . . . . 17085.2 19482.3 22388.0 25840.0 28205.3 33572.412. Financial assets - financial liabilities . . . . . . . . . . . . . . . . . 1365.8 1389.2 1289.8 1130.3 819.9 514.6

Notes:(a) Ra tio betwe en in te rest items in the pro fit and loss ac count, and the ave ra ge va lue of the un derlying ba lan ce sheet item, cal cu la ted on

quar terly va lues.(b) Cash and de mand de po sits in the Ban co de Por tu gal, li quid as sets and in vestments in cre dit ins ti tu tions, in clu ding De po sit Cer ti fi ca tes

in the Ban co de Por tu gal.

evidence this fact. Indeed, the behaviour of thefinancial margin as a percentage of adjustedaverage total assets in Portugal between 1991and 1997 placed this indicator at figures simi-lar to those of most countries in the EuropeanEconomic Area (table VIII.8). As shown inchart VIII.6, in 1991 Portugal stood at the topof the set of countries presenting the highestvalues for the financial margin as a percentageof adjusted average total assets; in 1995, theyear for which data is available for a wide setof countries, the indicator for the Portuguesebanking system takes an intermediate level

amongst the set of countries considered —close to those exhibited by Norway, Italy,Spain and Sweden — when adjusted for thedistinct proportions of interbank activity in to-tal assets (chart VIII.7).

Net commissions grew 44.6 per cent in 1997,accelerating strongly when compared to 1996(12.0 per cent growth). This development waschiefly an outcome of the growth of commis-sions on banking services and on operations onsecurities on the behalf of clients, linked to thehigher stock market turnover — partly inter-mediated by banks at their retail counters.


Banking system

rates of return on non-interbank business recorded a further reduction, due to the increased resort tosecuritised subordinated and non-subordinated debt as sources of funding of banks— whose rates ofreturn tend to exceed those practised in deposits.

The systematic reduction in the level of interest rates throughout the whole period 1992-1997, re-flex of the disinflationary process undergoing the Portuguese economy, also contributed to the narrow-ing of the margin, being this contribution proportional to the difference between financial assets and li-abilities.

On its turn, the (positive) difference between financial assets and liabilities started to narrow from1993 onwards, contributing as well to the reduction of the financial margin.

-120

-100

-80

-60

-40

-20

0

20

40

60

80

100

120

140

93/92 94/93 95/94 96/95 97/96

PTE

bill

ion

Differential of interest rates effect Volume of business effectInterest rate level effect Composition effect (a)Off-balance sheet (RES) Not explainedTotal

Chart 1CHANGE IN FINANCIAL MARGIN: BREAKDOWN

Note:(a) Effect on financial margin due to the change in the difference

between financial assets and liabilities.

Also worth noting the 3.5 per cent growthrecorded by the results from financial opera-tions in 1997, which build upon an already out-standing level in 1996. Indeed, foreign ex-change gains and gains from the portfolio ofvariable-income securities accounted for thebulk of this striking amount of gains. This de-velopment is linked to both the strong appre-

ciation of the Sterling and the US dollar, andalso to the valuation of stock markets worldwide — but specially in Portugal — through-out 1997. Recall that in 1996 the growth of gainsfrom financial operations were chiefly due tosignificant gains in fixed-income securities —namely Portuguese public debt fixed-incomebonds (table VIII.9).


Banking system

Table VIII.7

PROFIT AND LOSS ACCOUNT

As a percentage of average assets

As a percentage of average assets Year-on-year rate of change

1993 1994 1995 1996 1997 1994 1995 1996 1997

Financial margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.36 2.86 2.38 2.12 2.03 -1.6 -4.0 -1.7 14.2Other current results . . . . . . . . . . . . . . . . . . . . . . . . . 1.08 0.81 0.87 1.10 1.11 -13.2 23.9 39.4 20.3

Income from securities. . . . . . . . . . . . . . . . . . . . . 0.06 0.05 0.13 0.14 0.14 -14.3 225.2 19.3 17.6Commissions (net) . . . . . . . . . . . . . . . . . . . . . . . . 0.43 0.37 0.32 0.33 0.40 -1.4 0.1 12.0 44.6Profits on financial operations (net). . . . . . . . . . 0.44 0.23 0.25 0.44 0.38 -39.5 26.3 91.4 3.5Other current income (net). . . . . . . . . . . . . . . . . 0.14 0.16 0.17 0.20 0.20 32.4 18.9 28.7 19.7

Banking product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.44 3.67 3.25 3.23 3.15 -4.4 2.2 9.3 16.3Operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.13 1.95 1.84 1.82 1.67 5.6 8.9 9.1 9.1

Staff costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.42 1.28 1.19 1.15 1.05 4.4 7.6 6.5 8.8Other administrative costs . . . . . . . . . . . . . . . . . 0.72 0.67 0.65 0.67 0.62 8.0 11.5 14.1 9.6

Operating cash-flow. . . . . . . . . . . . . . . . . . . . . . . . . . 2.31 1.72 1.41 1.41 1.48 -13.6 -5.5 9.5 25.6Extraordinary income (net). . . . . . . . . . . . . . . . . . . . 0.19 0.15 0.11 0.09 0.11 -7.1 -15.6 -8.9 46.6Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.35 0.31 0.26 0.24 0.21 2.2 -1.6 -0.4 6.9Provisisions (replacements of provisions

deducted). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.10 0.80 0.55 0.51 0.53 -16.3 -20.6 2.5 23.9

Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 1.04 0.77 0.71 0.75 0.85 -15.0 6.7 15.7 35.3Tax on income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.22 0.17 0.15 0.16 0.18 -13.1 1.8 17.6 34.0Net income 0.82 0.60 0.56 0.59 0.67 -15.5 8.1 15.2 35.7

Average assets (PTE billion) . . . . . . . . . . . . . . . . . . . 20972.2 24237.3 27930.4 30778.1 36709.7 15.6 15.2 10.2 19.3

Chart VIII.6FINANCIAL MARGIN AS A PERCENTAGE OF

AVERAGE ASSETS AND OF ADJUSTEDAVERAGE ASSETS

International comparison — 1991

0

1

2

3

4

5

6

POR SPA DEN ITL NOR UK GRE SWE GER AUS NL FRA FIN BEL LUX

Perc

en

tag

e

As a percentage of average assetsAs a percentage of adjusted average assets

Source: OECD, Bank profitability, Paris 1997.

Chart VIII.7FINANCIAL MARGIN AS A PERCENTAGE OF

AVERAGE ASSETS AND OF ADJUSTEDAVERAGE ASSETS

International comparison — 1995

0

1

2

3

4

5

6

DEN NOR ITL SPA SWE POR UK GER GRE NL FIN AUS BEL FRA LUX

Perc

en

tag

e

As a percentage of average assetsAs a percentage of adjusted average assets

Source: OECD, Bank profitability, Paris 1997.

In this context banking product grew 16.3per cent in 1997. Despite accounting for an ac-celeration when compared to 1996 (9.3 per centgrowth rate), this growth was still not enoughto prevent a further decline in banking productas a percentage of average total assets, from3.23 per cent in 1996 to 3.15 per cent in 1997.However, if adjusted average assets for thegrowth of interbank items, this percentage rec-ords a recovery in 1996 and in 1997, after sharpreductions recorded between 1991 and 1995. In1997, banking product as a share of adjustedaverage total assets reached 4.67 per cent, com-pared with 4.58 per cent in 1996 and 4.46 percent in 1995.

The growth of the item “Other current re-sults” reached 20.3 per cent; as a result, theshare of this item in banking product again in-creased, from 34.2 per cent in 1996 to 35.4 percent in 1997. Also the contribution of commis-sions to banking product edged up, from 10.1per cent in 1996 to 12.6 per cent in 1997 (chartVIII.8).

Finally, after accelerating in 1995 and in1996, operating costs recorded virtually thesame growth as in the previous year (9.1 percent). Several factors explain the persistence ofthe rates of growth of operating costs in recentyears, in a context of the continued reduction of


Banking system

Table VIII.8

FINANCIAL MARGIN AS A PERCENTAGE OF AVERAGE ASSETSAND OF ADJUSTED AVERAGE ASSETS

1992 1993 1994 1995 1996 1997

(FM/AA)*100. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.90 3.36 2.86 2.38 2.12 2.03(FM/AA adjusted)*100 . . . . . . . . . . . . . . . . . . . . 4.81 4.25 3.81 3.26 3.01 3.02

FM – Financial margin.AA – Average assets.AA adjusted — total average assets deducted of interbank resources.

Table VIII.9

INCOME FROM FINANCIAL OPERATIONS

PTE billion

1992 1993 1994 1995 1996 1997

Gains from the foreign exchangeposition . . . . . . . . . . . . . . . . . . . . . . . . . 33.2 46.8 32.9 31.1 27.3 48.6

Fixed-income securities . . . . . . . . . . . . 38.8 45.5 -2.0 14.9 87.2 45.1Variable-income securities . . . . . . . . . . 2.9 0.1 16.2 12.1 14.6 38.6Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 0.3 9.1 12.8 6.6 8.1

79.1 92.7 56.1 70.9 135.6 140.3

Chart VIII.8BANKING PRODUCT: BREAKDOWN

24.1 22.8

73.264.6

16.9

12.610.19.9

65.8

0

10

20

30

40

50

60

70

80

90

100

1995 1996 1997

Perc

en

tag

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Financial marginCommissionsOther income{Other current

results

inflation: the strong investment in the informa-tion and communication systems, increasinglyconsidered a decisive factor in the develop-ment of institutions ‘competitiveness; the un-dergoing restructuring of institutions involvedin take-overs occurred since 1995, aiming at ra-tionalising common resources and structures,and that involve substantial initial invest-ments; the extraordinary contributions to pen-sion funds in order to cover past liabilities(classified as staff costs for the year).

Contributions to pension funds increasedsignificantly in 1997, accounting for 40 per centof the growth exhibited by staff costs and ex-plaining the increase in the growth of thesecosts from 6.5 per cent in 1996 to 8.8 per cent in1997. In fact, if excluding the contributions topension funds from staff costs, the latter wouldhave recorded a slowdown, from 7.5 per cent in1996 to 5.9 per cent in 1997.

5. Profitability and solvency

The profitability of the banking system,measured by the ratio of net results for the yearto average assets (return on assets — ROA) andthe ratio of net results to average equity capital(return on equity — ROE) rose substantially in1997. ROA grew from 0.59 per cent in 1996 to0.67 per cent in 1997, while the return on assetsadjusted for interbank activity stood at 0.99per cent , as against 0.84 per cent in 1996. On itsturn, ROE edged up 2 percentage points, from9.1 per cent in 1996 to 11.1 per cent in 1997(chart VIII.9).

As in 1996, “other current results” renderedin 1997 the greatest contribution to the increasein return on equity (1.4 p.p., compared with 4.2p.p. in 1996), among which the behaviour ofnet commissions should be singled out. Otherpositive contributions to the change in ROEwere those of financial margin (0.8 p.p., whichcompares to negative contributions of 4.1p.p.,4.3 p.p. and 2.1 p.p., respectively in 1994, 1995and 1996) and operating costs. The latter, de-spite accelerating slightly in 1997, contributed0.5 p.p. to the increase in the return on equity(as against a negative contribution of 1.2 p.p. in1996) (chart VIII.10).

As in 1996, indicators relating operatingcosts to average total assets and to bankingproduct again decreased in 1997. This develop-ment reflects the significant growth of total as-sets and the mentioned acceleration of bankingproduct, since operating costs — as referredabove — recorded in 1997 a similar rate ofgrowth as in 1996 (9.1 per cent). Operatingcosts as a percentage of banking product nar-rowed from 56.5 per cent in 1996 to 53.0 percent in 1997, while as a percentage of averagetotal assets this item decreased from 1.82 percent in 1996 to 1.67 per cent in 1997. Further-more, in a context of rapid technologicalchange — that enables the supply of an increas-ingly wider range of services to a greaternumber of clients through automatic market-ing and processing systems (namely the ATM,the electronic payment systems and direct andtelephone banking) — the proportion of staffcosts in total operating costs again decreased,continuing a trend initiated over one decadeago (from 63.3 per cent in 1996 to 63.1 per centin 1997).

The number of branches of most institutionsdeveloping retail business continued to in-crease strongly in 1997. In December 1997, 359more branches were operating, representing a


Banking system

Chart VIII.9RETURN ON EQUITY (ROE) AND RETURN

ON ASSETS (ROA)

10.6

8.2 8.29.1

11.1

0.600.5 0.59

0.67

0.82 0.80

1.04

0.77

0.84

0.99

0

2

4

6

8

10

12

1993 1994 1995 1996 1997

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0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

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ROE (left-hand scale) ROA(a) (right-hand scale)ROA(b) (right-hand scale)

Note:(a) Net results/average assets.(b) Net results/adjusted average assets.

9.3 per cent growth in relation to the previousyear (8.8 per cent in 1996). This expansion,alongside a virtual stabilisation of employment

in the sector, resulted in a reduction in thenumber of employees per branch, from 15.7 in1996 to 14.4 in 1997.

The scheme for calculating own funds stan-dards was altered in 1997. In addition to thefunds required to ensure the ratio between theown funds and assets (long position for thewhole balance sheet) and the off-balance sheetaccounts weighted by credit risk reaches aminimum of 8 per cent (i.e., the traditional sol-vency ratio) credit institutions were hereaftersubject to further requirements in terms of ownfunds (for which additional elements are ad-missible — e.g. short-term subordinated debt)for covering market risks of the trading portfo-lio (position risks, settlement risks and coun-terparty risks) and the exchange rate risk asso-ciated to overall business. In this new context,total own funds constituted are expected tosuffice to cover the own fund requirements cal-culated by the sum of the above mentioned re-quirements (except those regarding the hedg-ing of the trading portfolio credit risk). As a re-sult, the solvency ratios calculated before 30June 1997 and those assessed afterwards willno longer be directly comparable.

Nevertheless, the rate of coverage of mini-mum standards for the own funds can be ex-pressed as a ratio with a similar meaning to theprevious solvency ratio, after divided by 12.5(the inverse of 8 per cent): the solvency ratiocalculated in this fashion for 31 December 1997reached 11.5 per cent, which compares with11.4 per cent in 31 December 1996 (using theprevious methodology). Data referring to 30June 1997 — for which both the traditional ratio(11.7 per cent) and the ratio encompassing thenew total standards for the own funds (11.5 percent) are available — evidence the small contri-bution of the two new classes to total ownfunds requirements.


Banking system

Chart VIII.10CHANGE IN ROE

Contributions of main componentsof net results

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-2

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1994 1995

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FM OCR OC Other Total

-3

-2

-1

0

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2

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4

5

1996 1997

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ep

oin

ts

FM OCR OC Other Total

Notes:ROE = Net results/average equity capital.FM = financial margin.OCR = other current results.OC = operating costs.Other =extraordinary income + depreciation + provi-

sions + income taxes.


Banking system

LIBERALISATION, PRIVATISATION AND COMPETITION IN THE PORTUGUESE BANKING SYSTEM:PERIOD 1986-1997

The adhesion of Portugal to the European Eco-nomic Community in 1986 represented a strongcommitment towards the liberalisation of the Por-tuguese economy, required to achieve its integra-tion in a wider economic area. The creation of aSingle Market for goods and services was accompa-nied by measures of financial liberalisation andharmonisation of rules in the community area lead-ing to the creation of a Single Market for renderingfinancial services.

The transformations of the Portuguese bankingsector following from the liberalisation process,though shared by most banking systems in theEuropean Union, were among the most significantof these — bearing in mind the starting point re-garding the single market requisites and the pace ofintroduction of changes to the legal framework re-quired by this process. The liberalisation processconsisted of the lift of most legal constraints on banking business, covering three aspects:

(a) the structure of banking business — explicit restrictions to the composition of assets and to banks’ ac-tivity were lifted. In this context, it should be singled out the suppression of the compulsive investment inpublic debt securities and the gradual disappearing of the legally enforced segmentation of credit institu-tions’ activities (e.g., “leasing”, “factoring”) — culminating in the consecration of universal banking in late1992(1), which granted common competitive conditions to all credit institutions;

(b) competitive conditions — the competition framework of banks stopped being controlled directlythrough limits to credit granting, the administrative regulation of interest rates or restrictions to the estab-lishment of new banks or to the expansion of banks’ branches. In addition, the cash reserves coefficient wassubstantially reduced in November 1994, from 17 to 2 per cent(2).

(c) banks’ international activity — the liberalisation of the financial system at the domestic level was car-ried out alongside the gradual liberalisation of capital flows within the Union, between 1986 and late 1992.The full accomplishment of this process presupposed the free establishment and supply of financial servicesin the Union area, as well as the harmonisation of supervision instruments, also in force since the end of1992.

Up to 1984, the banking sector comprised a set of State-owned banks, which accounted for virtually thewhole market, and a few foreign banks with an inexpressive share of the business. Between 1984 and 1989,13 new banks came into activity, virtually multiplying twofold the number of institutions (chart 1). From1989 to 1997, the number of banks more than doubled, reaching 62 at the end of 1997. The first step towardsliberalising the Portuguese banking system consisted of opening the sector to private operations in 1984(3).

(1) After this date, credit institutions continued to be impeded from carrying out brokerage in the Lisbon Stock Exchange. The dead-line for the liberalisation of this activity for all credit institutions was postponed until the end of 1999.

(2) This change allowed for a gradual reduction of the taxation implicit in the cash reserve regime, lowering it to levels close to the onerecorded in most countries in the European Union (see box “Monetary and exchange rate regime in the period 1986-1997” inChapter “VI Monetary and exchange rate situation”).

(3) The first measure towards the liberalisation of the financial sector consisted of the authorisation of the constitution of non-bankingfinancial institutions — e.g. investment and leasing companies — in the early 1980s.

Chart 1NUMBER OF BANKS

14

22 23 24 2527

3135 36

4245

4851

62

0

10

20

30

40

50

60

70

1984 1986 1988 1990 1992 1994 1996


Banking system

Despite the greater number of new banks andthe gradual growth in their importance, State-owned banks continued to hold the bulk of bankingbusiness until late in the decade. The reprivatisa-tion process started in 1989 gradually transferingmost business, formerly directly controlled by theState through its shareholder function, to privateadministration. At the end of 1997, the marketshare of public banks stood below the 30 per centthreshold (chart 2).

The sequence of take-overs in the sector, inten-sified since 1994, brought important changes to themarket structure of the Portuguese banking systemtowards increasing concentration. Indeed, the mar-ket share of the five major banking groups in thecredit and deposits markets reached 67 per cent inlate 1992 in both segments, rising to 77.1 per centand 82.6 per cent in December 1997, respectivelyin the credit and in the deposits markets.

The gradual deconstruction of the regime of ad-ministratively set banking interest rates completedin May 1992, complemented with the substitutionin 1991 of credit ceilings by a liquidity control re-gime based upon market mechanisms, led to an in-crease in the strategic importance of prices prac-tised in banking operations. As observed in othersystems undergoing a financial deregulation pro-cess, the first consequence of this movement was anincrease in price competition, in most banking seg-ments where banking activity is stratified. Thisprocess was more evident and rapidly felt in bankcredit to clients with lower risk levels and in the re-turn on bank deposits.

Reflecting “inter alia” the increased competi-tion in the sector, the intermediation margin (i.e.,financial margin as a percentage of total average as-sets) decreased substantially, from 4.6 per cent in1991 to 2.0 per cent in 1997 (chart 3). In addition to the effect of the increased competition on the narrowingof financial intermediation, worth noting the increased proportion in the balance sheet of activities with asmall contribution to the financial margin. This is the case of investments in credit institutions abroad —traditionally exhibiting a small margin — and of interbank operations between domestic banks — whichrender no contribution to the financial margin of the system as a whole(4). The continuing reduction in infla-tion recorded since 1991 also contributed to the reduction in the intermediation margin, given the positivegap between financial assets and financial liabilities (see box Breakdown of the changes in the financial mar-gin: 1992-1997).

In parallel, with the free fixing of interest rates and the wider range of possibilities for the public to investsavings (which competed with banking deposits) and sources of financing of the economy — namely through

(4) The reduction of the financial margin as a percentage of assets adjusted for interbanking activity was not as significant: in 1997this indicator reached 3.0 per cent, compared with 4.8 per cent in 1992.

Chart 2MARKET SHARE OF STATE-OWNED BANKS

95.9

83.9

23.4

96.2

88.7

28.9

0

20

40

60

80

100

1984 1989 1997

Perc

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Credit Deposits

Chart 3INCOME AND COSTS

IN THE BANKING SECTORAs a percentage of average assets

4.56

3.90

3.36

2.86

2.382.12 2.03

5.51

4.94

4.44

3.67

3.25 3.23 3.15

2.18 2.25 2.131.95 1.84 1.82

1.67

0

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5

6

1991 1992 1993 1994 1995 1996 1997

As

ap

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Financial margin Banking product Operating costs


Banking system

borrowing from non-bank financial institutions,— banks developed differentiation strategies bytype of client; these involved the allocation of re-sources to credit risk analysis, and an effort to-wards improving the quality of services supplied.Credit to house purchase became one of the targetmarkets with a wide scope, due to households’ lowindebtedness when compared to other sectors andthe lift of liquidity constraints in the access tocredit — namely that allowed by the decrease innominal interest rates.

The structure of Portuguese banks’ profits alsochanged significantly — with financial margin de-creasing its importance against the profits of otheractivities. In 1991, the proportion of other currentresults (mostly consisting of results from financialoperations and commissions) in banking productamounted to 17.2 per cent, which shows the pre-dominance of traditional intermediation activitiesin bank’s income (chart 4). Commissions accounted for some 7.6 per cent of banking product — one of thelowest figures in the European Union — reflecting the existence of cross-subsidisation in the supply ofbanking services by the traditional intermediation activity, but also the imperfect competition in price set-ting in most products supplied by banks. Recent evidence suggests that, due to an intensification of compe-tition in the intermediation activities, prices of financial services have increasingly been carried out accord-ing to the cost of the service rendered, while services have become increasingly diversified and sophisticated.The share of commissions in banking product reached 12.6 per cent in 1997. Despite below those recorded inmost EU countries, this figure accounts for a significant convergence towards the standards of those coun-tries, when compared to the 1991 figure.

The increase in the relative importance of other current results against that of the financial margin, be-tween 1991 and 1997, was not enough to prevent the systematic decline of banking product as a percentageof total average assets, due to the striking growth of the latter (chart 3). However, banking product as a shareof total average assets adjusted for interbank activity rose 0.2 p.p. between 1995 and 1997, following a sharpreduction between 1991 and 1995.

Technological progress and narrowing margins in the business as a whole dynamised the rationalisa-tion of the production and distribution of financial products, which has reflected into the gradual substitu-tion of labour for new technologies — for instance, the ATM and other forms of self-service or remote supplyof services. Consequently, staff costs fell as a percentage of total average assets and as a proportion of totalcosts: the ratio between the staff costs and total operating costs fell from 76.4 per cent in 1985 to 69.2 percent in 1991, and to 63.1 per cent in 1997.

As in other European markets, take-overs also provided a means of restructuring the credit institutionsinvolved, through the merger/sharing of operating structures, as through profiting from eventual revenue-based economies — a process with increasing intensity since 1995.

Chart 4BANKING PRODUCT: BREAKDOWN

9.6 12.5 14.6 12.016.9

24.1 22.8

10.1 12.6

82.875.7 77.9

73.265.8 64.6

10.19.9

7.68.7 9.8

78.8

0

10

20

30

40

50

60

70

80

90

100

1991 1992 1993 1994 1995 1996 1997

Perc

en

tag

e

Financial marginCommissionsOther income{Other current results

Chapter IX

FINANCING THE ECONOMY

1. Overall analysis

In 1997, the external borrowing require-ment of the Portuguese economy increasedfrom 1.4 to 1.8 per cent of GDP (table IX.1 andIX.2). The increase in domestic saving and incapital transfers from the European Union onlypartly financed the strong growth of invest-ment. For the economy as a whole, the differ-ence between investment and domestic savingreached around 5 per cent of GDP (chart IX.1).

Domestic saving, measured as a percentageof GDP, recorded a slight increase in 1997. Ana-lysing by institutional sectors, the saving rateof General Government increased, while fall-ing in the non-financial companies sector; thesaving rate of individuals recorded a slight in-crease in 1997 (chart IX.2A). Note that, if ex-cluding the component representing monetaryassets erosion due to inflation, individuals’saving rate stands below the above referredrate, since this sector is a net creditor (see Box“Sectoral saving adjusted for the effect of infla-tion” included in chapter IX of the 1996 AnnualReport). However, the adjusted saving rate hasmaintained an upward trend since 1995 (chartIX.2B). On the contrary, the adjusted savingrate of net debtor sectors (General Governmentand non-financial companies) stands above thenon-adjusted rate. Then for the Portugueseeconomy as a whole the adjusted andnon-adjusted rates almost coincide.

The borrowing requirement of the privatesector dropped sharply. Alongside the continu-ation of the budgetary consolidation process,the General Government’s borrowing require-ment decreased to 2.4 per cent of GDP (chart

IX.3). As a whole, the financing capacity of theprivate sector reached 0.6 per cent of GDP,which compares to 1.9 per cent in 1996. This fallis due to the developments in the non-financialsector of the Portuguese economy. For the sec-ond year around, and unlike the usual, the fi-nancing capacity of individuals was not enoughtocompensatefortheborrowingrequirementofnon-financial companies (chart IX.4). Thegrowth of current saving stood below the stronggrowth exhibited by investment in thenon-financial private sector. On the contrary,the private sector increased its financing capac-ity in both absolute terms and as a percentage ofGDP, basically reflecting the increase in com-


Financing the economy

Chart IX.1ECONOMIC GROWTH, INVESTMENT

AND DOMESTIC SAVING

15

17

19

21

23

25

27

29

1990 1991 1992 1993 1994 1995 1996 1997

As

ap

erc

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tag

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fGD

P

-2

0

2

4

6

8

10

12

14

16

18

Re

alg

row

thra

te

Investment (left-hand scale)

Domestic saving (a)(left-hand scale)

GDP(right-hand scale)

Note:(a) Domestic saving = Current domestic saving -

public transfers from the European Union.Source: INE and Banco de Portugal.



Table IX.1

FLOW OF FUNDS IN THE PORTUGUESE ECONOMY

1996

PTE billion

GGFinancial

sectorNon-financial companies

and individualsExterior Total

Non-financial transactions U R U R U R U R U R

Current saving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -12.7 - 565.8 - 2766.2 - 642.0 - 3961.4Capital transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361.6 508.7 6.8 - 127.0 396.4 409.7 - 905.1 905.1Gross domestic formation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 679.5 - 123.1 - 3158.8 - - - 3961.4 -

Gross fixed capital formation. . . . . . . . . . . . . . . . . . . . . . . . . . . 679.5 - 123.1 - 3061.3 - - - 3863.9 -Changes in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - - 97.5 - - - 97.5 -

Net lending(+)/net borrowing(-) . . . . . . . . . . . . . . . . . . . . . . . . . -545.1 - 436.0 - -123.1 - 232.3 - - -Net lending as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . -3.3 - 2.6 - -0.7 - 1.4 - - -

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496.0 496.0 565.8 565.8 3162.7 3162.6 642.0 642.0 4866.5 4866.5

Discrepancy capital account/financial account . . . . . . . . . . . . . 17.4 - -30.9 - 13.6 - 0.0 - 0.0 -

Financial transactions U R U R U R U R U R U R

Non financialcompanies

Individuals

Financial saving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -562.5 - 466.9 - -472.2 - 335.5 - 232.3 - 0 -Net acquisition of financial assets . . . . . . . . . . . . . . . . . . . . . . . . . 381.4 - 3523.8 - 783.0 - 1439.3 - 1572.0 - 7699.6 -Net incurrence of financial liabilities . . . . . . . . . . . . . . . . . . . . . . - 943.9 - 3056.9 - 1255.1 - 1103.8 - 1339.7 - 7699.6

Monetary gold and special drawing rights (SDR) . . . . . . . . . . - - -39.9 - - - - - - -39.9 -39.9 -39.9Monetary gold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -42.9 - - - - - - -42.9 -42.9 -42.9SDR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 3 - - - - - - 3.0 3.0 3.0

Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -37.9 130.1 -256.3 1704.5 429.2 - 965.9 - 744.2 10.6 1845.2 1845.2National currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2.5 7.0 44.4 22.1 - 17.8 - - - 46.9 46.9Foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.7 - 78.3 - - - - - - 86.0 86.0 86.0

Transferable currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66.8 - 240.1 795.5 292.7 - 220.5 - 112.1 136.8 932.2 932.2In national currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66.8 - 219.3 761.7 316.1 - 225.6 - 91.7 157.7 919.4 919.4In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 20.9 33.7 -23.4 - -5.1 - 20.4 -20.9 12.8 12.8

Other deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -112.4 127.6 -581.7 864.6 114.3 - 727.6 - 632.2 -212.2 780.0 780.0In national currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -112.4 127.6 -328.2 667.7 93.1 - 709.6 - 466.8 33.6 829.0 829.0In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -253.6 196.9 21.2 - 18.0 - 165.4 -245.8 -49.0 -49.0

Securities other than shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0.2 445.4 1285.1 113.9 13.4 217.8 -94.7 - 353 779.5 1556.7 1556.7Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0.2 -69.5 233.7 139.4 -4 57.1 -25.3 - -64.3 13.0 140.0 140.0Medium- and long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 515 1051.4 -25.5 17.3 160.7 -69.5 - 417.3 766.4 1416.6 1416.6

Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 -6.5 1450.2 26.5 25.7 448.7 - 1103.8 190.5 93.9 1666.4 1666.4Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 8.1 -27.9 11.4 0.4 49.0 - 52.0 152.8 4.8 125.2 125.2In national currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8.1 -32.3 -79.7 0.5 55.0 - 52.0 67.7 0.4 35.8 35.8In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 4.4 91.1 -0.1 -6.0 - - 85.1 4.3 89.4 89.4

Medium- and long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -14.6 1478.1 15.1 25.4 399.7 - 1051.8 37.7 89.1 1541.2 1541.2In national currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 10.7 1391.5 20.4 19.4 576.1 - 1051.8 244.7 -3.5 1655.6 1655.6In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -25.3 86.6 -5.3 6.0 -176.4 - - -207.0 92.6 -114.4 -114.4

Shares and other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90.7 381.0 764.9 606.8 124.9 273.7 114.1 - 411.5 244.5 1506 1506Shares and other equity excl. investment trusts units . . . . . . 90.7 381.0 499.2 153.8 34.7 273.7 -127.1 - 417.0 105.9 914.4 914.4Investment trust units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 265.7 453.0 90.2 - 241.2 - -5.5 138.6 591.6 591.6

Insurance technical reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 - 12.4 687.6 15.9 - 667.3 - - 10.5 698.2 698.2Life insurance and pension funds reserves. . . . . . . . . . . . . . . - - - 616.6 - - 616.6 - - - 616.6 616.6Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 - 12.4 71.0 15.9 - 50.7 - - 10.5 81.5 81.5

Other accounts receivable/payable . . . . . . . . . . . . . . . . . . . . . . . 326.1 -6.1 307.4 -82.4 173.9 314.9 -213.3 - -127.2 240.6 467.0 467.0

Pour mémoire:Direct foreign investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 46.7 -8.9 66.9 118.0 4.4 - 109.1 118.0 227.1 227.1Financial saving as a percentage of GDP . . . . . . . . . . . . . . . . . -3.4 - 2.8 - -2.8 - 2.0 - 1.4 - - -

Source: Ministério das Finanças, Bolsa de Valores de Lisboa, Caixa Central de Crédito Agrícola Mútuo, Instituto de Seguros de Portugal, Associação Portuguesadas Sociedades Gestoras de Fundos de Investimento, Associação Portuguesa de Seguradores and Banco de Portugal.

U=Uses; R=Resources.



Table IX.2

FLOW OF FUNDS IN THE PORTUGUESE ECONOMY

1997E

PTE billion

GGFinancial

sectorNon-financial companies

and individualsExterior Total

Non-financial transactions U R U R U R U R U R

Current saving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 171.6 - 797 - 2730.7 - 847.3 - 4546.6Capital transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357.2 517.7 - - 7.4 372 525.1 - 889.7 889.7Gross capital formation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 767.3 - 138.7 - 3640.6 - - - 4546.6 -

Gross fixed capital formation. . . . . . . . . . . . . . . . . . . . . . . . . . . 767.3 - 138.7 - 3534.1 - - - 4440.1 -Changes in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - - 106.5 - - - 106.5 -

Net lending(+)/net borrowing(-) . . . . . . . . . . . . . . . . . . . . . . . . . -435.1 - 658.3 - -545.3 - 322.2 - - -Net lending as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . -2.4 - 3.7 - -3 - 1.8 - - -

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 689.3 689.3 797 797 3102.7 3102.7 847.3 847.3 5436.3 5436.3

Discrepancy capital account/financial account . . . . . . . . . . . . . 49 - -60.5 - 11.8 - 0 - 0 -

Financial transactions U R U R U R U R U R U R

Non-financialcompanies

Individuals

Financial saving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -484.1 - 718.8 - -840.2 - 283.0 - 322.2 - 0.0 -Net acquisition of financial assets . . . . . . . . . . . . . . . . . . . . . . . . . 336.3 - 4915.9 - 1364.6 - 1725 - 3065.2 - 11407.3 -Net incurrence of financial liabilities . . . . . . . . . . . . . . . . . . . . . . - 820.5 - 4197.1 - 2204.8 - 1442.0 - 2743.0 - 11407.3

Monetary gold and special drawing rights (DSR) . . . . . . . . . . - - -285 - - - - - - -285.0 -285.0 -285.0Monetary gold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -288.2 - - - - - - -288.2 -288.2 -288.2SDR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 3.2 - - - - - - 3.2 3.2 3.2

Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38.3 75.5 1414.2 2801.2 398.2 - 876.3 - 1580.5 1430.8 4307.5 4307.5National currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 4.2 43.3 -63.5 -38.1 - -64.7 - - - -59.4 -59.4Foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7.6 - 187.0 - - - - - - 179.4 179.4 179.4

Transferable currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 - 204.0 881.5 428.4 - 648.4 - 20.1 422.4 1303.8 1303.8In national currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 - 143.8 831 399.5 - 600.3 - -13.5 302 1133 1133In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 60.3 50.5 29.0 - 48.1 - 33.5 120.4 170.9 170.9

Other deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.0 71.3 979.8 1983.3 7.8 - 292.6 - 1560.4 829.1 2883.7 2883.7In national currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.0 71.3 550.5 1077.2 19.4 - 219 - 723.7 407.2 1555.7 1555.7In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 429.3 906.1 -11.6 - 73.6 - 836.7 421.9 1328 1328

Securities other than shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -85.3 -79.0 -117.7 194.2 216.9 43.3 - 746.1 891 904.7 904.7Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -305.1 -615.4 -117.2 -22.6 -11.4 -27.0 - 23.8 -207.5 -641.3 -641.3Medium- and long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 219.8 536.4 -0.6 216.9 228.3 70.3 - 722.3 1098.5 1545.9 1545.9

Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 24.1 2620.9 228.3 27.6 1414.3 -1.4 1442 463.5 1.9 3110.5 3110.5Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 -34.8 542.8 292.6 0.5 574.9 - 106.5 399.0 3.1 942.4 942.4In national currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -34.8 552.7 171.3 -0.3 555.1 - 106.5 257.9 12.3 810.3 810.3In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -9.9 121.4 0.8 19.8 - - 141.2 -9.1 132.1 132.1

Medium- and long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 58.9 2078.1 -64.4 27.0 839.4 -1.4 1335.5 64.4 -1.3 2168.2 2168.2National currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 45.3 2147.4 -16.0 0.0 975.9 - 1335.5 235.7 42.4 2383.1 2383.1Foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 13.6 -69.3 -48.4 27.0 -136.5 -1.4 - -171.3 -43.7 -215 -215

Shares and other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211.0 821.5 685.9 766.8 444.4 675.3 708.3 - 578.9 365 2628.6 2628.6Shares and other equity exclud. investment trust units. . . . . 211.0 821.5 666.9 -26.1 195.6 675.3 160.3 - 582.1 345.2 1815.8 1815.9Investment trust units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 19.1 792.8 248.9 - 548 - -3.3 19.8 812.7 812.7

Insurance technical reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.9 - 3.4 419.3 5.1 - 412.8 - - 2.9 422.2 422.2Life insurance and pension funds reserves. . . . . . . . . . . . . . . - - - 390.8 - - 390.8 - - - 390.8 390.8Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.9 - 3.4 28.5 5.1 - 22 - - 2.9 31.4 31.4

Other accounts receivable/payable . . . . . . . . . . . . . . . . . . . . . . . 86.2 -15.3 555.4 99.3 295 -101.7 -314.3 - -303.7 336.4 318.6 318.6

Pour mémoire:

Direct foreign investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 106.9 66.1 178.3 236.8 5.2 - 302.9 290.4 593.3 593.3Financial saving as a percentage of GDP . . . . . . . . . . . . . . . . . . . -2.7 - 4.0 - -4.7 - 1.6 - 1.8 - - -

Source: Ministério das Finanças, Bolsa de Valores de Lisboa, Caixa Central de Crédito Agrícola Mútuo, Instituto de Seguros de Portugal, Associação Portuguesadas Sociedades Gestoras de Fundos de Investimento, Associação Portuguesa de Seguradores and Banco de Portugal.


missions charged for services rendered by fi-nancial institutions and gains from operationsover securities. This development was also anoutcomeofthewideningofintermediationmar-gins, unlike in previous years.

Regarding financial operations carried outby the non-private financial sector, the signifi-cant change in companies’ and individuals’ as-sets and liabilities should be noted. In netterms, this development resulted in a reduc-tion in financial saving as a percentage of GDPin both subsectors. In the financial sector, bothmonetary and non-monetary subsectors re-

corded an increase in the financial saving toGDP ratio. The level of financial intermedia-tion of the Portuguese economy decreased forthe second year around, while investments ofthe public directly in the stock market in-creased (table IX.5). In what concerns financialoperations of the General Government, a re-duction in the flow of liabilities, and to a lesserextent, an increase in the flow of assets were re-corded. The continuation of integration of thePortuguese financial market in the interna-



Chart IX.2ANON-ADJUSTED SAVING RATES

-5

0

5

10

15

20

25

30

1991 1992 1993 1994 1995 1996 1997

As

ap

erc

en

tag

eo

fGD

P

Domestic saving IndividualsNon-financial GG

-5

0

5

10

15

20

25

1991 1992 1993 1994 1995 1996 1997

As

ap

erc

en

tag

eo

fGD

P

Domestic saving IndividualsNon-financial GG

Chart IX.2BADJUSTED SAVING RATE

Source: INE, Ministério das Finanças and Banco dePortugal.

Chart IX.3FINANCING CAPACITY OF THE PRIVATE

SECTOR AND PUBLIC SECTOR

-8

-6

-4

-2

0

2

4

6

8

1990 1991 1992 1993 1994 1995 1996 1997

As

ap

erc

en

tag

eo

fGD

P

Private sector

General Government

Chart IX.4FINANCING CAPACITYOF THE PRIVATE SECTOR

-4

-2

0

2

4

6

8

1993 1994 1995 1996 1997

As

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en

tag

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fGD

P

Financial sector

Non-financial companiesand individuals


tional market induced an increase in bothnon-residents’ investments in the Portuguesemarket and residents’ investments in foreignmarkets.

In 1997, the non-financial privatesubsector’s portfolio was subject to arecomposition. Companies, but specially indi-viduals resorted preferably to demand depos-its instead of time deposits. The reduction in in-terest rates on time deposits, and the increasein transactions demand for money account forthis development. The dynamism of the stockmarket reflected into an increase of invest-ments in shares — specially in those linked toprivatisation operations — as well as into an in-crease in investments trust units, mostly heldby individuals.

In 1997, non-financial companies resortedincreasingly to short-term non-securitisedcredit. Individuals also resorted to this re-source, though to a lesser extent. Medium- andlong-term credit granted to both subsectorsalso increased in the year. The recorded behav-iour of credit is possibly related to the fall in therespective interest rates, as to the behaviour ofeconomic activity — from which the dyna-mism of consumption, but specially of invest-ment is worth notice.

2. Analysis by sector

2.1 Private sector

2.1.1 Financial sector

In 1997, the financial sector financing capac-ity increased vis-à-vis the previous year, reach-ing 3.7 per cent of GDP (1.1 percentage pointsabove the 1996 value) (tables IX.1and IX.2).This result reflects the developments in themonetary sector(1) and in the non-monetarysector(2), both recording an increase in financial

saving as a proportion of GDP (tables IX.3 andIX.4, and for the sector as a whole, chart IX.5).The increases recorded in the return of servicescharged directly by financial institutions —namely commissions on operations over cus-tomers’ securities and the gains on operationsover securities were again, as in 1996, the mainfactors underlying the increase in the sector’ssaving. Meanwhile, interest margins on the fi-nancial intermediation services increased in1997, hence interrupting the downward trendexhibited in previous years. This developmentresulted from a stronger reduction of costs thanin profits.

In 1997 the level of financial intermediationin the economy, as measured by the contribu-tion of the financial sector to the net change infinancial assets/liabilities of the economy as awhole, decreased for the second year around,amounting to 43 per cent of the net change inassets, and to 37 per cent of the net change inliabilities (about 3 percentage points less thanthe 1996 levels, for both values). As regardsthe structure of financial intermediation of theeconomy in 1997, other monetary financial in-stitutions — mainly banks — strengthenedtheir position as the leading intermediary, ac-counting for over 28 per cent of the net changein financial liabilities of the economy (asagainst 24 per cent in 1996). The contribution



Chart IX.5FINANCIAL SAVING OF THE

FINANCIAL SECTOR

0

5

10

15

20

25

30

35

1993 1994 1995 1996 1997

As

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tag

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fGD

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0

1

2

3

4

5

6

7

8

9

10

As

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Financialsaving (right-hand scale)

Net acquisition of financial assets (left-hand scale)

Net incurrence of financialliabilities (left-hand scale)

(1) The monetary sector encompasses the central bank andother monetary financial institutions (OMFI) — i.e.,banks, mutual agricultural credit banks and saving banks.

(2) This sector comprises other financial intermediaries andfinancial auxiliaries (OFIFA), insurance companies andpension funds.



Table IX.3

FINANCIAL TRANSACTIONS OF THE FINANCIAL SECTOR

1996

PTE billion

Central Bank Banks NBFIInsurance Cos.

and PensionFunds

Total

Financial transactions U R U R U R U R U R

Financial saving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45.0 - 330.4 - 22.0 - 69.5 - 466.9 -Net acquisition of financial assets . . . . . . . . . . . . . . . . . . . . . . . . . -303.0 - 2181.2 - 844.8 - 800.8 - 3523.8 -Net incurrence of financial liabilities . . . . . . . . . . . . . . . . . . . . . . - -348.0 - 1850.8 - 822.7 - 731.3 - 3056.9

Monetary gold and SDR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -39.9 - - - - - - - -39.9 -Monetary gold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -42.9 - - - - - - - -42.9 -Special drawing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 - - - - - - - 3.0 -

Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101.4 -36.1 -106.5 1740.7 -327.8 0.0 76.6 - -256.3 1704.5National currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1.0 44.4 8.0 - - - - - 7.0 44.4Foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74.4 - 3.9 - - - - - 78.3 -Transferable deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 88.4 131.9 707.0 58.8 - 49.4 - 240.1 795.5

In national currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 88.4 104.3 673.3 74.2 - 40.7 - 219.3 761.7In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 27.5 33.7 -15.4 - 8.7 - 20.9 33.7

Other deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.0 -169.0 -250.3 1033.6 -386.6 - 27.2 - -581.7 864.6In national currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.0 -169.0 -4.5 836.8 -377.7 - 26.0 - -328.2 667.7

Time deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 2.6 573.1 -338.9 - 9.9 - -326.4 573.1Saving deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - 154.3 - - - - - 154.3Emigrants’ deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - 35.9 - - - - - 35.9Certificates of deposit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - 2.2 -8.1 - 2.3 - -5.8 2.2Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -0.4 56.8 -26.7 - 13.8 - -13.3 56.8IMM investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -6.7 -10.7 -4.0 - - - -10.7 -10.7GG deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -169.0 - 25.2 - - - - - -143.8IMF investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9 - - - - - - - 3.9 -Short-term operations with EMI. . . . . . . . . . . . . . . . . . . . . . 24.1 - - - - - - - 24.1 -

In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -245.8 196.9 -8.9 - 1.2 - -253.6 196.9Time deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -219.0 160.4 -8.9 - 1.2 - -226.8 160.4Emigrants’ deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - 16.6 - - - - - 16.6Certificates of deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - 65.7 - - - - - 65.7Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -26.8 -45.9 - - - - -26.8 -45.9

Securities other than shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25.1 -311.6 52.3 252.1 684.2 173.4 573.8 - 1285.1 113.9Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -0.5 83.1 4.5 139.4 135.4 11.2 - 233.7 139.4

CBMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -0.5 -0.8 - 0.3 - - - -0.5 -0.5Treasury bills and CLIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -3.7 - 22.6 - -3.0 - 15.9 -Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 121.6 4.5 53.8 135.4 19.1 - 194.5 139.9Other securities issued by non-residents . . . . . . . . . . . . . . . . - - -34.0 - 62.8 - -4.9 - 23.8 -

Medium- and long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25.1 -311.1 -30.8 247.6 544.8 38.0 562.6 - 1051.4 -25.5Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -311.1 -320.2 - 9.1 - - - -311.1 -311.1Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25.1 - 289.4 247.6 535.7 38.0 562.6 - 1362.5 285.6

of which: public debt issued in the domestic market . . . . . -25.1 - -199.8 - 109.1 - 429.2 - 313.4 -public debt in the foreign market . . . . . . . . . . . . . - - - - 1.3 - - - 1.3 -

Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -368.5 - 1634.5 -135.8 183.9 140.6 0.3 21.7 1450.2 26.5Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -370.1 - 278.2 -135.8 64.0 144.9 - 2.3 -27.9 11.4

In national currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -370.1 - 273.8 -225.7 64.0 143.7 - 2.3 -32.3 -79.7In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 4.4 89.9 - 1.2 - - 4.4 91.1

Medium- and long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 - 1356.3 0.0 119.9 -4.3 0.3 19.4 1478.1 15.1In national currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 - 1275.3 1.4 114.6 -0.4 - 19.4 1391.5 20.4In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 81.0 -1.3 5.3 -3.9 0.3 - 86.6 -5.3

Shares and other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 377.0 40.4 231.0 544.4 156.9 22.0 764.9 606.8Shares and other equity excl. investment trust units . . . . . . . - - 219.1 40.4 203.9 91.4 76.2 22.0 499.2 153.8of which: privatisation operations. . . . . . . . . . . . . . . . . . . . . . - - 106.7 - 30.4 - - - 137.1 -

Investment trust units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 157.9 - 27.0 453 80.7 - 265.7 453.0Insurance and technical reserves . . . . . . . . . . . . . . . . . . . . . . . . . - - 0.4 - 1.4 - 10.5 687.6 12.4 687.6

Life insurance and pension funds reserves. . . . . . . . . . . . . . . - - - - - - - 616.6 - 616.6Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 0.4 - 1.4 - 10.5 71.0 12.4 71.0

Other accounts receivable/payable . . . . . . . . . . . . . . . . . . . . . . . 29.1 -0.2 223.6 -46.5 72.0 -35.7 -17.3 - 307.4 -82.4Pour mémoire:

Foreign direct investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 42.5 -17.8 3.8 1.2 0.4 7.8 46.7 -8.9Equity capital and reinvested earnings . . . . . . . . . . . . . . . . . - - 37.8 -11.1 -1.5 0.3 0.2 7.5 36.5 -3.3Loans, additioned capital and others . . . . . . . . . . . . . . . . . . . - - 4.7 -6.7 5.3 0.8 0.3 0.3 10.3 -5.6Real estate transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - - - - - - - -

Financial saving as a percentage of GDP . . . . . . . . . . . . . . . . . 0.3 2.0 0.1 0.4 2.8

Fonte: Associação Portuguesa de Seguradores, Associação Portuguesa das Sociedades Gestoras de Fundos de Investimento, Bolsa de Valores de Lisboa, CaixaCentral de Crédito Agrícola Mútuo, Instituto de Seguros de Portugal, Ministério das Finanças and Banco de Portugal.




Table IX.4

FINANCIAL TRANSACTIONS OF THE FINANCIAL SECTOR

1997E

PTE billion

Central Bank Banks NBFIInsurance cos.

and pensionfunds

Total

Financial transactions U R U R U R U R U R

Financial saving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174.9 - 267.2 - 109.3 - 167.5 - 718.8 -Net acquisition of financial assets . . . . . . . . . . . . . . . . . . . . . . . . . -181.9 - 3511.5 - 1046.4 - 539.8 - 4915.9 -Net incurrence of financial liabilities . . . . . . . . . . . . . . . . . . . . . . - -356.7 - 3244.4 - 937.1 - 372.4 - 4197.1

Monetary gold and SRD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -285.0 - - - - - - - -285.0 -Monetary gold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -288.2 - - - - - - - -288.2 -Special drawing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 - - - - - - - 3.2 -

Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224.6 -59.0 919.3 2860.2 237.1 - 33.1 - 1414.2 2801.2National currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 -63.5 43.1 - - - - - 43.3 -63.5Foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186.2 - 0.8 - - - - - 187.0 -Transferable deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 41.8 99.3 839.7 114.4 - -9.7 - 204.0 881.5In national currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 41.8 45.3 789.2 106.4 - -8.0 - 143.8 831.0In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 54.0 50.5 8.0 - -1.7 - 60.3 50.5

Other deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38.2 -37.2 776.1 2020.5 122.7 - 42.8 - 979.8 1983.3In national currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38.2 -37.2 354.3 1114.4 120.2 - 37.9 - 550.5 1077.2

Time deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 347.6 736.9 53.7 - 34.8 - 436.1 736.9Saving deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - 230.2 - - - - - 230.2Emigrants’ deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -18.2 - - - - - -18.2Certificates of deposit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - 40.5 30.8 - -14.2 - 16.6 40.5Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 18.1 64.1 36.0 - 17.3 - 71.4 64.1IMM investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -11.4 -11.7 -0.3 - - - -11.7 -11.7GG deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -37.2 - 72.6 - - - - - 35.4IMF investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1.4 - - - - - - - -1.4 -Short-term operations with EMI. . . . . . . . . . . . . . . . . . . . . . 39.6 - - - - - - - 39.6 -

In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 421.9 906.1 2.5 - 4.9 - 429.3 906.1Time deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 297.1 818.5 2.5 - 4.9 - 304.5 818.5Emigrants’ deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - 31.6 - - - - - 31.6Certificates of deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -7.3 - - - - - -7.3Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 124.8 63.4 - - - - 124.8 63.4

Securities other shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34.7 -315.9 -790.0 258.5 469.7 -1.8 276.0 -58.5 -79 -117.7Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 18.5 -446.0 0.0 -162.8 -77.1 -6.6 -58.5 -615.4 -117.2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 18.5 18.5 - - - - - 18.5 18.5Treasury bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -222.3 - -67.1 - -6.7 - -296.1 -Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -201.3 - 68.0 -77.1 -1.8 -58.5 -135.1 -135.6Other securities issued by non-residents . . . . . . . . . . . . . . . . - - -40.9 - -163.7 - 1.9 - -202.7 -

Medium- and long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34.7 -334.4 -344.0 258.5 632.6 75.3 282.5 - 536.4 -0.6Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -334.4 -345.7 - 11.4 - - - -334.4 -334.4Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34.7 - 1.8 258.5 621.2 75.3 282.5 - 870.8 333.8of which: public debt issued in the domestic market . . . . . -34.7 - -662.4 - 131.9 - 114.8 - -450.5 -

public debt in the foreign market . . . . . . . . . . . . . - - - - 3.6 - - - 3.6 -Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -147.8 - 2604.3 147.2 137.7 73.1 26.8 8.0 2620.9 228.3

Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -149.6 - 649.5 208.3 16.1 76.5 26.8 7.9 542.8 292.6In national currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -149.6 - 659.4 89.8 16.1 73.6 26.8 7.9 552.7 171.3In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -9.9 118.5 - 2.9 - - -9.9 121.4

Medium- and long term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 - 1954.8 -61.1 121.6 -3.4 0.0 0.1 2078.1 -64.4In national currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 - 2026.4 -15.9 119.3 -0.2 - 0.1 2147.4 -16.0In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -71.6 -45.2 2.3 -3.3 - - -69.3 -48.4

Shares and other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 233.3 -38.8 191.8 802 260.8 3.5 685.9 766.8Shares and other equity exclud. investment trust units. . . . . - - 255.7 -38.8 194.4 9.2 216.8 3.5 666.9 -26.1

of which: privatisation operations. . . . . . . . . . . . . . . . . . . . . . - - 210.2 - 16.7 - - - 226.9 -Investment trust units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -22.3 - -2.6 792.8 44.0 - 19.1 792.8

Insurance technical reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 0.1 - 0.4 - 2.9 419.3 3.4 419.3Life insurance and pension funds . . . . . . . . . . . . . . . . . . . . . . - - - - - - - 390.8 - 390.8Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 0.1 - 0.4 - 2.9 28.5 3.4 28.5

Other accounts receivable/payable . . . . . . . . . . . . . . . . . . . . . . . 61.0 18.2 544.4 17.3 9.7 63.8 -59.7 - 555.4 99.3

Pour mémoire:Direct foreign investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 83.4 50.2 23.4 15.2 0.0 0.7 106.9 66.1

Equity capital and reinvested earnings . . . . . . . . . . . . . . . . . - - 59.2 0.7 21.1 15.0 0.0 0.6 80.3 16.3Loans, additioned capital and others . . . . . . . . . . . . . . . . . . . - - 24.2 49.5 2.3 0.2 - 0.1 26.5 49.9Real estate transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - - - - - - - -

Financial saving as a percentage of GDP . . . . . . . . . . . . . . . . . 1.0 1.5 0.6 0.9 4.0

Source: Associação das Empresas Gestoras de Fundos de Pensões, Associação Portuguesa das Sociedades Gestoras de Fundos de Investimento, Bolsa de Valoresde Lisboa, Caixa Central de Crédito Agrícola Mútuo, Instituto de Seguros de Portugal, Ministério das Finanças and Banco de Portugal.


of investment funds of other financial interme-diaries to the net change in the economy’s fi-nancial liabilities also increased in 1997, whilethe remaining financial intermediaries and fi-nancial auxiliaries exhibited a moderation inactivity — more evidently recorded by insur-ance companies than by pension funds (chartIX.6).

Indeed, in what concerns resources raisedby other institutional sectors, the increase indeposits — specially time deposits denomi-nated in foreign currency — should be singledout. The behaviour of the latter allowed for anet flow of non-transferable deposits in foreigncurrency virtually equal to that ofnon-transferable deposits denominated in es-cudos. The significant growth in foreign cur-rency deposits in the Portuguese banking sys-tem chiefly results from non-resident bankinginstitutions’ investments; these were accompa-nied by an increase — though of lower value —in resident banks’ deposits abroad. The growthof deposits in escudos reflected, as the formerdeposits, the behaviour of non-residents in thedomestic banking system, but also a greateramount of savings deposits constituted by do-mestic households, as well as deposits by theGeneral Government.

On the other hand, resources raised in theform of time deposits by residents presented alower flow than in 1996. Net time deposits con-stituted by individuals, and also bynon-financial companies, though to a lesser ex-tent, decreased in relation to 1996. Indeed, indi-viduals’ portfolio recorded a recomposition in1997, including that constituted in the bankingsystem; individuals revealed a greater prefer-ence for demand and saving deposits againsttime deposits. The reduction in the latter wasdue to a fall in time deposits’ absolute and rela-tive return. Indeed, the fall in these interestrates took place in a period of high dynamismin the capital market — with individuals in-vesting funds preferably in investment funds.The high flow of net investments in demanddeposits reflects not only a lower opportunitycost in holding these assets — in a period of

disinflation — but also a higher transactionsdemand for money.

The above referred preference for invest-ment trust units throughout 1997 allowed forinvestment funds to stand as the second mainfinancial intermediary — following banks — interms of resources raised (chart IX.6). In thissegment, while a small proportion of funds isplaced in institutional investors (mainly fundsof funds), the bulk is held by the public —mostly individuals. On its turn, the insurancesector (including pension funds) recorded aslowdown in activity since both life andnon-life premia exhibited a very moderategrowth in 1997 — resulting in a growth of tech-nical reserves below that in 1995 and 1996. In-surance companies also repaid commercial pa-per issued in 1995. This result, alongside thenet redemption of this type of securities issuedby other financial intermediaries, resulted in anet negative change in short-term securitiesheld by the financial sector. On the other hand,short-term non-securitised credit recorded anet positive change, above that posted in 1996,reflecting operations with non-residents; partof these operations took the form of loans andadditioned capital in the context of foreign di-rect investment operations in Portugal.

Regarding investments carried out by the fi-nancial sector over the course of 1997, the in-crease in investments in deposits abroad — in



Chart IX.6FINANCIAL INTERMEDIATION

-6

-2

2

6

10

14

18

1993 1994 1995 1996 1997

As

ap

erc

en

tag

eo

fto

tall

iab

ilitie

s

0

5

10

15

20

25

30

35

40

As

ap

erc

en

tag

eo

fto

tall

iab

ilitie

s

Banks (right-hand scale)

Banco de Portugal Investment funds

Other NBFI Ins.Cos.and Pension funds

both escudos and foreign currency — shouldbe singled out. This development contrastswith the net utilisation of these securities re-corded in 1996. Concerning net credit granted,while the overall amount of securitised andnon-securitised credit was virtually equal tothat in 1996, the composition of the portfolio ofthese securities was strongly changed. Firstly,short-term securities posted a net disinvest-ment in the year, in parallel with a lower flowof investments in medium- and long-term se-curities (excluding shares); secondly, bothshort-term and medium- and long-termnon-securitised credit exhibited a strong in-crease. Credit granted in the form of invest-ment in shares and other equity remained atvalues similar to those of 1996. The distinct be-haviours of securitised and non-securitisedcredit chiefly reflects a different structure ofcounterparts of this credit. On the one hand,domestic credit to the General Government re-corded a net redemption; on the other hand,credit granted to individuals and non-financialcompanies increased. Regarding the latter, thesharper reduction in interest rates on loans andadditioned capital than that on commercial pa-per is expected to have contributed to this be-haviour.

Therefore, the net negative change inshort-term securitised credit basically reflectsthe redemption of Treasury bills which wereheld by most institutions in the financial sector,and the net repayment of commercial paper is-sued by financial intermediaries, insurancecompanies and non-financial companies,mainly held by banks. Meanwhile, the net re-demption of long-term public debt securitiesissued in the domestic market, as well asbanks’ supply of this kind of securities tonon-residents, resulted in a high net disinvest-ment by monetary institutions in these finan-cial assets, only partly offset by net acquisitionscarried out by other financial institutions. Asregards bonds issued by non-residents, most fi-nancial institutions continued to invest largeamounts in these instruments (in net terms)mostly in securities issued in escudos, as in1996.

As far as short-term non-securitised credit isconcerned, non-financial companies resortedincreasingly to this financing in 1997, followingthe continuation of the fall in interest rates onthese operations. Credit granted to individualsin this maturity also increased in relation to1996, specially in the second and fourth quar-ters of 1997. This result reflects operations ofcredit granted by banks to finance purchases ofshares due to privatisation operations in theyear. In the credit granted at more than oneyear segment the high net amounts granted toboth non-financial companies and individualsshould be highlighted. This development is ba-sically linked to the behaviour of real economicactivity in Portugal, since credit to companieswas mainly channelled to financing invest-ment expenditure, while credit to individualswas chiefly directed to housing investment.

2.1.2 Non-financial companies and individuals

In 1997, the borrowing requirement of thenon-financial private sector (comprisingnon-financial companies and individuals) rosesubstantially, amounting to 3 per cent of GDP(0.7 per cent in 1996) (tables IX.1 and IX.2). In acontext of strong growth in investment by com-panies and individuals, current saving of bothsubsectors recorded, as a whole, a slight in-crease. In 1995 and in 1996, financing capacityof individuals did not suffice to compensate forcompanies’ borrowing requirement.

In 1997, the increase in companies’ borrow-ing requirement was greatly due to the dyna-mism of companies’ Gross Fixed Capital For-mation (GFCF). Meanwhile, companies’self-financing capacity and capital transfers re-corded, in overall terms, a small increase only.Worth noting that self-financing is to compa-nies the major source of financing of invest-ment expenditure. Among those factors whichmost likely affected companies’ financial situa-tion in 1997, the improvement of the terms oftrade is worth noting; this development is ex-pected to have resulted, ceteris paribus, in thegrowth of companies’ margins in more interna-tional trade-oriented sectors (chart IX.7A).



Companies — mostly those more indebted —continued to profit from the fall in interestrates, namely those on lending operations.Note that interest paid by companies as a per-centage of GDP decreased, despite the in-creased indebtedness of companies. Mean-while, unit labour costs supported by compa-nies are estimated to have grown by 2.5 percent, the growth of compensation per em-ployee standing above that of productivity(chart IX.7B). This increase stands slightly

above that estimated for the previous year (2per cent), hence interrupting the slowdowntrend recorded since 1991.

Households’ real disposable income rosestrongly in 1997, accelerating vis-à-vis the pre-vious year. The significant growth of wages re-sulted from increases in both employment andcompensation per employee (chart IX.8A). Onthe contrary, households’ entrepreneurial andproperty income increased less than in the pre-vious year, due to the fall in net interest re-



Chart IX.7ADETERMINANTS OF COMPANIES

FINANCING CAPACITYChange in terms of trade

-3

-2

-1

0

1

2

3

4

5

1991 1992 1993 1994 1995 1996 1997

Perc

en

tag

e

Chart IX.7BUnit labour costs of the companies sector

0

5

10

15

20

25

1991 1992 1993 1994 1995 1996 1997

Ave

rag

era

teo

fch

an

ge


Chart IX.8ADETERMINANTS OF INDIVIDUALS

FINANCING CAPACITYEmployment and remuneration

-5

0

5

10

15

20

25

1991 1992 1993 1994 1995 1996 1997

Ave

rag

era

teo

fch

an

ge

Compensation per employee (wage-earners)

Employment

-2

-1

0

1

2

3

4

5

6

1991 1992 1993 1994 1995 1996 1997

Re

alg

row

th

Disposable income

Private consumption

Chart IX.8BDisposable income and private consumption




Table IX.5

FINANCIAL TRANSACTIONS OF NON-FINANCIAL COMPANIES AND INDIVIDUALS

PTE billion1996 1997E

NFC Individuals NFC Individuals

Financial transactions U R U R U R U R

Financial saving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -472.2 - 335.5 - -840.2 - 283.0 -Net acquisition of financial assets . . . . . . . . . . . . . . . . . . . . . . . . . 783.0 - 1439.3 - 1364.6 - 1725.0 -Net incurrence of financial liabilities . . . . . . . . . . . . . . . . . . . . . . - 1255.1 - 1103.8 - 2204.8 - 1442.0

Currency and deposits 429.2 - 965.9 - 398.2 - 876.3 -National currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.1 - 17.8 - -38.1 - -64.7 -Foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - - - - - -

Demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292.7 - 220.5 - 428.4 - 648.4 -In national currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316.1 - 225.6 - 399.5 - 600.3 -In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23.4 - -5.1 - 29.0 - 48.1 -

Other deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114.3 - 727.6 - 7.8 - 292.6 -In national currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93.1 - 709.6 - 19.4 - 219.0 -

Time deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92.8 - 344.2 - -10.0 - -55.7 -Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 154.3 - - - 230.2 -Emigrants’ deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 35.9 - - - -18.2 -Certificates of deposit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -2.8 - 10.8 - 24.8 - -0.9 -Saving certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 127.6 - - - 71.3 -Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 - 36.9 - 4.6 - -7.7 -

In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.2 - 18.0 - -11.6 - 73.6 -Time deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.2 - 1.4 - -11.6 - 42.0 -Emigrants’ deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 16.6 - - - 31.6 -

Securities other than shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4 217.8 -94.7 - 194.2 216.9 43.3 -Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -4.0 57.1 -25.3 - -22.6 -11.4 -27.0 -Treasury bills and CLIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8.6 - -10.0 - -16.4 - -19.2 -Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 57.1 0.2 - 1.7 -11.4 -0.3 -Securities issued by non-residents . . . . . . . . . . . . . . . . . . . . . 4.6 - -15.5 - -7.9 - -7.5 -

Medium- and long-term - bonds . . . . . . . . . . . . . . . . . . . . . . . . 17.3 160.7 -69.5 - 216.9 228.3 70.3 -of which: domestic public debt . . . . . . . . . . . . . . . . . . . . . . . . -47.3 - -122.2 - 57.2 - -132.1 -

Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.7 448.7 - 1103.8 27.6 1414.3 -1.4 1442.0Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 49.0 - 52.0 0.5 574.9 - 106.5In national currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 55.0 - 52.0 -0.3 555.1 - 106.5In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0.1 -6.0 - - 0.8 19.8 - -

Medium- and long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.4 399.7 - 1051.8 27.0 839.4 -1.4 1335.5In national currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.4 576.1 - 1051.8 0.0 975.9 - 1335.5In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.0 -176.4 - - 27 -136.5 -1.4 -

Shares and other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124.9 273.7 114.1 - 444.4 675.3 708.3 -Shares and other equity exclud. investment trust units. . . . . 34.7 273.7 -127.1 - 195.6 675.3 160.3 -

of which: domestic public debt . . . . . . . . . . . . . . . . . . . . . . . . 56.6 84.4 128.0 - 66.9 28.3 331.0 -Investment trust units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90.2 - 241.2 - 248.9 - 548.0 -

Insurance technical reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.9 - 667.3 - 5.1 0.0 412.8 -Life insurance and pension fundss. . . . . . . . . . . . . . . . . . . . . . - - 616.6 - - - 390.8 -Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.9 - 50.7 - 5.1 0.0 22.0 -

Other accounts receivable/payable . . . . . . . . . . . . . . . . . . . . . . . 173.9 314.9 -213.3 - 295.0 -101.7 -314.3 -

Pour mémoire:Direct foreign investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66.9 118.0 4.4 - 178.3 236.8 5.2 -

Equity capital and reinvested earnings . . . . . . . . . . . . . . . . . 60.0 103.0 - - 149.9 94.4 - -Loans, additioned capital and others . . . . . . . . . . . . . . . . . . . 6.9 -2.0 - - 28.5 122.8 - -Real estate transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 16.9 4.4 - - 19.6 5.2 -

Financial saving as a percentage of GDP . . . . . . . . . . . . . . . . . -2.8 - 2.0 - -4.7 - 1.6 -

Source: Associação das Empresas Gestoras de Fundos de Pensões, Associação Portuguesa de Seguradores, Bolsa de Valores de Lisboa, Caixa Central de CréditoAgrícola Mútuo, Instituto de Seguros de Portugal and Banco de Portugal.


ceived, a significant item of disposable income.Also domestic transfers exhibited a slowdownin 1997. On the other hand, external transferscontributed greatly to the acceleration of indi-viduals’ disposable income. In this context,consumers’ confidence levels increased, andreal consumption expenditure recorded a sig-nificant growth, above that in 1996 (chartIX.8B). The behaviour of private consumptionis also expected to have resulted from the im-proved accessibility of households to credit toconsumption, made possible by the decrease innominal interest rates, in a context of deregula-tion of the markets for credit to consumption.These factors contributed to a reduction in in-dividuals’ liquidity constraints, allowing forthe purchase of goods, unavailable otherwisedue to the lack of financing capacity.

As a result from the behaviour of individu-als’ income and consumption, individuals’saving increased slightly. As a percentage ofdisposable income, saving increased from 9.4to 9.7 per cent. Also note that part of the returnon monetary assets and on financial assets withvalue fixed in monetary terms are allocated tothe compensation for the loss of its “real” valueeroded by the inflation effect. The saving rateadjusted for this effect has exhibited a slightlyupward trend in recent years (see chart III.12 inChapter III, Prices, demand, output and labourmarket). As mentioned, individuals’ invest-ment also increased strongly in 1997. The highgrowth of its main component — housing —resulted to a great extent from the liquidity ef-fect associated to the reduction in interest rates(see box An indicator for households accessibilityto housing credit in Chapter III). Note that inter-est paid by households as a proportion of dis-posable income remained constant, despite thesharp increase in indebtedness. As a whole, theincrease in current saving and in households’capital transfers was not enough to finance thestrong increase in their investment expendi-ture. Therefore, households’ financing capacitydecreased.

Financial operations of the non-financialprivate sectors recorded a significant value in1997. The changes recorded in both financial

assets and financial liabilities were substan-tially higher than in the previous year, fornon-financial companies as for individuals (ta-ble IX.5 and chart IX.9 and IX.10). In net terms,these changes resulted in a reduction of bothsubsectors’ financial saving. Companies’ finan-cial saving stood at -4 per cent of GDP in 1997(-2.8 per cent in 1996), while financial saving ofindividuals decreased from 2 to 1.6 per cent ofGDP in 1997.

The main allocations of non-financial com-panies’ funds in 1997 were currency and de-



Chart IX.9FINANCIAL SAVING OF NON-FINANCIAL

COMPANIES

-10

-5

0

5

10

15

1993 1994 1995 1996 1997

As

ap

erc

en

tag

eo

fGD

P Net incurrence of financial liabilities

Net acquisition of financial assets

Financial saving

0

2

4

6

8

10

12

14

1993 1994 1995 1996 1997

As

ap

erc

en

tag

eo

fGD

P

Net incurrence of financial liabilities

Net acquisiton of financial assets

Financial saving

Chart IX.10NET ACQUISITION OF FINANCIAL ASSETS

BY INDIVIDUALS

posits, as in 1996 (chart IX.11). The increase ineconomic transactions due to the dynamism ofeconomic activity, but specially to the growthof investment in fixed capital, resulted in an in-creased need for holding these assets. Therecomposition of deposits — favouring trans-ferable deposits in relation to others — alsopoints towards this need. The behaviour of thelatter was also linked to the fall in interest rates,which make these investments less attractive,when compared to non-banking investments.In 1997, the Portuguese stock market exhibiteda particularly high dynamism during mostpart of the year. Investment of non-financialcompanies in securities — namely shares andother equity — recorded a much higheramount than in 1996.

In 1997, non-financial companies chiefly re-sorted to banking credit to fulfil their borrow-ing requirement (chart IX.12A).Non-securitised credit (mostly banking credit)which accounted for the bulk of funds raised inexternal sources, more than doubled in relationto the previous year. As mentioned, this devel-opment reflects, to a great extent, the decreasein interest rates. Both short-term credit and me-dium- and long-term credit recorded strong in-creases in 1997 (chart IX.12B). However, com-mercial paper — an instrument accounting foran important share in short-term financing —recorded a lower pace of growth than in previ-ous years. The greatest share of credit raised by



Chart IX.11NON-FINANCIAL COMPANIES’ INVESTMENT

-400

-300

-200

-100

0

100

200

300

400

500

1993 1994 1995 1996 1997

PTE

bill

ion

Currency and deposits Securities other than shares

Non-securitised credit Shares and other equity

Chart IX.12ARESOURCES OF NON-FINANCIAL

COMPANIESBy instruments

-200

0

200

400

600

800

1000

1200

1400

1600

1993 1994 1995 1996 1997

PTE

bill

ion

Commercial paper BondsNon-securitised credit Shares and other equity

Chart IX.12BNON-SECURITISED CREDIT

TO NON-FINANCIAL COMPANIESBy maturity

-200

0

200

400

600

800

1000

1200

1400

1600

1993 1994 1995 1996 1997

PTE

bill

ion

Short-term credit Long-term credit

Chart IX.12CNON-SECURITISED CREDIT

TO NON-FINANCIAL COMPANIESBy origin

-200

0

200

400

600

800

1000

1200

1400

1600

1993 1994 1995 1996 1997

PTE

bill

ion

Domestic credit Foreign credit

companies was constituted by domestic creditgranted to companies by non-residents contin-ued recording a recomposition, towards the in-creasing in the share of credit denominated inescudos. Despite the growth of credit, compa-nies also resorted increasingly to the stock mar-ket — in both its share and bond segments —for raising resources. The behaviour of finan-cial flows carried out by companies resulted ina sharp increase in companies’ stock of liabili-ties measured as a percentage of GDP, and in adecrease in companies’ assets net of liabilities,considering solely interest-bearing instru-ments (chart IX-13).

Regarding investments of individuals(flows of funds), the reduction of the propor-tion of time deposits is particularly noticeable(chart IX.14). This development reinforces thetrend of previous years, reflecting the down-ward path of the respective interest rates, aswell as the supply of alternative financial prod-ucts. However, individuals’ demand depositsincreased substantially, which is related to theneed for holding funds available for meetingthe increased consumption expenses. Alsoworth noting the increase in individuals’ in-vestments in shares and other equity. The dy-

namism of the stock market — with stockprices increasing — also attracted individuals’saving. The demand for shares of large compa-nies undergoing a privatisation process wasparticularly noticeable in 1997. Favourable ex-pectations regarding the behaviour of prices inthe stock market also accounted for the in-crease in the demand for investment trustunits.

As referred above, individuals resorted in-creasingly to short-term credit, mostly raised



40

45

50

55

60

65

70

1990 1991 1992 1993 1994 1995 1996 1997

As

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-50

-45

-40

-35

-30

-25

-20

As

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P

Liabilities (left-hand scale)

Net assets (right-hand scale))

-400

-200

0

200

400

600

800

1000

1200

1993 1994 1995 1996 1997

PTE

bill

ion

Currency and demand deposits Other depositsSecurities other than shares Shares and other equity

Chart IX.13NET FINANCIAL ASSETS AND LIABILITIES OFNON-FINANCIAL COMPANIES(a) (STOCKS)

Note:(a) Only interest-bearing instruments are considered.

Chart IX.14INDIVIDUALS’ INVESTMENT

Chart IX.15NET ASSETS AND FINANCIAL LIABILITIES(a)

OF INDIVIDUALS (STOCKS)

0

10

20

30

40

50

60

1990 1991 1992 1993 1994 1995 1996 1997

As

ap

erc

en

tag

eo

fGD

P

Net assets

Liabilities

Note:(a) Only interest-bearing instruments are considered.

in banks, to finance consumption. The sharecorresponding to longer-term credit also in-creased strongly in 1997 — specially housingcredit, a segment where interest rates contin-ued to decrease.

As a result of the above described behaviourof flows, individuals’ indebtednessasapercent-age of GDP increased by almost 6 percentagepoints, strengthening the trend observed since

1992 (chart IX.15). On its turn, the stock of indi-viduals’ assets net of liabilities — consideringsolely interest-bearing instruments — as a per-centageofGDPhascometodecrease.Followingthe sharp rise in individuals’ indebtedness, in-terest paid by households has remained virtu-allyconstantasashareofGDP,despite thefall ininterest rates. Meanwhile, the proportion of in-terest received has been decreasing.



Table IX.6

FINANCIAL TRANSACTIONS OF GENERAL GOVERNMENT


Financial transactions U R U R

Financial saving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -562.5 - -484.1 -Net acquisition of financial assets . . . . . . . . . . . . . . . . . . . . . . . . . 381.4 - 336.3 -Net incurrence of financial liabilities . . . . . . . . . . . . . . . . . . . . . . - 943.9 - 820.5

Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -37.9 130.1 38.3 75.5National currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2.5 - 4.2Foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.7 - -7.6 -

Transferable deposits (national currency) . . . . . . . . . . . . . . . . 66.8 - 2.9 -Other deposits (national currency) . . . . . . . . . . . . . . . . . . . . . . -112.4 127.6 43.0 71.3

Saving certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 127.6 - 71.3Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.4 - 7.7 -Deposits of the General Government . . . . . . . . . . . . . . . . . . . -143.8 - 35.4 -

Securities other than shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0.2 445.4 - -85.3Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0.2 -69.5 - -305.1Treasury bills and CLIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -2.7 - -331.7Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0.2 -66.8 - 26.6

Medium- and long-term – Public debt bonds . . . . . . . . . . . . . - 515.0 - 219.8Issued in the domestic market . . . . . . . . . . . . . . . . . . . . . . . . - 231.1 - -182.1Issued abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 283.9 - 401.9

Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -6.5 - 24.1Short-term (national currency). . . . . . . . . . . . . . . . . . . . . . . . . . - 8.1 - -34.8

Medium and long-term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -14.6 - 58.9In national currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 10.7 - 45.3In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -25.3 - 13.6

Shares and other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90.7 381.0 211.0 821.5of which: privatisation operations. . . . . . . . . . . . . . . . . . . . . . - 381.0 - 821.5

Insurance technical reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 - 0.9 -

Other accounts receivable/payable . . . . . . . . . . . . . . . . . . . . . . . 326.1 -6.1 86.2 -15.3Other General Government financial assets . . . . . . . . . . . . . . 0.0 - 72.1 -Other operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326.1 -6.1 14.1 -15.3

Pour mémoire:Financial saving as a percentage of GDP . . . . . . . . . . . . . . . . . -3.4 - -2.7 -

Source: Associação Portuguesa de Seguradores, Bolsa de Valores de Lisboa, Instituto de Seguros de Portugal, Ministério das Finanças and Banco de Portugal.U=Uses; R=Resources

2.2 General Government

The General Government borrowing re-quirement decreased again in 1997 as a per-centage of GDP (2.4 per cent in 1997, whichcompares to 3.3 per cent in the previous year asin absolute terms (tables IX.1 and IX.2). This re-duction in public deficit takes place in a contextof a budgetary consolidation process, and is as-sisted by the continuation of reduction in inter-est rates without jeopardising the escudo ex-change rate stability. This behaviour waslinked to an increase in current revenue abovethat of current public expenditure, which inturn determined a positive current saving ofaround 1 per cent of GDP. This increase in cur-rent saving allowed for the reduction in theGeneral Government borrowing requirement,even alongside the recorded growth in publicinvestment (from 4.1 to 4.3 per cent of GDP)and the relative stabilisation of capital transfersreceived/paid by the sector.

As regards financial operations, the behav-iour of public deficit resulted in a reduction inthe flows of assets, but specially in the netchange in liabilities of the sector (table IX.6 andchart IX.16). In what relates to the structure offinancing of General Government, the highgrowth of revenue from privatisation, thestrong reduction in securitised domestic credit

(both short-term and medium- and long-term),and the growth of foreign securitised creditshould be noted (chart IX.17). The increase inrevenue from privatisation operations and theallocation of around 74 per cent of annual reve-nue to public debt redemption contributed tothe negative balance recorded in net publicdebt bond issuing in the domestic market. Thiscontrasts with the positive values recorded inprevious years. Indeed, in 1997, most of the stillexisting FIP and Family Treasury bonds, andall OCA were subject to redemption; these op-erations were only partly offset by the issuingof fixed-rate Treasury Bonds. In parallel, theGeneral Government itself carried out a signifi-cant net purchase of public debt bonds —hence also contributing to the reduction in fi-nancing through bonds, in consolidated terms.Meanwhile, Treasury bills held by most resi-dent sectors — specially monetary financial in-stitutions — decreased, in a period where inter-est rates on these securities continued to de-crease. Net saving certificates issued recordeda nominal value lower than that of the last fouryears, while the General Government carriedout a net repayment of short-term creditsgranted by resident banks.



Chart IX.16FINANCIAL SAVING OF THE

GENERAL GOVERNMENT

-8

-6

-4

-2

0

2

4

6

8

10

1993 1994 1995 1996 1997

As

ap

erc

en

tag

eo

fGD

P

Financial saving

Net acquisition of financial assets

Net incurrence of financial liabilities

Chart IX.17FINANCING SOURCES OF THE

GENERAL GOVERNMENT

-200

0

200

400

600

800

1000

1200

1993 1994 1995 1996 1997

PTE

bill

ion

Saving certificates Securitised creditNon-securitised credit Privatisations receipts


On the other hand, the General Governmentplacement of bonds and commercial paper inforeign markets increased strongly in 1997.Most of these securities were taken bynon-residents (chart IX.18). External issuing ofbonds continued to exhibit a high share in totalGeneral Government financing, accounting forabout 49 per cent of the net change in financialliabilities of the sector. External issuing of com-mercial paper presented a positive balance,contrasting with the net redemption recordedin the previous year. In 1997, the General Gov-ernment also resorted to non-securitised exter-nal credit denominated in foreign currency —which contrasts with the net repayment in 1996— and increased long-term credit contractedwith resident banks.

As regards net investments of the GeneralGovernment, worth noting the increase in rev-enue from privatisation operations allocated tocapital increases, and the growth in this sec-tor’s deposits in resident banks.

2.3 Non-resident sector

In 1997, the borrowing requirement of thePortuguese economy by the non-resident sec-tor amounted to 1.8 per cent of GDP, 0.4 per-

centage points more than in 1996, due to thefact that the growth of investment stood clearlyabove the growth in domestic saving (tablesIX.1 and IX.2). This development resulted in anincrease in the current saving of the rest of theworld above that recorded by capital transfersfrom the non-resident sector. As regards finan-cial operations, net investments of thenon-resident sector in the domestic market re-corded a higher growth than residents’ invest-ments abroad, although both segments grewsteadily due to the increasing integration of thePortuguese economy in the international finan-cial markets (table IX.7).

Among all investments of non-residents,those accelerating the most were time depositsand repurchase agreements contracted withresident monetary financial institutions —mainly in foreign currency, but also in escudos.Net capital inflows into the Portuguese securi-ties market also increased strongly, reflectingthe exchange rate stability, the favourable be-haviour of financial markets and the increasingconfidence regarding the Portuguese econ-omy. The growth of this kind of investmentswas particularly evident in shares and infixed-rate public debt bonds issued in the do-mestic market. The greater participation ofnon-residents in the Portuguese stock marketwas partly linked to some privatisation opera-tions held in 1997, and is expected to have con-tributed to the general increase in share prices.The greater demand of shares by non-residentsis probably associated to the international pro-motion of this market, since some of the shareslisted in the Portuguese stock exchange wereincluded in the calculation of international in-dexes. The increased liquidity of the domesticmarket and the growth in stock capitalisationof these securities also promoted our marketinternationally. The performance of thefixed-rate public debt bonds segment also re-acted to the expectation of capital gains in themarket. Meanwhile, the issuing of public debtbonds in external markets increased in 1997 —now standing at values close to those recordedin 1995 — accompanied by the increase innon-residents’ claims on these bonds. The rest



Chart IX.18SECURITISED CREDIT TO THEGENERAL GOVERNMENT

-400

-200

0

200

400

600

800

1993 1994 1995 1996 1997

PTE

bill

ion

TB and CLIPCommercial paper in the foreign marketBonds issued in the domestic marketBonds issued in the foreign market


of the world was also responsible for the pur-chase of commercial paper placed abroad bythe General Government, contrasting with the

net disinvestment occurred in the previousyear.



Table IX.7

FINANCIAL TRANSACTIONS WITH NON-RESIDENT SECTOR


Financial transactions U R U R

Financial saving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232.3 - 322.2 -Net acquisition of financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1572.0 - 3065.2 -Net incurrence of financial liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1339.7 - 2743.0

Monetary gold and SDR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -39.9 - -285.0Monetary gold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -42.9 - -288.2Special drawing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 3.0 - 3.2

Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 744.2 10.6 1580.5 1430.8National currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -Foreign currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 86.0 - 179.4Transferable deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112.1 136.8 20.1 422.4In national currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91.7 157.7 -13.5 302.0In foreign currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.4 -20.9 33.5 120.4

Other deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 632.2 -212.2 1560.4 829.1In national currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 466.8 33.6 723.7 407.2

Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468.3 5.8 715.3 348.9Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1.6 -0.2 8.4 20.2IMF reserve position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 3.9 - -1.4Short-term operations with the EMI. . . . . . . . . . . . . . . . . . . . . . . . - 24.1 - 39.6

In foreign currency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165.4 -245.8 836.7 421.9Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145.6 -219.0 780.6 297.1Certificates of deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65.7 - -7.3 -Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45.9 -26.8 63.4 124.8

Securities other than shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353.0 779.5 746.1 891.0Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -64.3 13.0 23.8 -207.5

Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -64.3 - 23.8 10.5Securities issued by non-residents. . . . . . . . . . . . . . . . . . . . . . . . . . - 13.0 - -218.0

Medium- and long-term bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417.3 766.4 722.3 1098.5of which: National public debt issued in the domestic market . . 93.0 - 343.4 -

National public debt issued abroad . . . . . . . . . . . . . . . . 282.5 - 398.4 -

Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190.5 93.9 463.5 1.9Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152.8 4.8 399.0 3.1In national currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67.7 0.4 257.9 12.3In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85.1 4.3 141.2 -9.1

Medium and long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.7 89.1 64.4 -1.3In national currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244.7 -3.5 235.7 42.4In foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -207.0 92.6 -171.3 -43.7

Shares and other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411.5 244.5 578.9 365Shares and other equity excluding investment trust units . . . . . . . 417.0 105.9 582.1 345.2of which: privatisation operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 143.7 - 224.9 -

Investment trust units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -5.5 138.6 -3.3 19.8

Insurance technical reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 10.5 - 2.9

Other operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -127.2 240.6 -303.7 336.4

Pour mémoire:Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109.1 118.0 302.9 290.4

Equity capital and reinvested earnings. . . . . . . . . . . . . . . . . . . . . . . 99.8 96.5 110.7 230.2Loans, additioned capital and others . . . . . . . . . . . . . . . . . . . . . . . . -7.6 17.1 172.7 55.0Real estate transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.9 4.4 19.6 5.2

Financial saving as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . 1.4 - 1.8 -


The net amount of non-securitised credit re-ceived from the rest of the world increasedstrikingly, basically due to the greater value ofshort-term loans — in escudos and in foreigncurrency — granted to resident monetary fi-nancial institutions. The net value of long-termloans granted by non-residents presented aslight increase, chiefly due to loans and ad-vances between direct investment companies,and to a greater resort of General Governmentto credits denominated in foreign currency —contrasting with the reduction recorded in1996. On the contrary, resident monetary fi-nancial institutions carried out a net repay-ment of long-term credit — mostly in foreigncurrency but also in escudos — andnon-financial companies resorted less to es-cudo-denominated credit in this maturity,while continuing to repay debt denominated inforeign currency. The growth of loans and ad-ditioned capital between direct investmentcompanies determined the increase in the over-all foreign direct investment balance, invertingthe trend recorded in the previous three years.

Regarding funds invested abroad, the valueof deposits held by resident sectors in foreignmonetary financial instruments increasedstrikingly. The increase in transferable depositswas linked to the greater amount ofnon-banking residents’ net investments in de-posits, both in escudos and in foreign currency.The rise in investments in other deposits wasassociated to the behaviour of monetary finan-cial institutions — through the constitution oftime deposits and the contracting of repur-

chase agreements (also in escudos and in for-eign currency), contrary to the reduction inthese deposits as a whole in the previous year.Simultaneously, net portfolio investment byresidents abroad increased. This developmentwas linked to the growth of the investments ofmonetary financial institutions, of investmentfunds and of insurance companies in the bondsegment and, to a lesser extent, to the increasein residents’ investment in shares. In the oppo-site direction, short-term securities recorded anet disinvestment carried out by Portugueseinvestment funds, while investments in trustunits by resident monetary financial institu-tions and by investment funds decreased. Onceagain, the total amount of purchases and salesof foreign securities by residents increased sig-nificantly, as has been recorded since capitalmovements were liberalised in late 1992.Meanwhile, the balance of Portuguese directinvestment abroad increased, in line with theacceleration of domestic economic activity, andreflecting the increasing effort of internation-alisation drawn by Portuguese companies.This increase in direct investment basicallytook the form of acquisition of equity capital informerly existing companies, and was greatlycarried out by non-financial companies, butalso by financial companies. Regarding opera-tions contributing to the reduction in liabilitiesof the rest of the world, the reduction inlong-term credit in foreign currency granted byPortuguese monetary financial institutions tothe rest of the world should be highlighted.



Banco de Portugal / 1997 Annual Report 221

1 - MANAGEMENT AND AUDITING OF THE BANK

BOARD OF DIRECTORS

GOVERNORAntónio José Fernandes de Sousa

VICE-GOVERNORSAntónio Manuel Martins Pereira Marta

Luís Manuel Moreira de Campos e Cunha

DIRECTORSAbel Moreira Mateus

Bernardino Manuel da Costa Pereira

Diogo José Paredes Leite de CamposCarlos Alberto de Oliveira Cruz

*

BOARD OF AUDITORS

Emílio Rui da Veiga Peixoto Vilar — CHAIRMAN

Rui José da Conceição NunesModesto Teixeira Alves

António Miranda(Official auditor)


2 - HEADS OF DEPARTMENTS, REGIONAL AND FOREIGN DELEGATIONSAND AGENCIES

Office of the Governor and of the Boards (GAB) - Helena M. A. Franco Bebiano

Secretariat to the Board (SEC) - João António Lopes Alves

Audit Department (DAU) - João António Lopes Alves

Accounting and PaymentsDepartment (DCP) - Américo Francisco C. Sequeira

Treasury and Issue Department (DET) - Luís A. Gonçalves Ambrósio

Statistics Department (DDE) - Orlando P. Caliço

Economic Research Department (DEE) - Vítor Louçã Rabaça Gaspar

Foreign Department (DES) - José Joaquim B. S. Ramalho

Human Resources Management andDevelopment Department (DRH) - Manuel Pimentel Castelhano

Credit Operations and MarketsDepartment (DOC) - Silvino Tomé Paiva Lopes

Organisation and Information Department (DOI) - Paulino A.M. Magalhães Corrêa

International Relations Department (DRI) - José Agostinho M. de Matos

Support Services Department (DSA) - Henrique Möller Miranda

Legal Services Department (DJU) - Armando da Silva Couto

Banking Supervision Department (DSB) - Carlos Eduardo Lemos Santos

Pension Fund - M. Margarida Corrêa de Aguiar

224 Banco de Portugal / 1997 Annual Report

OPORTO BRANCH - Cosme Lucílio Nogueira Pontes

REGIONAL DELEGATIONS

Regional Delegation of the Azores (Ponta Delgada) - Egberto T. Bettencourt Mendes

Regional Delegation of Madeira (Funchal) - Leonel Mário Pestana França

DISTRICT AGENCIES

Braga - Paulo César Gomes Melo

Castelo Branco - Carlos Pereira Mendes

Coimbra - António Albuquerque

Évora - Abel Pereira Correia

Faro - José Samuel Oliveira Monteiro

Vila Real - João Reis Cariano

Viseu - Manuel Carlos Ferreira Costa

FOREIGN DELEGATIONS

Angola (Luanda) - António J. Gama Direitinho


3 - PREPARATION FOR STAGE THREE OF ECONOMIC AND MONETARY UNIONAND INTEGRATION IN THE EUROPEAN SYSTEM OF CENTRAL BANKS

In 1997, in addition to the activities intendedto strengthen the co-operation between nationalcentral banks and the co-ordination of monetarypolicies in Stage Two of Economic and MonetaryUnion (EMU), the preparatory work for StageThree of EMU was pursued and intensified.Work was mainly developed within theframework of the European Monetary Institute(EMI), at the level of its Council and the severalSub-Committees (Monetary Policy Sub-Committee, Foreign Exchange Policy Sub-Committee and Banking Supervisory Sub-Committee) and Working Groups (WorkingGroup on EU Payment Systems, Working Groupon Printing and Issuing the European Banknote,Working Group on Statistics, Working Group onAccounting Issues, Working Group onInformation Systems, and Working Group ofLegal Experts), in close co-operation with theEMI’s services and the National Central Banks(NCBs).

Within the preparatory work for StageThree, which was reflected in the activity of theBanco de Portugal, documentation on theoperational framework of the single monetarypolicy, including the instruments and proceduresat the disposal of the European System of CentralBanks (ESCB) as well as the required adaptationsof monetary, financial and balance of paymentsstatistics was published. The ECB GoverningCouncil will make the final decision on thissubject and it may accept to use or not all theoptions proposed, or it may introduce changesin some of the characteristics of the instrumentsor procedures presented. This paper isnevertheless instrumental in the internalpreparation of both the NCBs and institutionsthat will act as counterparties in the singlemonetary policy, and of the financial system, ingeneral.

In terms of the exchange rate policy andmanagement of external reserves, technicalpreparations also continue regarding, namelythe selection of the counterparties, the transferof reserves to the ECB and their management,and the regulatory features concerning themanagement of the NCBs’ own reserves and

Member States’ transactions with their foreignexchange working balances.

The development of the payment systems(TARGET project) and of the securities settlementsystems, particularly in terms of the organisationand technical features, also accounted for asignificant share of the activity developed withinthe framework of the EMI.

With respect to the accounting system,preparatory work was undertaken for the revisionof the Chart of Accounts. This process has beendeveloped simultaneously and in line with theharmonisation work developed by the EMI’sWorking Group on Accounting Issues. The newaccounting system of the Banco de Portugal willbe designed according to the accountingprinciples and techniques established for theESCB, except for some accounting rules andprinciples specifically intended for domesticapplication.

Work was also developed in thepreparation of the technical features for theassessment of the progress in terms ofconvergence, including legal convergence. Inthis context, on 25 July 1997, the Banco de Portugalconsulted the EMI on a proposal of theamendments to its Organic Law. The EMI issueda favourable opinion, having suggested somesmall changes, which have been incorporated inthe final text of the new Law, which has alreadybeen approved by Parliament (Assembleia daRepública), and published on 31 January 1998(Law no. 5/98).

The preparation for Stage Three of EMUwas also particularly relevant to the activity ofthe Monetary Committee. Another importantactivity of this committee was the monitoring ofthe monetary and financial situation in theMember States and in the Community, namelythe assessment of the national convergenceprogrammes and the preparation of themultilateral supervisory exercises, as well asthe general payment system of the Member Statesand the situation relating to capital movementsand freedom of payments. The Monetary


Committee, as the advisory body to the ECOFINCouncil and to the Commission, discussed theparticulars regarding the preparation of theEuropean Council Resolutions related to theStability and Growth Pact, the co-ordination ofthe economic policies of the Member States inStage Three and the implementation of the Treatyprovisions in terms of the exchange rate policyand the external representation of theCommunity.

Given the impact of the changes arisingfrom the participation in Stage Three of EMU onthe nature and specificity of the activity of thecentral bank and hence on the relationship withthe other financial market operators, and inparticular, with the commercial banks, the Bancode Portugal, jointly with the PortugueseAssociation of Banks, created several workinggroups, chiefly involving the commercial banks,but also with the participation of representativesof the Stock Market Commission, the PortugueseAssociation of Insurance Companies, thePortuguese Insurance Institute, and the PublicCredit Management Institute, oriented to theanalysis of four thematic areas:

— Information, Accounting and PaymentSystems

— Interbank Markets and CashManagement

— Legal Issues— Relationship between Banks and their

Clients

Several working papers were presentedthroughout the year by the working groups,summarising the main reflections, opinions andtechnical solutions found. “The changeoverto the single currency and the Portuguesebanking sector” (January 1997) was the first paperon the evolution of the state of the works anddiscussions and presenting also the specificmandates of each group. By mid and at theend of 1997, the working groups presentedprogress reports. A summary of which is madebelow.

The Working Group on Information,Accounting and Payment System analysed thetechnical features and the action plan relative tothe retail payment system: the cheque,MULTIBANCO, interbank electronic transfersand commercial bills sub-systems. On the other

hand, the redefinition, at the EU level, of severaltechnical and operational specifications of theInterlinking system implied the internal revisionof some technical features of the linkage of thePortuguese RTGS (real-time gross settlementsystem), in particular, as regards the format ofRTGS/Interlinking messages and the system ofdirect consultation to the Banco de Portugal.These works were undertaken with the co-operation of the Interbank Services Company).

The Working Group on Interbank Marketsand Cash Management analysed the issuesrelated to the definition by the Banco de Portugalof the list of debt securities eligible as collateral inthe supply of liquidity by the Banco de Portugal.This Working Group presented the new MoneyMarket Information System, containing thetechnical specifications for the linkage of theparticipating institutions to the Banco dePortugal. The works already developedcontinued in co-operation with the Stock MarketCommission and the Oporto Derivatives StockExchange, for the improvement of the operationof the capital, derivatives, repos, and short sellingmarkets.

The Working Group on Legal Issuesanalysed some of the implications of theintroduction of the single currency in Portugueselaw, in particular the issues related to theredenomination of the debt, the inventory of therules to be reformulated within the scope of theamendment to the Commercial Company Code,the substitution of benchmark and indexing rates,and the continuity of contracts.

The activities undertaken by the WorkingGroup on the Relationship between Banks andtheir Clients were focused on: reflection on somepractical issues arising from the introduction ofthe euro, with particular emphasis on therelationship between banks and their clients,assessment of the evolution of the state of theworks and plans for the disclosure of informationon the single currency by the financial sectorand a survey of the initiatives to be undertakenby the non-financial sector, particularly, by thePublic Administration.

The Working Groups have also identifiedseveral areas whose legal framework must bethe object of changes due to the new technicaland operational specifications and conditions.


The Banco de Portugal, within the scope ofits specific functions and in accordance with theCommunity time schedule and Communitydecisions regarding the transition to the euro,has decided the following:

— All accounts opened with the Banco dePortugal held by institutions of the bankingsystem will be denominated in euro from1 January 1999;

— The accounts of the Banco de Portugalas well as all cash operations, processed by theBank within this context will be denominated ineuro from 1 January 1999;

— The RTGS and the SITEME (marketelectronic transfer system) will only operate ineuro from 1 January 1999;

— The securities held in the CentralSecurities Depository issued by the Banco dePortugal will be issued in euro and those alreadyheld shall be redenominated in euro from1 January 1999. Any other securities thereinincluded, which have not been previouslyredenominated, must be converted into eurowhen they are placed at the Central;

— The accounting and prudential data tobe reported by credit institutions and financialcompanies will be denominated in euro from1 January 1999;

— The statistical data reported will bedenominated in euro from 1 January 1999.


4 - ACTIVITIES OF THE BANK

The functions of the Banco de Portugal areclearly defined in its Organic Law (approved byDecree-Law No. 337/90 of 30 October, asamended by Decree-Law No. 231/95 of 12September and by Law No. 5/98 of 31 January).

The primary objective of the Banco dePortugal shall be to maintain price stability, takinginto account the overall economic policy definedby the Government. Therefore, the Bank shall beresponsible for the conduct of monetary policyand for the implementation of the foreignexchange policy. In addition to its role as currencyissuer, it shall also be incumbent on the Bank toprovide for the stability of the Portuguesefinancial system, to regulate, oversee and promotethe smooth operation of the payment systems,and to ensure the centralisation and compilationof the monetary, financial, exchange and balanceof payments statistics. The Bank shall also advisethe Government in the monetary, financial andforeign-exchange fields.

This report on the Bank’s activities presentsa brief account of its main spheres of action,including the most relevant aspects of its internalorganisation and management.

4.1 Definition and execution of monetary andforeign exchange policy

4.1.1 Statistical information, research andanalysis

4.1.1.1 Statistical information

In 1997, the Banco de Portugal continuedto undertake the project regarding the adaptationof the Monetary and Financial Statistics to thestatistical requirements of Stage Three of EMU,taking into account the time schedule approvedby the Council of the EMI. The project wasformally started in the first quarter of 1996 withthe study of conceptual features associated withthe information to be collected; a solution wasadopted that simultaneously enables to meet theusers’ needs and the preferences and possibilities

of the reporting institutions. In 1997, the activitieswere particularly focused on the implementationof the new reporting system. The bankinginstitutions reorganised the procedures regardingthe supply of information and the Banco dePortugal provided for a number of supportinstruments, which enable a more efficient andhigher quality reporting of data; in addition, italso defined the process for the handling of datareported by the institutions.

Taking particularly into account the needto send to the EMI statistical data, in mid-1998,with quality estimates since September 1997,and given the information gaps in the formerreporting system, a new system was launched inOctober 1997, with data relative to the end of theprevious month. The set of rules, concepts, andinformation requirements on the new reportingwas published in September 1997, in theInstructions of the Banco de Portugal (InstructionNo. 43/97).

In order to enable the users to continue toutilise the most important data disclosed prior tothe revision, the Statistical Bulletin of the Bancode Portugal will continue to include, for theperiod of one year, the series that do not presentconceptual breaks, or whose estimation processguarantees their quality and validity. At the endof the one-year period, the Statistical Bulletinwill be revised so as to include a new set of seriesresulting from the full utilisation of the statisticalinformation potential made available throughthe new reporting.

In the balance of payments field, actionscontinued to be undertaken for compliance withthe statistical requirements regarding Stage Threeof EMU. A first survey was made to the companiesin which foreign holdings are held, for thepurpose of constructing statistics on foreign directinvestment in Portugal and direct surveys startedto be conducted in several non-financialcompanies on external commercial claims andliabilities. The surveys to companies in whichforeign holdings are held, was made within thescope of the works regarding the compilation of


statistics on the International Investment Position;the direct survey to non-financial companies isaimed at collecting data on the time lags betweensettlements and transactions in international tradeoperations, to enable the preparation of thebalance of payments on a transactions basis andto construct statistics on stocks of externalcommercial claims and liabilities.

In 1997, two projects were concludedregarding the preparation of the statistical seriesfor the Portuguese economy: “New Estimatesfor Portugal’s GDP 1910-1958”, with aforthcoming publication by the Banco de Portugalin the series “Economic History”, and “LongSeries for the Portuguese Economy - Post-SecondWorld War”, presented to the public in the Bancode Portugal, on 15 July 1997. This publication,already available, is divided into two volumes.Volume I contains the statistical series andcorresponding CD-ROM, and Volume II presentsthe methodological notes.

With a view to improving the economicinformation available by the Banco de Portugalin 1997, a quarterly survey was launched, of aquantitative nature, to some non-financialresident companies on their economic activityand financial net worth. This survey is aimed atobtaining more comprehensive information onthe Portuguese economic juncture and at makingavailable data required for the preparation of the(annual and quarterly) national financialaccounts.

As regards the financial accounts,methodological and other studies have beendeveloped for the assessment of the informationsources, to enable their compilation in terms oftransactions and end-of-period positions,according to the methodology of the EuropeanSystem of Accounts (ESA 95). This activity is alsoincluded within the scope of the works for theharmonised implementation of ESA 95, whichhave been undertaken under the aegis of theEMI, with the objective of preparing the financialaccounts of the European Union.

Amongst the initiatives taken in 1997 toimprove the statistical reporting to the Banco dePortugal, reduce the associated costs, grant easieraccess by the users and to increase the efficiencyand quality of the statistical production of theBank, the following are highlighted: creation of

the Statistics Department and of a Statistics Unitin the Oporto Branch; launching of the processfor the electronic transfer of statistical informationfrom the banks to the Banco de Portugal; startingup of the statistical information data base of theBanco de Portugal; disclosure via the INTERNETof the Statistical Bulletin and of the statisticalseries.

4.1.1.2 Research and analysis

In 1997, economic studies and analysescontinued to be guided by the statutory objectivesof the Banco de Portugal: to maintain pricestability and to provide for the stability of thedomestic financial system. Besides, and similarlyto the previous years, the features related to thepreparation for EMU continued also to gear theactivity of the Banco de Portugal. The Bank maderesearches and analyses on the Portuguese andEuropean economy, on the monetary and foreignexchange policy and on the markets and financialinstitutions. More specifically, particularattention was paid to the development andimprovement of models of inflation forecast,gathering information through the relevantindicators of the financial markets, monitoringand forecast the trend of the domestic andinternational economy, and preparation ofstudies on the Portuguese economy, particularly,on the labour market performance.

The studies and analyses made at the Bankcontinued to be disclosed through itspublications, through the Monthly Survey andthrough the Economic Bulletin, which is aquarterly publication including articles on theeconomic and political situation and analyseson: inflation, trend of the Portuguese economy,monetary and foreign exchange policy, nationaland international financial markets, monetaryand credit aggregates, labour market, balance ofpayments, and banking system. The Bankcontinued also to disclose several research worksthrough the publication of the “Working Papers”series. Some works made by economists of theBank’s Economic Research Department werepublished in international scientific magazines.

The Banco de Portugal continued to ensurethe representation and the institutional reportingto national bodies — INE (National StatisticalOffice) and Ministry of Finance - and international


organisations — International Monetary Fund(IMF), Organisation for Economic Co-operationand Development (OECD), Eurostat, EuropeanCommission (EC), European Monetary Institute(EMI), and Bank for International Settlements(BIS).

The Banco de Portugal continued topromote the interchange with Universities andnational and foreign researchers, by hostingseveral conferences, seminars and meetings.Special mention should be made of the followingconferences: “The Portuguese Labour Market inan International Perspective”, in co-operationwith Fundação Luso-Americana para oDesenvolvimento (Portuguese-AmericanFoundation for Development) and the NovaUniversity of Lisbon; and “Speculative Attackson Foreign Exchange reserves”, in a jointorganisation with the Centre for Economic PolicyResearch, which counted on the participation ofrenowned and prestigious economists, whosemerit is recognised internationally.

4.1.2 Stance and intervention in the foreignexchange, money and financial markets

In the course of 1997, the implementationof monetary and foreign exchange policy inPortugal continued to be pursued with a view tomaintaining the exchange rate stability, withinthe framework of the Exchange Rate Mechanismof the European Monetary System, and with thefinal objective of maintaining price stability.

In Europe, 1997 was marked byconvergence, at the level of both exchange rates— the exchange rates of most currenciesparticipating in the Exchange Rate Mechanismmoving closer to their bilateral central rates - andshort- and long-term interest rates, whosedifferentials vis-à-vis the Deutsche marknarrowed. This trend was chiefly due to theprogress achieved in nominal convergence andto its perceived sustainability, and, in this context,the political commitment of the authorities tocomply with the provisions of the Treaty onEuropean Union as regards the start of StageThree of EMU on 1 January 1999. In this particulararea, the most important underlying factors werethe approval of the Stability and Growth Pact (inJune) and the decision taken by the ECOFINinformal meeting in Mondorf (in September) on

the pre-announcement, in May 1998, of thebilateral central rates that will serve as a basis forthe fixing of the conversion rates to the euro atthe beginning of 1999, together with the disclosureof the list of countries that will participate in theeuro.

Underlying the exchange rate trend inEurope was the strong appreciation of the USdollar against most currencies, particularly inthe first half-year. This appreciation was due tothe advanced stage of the US economic cycle,together with some uncertainty as to the growthpace in Continental Europe (being reflected in awidening of the interest rate differentials). In thesecond half of 1997, the confirmation that theEuropean economy was regaining momentum,led to a larger stabilisation of the US dollar.

Within the scope of the Exchange RateMechanism of the European Monetary System,1997 witnessed a gradual reduction of the intra-European exchange rate volatility, albeit markedby a higher volatility of the US dollar against theDeutsche mark. Some uncertainty as to thefulfilment of the convergence criteria havingbeen dispelled, the second half-year was markedby an increased optimism regarding theintroduction of the euro on 1 January 1999 in alarge group of countries. Against thisbackground, based on clearly stability-orientedpolicies, the European markets remainedrelatively unaffected by the financial andeconomic crisis in Asia, triggered in July by thedevaluation of the Thai currency and whichspread in the subsequent months across severalforeign exchange and stock markets of the region.The maximum width of the fluctuation band ofthe Exchange Rate Mechanism reflected the trendof the Irish pound (which held the strongestposition in 1997); the band widened up to themiddle of the year, narrowing thereafter;excluding Ireland, the band narrowed to levelsclose to 1% at the end of the year.

The trend of the escudo in 1997 wasdetermined by increasing prospects aboutPortugal’s participation in the single currency in1999, considering the significant progressachieved, both at the level of the fiscalconsolidation — with an increasing perceptionthat the budget deficit would be lower than the2.9 per cent of GDP forecast in the State budgetfor 1997, remaining thus below the reference


level of 3 per cent, stipulated in the Treaty onEuropean Union — and at the level of thedisinflationary process — with a gradual declinein the average rate of inflation as of the end of thefirst quarter of 1997, which was reflected in agradual widespread perception that this criterionwould also be met in 1997.

In annual average terms, the escudoappreciated by 1.4 per cent vis-à-vis the Deutschemark, while in end-of-period terms it depreciatedby 1.6 per cent against the Deutsche mark. Inparallel with the decreasing volatility of theescudo vis-à-vis the Deutsche mark, there was areduction in the bilateral deviation of the escudovis-à-vis the Deutsche mark from 1.8 per cent, atthe end of 1996, to 0.2 per cent at the end of 1997,after having reached 3.0 per cent in mid-January.In fact, the escudo remained always above itscentral parity vis-à-vis the Deutsche mark, but asof the end of January 1997, the escudo movedslowly closer to its central parity. In effectiveterms, the domestic currency weakened in linewith most currencies participating in theExchange Rate Mechanism, with a real andnominal average depreciation of 1.9 per cent,chiefly accounted for by the strong appreciationof the US dollar and the pound sterling ininternational markets.

In a context of increasing expectations aboutthe participation of Portugal in the singlecurrency, in view of the favourable trend ofinflation and the progress achieved in fiscalconsolidation, together with the sustainedstability of the escudo within the Exchange RateMechanism of the European Monetary System,the Banco de Portugal cut gradually its officialinterest rates. The standing absorption facilityrate was cut by 1.3 percentage points to 4.9 percent and the overnight credit facility rate was cutby 1.4 percentage points to 6.9 per cent. Inparallel, the central bank induced the fall of therepo rate by 1.4 percentage points to 5.3 per cent.The differential between the German repo rateand the Portuguese equivalent rate narrowed by1.7 percentage points to 2.0 percentage points atthe end of the year, as a result of the falls of thePortuguese rate throughout the year and a rise inthe German repo rate in October.

In early February the issues of central bankintervention bills, with maturities of 4 and 9weeks were resumed. This measure was intended

to mop up part of the significant liquidityoverhang existing on the interbank money marketduring the first half of the year, enabling a bettercontrol by the monetary authority of short-terminterest rates.

In mid-July, the Banco de Portugal, througha Circular Letter, informed the institutionsauthorised to participate in the Interbank MoneyMarket that private-debt securities would beaccepted in its liquidity injection operations, thusmoving forward towards the neutrality oftreatment as regards the type of issuer ofsecuritised debt, in accordance with the principlesset forth in the Treaty on European Union.Subsequently, on 17 November, this change wasextended to the Intraday Credit Market, and thesecurities eligible for use in monetary policyoperations and in the payment system becameuniform.

Money-market interest rates moved in linewith or anticipated the cuts in the official interestrates, and therefore the yield curve up to the two-year maturity maintained a negative slope duringall 1997. The Portuguese yield curve recorded avirtually parallel downward shift, declining forall maturities between 1.1 and 1.3 percentagepoints. Mirroring the process of nominalconvergence of the domestic economy, this shiftwas followed by a narrowing of the differentialagainst German rates for all maturities, and inparticular at the shortest end. The three-monthinterest rates of the escudo fell by 1.3 percentagepoints to 5.1 per cent at the end of the year, andthe differential against the correspondingGerman rates narrowed by 1.8 percentage pointsto 1.4 percentage points. The rates for longermaturities recorded also a fall. The yield on 10-year Treasury bonds declined by 1.25 percentagepoints to 5.6 per cent at the end of 1997, while thedifferential vis-à-vis the German equivalentnarrowed by 0.82 percentage points to anhistorical low of 0.25 percentage points.

The discount rate, currently irrelevant formonetary policy purposes, was cut from 7 to 6per cent in early May.

The Portuguese stock market recorded astrong growth in 1997 both in terms of quotationindices and of amounts traded. The fall of depositrates, the pursuance of the privatisations processand the larger international interest in the Lisbon


stock exchange led to an increase in the demandfor listed securities. In parallel, strongerexpectations about the participation of Portugalin Stage Three of EMU, living room for a cut inmedium- and long-term interest rates, and thefavourable trend of the actual or planneddomestic economic juncture, also induced a risein quotations; the BVL index (Lisbon StockExchange index) rose by approximately 65 percent in 1997.

4.1.3 Procedures and instruments to supportbanking and business activities

The Central Balance Sheet Data Office,pursuing its objective of obtaining aggregatedata for the appraisal of the Portuguese businessstructure, issued, in 1997, sectoral position tablesand summary tables broken down by company,relating to the 1995 and 1996 fiscal years andcovering a large number of companies. In 1997,the Central Balance Sheet Data Office startedalso to cover the wholesale trade sector (Division51 of the Classification of Economic Activities —CAE — Rev. 2). As regards 1996, nearly 26,000companies joined the Central Balance Sheet DataOffice, representing approximately 35 per centof all the companies surveyed, which carry ontheir major economic activity in the followingsectors: agriculture, livestock, hunting and for-estry, fishing, mining and manufacturing indus-try, production and distribution of electricity,gas and water, construction, transports, storage,communications, hotels, and wholesale trade.

Pursuing the objective of providing thedifferent units within the financial system withan instrument permitting to evaluate the risksattaching to their lending operations, the Bancode Portugal, pursuant to the provisions laid downin Decree-Law No. 29/96 of 11 April 1996, con-tinued to ensure the compilation and respectivedissemination to the banking system ofend-of-month balances of credit-related accounts.The table below shows the centralisation ofliabilities as at 31st December 1997.

PTE billion

CREDIT CREDIT AND INTEREST OFF-BALANCEGRANTED FALLEN DUE SHEET ACCOUNTS

15,687 684 3,357

In order to provide the units operatingwithin the financial system with an instrumentthat enables them to assess the risks inherent intheir lending operations, the Banco de Portugalcontinued to ensure the centralisation and thesubsequent dissemination throughout thebanking system of protested bills. The number ofcredit incidents continued to decline, 14,332 caseshaving been recorded, to the amount of PTE13,523 million.

As regards support granted to creditoperations, the interest rate subsidies extendedin 1997 continued to decrease from PTE 2,634million in 1996 to 2,176 million in 1997.

In the use of the legislative powers grantedto it by Law No. 114/97 of 16 September, theGovernment introduced amendments to theLegal System governing Uncovered Cheques,approved by Decree-Law No. 454/91 of 28December, through Decree-Law No. 316/97 of19 November, which reworded several articlesand introduced others. In addition to changes ofa penal nature, such as the depenalisation ofpost-dated cheques, the Banco de Portugal wasgranted increased powers to oversee the tasksentrusted to credit institutions. The minimumamounts of fines applicable to breaches ofregulations were substantially raised, and newsanctions were imposed, even on infractionsresulting from negligence. The violation of thecompulsory payment of cheques started to besubject to the analysis and control of the Banco dePortugal and credit institutions currently requireauthorisation to supply cheque books to theirclients, where the cheque convention has beenterminated for less than two years. The new legalsystem took effect on 1 January 1998 and theBanco de Portugal, in the use of its regulatorypowers, approved and published Notice No.1741-C/98 (Series II) of 4 February and InstructionNo. 1/98 (BNBP No. 2 of 16 February 1998).

By decision of the Banco de Portugal,in 1997, 10,095 entities ceased to be listed ascredit defaulters, either at their request or byproposal of the credit institutions. 456 ceased tobe included and the other were removed onmotivated grounds. For this purpose, 16,688administrative files were opened and appraised.On 31 December 1997, there were 82,905 riskusers, i.e. slightly more than in 1996 (1.5 per cent)and 832 new judicial decisions of prohibition or


suspension of the use of the cheque wereregistered.

In 1997, the Special Fund for theReconstruction of Chiado (Portuguese acronym:FEARC) received six requests for subsidy, threeof them in November and December, whichwere still under examination at the end of theyear. Two requests were approved and a thirdwas refused. The appraisal of a request for acapital grant was postponed to 1998, consideringthat until 31 December 1997 the data required forits appraisal had not yet been submitted.Subsidised credit paid during the year amountedto PTE 329,481 thousand, i.e., below the figurefor 1996: PTE 433,350 thousand. The total amountpaid by the Fund, as at 31st December 1997,reached PTE 2,150,688 thousand. The FEARC’snet worth amounted to PTE 10,788,285 thousandat the end of 1997 against PTE 10,540,514 thousandin 1996.

4.2 Exchange authority

4.2.1 Foreign exchange system

The principle of full freedom of foreigncurrent and capital operations was implementedin Portugal in December 1992. This principle isembodied in Decree-Law No. 176/91 of 14 May,as amended by Decree-Law No. 170/93 of 11May. The full freedom of capital movements hasonly the derogations derived from theinternational law, namely the embargoes decidedby the United Nations Security Council. Inaddition to the execution of the embargoes,namely in the financial area, the Banco de Portugalwas also often requested to issue its opinion ondifferent subjects directly or indirectly related tothe foreign exchange system.

In the use of the powers conferred upon itby Decree-Law no. 13/90 of 8 January, the Bancode Portugal continued to be responsible for thecompilation of files relating to breaches ofregulations, arising from the violation of legalprovisions applicable to foreign exchange andexternal operations.

Associated with the entry into force ofinstructions of a prudential nature on theadequacy of own funds of financial companies,the limits imposed on the banks’ foreign exchange

positions against escudos were eliminated. Thisimplied the introduction of a change in InstructionNo. 31/96 on foreign exchange positions,wherefore the articles referring to the fixing ofsuch limits were revoked with effect from 30June 1997 onwards. Effective on 1 October 1997,Instruction No. 31/96 was revoked and replacedwith Instruction No. 36/97, regarding requestsfor information on foreign exchange positionsfor statistical purposes.

4.2.2 Management of foreign exchange reserves

In 1997, net foreign exchange reserves heldand actively managed by the Banco de Portugaldeclined by approximately 7 per cent, whenvalued in US dollars, and increased by 9 per cent,when valued in escudos (market values as at theend of 1997 against the end of 1996).

The Bank continued to carry out an activebut prudent management of foreign exchangereserves in compliance with the objective ofensuring the implementation of the foreignexchange policy. The Bank’s investment strategycontinued to be geared towards the maximisationof profitability, but the risks incurred were strictlycontrolled.

As regards the management of the goldreserve, the Bank continued a process ofreplacement of part of its deposits with swapsagainst US dollars, which, in turn, were investedin instruments with sovereign risk and inshort-term instruments. Preference was thusgiven for lower credit-risk placements, whichenabled the investment of a larger share of thereserve.

4.3 Currency issue

With the issue of the 500 escudo banknote,plate 13, the Bank has completed the newseries of banknotes associated with thecommemoration of the Portuguese Discoveries.At the end of the year, the former plates ofthe 10,000, 5,000, 2,000 and 1,000 escudobanknotes were withdrawn from circulation.


At the end of 1997, the value of banknotesin circulation amounted to PTE 975,518 million1 ,having increased by 4.1 per cent from 1996.

The following table shows the number ofnew banknotes in circulation in the last twoyears; as it can be seen, in 1997, the impact of thereplacement of old plates with the new seriesplates had already been cushioned.

Million banknotes

Denomination 1996 1997

10 000$ 18.6 16.0 5 000$ 83.7 43.8 2 000$ 70.5 19.9 1 000$ 45.2 48.4 500$ 26.0 30.4

Total 244.0 158.5

The average value of banknotes incirculation continued to be in line with thedecreasing trend recorded in 1996, partly as aresult of the fact that ATMs currently providemainly banknotes of middle-valuedenominations.

Year-end Average value ofbanknotes in circulation

1993 3 624$1994 3 691$1995 3 733$1996 3 681$1997 3 656$

In 1997, the following commemorativecoins were put into circulation and distributedthrough credit institutions:

w Centenary of the First Portuguese Oceano-graphic Expedition, with a face value of PTE1,000 (silver)

w Dances and Typical Costumes - “Pauliteiros deMiranda”, with a face value of PTE 1,000(silver)

w Second Centenary of Public Credit, with a facevalue of PTE 1,000 (silver)

w Third Centenary of the Death of Padre AntónioVieira, with a face value of PTE 500 (silver)

w Dolphins of the Portuguese coast, with a facevalue of PTE 200 (cupronickel)

w São Francisco Xavier, with a face value ofPTE 200 (cupronickel)

w Padre Luís Fróis, with a face value of PTE 200(cupronickel)

w Beato José Anxieta, with a face value of PTE200 (cupronickel)

w Irmão Bento de Góis, with a face value of PTE200 (cupronickel)

w Sea-wolf - Desertas Islands, with a face valueof PTE 100 (cupronickel)

In 1997, the demand for metal coinscontinued to be high. In order to meet theincreasing demand, the Banco de Portugal putinto circulation around PTE 2,5 million of changeand fractionary currency and resumed itsdistribution to the public and economic agentsthrough its branches in Lisbon and Oporto.

The table below shows the breakdown ofPortuguese metal coins issued and thecorresponding legal issue ceilings:

1 This value includes PTE 55,688 million of 10,000 escudo banknotes, plate 1,PTE 35,050 million of 5,000 escudo banknotes, plates 2 and 2A, PTE 3,851million of 2,000 escudo banknotes, plate 1, and PTE 7,343 million of 1,000escudo banknotes, plate 12, totalling PTE 101,932 million, relating to thebanknotes still held by the public.

2 The calculation of the average value in circulation was based on PTE 101,932million relating to the 10,000 escudo banknotes, plate 1, 5,000 escudobanknotes, plates 2 and 2A, 2,000 escudo banknotes, plate 1, and 1,000escudo banknotes, plate 12, still held by the public.

(2)


DIFFERENCELEGAL BETWEEN THE LEGAL

SPECIES IN THE VAULTS ISSUE ISSUE CEILINGIN OF THE TOTAL CEILING AND THE TOTAL

CIRCULATION BANCO DE PORTUGAL VALUE ISSUED

CHANGE ANDFRACTIONARYCURRENCY

Bronze$50 139,970,899.5 29,100.5 140,000,000.0 170,000,000.0 30,000,000.0

Nickel-Brass1$00 425,207,074.0 9,559,917.0 434,766,991.0 650,670,000.0 215,903,009.05$00 1,388,959,985.0 26,174,960.0 1,415,134,945.0 1,450,000,000.0 34,865,055.0

10$00 1,423,305,480.0 24,614,430.0 1,447,919,910.0 1,700,000,000.0 252,080,090.0Cupronickel

2$50 1,225,042,395.0 4,268,505.0 1,229,310,900.0 1,485,000,000.0 255,689,100.020$00 3,994,867,380.0 36,052,440.0 4,030,919,820.0 6,500,000,000.0 2,469,080,180.050$00 5,274,545,350.0 15,929,200.0 5,290,474,550.0 8,500,000,000.0 3,209,525,450.0

100$00 13,443,964,600.0 267,544,400.0 13,711,509,000.0 20,000,000,000.0 6,288,491,000.0200$00 9,164,745,800.0 648,454,200.0 9,813,200,000.0 30,000,000,000.0 20,186,800,000.0

TOTAL 36,480,608,963.5 1,032,627,152.5 37,513,236,116.0 70,455,670,000.0 32,942,433,884.0

COMMEMORATIVE

COINS

Nickel-Brass1$00 1,999,475.0 525.0 2,000,000.0 2,000,000.0 0.0

10$00 19,995,050.0 4,950.0 20,000,000.0 20,000,000.0 0.0Cupronickel

2$50 22,388,497.5 4,002.5 22,392,500.0 22,500,000.0 107,500.05$00 44,776,995.0 8,005.0 44,785,000.0 45,000,000.0 215,000.0

10$00 1,999,570.0 430.0 2,000,000.0 2,000,000.0 0.025$00 524,126,600.0 160,675.0 524,287,275.0 526,000,000.0 1,712,725.0

100$00 2,255,087,700.0 2,361,400.0 2,257,449,100.0 2,293,800,000.0 36,350,900.0200$00 5,480,850,800.0 19,149,200.0 5,500,000,000.0 5,980,000,000.0 480,000,000.0250$00 428,410,750.0 292,250.0 428,703,000.0 450,000,000.0 21,297,000.0

Silver5$00 3,983,205.0 16,795.0 4,000,000.0 4,000,000.0 0.0

10$00 2,173,070.0 33,590.0 2,206,660.0 2,700,000.0 493,340.020$00 63,063,240.0 936,760.0 64,000,000.0 64,000,000.0 0.025$00 750,000.0 0.0 750,000.0 750,000.0 0.050$00 157,436,200.0 42,563,800.0 200,000,000.0 200,000,000.0 0.0

100$00 134,485,100.0 25,058,000.0 159,543,100.0 236,700,000.0 77,156,900.0200$00 69,598,000.0 0.0 69,598,000.0 376,800,000.0 307,202,000.0250$00 185,620,250.0 66,934,000.0 252,554,250.0 276,750,000.0 24,195,750.0500$00 718,949,500.0 269,299,500.0 988,249,000.0 1,037,500,000.0 49,251,000.0750$00 153,372,750.0 3,000,750.0 156,373,500.0 195,000,000.0 38,626,500.0

1000$00 3,787,990,000.0 884,473,000.0 4,672,463,000.0 5,800,000,000.0 1,127,537,000.0

TOTAL 14,057,056,752.5 1,314,297,632.5 15,371,354,385.0 17,535,500,000.0 2,164,145,615.0

TOTAL GERAL 50,537,665,716.0 2,346,924,785.0 52,884,590,501.0 87,991,170,000.0 35,106,579,499.0

* This value includes PTE 181,425,000 already demonetised.

ISSUED BY THE STATE

(PTE)

*


4.4 Payment system

In 1997, within the functions of the Bank inthe field of the payment systems, it is to be notedthe start of the activity of the Comissão deCoordenação Interbancária para os Sistemas dePagamentos — CISP (Interbank Co-ordinationCommission for Payment Systems), whose mainobjective is to ensure the interbank co-ordinationof activities related to the development and theutilisation of retail interbank payment systems,by promoting:

— The definition of strategies leading tothe development of retail paymentsystems with a view to improving theirefficiency and modernisation;

— Interbank co-operation for thedevelopment of new products relatedto means and instruments of payment;

— Standardisation and regulation of thesepayment systems.

The intervention of CISP will cover the co-ordination of the activity of interbank workinggroups on payment systems, which have beenoperating in the past years under the aegis of theBanco de Portugal.

The Commission is composed ofrepresentatives of the Banco de Portugal (whoholds the chairmanship), of banks, of thePortuguese Association of Banks, and of theInterbank Services Company. The Commissionis assisted by an Executive Commission with theaim of guaranteeing higher operational efficiency.

4.4.1 Large-value payment system

In 1997, the activity of the Portuguese large-value payment system (Portuguese acronym:SPGT), illustrated in the table below, can beconsidered to have reached the expected“cruising speed”, having recorded a significantrise in the number of interbank settlementsthrough the system, both in absolute and averageterms.

PTE billion

1996 1997 Change

Volume Value Volume Value Volume Value

Total operationssettled 417 013 495 191 507 332 729 855 90 319 234 664- Settlements from

the operating systemsof the BP 202 996 198 508 228 605 244 637 25 609 46 129

- Settlements orderedvia SPGT 214 017 296 683 278 727 485 218 64 710 188 535

Daily average of totaloperations settled 1 837 2 182 2 046 2 943 209 761

The daily average of operations settled viaSPGT increased by 11 per cent in quantity and by35 per cent in value from 1996 to 1997.

The SPGT, confirming its specific role asprocessor of large-value interbank settlements,reached with only 0.07 per cent of the operationssettled by it, in interbank settlements as a wholemade by the central bank (SPGT and Sistema deCompensação Interbancária — SICOI, Portugueseacronym for Interbank Clearing System),approximately 91 per cent of the total value ofthose settlements.

The average amount per operation settledvia the SPGT and SICOI (as illustrated in thetable for 4.4.2) is also substantially different: PTE1.4 billion for the former and PTE 103 thousandfor the latter. This mirrors the nature of bothsystems: SPGT is specialised in the grossprocessing of large-value operations; SICOI,including netting systems, is specialised in retailpayments.

Another relevant feature in the operationof SPGT, in 1997, was the improvement recordedin the “indices of utilisation” of the system —

measured through the average prices of the“Price List of Services of the Banco de Portugal”— by the participating credit institutions. Theaverage price of operations, in all the openingperiod of SPGT decreased by approximately9 per cent; the average price of operations in the“last hour period” declined by approximately26 per cent; the average overall price peroperation, including the “monthly utilisationrate” and the “penalties”, dropped by nearly12 per cent.

With respect to the TARGET system, in1997, works continued, as planned by the centralbanks and the EMI, in order to enable, throughthe connection of the real-time gross settlement


systems of the EU, the safe and quick executionof cross-border transfers from the start of StageThree of EMU.

In Portugal, according to the timetabledrawn up, the static tests between the Banco dePortugal and the EMI started in October 1997and were completed at the end of 1997. FromDecember 1997 to February 1998, dynamic testswere made, followed by multilateral tests,involving already groups of national centralbanks; these tests are due to continue up to endof June. The final phase will follow with theimplementation of the TARGET system and theconnection of SPGT to this system via theInterlinking. The simulation phase will beundertaken in the second half of 1998. The moreeffective involvement of the institutionsparticipating in SPGT in the works regarding theimplementation of the TARGET system will occurduring the multilateral tests phase and will begradually intensified, covering an increasingnumber of institutions in the simulation phase.

The TARGET system, given itsacknowledged intrinsic characteristics of safety,reliability and quickness, inherent in the real-time gross settlement systems on which it isbased, constitutes the most adequate Trans-European funds transfer system.

4.4.2 Interbank Clearing System — SICOI

The settlement of operations processedthrough the subsystems integrating the SICOI(traditional clearing and automated clearing —

cheques, commercial bills, interbank electronictransfers (TEI) and operations processed viaMULTIBANCO) presented the followingdevelopment:

Quantity: millionValue: PTE billion

1996 1997 Change

Volume Value Volume Value Volume Value

Automatedclearing 576,6 97 084 668,6 68 293 92,0 -28 791

Cheques 227,5 49 886 234,3 54 264 6,8 4 378Other (1) 349,1 47 198 434,3 14 029 85,2 -33 169

Traditionalclearing 10,4 1 841 7,6 1 388 -2,8 -453

Cheques 6,6 1 412 5,5 1 282 -1,1 -130Other (2) 3,8 429 2,1 106 -1,7 -1323

TOTAL 587,0 98 925 676,2 69 681 89,2 -29 244

(1) Commercial bills, EIT (electronic interbank transfer system) and MULTIBANCO;(2) Chiefly payment orders (1996) and Social Security receipts (1997).

The negative change in the valuesprocessed via SICOI was chiefly due to theintegration in SPGT from March 1996 onwards,of payment orders with a higher value than PTE100,000,000, which during a transitional periodwere processed through the TEI sub-system.

Amongst the actions planned for 1998,within the framework of SICOI, mention shouldbe made of those agreed with the banking systemfor the extinction of the Traditional Clearing, theenlargement to the Autonomous Regions of theAutomated Clearing of cheques (coinciding withthe launching of the system in Angra doHeroísmo) and for the installation, in virtuallyall the former Traditional Clearing centres of“physical exchange centres” for the exchange ofuntruncated documents.

A large share of the actions planned in theseveral sub-systems of SICOI for the adaptationto the euro will also be carried out in the courseof 1998. With respect to the activity developedwithin the scope of the interbank working group,operating under the co-ordination of the Bancode Portugal, progress reports have beenperiodically produced, disclosing the mostrelevant information to the credit institutions,which are involved in the process of transition tothe single currency.

4.5 Financial relations with the State

In the wake of the actions for thesimplification and rationalisation of theprocedural and book-entry relationships betweenthe Banco de Portugal and the Treasury, whichwere most active in 1994, 1995 and 1996, the year1997 was featured by the consolidation of theefforts previously developed. Thus, thesettlement account of the Directorate-General ofthe Treasury currently centralises all the book-entry movements of the Treasury settled via thecentral bank. The said account posted a creditbalance of PTE 1,590.80 as at 31st December1997.

Under the terms established by the Protocolon Portugal attached to the Treaty on EuropeanUnion, the Autonomous Regions of the Azoresand Madeira continued to be authorised to benefitfor a transitional period from an interest-free


credit facility with the Banco de Portugal, whoselimits were set at PTE 9,428.1 million and PTE6,771.8 million, respectively.

The balances on the current accounts of theAutonomous Regions, as at 31st December 1997,were as follows:

- PTE million -- Autonomous Region of the

Azores — current account 0.0- Autonomous Region of

Madeira — current account 6 ,771.8(debit)

In addition to the above-mentionedsettlement account, the Central Administrationholds special accounts with the Banco de Portugal,remunerated according to specific regulations,which posted, as at 31st December 1997, thefollowing credit balances:

- PTE million -- Public Treasury — Available

resources account 478 711,0- Public Debt Settlement Fund 7 965,5

4.6 Supervision of credit institutions andfinancial companies

4.6.1 General comments

The most significant of the Bank’sprudential regulatory and supervisory activitiesin 1997 were the following:

— Preparation of, or co-operation in,legislative and regulatory projects, witha view to the reformulation of the legalsystem governing certain types of creditinstitutions and financial companies,the revision of the legal framework ofcertain financial instruments and meansof payment, and the improvement ofsupervisory instruments.

— Continuous and systematic monitoringof the activity and financial situation ofcredit institutions and financialcompanies, both on a consolidated andnon-consolidated basis.

— Evaluation, from a prudentialperspective, of the restructuringoperations of banking and financialgroups and their institutions, andanalysis of the rationalisationprogrammes subsequent to thoseoperations.

— Monitoring of financial reorganisationand settlement processes of institutionssubject to the supervision of the Bancode Portugal.

— Strengthening of co-operationinitiatives with other supervisoryauthorities, at both the national andinternational levels, and furtherparticipation in committees andworking groups of the European Unionand other international organisations.

4.6.2 Legal framework governing the activitiesand supervision of credit institutions

In 1997, the Banco de Portugalcollaborated in the reformulation of the legalsystem governing some types of creditinstitutions, financial companies and institutionalinvestors, of which the following are highlighted:

— Decree-Law No. 17/97 of 21 Januaryrelating to wealth managing companies,having abolished the prohibition of themembers of their corporate bodies, theshareholders having holdings higherthan 20 per cent of the capital stock andthe respective employees withadvisory, professional or managingfunctions from having holdings in thecapital stock, belong (in their own nameor as representatives of a third party) tothe corporate bodies or perform anyother functions in another wealthmanaging company.

— Decree-Law No. 265/97 of 2 October,which imposed in particular a uniformlegal system on financial leasingagreements; therefore, specialagreements on real estate for housingpurposes no longer exist.

— Decree-Law No. 319/97 of 25November empowered the Banco dePortugal to authorise savings banks,


which have the adequate structuralconditions and sufficient resources,namely in terms of own funds, solvencyand internal control systems, to carryon other types of financial activities(among those allowed to banks).

— Decree-Law No. 320/97 of 25November, envisaged at creatingconditions for the strengthening of thesolvency of mutual agricultural creditbanks, laying down rules which inducecapital increases (e.g., fixing a higherminimum amount for the payment ofcapital contributions, prohibiting undercertain circumstances, the distributionof profits and providing for theconstitution of a special reserve),allowing the sectoral diversification ofcredit risks (permitting the granting ofloans with purposes other than thosepreviously established), and wideningthe intervention mechanisms of theCentral Mutual Agricultural CreditBank in the processes of financialreorganisation or liquidation of theagricultural banks integrated in SICAM- Portuguese acronym for IntegratedMutual Agricultural Credit Scheme(e.g., by conferring powers to theCentral to appoint a supervisorycommission and a representative in thewinding-up committees).

— Decree-Law No. 322/97 of 26 Novem-ber, which specifically stipulated thatthe Central Agricultural Credit Bankshall participate in the Mutual Agricul-tural Credit Guarantee Fund.

— Decree-Law No. 323/97 of 26 Novem-ber, which provided for the harmoni-sation of the legal and supervisoryframework of risk capital funds, of en-trepreneurial restructuring and inter-nationalisation funds, and real estatewealth managing funds.

The Banco de Portugal issued regulatorynorms and participated in the preparation ofdraft legislation governing financial instrumentsand means of payment, viz.:

— Decree-Law No. 70/97 of 3 April, whichestablished the legal validity of bilateralnetting agreements, related to contractson financial instruments, within thescope of bankruptcy procedures.

— Notice No. 1/97 of 21 April, on standardrepurchase operations.

— Instruction No. 26/97 (amendingInstruction No. 47/96), published on16 June, pursuant to which the issue ofdebit cards does no longer require theprior authorisation of the Banco dePortugal, it also fixed the minimumconditions to be complied with by thewritten contracts governing therelationship between the issuer and theholder of the card.

Instructions of a technical nature andcircular letters were also issued in 1997,envisaging the improvement of the supervisoryinstruments, particularly on the following areas:

— Solvency ratio: Concept and list of ZoneA countries (Instruction No. 19/97published on 17 March) andclarification of the own fundrequirements to which the institutionsintervening in repo operations aresubject (Circular Letter No. 21/DSB of11 June).

— Own funds requirements for thecoverage of market risks: concept ofreputable investment company,recognised stock exchange, recognisedclearing house, recognised ratingagency, widely-diversified indices andclosely correlated currencies(Instruction No. 23/97, published on15 April) and exclusion of savings banks(with the exception of Caixa EconómicaMontepio Geral) from compliance withthe requirements laid down in NoticeNo. 7/96, save for foreign exchangerisks (Instruction No. 24/97, publishedon the same date).

— Integrated system for the reporting ofperiodical information on the ownfunds minimum requirements relatingto solvency, coverage of market risks


and large exposures (Instruction No.25/97, published on 15 May).

— Uniformisation of the contents of thenotification regarding the setting up ofsubsidiaries of investment firms, or thefree provision of services in anotherMember State of the EuropeanCommunity (Instruction No. 102/96,as amended by Instruction No. 20/97,published on 17 June) and of thecontents of the application for specialregistration of subsidiaries of creditinstitutions and financial companies(Instruction No. 47/97, published on17 November).

— Subordinated loans: clarification of theprocedures to be complied with byborrowing institutions with regard tothe reduction of the amounts of thesubordinated loans eligible as ownfunds in the last five years of the life ofthe loan, as well as the possibility ofrepayment of the amounts of the saidloan not included in the own funds(Circular Letter No. 29/DSB of 17December).

As to the accounting regulations, it shouldbe highlighted, due to their significance, thecompletion of the works relating to the creationof a Unified Chart of Accounts, applicable to allcredit institutions and financial companies, whichwill take effect on 1 January 1999.

Changes have also been introduced in theChart of Accounts for the Banking Systemregarding the definition of accounting proceduresof special operations on financial instruments(securities lending and short-sales), the possibilityof marking to market — with a reflection on theprofit and loss account — the shares of the tradingbook, when they show adequate liquidity;furthermore, trading forward rate agreementscan also be re-evaluated.

4.6.3 Supervision activities

4.6.3.1 Evolution of the institutions supervisedby the Banco de Portugal

In 1997, the total number of creditinstitutions and financial companies decreased(475 as at 31st December 1997 compared with 489a year earlier).

TABLE I

Breakdown of institutions

Number of institutions

1996 1997

Credit institutions

- Banks and branches of foreign banks 53 60- Savings banks (1) 10 9- Mutual agricultural credit banks 181 170- Investment companies (2) 4 4- Financial leasing companies 34 28- Factoring companies 11 10- Credit-purchase financing companies 26 23- Branches of other foreign credit institutions 4 6

Sub-total 323 310

Financial companies

- Dealers 12 12- Brokers (3) 12 10- Foreign-exchange or money-market

mediating companies 3 3- Investment fund managing companies 55 55- Credit card issuing or managing companies 3 3- Wealth managing companies 16 18- Regional development companies 3 3- Risk capital companies (4) 14 13- Group-purchase managing companies (5) 21 19- Exchange offices 25 27- Other companies 2 2

Sub-total 166 165

Representative offices of credit institutionsand financial companies having their head

office abroad 29 27

Holding companies 59 59

Total 577 561

(1) Of which, as at 31st December 1997, two savings banks had goneinto winding-up procedures.

(2) Of which, on the same date, 1 investment company had goneinto winding-up procedures.

(3) Of which, on the same date, 2 brokers had gone into liquidation.

(4) Of which, on the same date, 1 risk capital company had goneinto winding-up procedures.

(5) Of which, on the same date, 12 group-purchase managingcompanies had gone into winding-up procedures.


This evolution was chiefly due, as shownin Table I, to the reduction of the number of creditinstitutions, in particular, of mutual agriculturalcredit banks (due to the continuation of mergers)and of financial leasing companies (in the contextof the rationalisation of the operating conditionsof banking groups), although it was partiallyoffset by the registration of eight banks (fourhaving their head office in Portugal, and fourbranches, of which three of credit institutionshaving their head office in other Member Statesof the European Union) and of two credit-purchase financing companies.

The number of financial companiesremained virtually unchanged, although twowealth managing companies and two exchangeoffices have been set up.

The number of new registrations in 1997(see Table II) was slightly lower than in the

previous year (48 versus 50); most registrationswere made by credit institutions, special emphasisbeing laid on the notifications relating to theinternational provision of services by creditinstitutions authorised in other Member Statesof the European Union (21 notifications, of whichseven from the United Kingdom, four fromGermany and four from Luxembourg), as well ason eight new registrations of banks. Finally,despite the maintenance of the total number ofholding companies subject to the supervision bythe Banco de Portugal, eight new registrationswere made and eight were cancelled.

4.6.3.2 Monitoring of the institutions

In the course of 1997, a systematic appraisalof the situation and evolution of the financialgroups continued to be developed as well as ofcredit institutions and financial companies, takenindividually, on the basis of the analysis ofreporting data included in the prudential andaccounting reporting system as well as on thebasis of inspections.

The assessment of information of aprudential and accounting nature — summarisedin periodical notes — enabled the identificationand characterisation of the main risks inherent inthe activity of the supervised institutions, theevaluation of the structure of the profit and lossaccount and the evaluation of the activities carriedon (balance sheet or off-balance sheet items), thecheck of compliance with ratios and limits aswell as the monitoring of the corrective measuresimposed by the Banco de Portugal, following thedetection of anomalies or deficiencies.

On the other hand, the analysis of theannual reports on the internal control systemsprovided supplementary data for a qualitativeand overall appraisal of risk management policiesand systems of credit institutions and financialcompanies.

Within the scope of the activity planadopted for 1997, about 70 inspections werecarried out, covering the most relevant creditinstitutions or financial companies (due to theirsize, ranking, complexity of operations carriedout or problems presented) of the banking groupsincluded in the said planning. The programme

TABLE II

Number of new registrations

1996 1997

Credit Institutions

- Banks and branches of foreign banks 6 8- Mutual agricultural credit banks (1) 6 1- Investment companies - -- Credit-purchase financing companies 1 -- Branches of other foreign credit institutions 1 2- Credit institutions having their head office in

EC Member States and providing servicesin Portugal 17 21

Sub-total 31 32

Financial companies

- Dealers 1 -- Brokers 1 -- Investment fund managing companies 2 1- Wealth managing companies 1 2- Exchange offices 3 3

Sub-total 8 6

Representative offices of credit institutions

and financial companies having their head

office abroad - 2

Holding companies 11 8

Total 50 48

(1) As a result of mergers.


included inspections of a general (50) andselective nature, i.e., limited to specific areas andcovering the several types of supervisedinstitutions (on the whole 26 inspections weremade to banks).

Inspections had the following majorpurposes:

— assess the quality of the assets and therespective provisioning levels;

— evaluate the adequacy of the globalmanagement systems of treasury op-erations and market risks.

— assess the intra-group operations, inparticular, in terms of their accountingand contribution to results.

— gauge the reliability of the prudentialand accounting reporting forms, inparticular, regarding the calculation ofthe underlying risks of off-balance sheetoperations and / or in foreign cur-rency.

— check the soundness of the internalcontrol systems, in particular, asregards the areas of credit and deriva-tive operations, accounting, data-processing and anti-money launder-ing measures.

4.6.4 Consultancy, research and informationmanagement activities

In addition to the activities associated withthe regulatory framework of institutions andsupervision, the (economic and juridical)advisory and research functions were mainlyfocused on the following areas:

— Setting up or establishment of creditinstitutions and financial companies,as well as mergers, splitting, windingup and liquidation of institutions orrestructuring of financial groups.

— Assessment of the fitness and proper-ness of the owners of qualifying hold-ings and of the members of the corpo-rate bodies as well as appraisal of situ-ations of accumulation of posts in themanagement boards of credit institu-tions and financial companies.

— Changes to articles of associationand complementary groupings ofcompanies.

— Own funds (e.g., items eligible to beincluded in tier 2 own funds) andprudential ratios or limits (e.g. fixedassets).

— Replies to consultations made by exter-nal bodies (e.g., foreign supervisoryauthorities and Community institu-tions).

In the field of information systems, mentionshould also be made of the works developed inco-operation with the Organisation andInformation Department, for the implementationof three new systems in the field of documentarybusiness management, special registration ofsupervised institutions and operation ofaccounting data.

4.6.5 Claims and breaches of regulations

The Banco de Portugal, when expresslyrequested, analysed claims submitted by theinstitutions supervised or by their clients, arisingin particular from alleged irregularities indisclosure requirements related to the operationof deposit accounts, housing and consumer credit,commissions and other banking costs, the breachof rules of conduct, irregularities in credit cards,bank secrecy, reporting requirements andmisleading advertising.

On the other hand, 16 breach-of-regulationproceedings were started, in reply to situationsin which recourse to the preventive means andinstruments at the disposal of the Banco dePortugal proved insufficient. The reasons behindthe above proceedings were, in particular, thecarrying out of unauthorised operations, non-compliance with the prudential limits fixed andaccounting rules, irregularities in the granting ofcredit and in the registration of the members ofthe corporate bodies, infractions to the rulesgoverning the use of the business name, non-compliance with the rules aimed at preventingthe utilisation of the financial system for money-laundering purposes and violation of thereporting requirements towards the Banco dePortugal.


4.6.6 Deposit Guarantee Fund

At the end of 1997, 55 credit institutionsparticipated in the Deposit Guarantee Fund (45banks, 7 savings banks and 3 mutual agriculturalcredit banks not belonging to the SICAM).

In the course of the year, five banks, recentlyset up and having their head office in Portugal,became participants in the Fund, while onesavings bank (in the process of winding-up)ceased to participate in the deposit guaranteescheme.

In the regulatory field, several Instructionsof the Banco de Portugal were published, ofwhich the following are highlighted:

— Instruction No. 41/97, published on 15October, which set at 40 per cent theirrevocable minimum contribution for1998. Note that the participatinginstitutions, may replace theircommitment, up to a certain amount(annually fixed and which can reach amaximum of 75 per cent) with theassumption of an irrevocablecommitment, collateralised by certainsecurities, to pay the correspondingamount, at any time, when the Fundthus requests, particularly in situationswhere the deposits become unavailable.

— Instruction No. 51/97, published on 15January 1998, which laid down, for thepurposes of the weighting of thecontribution base rate, the utilisation ofa new ratio for the adequacy of ownfunds, which envisages, in addition tothe coverage of credit risks, the coverageof market risks.

The financial resources of the Fund totalledapproximately PTE 83.0 billion, as at 31 December1997. Contributions for 1997 (both annual andinitial) amounted approximately to PTE 14.2billion and, for the most part (75.5 per cent) weresettled with certificates of deposit issued by theBanco de Portugal.

In turn, the recourse by the participatinginstitutions to irrevocable payment commitmentsincreased sizeably (23.5 per cent of total annualcontributions as compared with 16.1 per cent in

1996). Under these circumstances, in overallterms, the degree of utilisation of suchcommitments averaged 94.0 per cent at the endof 1997 (against 63.6 per cent in 1996).

The annual contributions correspond tothe application of a base rate, annually fixed (0.1per cent in 1997) on deposits opened with theparticipating credit institutions and of a low rate(0.01 per cent), which in 1997 was extended todeposits held by the Oporto Derivative StockExchange Association, built up with resourcesfrom collateral associated with repo operations,within the scope of the integrated registration,settlement and clearing services provided by thesaid Association.

Finally, the average rate of contribution,defined as the ratio between contributions andguaranteed deposits, stood at 0.093 per cent, in1997.

4.6.7 Co-operation with other supervisoryauthorities

In this area, co-operation with the bankingsupervisory authorities of other Member Statesof the European Union, as well as of thirdcountries, was further developed, chiefly withinthe scope of the prudential control of branches ofcredit institutions. This co-operation consistedboth in the conclusion of co-operation agreements(e.g. Brazil) and in the exchange of information(e.g. Federal Reserve of the USA), or in theprovision of technical assistance (e.g. CentralBank of Russian Federation).

At the domestic level, contacts with theStock Market Commission and with thePortuguese Insurance Institute have beenstrengthened, and continued to be chiefly centredon the field of the financial situation of the groupsthat include banks and investment firms,authorisations and appraisal of the fitness andproperness of managers of credit institutionsand financial companies, as well as on theformulation of opinions on regulatory initiatives(in particular as regards: the transposition of the“Investment Services” Directive; the legal systemgoverning investment funds and short-sellingoperations; the integrated registration, settlementand clearing services or counterparty services in


securities lending operations of the OportoDerivative Stock Exchange Association; thedisclosure of profitability measures bytransferable securities investment funds; and theregistration of financial intermediaries for thepursuit of intermediation activities in transferablesecurities).

4.7 International relations

In 1997, the Banco de Portugal took anactive role in the works of different internationalbodies, in which the Bank represents the country,and continued to further enhance the bilateralrelationships with other central banks, inparticular, of the European Union and ofPortuguese-Speaking African Countries(Portuguese acronym: PALOP) as well as of somecountries of Central and Eastern Europe.

Given the national priority of strengtheningthe economic, financial and monetary integrationof the country into the EU, the participation inthe several organisations was, as in the recentpast, the fundamental focus of the internationalactivity of the Banco de Portugal (see number 3.).This participation was centred on the EuropeanMonetary Institute (EMI), the MonetaryCommittee, the Economic Policy Committee, theBanking Advisory Committee and in otherCommittees and Working Groups of the Counciland the Commission in the fields of bankingsupervision, regulation of the financial system,operation of payment systems, export credit,and monetary, financial and balance of paymentsstatistics.

At the extra-Community level, the Bankparticipated, as regards issues related to its tasks,in the works of the OECD Committees — inparticular, in the Committee on Economic Policy,the Committee on Financial Markets, theCommittee on Capital Movements and InvisibleTransactions, the Financial Action Task Force(FATF) on money laundering and, by way of itsrepresentation in the Council of FinancialGuarantees, in the Export Credit Group and inthe Participants on the Arrangement onGuidelines for Officially Supported ExportCredits (Consensus) — and integrated the nationaldelegation that participated in the OECD’s annualexamination of the Portuguese economy.

At the international financial and monetarylevel, the activity of the Bank for InternationalSettlements continued to be regularly monitored.The Banco de Portugal participated, namely, inthe BIS Ordinary General Meeting, held in Basle,on 9 June.

The customary relations were maintainedwith the International Monetary Fund (IMF), inparticular within the scope of the annual missionsto Portugal for consultations under Article IV,and participation in the General Meeting of theIMF and of the World Bank (held in Hong Kongfrom 23 to 25 September), and in the semi-annualmeetings of the Interim Committee (on 28 Apriland 21 September).

The 11th global revision of quotas wasapproved at the beginning of 1998, correspondingto a general increase of 45 per cent. In the case ofPortugal, and taking into account the weight ofits current quota and the relative economicposition, the quota will increase from SDR 557.6million to SDR 867.4 million, as laid down inDecision No. 11668/97 of the Minister of Finance,published in the Official Gazette No. 273, SeriesII of 25 November, as amended through theAmendment No. 161/98, published in the OfficialGazette No. 24, Series II of 29 January.

The General Meeting of the Board ofGovernors of the IMF also approved a proposalfor the amendment of the Articles of Agreement,regarding a special allocation of Special DrawingRights (SDR). This amendment will allow for aduplication of the amount of SDR allocated,which will be raised to SDR 42,87 billion. In thecase of Portugal, the total amount of the allocationwill be approximately SDR 163.46 million, i.e., anincrease of approximately SDR 110 million.

In the fourth quarter of 1997, Portugaljoined the Special Data Dissemination Standard(SDDS), which is a standard for the disseminationto financial operators and the general public ofaccurate data at the level of economic andfinancial statistics, in compliance with strictupdating, transparency, integrity and qualitycriteria. With the creation of SDDS (in thebeginning of 1996), the IMF gave a furtherimportant step towards the improvement of itssupervisory procedures, with the aim ofstrengthening the capacity of preventing crises.


The Banco de Portugal also participated inthe Portuguese delegations to the GeneralMeetings of the Interamerican Development Bank(held in Spain, Barcelona from 17 to 19 March)and of the African Development Bank / AfricanDevelopment Fund (held in the Ivory Coast,Abidjan from 28 to 30 May).

Institutional co-operation with centralbanks of developing countries — particularlyPortuguese-speaking African countries, whichis another important segment of Portugal’sinternational relationships — was pursued incompliance with the time schedule establishedfor the purpose, largely reflecting the majorconcerns and priorities of those central banks.These activities continued to be centred onmultilateral initiatives — i.e., of the Banco dePortugal with the five Central Banks of the PALOP— such as training courses on central bankactivities, meetings and round-tables, and onbilateral initiatives, such as visits and trainingperiods at the Banco de Portugal as well astechnical assistance projects in those countries.

In 1997, courses were held in Lisbon on“Internal Audit”, “Means of payment andpayment systems”, “Foreign operations andforeign exchange market”, and “Macro-economicpolicy and programming”, with a total of 44participants. The latter was held in co-operationwith the Institute of the IMF and counted on theparticipation of officials of the Ministries ofFinance. In Luanda, courses were held on“Monetary Programming”, “Monetary andFinancial Statistics”, “Central Bank AccountingSystem” and “Balance of Payments Statistics”,with a total of 18 participants.

Several meetings/round-tables were alsoheld, with the participation of the six CentralBanks: in São Vicente, Cape Verde, “4th Meetingof Human Resources Directors”, on 16 and 17June; in Lisbon, a round-table on “The transitionfrom direct to indirect monetary control”, on 26and 27 June; in Maputo, “5th Meeting of BankingJurists”, from 14 to 16 October. On the otherhand, as it has happened in the past years, thedelegations of the Portuguese and PALOP’sFinance Ministries and Central Banks to theAnnual General Meetings of the IMF/WorldBank met in Lisbon, in their 7th Lisbon Meeting,on 16 September. This provided an opportunityto discuss the economic and financial situation of

Portuguese-speaking African countries and therespective stance of economic policy, to promotecontacts between Portuguese investors in thefinancial and entrepreneurial fields and theauthorities of those countries, and to discussseveral aspects of co-operation.

Still in the field of co-operation withdeveloping countries, in a joint organisation ofthe Banco de Portugal and the IMF, and alsoinvolving French co-operation organisations, aseminar was held in Lisbon on “Fight againstcorruption in economic and financialmanagement”, which counted on theparticipation of representatives of eleven AfricanPortuguese- and French-speaking countries.

As regards financial relationships with thePALOP, the Banco de Portugal continued toensure the operation of the so-called OilAgreement signed with the Banco Nacional deAngola, within the framework of which it waspossible to settle debts of that country towardsPortuguese entities, under the terms establishedin the renegotiations held in 1994.

The co-operation with Transition Countriescontinued with visits to the several activity areasof the Bank and with the participation of expertsin seminars and courses held in the partnercountries.

4.8 Internal organisation and management

4.8.1 Human resources

The Management and Development ofHuman Resources Department was engaged in anumber of activities in 1997, among which themost significant were the following:

— Introduction of structural adjustmentsin the Economic Research Departmentand in the Statistics Department as wellas in the reorganisation and operationalupgrading of the Oporto branch andthe Bank’s Agencies.

— Conclusion of a process of functionalcharacterisation of the organisation,involving the identification and thecomparative analysis of the Bank’s jobs,enabling the consolidation of important


referentials for the Management ofHuman Resources, which areinstrumental in developing a systembased on the Identification ofOrganisational Competencies.

— Completion of a better-matchedremuneration policy cycle, envisagingincreased equality, clarity andmanagement simplicity.

— “Cultural diagnosis and organisationalenvironment”, which enabled theidentification of important segmentsregarding the sociological context ofthe Bank, while confirming the need ofstrategic repositioning of the humanresources function.

— Development of recruitment andselection processes, at internal andexternal level, with particular emphasison the internal competitions and otherprocesses for the utilisation of theinternal potential and classification ofemployees in more qualified jobs.

— Development of several institutionalintervention programmes, within thescope of the training policy, covering asignificant number of functions andprofessional segments, with particularemphasis on the areas of training inmanagement, quality of the servicesand institutional image, enabling thedevelopment of competencies,particularly at the management level,for the improvement of the internalcommunication levels, qualificationand provision of external services.

In 1997, 22 staff were recruited (19professional staff and 3 support staff); there were18 retirements (10 early retirements, 6 retirementson account of disability and 2 on account of agelimit), 10 terminations of the labour contract (6 atrequest and 4 on mutual agreement), and 3deceases. At the end of 1997, the Bank employed1,811 staff.

Of the total staff of the Bank, 1,089 are menand 722 are women, working at the head office(1,523), at the Oporto branch (159) and at theRegional Delegations and Agencies (129).

Of the Bank’s 1,811 staff, there are 37 Headsof Department, 89 managerial staff, 614professional staff, 82 specialist staff, 643administrative staff, and 346 are managers andsupport staff belonging to Groups II, III and IV.

The table below shows the evolution of theBank’s staff over the last five years:

Staff 1993 1994 1995 1996 1997

Male 1102 1062 1064 1099 1089Female 714 695 707 721 722Total 1816 1757 1771 1820 1811

The age group table below shows that thegroup with the highest number of staff (832)continues to be the 36/45 age group, followed bythe 46/55 age group (566).

The Bank has 310 employees who areyounger than 36 (43 less than in 1996)corresponding to 17.1 per cent of its total staff.

The average age, as at 31st December 1997,was 42.6 years, reflecting a slight increase from1996 (41.8 years).

Age group 1993 1994 1995 1996 1997

19/25 31 18 25 70 5926/30 105 112 124 115 11931/35 407 295 189 168 13236/45 767 814 866 842 83246/55 452 453 495 532 56656/60 47 60 62 76 8061/65 7 5 10 17 21

Over 65 - - - - 2Total 1816 1757 1771 1820 1811

With regard to seniority in the bankingsector, the table below shows that the largestgroup of staff (583) has served in the sector for11/15 years, followed by the 21/25 group, with345 staff.

A total of 940 employees, representing 51.9per cent of the total staff, have been employed atthe Bank for less than 15 years, as against 871employees (48.1 per cent of total staff), who haveworked for the Bank for more than 15 years.

The average seniority in the Bank was16.3 years in 1997, increasing slightly from 1996(15.4 years).


Seniority 1993 1994 1995 1996 1997

Up to 2 years 99 69 94 147 1423 to 5 64 102 112 97 656 to 10 436 312 223 154 15011 to 15 472 563 585 600 58316 to 20 376 302 260 287 30721 to 25 221 266 344 356 345

Over 25 years 148 143 153 179 219Total 1816 1757 1771 1820 1811

In 1997, the number of staff in retirementwas 1,742 (22 less than in 1996), i.e., 96.2 per centof the Bank’s active staff (1,811).

The number of pensioners increased from

456 to 472, i.e. a 3.5 per cent increase from 1996.

Evolution 1993 1994 1995 1996 1997

In retirement 1732 1771 1775 1764 1742Pensioners 448 464 470 456 472

In 1997, 1,401 staff (corresponding to 77.4per cent of the Bank’s total staff) took part ininternal and external (in Portugal and abroad)training activities, totalling 2,551 participations.950 staff took part in internal training and 451 inexternal training, of which 297 in the country and154 abroad.

Training actions totalled 63,969 hours(17,024 hours more than in 1996), of which 48,931hours at the internal level and 15,038 hours at theexternal level.

The average number of training hours perparticipant increased from 25.8 in 1996 to 35.3 in1997. Over the same period, the rate ofparticipation rose from 50.9 per cent to 77.4 percent, denoting the substantial qualification effortdeveloped.

4.8.2 Pension Fund

Pension liabilities are financed through apension fund, managed by Sociedade Gestora doFundo de Pensões do Banco de Portugal, S.A..

Pensions paid in 1997 amounted to PTE5,995 million, accounting for +2.1 per cent of theamount paid in 1996.

The present value of liabilities totalled PTE122,196 million, as at 31st December 1997,increasing by PTE 4,914 million from 1996, i.e.,corresponding to +4.2 per cent.

The calculation of the liabilities of thePension Fund is subject to the provisions ofNotice No. 6/95 of the Banco de Portugal, whichlays down the regulatory framework for thecoverage and calculation of the liabilities withcredit institutions’ pension schemes; no changeswere recorded in the calculation assumptionsutilised in the assessments for the years 1995 and1996.

PAST SERVICE LIABILITIES

(PTE million)1995 1996 1997

Present value of pensions

in payment 83 414 83 080 83 680 Retired staff 77 249 76 966 76 958 Pensioners 6 165 6 114 6 722Past service liabilities 29 809 34 202 38 516

TOTAL 113 223 117 282 122 196

The value of the Pension Fund amountedto PTE 124,586 million, on 31 December 1997,increasing by PTE 8,267 million from 31 December1996, corresponding to +7.1 per cent.

As to the funding level, the Pension Fundrecorded a PTE 2,391 million surplus over totalliabilities at the end of the period under review.

This funding level determines a rate ofcoverage of past service liabilities and presentvalue of pension liabilities of 102.0 per cent.

4.8.3 Organisation and computerisation

Focused on the process of Europeanintegration and on the creation of the EuropeanSystem of Central Banks (ESCB), the DataProcessing and Information Department carriedout an objective study on the evolution trends ofthe several business areas of the European CentralBanks, which enabled to get a clear view of theseveral complexities to be faced in the near future.

Amongst the operational reorganisationeffort of the Bank, the complete restructuring of


the statistics and economic research areas werethe most important, with the creation of twoautonomous departments: the EconomicResearch Department (DEE) and the StatisticsDepartment (DDE).

Equally important were several initiatives— in which participated the Organisation andInformation Department and the HumanResources Management and DevelopmentDepartment together with other departmentsconcerned — aimed at improving the operationof the network of the Bank’s agencies, namely,the transfer of a large share of the functionsrelated to the Balance of Payments to the Oportobranch. The improvements in the electronic areawere particularly important, enabling the creationand provision of several access facilities, viz.,direct consultation by the agencies to theinformation systems on the termination of thecheque convention, credit incidents and liabilities;the electronic means available at the Oportobranch were upgraded and consolidated.

The installation of the internal e-mail wasvirtually extended to all individual workstations(96.2 per cent) and a restructuring andconsolidation of the internal post-offices andservice network was undertaken.

The INTRANET, launched at the end of1996, is currently an important internal means ofcommunication, enabling the access to a largenumber of very useful instruments (norms andinstructions, documentation data bases, economiclegislation data bases, press review, statisticalinformation data bases, statistical bulletin,bulletin board on information systems andtechnologies projects, information on humanresources management and development, phonedirectory, in addition to several other sundryand occasional informations).

In November 1997, the Banco de Portugalinaugurated its website in INTERNET.Culminating strong organisational and infra-structural efforts as well as of identification,stabilisation and information structuring, thisinstrument gives a decisive contribution to adirect, quick, user-friendly and economicalcommunication between the Bank and the usersof the information produced and made availablewithin the scope of the Bank’s institutionalfunctions.

The project involving the construction of astatistical information data base was completed,materialised in version 3 of InfoEstat and madeavailable to a large number of users, althoughworks are still planned for 1998 regarding facilitiesspecifically related to the ESCB’s reportingrequirements and to the correspondingstabilisation and consolidation.

A communications network between thefifteen Central Banks of the EU and the EMI wasalso implemented, being a central point of thetechnological infrastructure needed for the Bank’sparticipation in the ESCB. The teleconferenceservice was the first to become available throughthis network, making possible multiple facilitiesof phone conference, with strict safety, controland reliability conditions. This network will alsoprovide, in the near future, data reportingservices, supported by specific computerisedapplications, which are currently beingdeveloped at several stages by the Bank in co-operation with the said entities. Still within thescope of the European integration, a technologicalenvironment for the implementation of the SWIFTAlliance, was also made available, which willsupport the TARGET-Interlinking, a Trans-European system for the connection of nationalsystems to the Real Time Gross SettlementSystem.

Since the strategy for the future evolutionof the Central Computerised System of the Bancode Portugal has been outlined, the technicalimplementation was started, namely with thereplacement of the IBM 9021 - 340 and 9021 - 26processors with modern units of the IBM 9672 -R24 type, which are interconnected throughcoupling facilities, in order to operate in a ParallelSysplex environment. The automatic chargebalancing and the intrinsic operational resiliencecapacities associated with such configurationswill enable the achievement of much higheroperationality and safety conditions than thoseexisting before. The IBM 9121 - 521 processor,which was de-activated for the technologicalupgrading, was however kept, since it will beused initially for the construction of a remotedisaster recovery centre.

In the last quarter of 1997, an institutionalproject was launched for the preparation of aBusiness Continuity Plan, supported by arecovery plan in case of disaster.


Among the several information systemprojects pursued in 1997, the SITEME was theleading one; this system will reformulate theinformation system of the money markets andwill replace SISTEM (which has been operatingsince the end of the 1980s) in 1998. The system isbacked by modern technology — client / serverarchitecture, extranet network, softwarecommunications of the message orientedmiddleware type, graphic mode client interfaces.SITEME will enable the direct electroniccommunication of the participating institutionswith the Banco de Portugal, envisaging the mostdemanding needs arising from Europeanintegration, in terms of velocity and flexibility ofexecution.

A new support system for the preparationof the minutes of the Board of Directors’ meetingswas also launched. The final phase of GESPROC(a particularly important system for the operationof the Banking Supervision Department) andACRI (in the field of the co-ordination andinter-communication of the representatives ofthe Banco de Portugal to international meetingsand institutions) was implemented.

In short, eight Information SystemDevelopment Projects were concluded in 1997,and six new projects were started (in addition to19 projects started in 1996). 15,230 man-hourswere spent in the maintenance and developmentof computer applications, 38 opinions were issuedon the acquisition of new office equipment and206 form-related processes were developed. 1,946individual technical intervention requests werereceived and solved, corresponding to 1,165requests for assistance, 516 problems, 49 incidentsand 216 requests for the introduction of changes.Several individual technical support actions wereregistered, and the average intervention durationwas of 42 minutes (78 per cent of the interventionswas solved in less than 30 minutes and only 10per cent required more than one hour).

4.8.4 Information and documentation

Following the implementation of new in-formation systems, the paper versions of some ofthe Bank’s publications were replaced with elec-tronic versions, available via the INTERNET.The Banco de Portugal has currently two sites in

the INTERNET: www.bportugal.pt, with freeaccess, and www.cidadevirtual.pt/sibap, for thedisclosure of the Instructions of the Banco dePortugal. The access to the latter site requires adirect contract with an external telecommunica-tions operator.

The first site, in addition to data on theBank - history, functions and services —providesinformation of a quantitative and qualitativenature, which so far was only available on paper— statistics, rates, policies and research works onthe Portuguese economy — as well as some of theBank’s printed publications.

The second site — Systems of Instructionsof the Banco de Portugal (SIBAP) — contains adata base with the regulatory ordinances issuedby the Bank, the Notices, which are published inthe Official Gazette, and Circular Letters, whichhave a wider-ranging nature. In addition to thisinformation, daily updated, the Manual ofInstructions of the Bank, duly updated andannotated is also available via the INTERNET.

In parallel, periodical publications withupdated data on the Portuguese economy andmonographs on economic history continued tobe published on paper. Amongst them, wehighlight the updated re-edition of “O PapelMoeda em Portugal” (Paper Money in Portugal),which builds on and increases the informationcontained in the first edition, namely as regardsthe last issues of escudo banknotes.

The Library of the Banco de Portugal isnow equipped with a new reading room, atPortugal Building, open to the public, andproviding on-line access to the Bank’s data basesand to the Bank’s periodical publications andmonographs.

4.8.5 Legal services

The main intervention area of the LegalDepartment continued to be the delivery ofopinions on internal and external consultations,which totalled approximately 200. The largemajority of the consultations related to bankingand financial law. The examination andmonitoring of the Bank’s contracts was also veryimportant and started to be made in a more


regular and systematic way. In addition to theseconsultations, the appraisal of housing creditapplications (200 deeds and several relatedprocedures) and of labour accident processeswere permanently ensured.

The representation of the Banco de Portugalin legal fora continued to be ensured by the legalservices, which also continued to monitor theprocesses in which the Bank is directly orindirectly involved. The number of theseprocesses remained at modest levels, coveringcases within civil, labour and administrative law,and breaches of regulations, resulting from theapplication of the Legal System of CreditInstitutions and Financial Companies.

Legal experts took part in several internalworking groups and represented the Bank inCommunity and international technical groups.

As in previous years, several co-operationand interchange activities were held with nationaland foreign legal entities, in particular throughthe participation in symposiums and conferences,namely the one on “Tax Infraction and FinancialSystem, organised in co-operation with Institutode Direito Bancário and Instituto de Política e CiênciasCriminais. Also worthy of mention is theparticipation in the 5th Meeting of Banking Juristsof Portuguese-speaking African countries.

The activity of the legal services was alsofeatured, in the editorial field, by the publicationof the Minutes of the Congress on Banking Law,held in October 1996, within the scope of thecommemorations of the 150th Anniversary of theBanco de Portugal, and of the Minutes of thePortuguese and Brazilian Colloquium on BankSecrecy, organised in November 1996, with theco-operation of Instituto de Direito Bancário.

4.8.6 Internal Audit

In 1997, 27 audits were carried out in theHead Office, Oporto branch, and RegionalDelegations and Agencies, either within theDepartmental scope or, more significantly, withinthe operational scope.

Taking into account the need to ensure abetter control of potential problems related to the

integrity, confidentiality and safety ofinformation, and in view of the increasedcomplexity of the systems, audits were reinforcedin this area.

The experts of the Department participatedin several internal working groups of the Bankfor the monitoring of the information systemprojects, and continued to represent the Bank inworking groups within the framework of theEMI.

Finally, it should be mentioned that theDepartment was requested to intervene in auditsto the Mutual Agricultural Credit GuaranteeFund and to the Special Fund for theReconstruction of Chiado.

The Audit Department also promoted thecarrying out of the second “Internal AuditWorkshop”, which focused on the new challengesfaced by the audit function due to the evolutionof the risk and safety issues. Similarly to the first,the second Workshop was open to alldepartments of the Bank, as well as to officialsresponsible for inspections and internal audit ofcredit institutions. The second Workshop countedalso on the participation and active co-operationof the members of the TARGET Audit Group,which held for the first time one of its meetingsin Lisbon, at the head office of Banco de Portugal.

Finally, reference should be made to thefirst issue of the “Internal Audit Papers”, whichwill be regularly published, with the generalpurpose of disclosing information and reflectionmaterial on internal audit, not only for auditorsbut also for all those responsible for the internalorganisation.

4.8.7 Premises

The remodelling works of the interior ofthe 4th floor of the Head Office building, theexterior renovation of the agency of Coimbrabuilding as well as the remodelling andenlargement of the agency of Vila Real buildingwere completed. With the completion of theseworks, the regional network of the Bank isequipped with model state-of-the-arttechnologies, i.e., with the so-called “intelligent”technologies.


The project for the renovation and enlargementof the building of the Faro agency was made.Works started for the construction of a disasterrecovery centre in the Carregado Complexpremises.

The power supply to the vital areas of theBank was increased. The infrastructures for voice,data and image transmission between the headoffice, all the agencies and the Oporto branchwere concluded.


5 - FINANCIAL STATEMENTS

5.1 BALANCE SHEET

5.1.1 Balance sheet and explanatory notes

The financial position of the Banco de Portugal as at 31st December 1997 is shown on the balancesheet that follows. An explanation of the contents of the Accounts, which are not referred to in otherchapters of this Report, is also included


BANCO DE PORTUGAL BALANCE

ASSETS 1997 1996

Gold ................................................................................................ 951 429 403 913$00 811 595 445 196$90

Foreign assets

Deposits and other investments .......................................... 689 892 292 607$40 547 229 721 673$50Foreign securities ................................................................... 1 673 811 151 367$40 1 479 353 325 824$60

International institutions

International Monetary FundReserve position ...................................................... 77 621 385 791$00 72 012 805 183$00Special Drawing Rights .......................................... 19 676 500 086$30 15 331 719 052$30Other assets .............................................................. 2 171 026 844$00 1 477 761 579$00

European Monetary InstituteOfficial ECUs ........................................................... 405 312 363 544$00 353 039 429 951$30Gold and currency receivable from the EMI ....... 407 264 164 646$50 318 310 156 951$20Other assets .............................................................. 2 261 125 084$80 2 173 265 528$40

Other international organisations ............................... 2 878 607 535$10 2 538 960 286$10

Domestic credit

Credit to financial institutionsDiscount and rediscount ............................................... 500 000 000$00Repurchase agreements ................................................ 112 556 000 000$00 261 886 000 000$00

Credit to the StateCurrent accounts of the Autonomous Regions ......... 6 771 826 767$90 6 499 665 275$00Portuguese metal coin held in reserve ........................ 2 346 924 785$00 2 077 769 621$50

Domestic securities

Bonds issued by public entities ........................................... 160 323 939 000$00 195 041 012 000$00Financial holdings ................................................................. 1 646 645 420$00 2 646 627 075$00Other domestic securities ..................................................... 14 527 234 000$00 14 527 234 000$00

Cheques and other items in course of collection .................... 2 288 784$00 5 580 800$00

Fixed assets ................................................................................... 21 937 348 171$80 22 831 629 585$40

Other assets ................................................................................... 53 505 398 748$40 42 982 849 661$20

4 605 935 627 096$60 4 152 060 959 244$40

OFF-BALANCE SHEET ACCOUNTSCommitments to third parties ................................................ 579 964 027 986$40Foreign exchange and interest rate operations - purchases 111 587 513 815$00Foreign exchange and interest rate operations - sales ........ 110 949 837 772$50Securities and other items held in safe custody ................... 3 826 479 254 963$00Other off-balance sheet accounts ........................................... 1 303 457 309 467$80


SHEET AS AT 31 ST DECEMBER 1997

LIABILITIES 1997 1996

Notes in circulation ...................................................................... 873 483 328 000$00 937 030 122 500$00

Foreign liabilities

Non-resident credit institutions .......................................... 372 550 999 058$10 40 075 364 546$80

International institutionsInternational Monetary Fund

Allocation of Special Drawing Rights ................. 13 208 483 720$00 11 987 562 360$00European Monetary Institute - ECUs due .................. 405 312 363 544$00 353 039 429 951$30Other international institutions ................................... 477 402 397$00 229 802 239$00

Other non-residents ............................................................... 368 591 703$00 2 249 335 953$00

Liabilities towards residents

Residents' deposits - Domestic currencyDeposits of credit institutions and financial companies ... 412 774 808 455$20 370 914 223 782$10Public sector deposits .................................................... 76 485$50 43 927$50

Other liabilities towards residentsInvestments of credit institutions and financial companies 1 227 630 000 000$00 1 543 576 000 000$00Public Treasury investments ........................................ 486 676 512 206$40 523 958 214 444$00Sundry liabilities towards residents ........................... 112 698 135 137$00 11 324 833 046$40

Fluctuation in reserve valuations .............................................. 2 716 773 024$00 2 310 649 465$20

Adjustment accounts .................................................................... 16 445 628 848$90 18 427 967 949$00

Provisions ....................................................................................... 324 255 079 683$50 151 160 455 136$60

Reserves .......................................................................................... 355 349 353 943$50 184 681 381 952$60

Capital ............................................................................................. 200 000 000$00 200 000 000$00

Profit for the year ........................................................................ 1 788 090 890$50 895 571 990$90

4 605 935 627 096$60 4 152 060 959 244$40

HEAD OF THE ACCOUNTING AND PAYMENTS DEPARTMENT

Américo Sequeira


Gold is valued at 323.00 US dollars per troy ounce of fine gold, in accordance with Article 1 ofDecree-Law No. 229-H/88 of 4 July.

Gold reserves as at 31st December 1997 - amounting approximately to 499.757 tons of fine gold- were entered in the books at the price of PTE 1,903.78363 per gramme of fine gold. According to theaccounting rules utilised by Banco de Portugal, the gold involved in swap operations against foreigncurrency is not deducted from assets; the amount of foreign currency to be paid on the maturity dateof the operations is entered under liabilities. This liability is recorded in the item Foreign liabilities -Non-resident credit institutions, which amounted to 346,998.9 million escudos as at 31st December 1997.

Foreign exchange reserves are valued at the exchange rates of the Banco de Portugal prevailingon the last working day of December.

The item Deposits and other investments represents claims on non-residents, denominated indomestic or in foreign currencies, repayable on demand.

The item Foreign securities comprises:

— Short-term investments in securities .................................... 1 673 810 878 611$40— Other foreign securities ..................................................... 272 756$00

1 673 811 151 367$40

The item International Monetary Fund — Reserve position represents the Banco de Portugal’s netasset position with the IMF, which is broken down as follows:

SDR PTE

IMF Quota — Special Drawing Rights ........................... 137 647 952,16 34 098 283 829$00IMF Quota — Domestic currency ................................... 419 952 047,84 104 030 927 428$00

138 129 211 257$00

Deposits and current accounts with the IMF - Domestic currencyNo. 1 Account ................................................................................. 36 374 415 536$00)No. 2 Account ................................................................................. 4 649 633$00)Promissory notes ............................................................................ 25 000 000 000$00)

Adjustment of IMF holdings to be settled ................................................... (871 239 703$00)

60 507 825 466$00)


The item Special Drawing Rights represents 79,430,085 special drawing rights, the unit of accountof the International Monetary Fund.

The item Official ECUs shows the equivalent in escudos to ECU 2,004,224,733, which representsthe counterpart to the contributions to the EMI of the gold and US dollar reserves of the Bank, underthe terms of the swap agreement concluded with the EMI.

The item Gold and currency receivable from the EMI, showing amounts which correspond to thecounterpart of the official ECUs created, the administration of which has been delegated to the Bancode Portugal by the EMI, is broken down as follows:

— Gold (grammes of fine gold)......................... 124 946 415,60 237 870 940 646$50— US dollars ........................................................ 924 000 000,00 169 393 224 000$00

407 264 164 646$50

The item Other international organisations includes Foreign-currency demand deposits with the Bankfor International Settlements to the amount of PTE 115,050,653.10, and 8,000 shares (25% paid) of the BISheld by the Banco de Portugal, with a total face value of 20,000,000.00 Swiss gold francs andcorresponding to PTE 2,763,556,882.00.

The item Current accounts of the Autonomous Regions shows the balance on the current account ofthe Autonomous Region of Madeira opened with the Banco de Portugal under the terms of Article 5of Decree-Law No. 336/90 of 30 October.


The item Bonds issued by public entities, included in the aggregate DOMESTIC SECURITIES, isbroken down as follows:

Description Quantity Face Value Average PurchasePurchase Price Value

TREASURY BONDS - MEDIUM- AND LONG-TERM

1977 Treasury bonds - Nationalisations andExpropriations ......................................................................... 1 133 606 1 133 606 000$00 1 000$00 1 133 606 000$00

Redeemable domestic loan bonds-- Law No. 2/92 of 9 March ................................................... 12 419 252 124 192 520 000$00 10 000$00 124 192 520 000$00

BONDS ISSUED BY THE AUTONOMOUSREGION OF MADEIRA

Redeemable domestic loan bonds - Decree-Law No. 187/81- of 2 July and Executive Order of 22 December 1990 ..... 34 997 813 34 997 813 000$00 1 000$00 34 997 813 000$00

160 323 939 000$00

The item Financial holdings (after deduction of the respective provisions), including the Holdingin Finangeste, to the amount of PTE 1,459,000,000.00 registers also holdings in the Banco de Portugal’sPension Fund Managing Company and in VALORA.

The item Other domestic securities records the value of 14,527,234 bonds in PARTEST, Participações

do Estado — a State holding company — with a face value of PTE 1,000.00 each.


Excluding the sub-item Fixed assets in progress, in relation to which no depreciation was made -the item Fixed assets showed the following balances, after application of the rates of depreciationpermitted by tax authorities:

Assets Depreciations Net assets

LAND AND BUILDINGSLand.................................................................... 1 536 260 436$00 1 536 260 436$00Buildings ............................................................ 10 803 964 546$00 1 956 380 786$00 8 847 583 760$00Buildings used for welfare purposes ............. 637 310 659$00 38 469 295$00 598 841 364$00

EQUIPMENTOffice furniture and fittings ............................ 1 550 021 834$00 1 065 112 909$00 484 908 925$00Machinery and tools ........................................ 3 069 954 704$00 2 174 175 049$00 895 779 655$00Computer equipment ...................................... 5 451 712 928$00 3 908 853 743$00 1 542 859 185$00Premises ............................................................. 8 217 631 777$00 4 021 437 614$00 4 196 194 163$00Vehicles .............................................................. 593 632 854$00 427 788 589$00 165 844 265$00

MUSEUM AND ART COLLECTIONS .................. 1 065 516 964$00 1 065 516 964$00

OTHER FIXED ASSETSTangible ............................................................. 1 351 416 034$00 1 183 866 116$00 167 549 918$00Intangible ........................................................... 18 241 367$00 18 241 367$00

34 295 664 103$00 14 794 325 468$00 19 501 338 635$00

The sub-item Fixed assets in progress is broken down as follows:

LAND AND BUILDINGSLand.................................................................... 760 500$00Buildings ............................................................ 826 064 856$70Buildings used for welfare purposes ............. 75 408 019$80

EQUIPMENTOffice furniture and fittings ............................ 4 507 725$00Machinery and tools ........................................ 37 865 769$00Computer equipment ...................................... 37 544 043$00Premises ............................................................. 1 129 379 242$80

MUSEUM AND ART COLLECTIONS .................. 600 000$00

OTHER FIXED ASSETSOther tangible assets ........................................ 104 638 576$00

ADVANCES ................................................................ 219 240 804$50

2 436 009 536$80


The aggregate OTHER ASSETS comprises the following accounts:

— Debtors and other assets ............................................................ 46 074 234 770$00— Overdue domestic credit and Portuguese securities.............. 268 173 736$00— Income receivable ........................................................................ 19 394 561 739$50— Deferred costs .............................................................................. 11 474 629 627$00— Other internal and adjustment accounts .................................. 2 794 080 196$40— Provisions for domestic credit and other claims on residents .. (26 500 281 320$50)

53 505 398 748$40

*

Under LIABILITIES, the item Non-resident credit institutions, includes the balances on thefollowing accounts:

— Demand deposits of non-resident credit institution -- domestic currency ................................................................. 416 021 238$00

— Repurchase agreements on foreign securities -- foreign currency .................................................................... 25 136 081 698$70

— US dollars to be paid - gold swap operations ......................... 346 998 896 121$40

372 550 999 058$10

The item Allocation of Special Drawing Rights represents the liability towards the InternationalMonetary Fund arising from the allocation of a total of 53,320,000 special drawing rights.

The item European Monetary Institute - ECUs due represents the counterpart of the item OfficialECUs on the assets side of the balance sheet.

The item Other international institutions represents the Banco de Portugal’s liabilities as thedepository of the escudo holdings of the following international financial institutions:

— International Bank for Reconstruction and Development .... 8 271 442$00— African Development Bank........................................................ 31 268 370$00— African Development Fund ....................................................... 25 438$00— European Investment Bank ........................................................ 170 370 278$00— Bank for International Settlements ........................................... 1 753 001$00— Inter-American Development Bank .......................................... 92 089 868$00— Central Bank of West African States ......................................... 173 624 000$00

477 402 397$00


The item Other non-residents records the Banco de Portugal’s liabilities towards entities notincluded in the items referred to above.

The sub-item Deposits of credit institutions and financial companies includes chiefly deposits associatedwith compliance with reserve requirements, whose coefficient stands currently at 2 per cent.

The sub-item Public sector deposits includes the accounts of the Directorate-General of theTreasury as well as other public sector accounts.

The item Investments of credit institutions and financial companies includes the certificates ofdeposit issued by the Banco de Portugal, to the amount of PTE 1,200,180 million, as well as theliquidity placements by these entities on the Interbank Securities Market.

The item Public Treasury investments comprises the following accounts:

— Public Treasury - investment account - available resources . 478 711 022 000$00— Public Debt Settlement Fund - investment account ............... 7 965 490 206$40

486 676 512 206$40

The most significant component of the item Sundry liabilities towards residents is the balanceon the account Notes withdrawn from circulation — Bank’s own account to the amount ofPTE 111,304,375,370.00, which represents the Bank’s liability towards the holders, during theperiod in which banknotes can be exchanged. The high balance recorded at the end of 1997, is due tothe withdrawal from circulation, at the end of the year, of 4 plates of banknotes with the followingdenominations: 10,000, 5,000, 2,000 and 1,000 escudos.

The aggregate ADJUSTMENT ACCOUNTS includes:

— Costs payable ............................................................................... 15 698 000 151$70— Deferred income .......................................................................... 65 731 360$00— Other adjustment accounts ........................................................ 681 897 337$20

16 445 628 848$90


The aggregate PROVISIONS includes:

— Provisions for valuation change risks ............................................ 219 600 000 000$00— Provisions for valuation risks of foreign

currency securities ............................................................................ 46 000 000 000$00— Provisions for labour accident charges .......................................... 155 079 683$50— Provisions for other risks ................................................................. 58 500 000 000$00

324 255 079 683$50

The aggregate RESERVES includes:

— Legal reserve ...................................................................................... 7 531 276 342$70— Gold revaluation reserve .................................................................. 337 422 682 296$80— Other reserves .................................................................................... 10 395 395 304$00

355 349 353 943$50


5.1.2 Analysis of the balance sheet

The table below summarises changes relative to the previous year in the various aggregates ofthe Bank’s assets and liabilities. An overall positive change of PTE 453,875 million was recorded,corresponding to a 10.9 per cent increase.

PTE million1996 1997 Change

ASSETS

Gold ..................................................................................... 811 595 951 430 +139 835Deposits and other investments ...................................... 547 230 689 892 +142 662Foreign securities ............................................................... 1 479 353 1 673 811 +194 458Reserve position with the International Monetary Fund 72 013 77 621 +5 608Special Drawing Rights..................................................... 15 332 19 677 +4 345IMF - Other assets .............................................................. 1 478 2 171 +693Official ECUs ...................................................................... 353 039 405 312 +52 273Gold and currency receivable from the EMI.................. 318 310 407 264 +88 954EMI - Other assets .............................................................. 2 173 2 261 +88Other international organisations ................................... 2 539 2 879 +340Credit to financial institutions ......................................... 262 386 112 556 -149 830Credit to the State .............................................................. 8 577 9 119 +542Domestic securities ............................................................ 212 215 176 498 -35 717Cheques and other items in course of collection ........... 6 2 -4Other assets ......................................................................... 65 814 75 442 +9 628

Total ......................................... 4 152 060 4 605 935 +453 875

LIABILITIES

Notes in circulation ........................................................... 937 030 873 483 -63 547Non-resident credit institutions ...................................... 40 075 372 551 +332 476Allocation of special drawing rights ............................... 11 988 13 208 +1 220European Monetary Institute - ECUs due ...................... 353 039 405 312 +52 273Other non-residents' deposits .......................................... 2 479 846 -1 633Deposits of credit institutions and financial companies 370 914 412 775 +41 861Investments of credit institutions andfinancial companies........................................................... 1 543 576 1 227 630 -315 946Public Treasury investments ............................................ 523 958 486 677 -37 281Sundry liabilities towards residents ............................... 11 325 112 698 +101 373Other liabilities ................................................................... 20 739 19 163 -1 576Provisions ........................................................................... 151 160 324 255 +173 095Capital and reserves .......................................................... 184 881 355 549 +170 668Profit for the year ............................................................... 896 1 788 +892

Total ......................................... 4 152 060 4 605 935 +453 875


From the most significant changes the following should be highlighted:

— On the ASSETS side of the balance sheet:

— The item Gold showed a positive change of PTE 139,835 million, due to the rise in the exchangerate of the US dollar, in which currency the basis-price of its valuation is denominated;

— Deposits and other investments increased by PTE 142,662 million, chiefly reflecting a rise inshort-term placements in foreign currency.

— The item Foreign securities increased by PTE 194,458 million, chiefly due to a rise in short-term placements in foreign public debt securities — Treasury bonds in foreign currency.

— The aggregate Credit to financial institutions decreased by PTE 149,830 million fully due to areduction in the supply of liquidity to financial institutions through repo operations.

— On the LIABILITIES side of the balance sheet:

— The item Notes in circulation decreased by PTE 63,547 million, chiefly reflecting thebanknotes withdrawn from circulation, which on 31 December 1997 had not yet been presented tothe Bank for payment. The liability arising from this operation is entered under Other liabilitiestowards residents, which therefore shows a PTE 101,373 million increase.

—The significant rise by PTE 332,476 million in the item Non-resident credit institutions ischiefly due to an increase in the Bank’s liability on account of gold swap operations against foreigncurrency.

—The PTE 315,946 million decrease recorded in the item Investments of credit institutionsand financial companies corresponds, in its near entirety, to the redemption of Certificates of Depositin the 1997 fiscal year.

—The PTE 173,095 million increase in Provisions, reflects the consolidation of the followingentries: replacement of provisions for overall credit risks (PTE 989.7 million) and increase in thefollowing provisions: provisions for valuation change risks (PTE 97,539.2 million); provisions forvaluation risks of foreign currency securities (PTE 38,000 million); provisions for labour accidentcharges (PTE 45 million); and provisions for other risks (PTE 38,500 million).

—The PTE 170,668 million rise in Reserves is chiefly due to the PTE 169,772 million increasein the gold revaluation reserve. After this increase, the “book-value” of gold — official value less goldrevaluation reserve — reflects a safety margin of 20 per cent in relation to the market value.


The relationship between the Banco de Portugal currency issue and the corresponding coverageassets, in accordance with the provisions of Articles 15 to 17 of the Bank’s Organic Law is shown inthe table below. The coverage rate of the issue (1,204) increased by 9.5 per cent, reflecting theconsolidation of the changes in the contribution recorded by Net foreign exchange reserves(+15.1 per cent) and by Other cover of the issue (-4.7 per cent).

PTE millionChange in the contribution

to the coveragerate (%)

Notes in circulation ............................................................................ 937 030 873 483

Foreign liabilities - Domestic currency ............................................ 2 875 1 262Liabilities towards residents - Domestic currency ......................... 2 449 770 2 239 777

Currency issue of the Bank (A) ....................... 3 389 675 3 114 522

Gold (1) ................................................................................................. 811 595 951 429 +6,6Foreign assets

Deposits and other investments ............................................ 547 230 689 892 +6,0Foreign securities ..................................................................... 1 479 353 1 673 811 +10,1International institutions

IMF - reserve position.................................................. 72 013 77 621 +0,4Special drawing rights................................................. 15 332 19 677 +0,2IMF - other assets ......................................................... 1 478 2 171EMI - official ECUs ...................................................... 353 039 405 312 +2,6EMI - other assets ......................................................... 2 173 2 261Other international organisations.............................. 2 539 2 879

2 473 157 2 873 624 +19,3

Foreign currency liability .................................................................. -39 683 -372 135 -10,8(2) 2 433 474 2 501 489 +8,5

Net foreign exchange reserves (1+2)(B) ......... 3 245 069 3 452 918 +15,1

Credit to financial institutions .......................................................... 262 386 112 556 -4,1Credit to the State ............................................................................... 8 577 9 119Domestic securities ............................................................................. 212 215 176 498 -0,6Cheques and other items in course of collection ........................... 6 2

Other cover of the issue (C) ............................. 483 184 298 175 -4,7

Reserves and other cover of the issue (B+C) 3 728 253 3 751 093 +10,5

Excess cover of the issue (B+C-A) .................. 338 578 636 571

Cumulative allocation of special drawing rights ........................... 11 988 13 208

EXCESS ................................................... 326 590 623 363

Coverage rate of the currency issue (––––––––––) .................................... 1,100 1,204 9,5

31/12/96 31/12/97

B+CA


5.2 RESULTS

5.2.1 Profit and loss account for the year

Details of the Banco de Portugal’s results for the year ended on 31st December 1997 are given inthe “Profit and Loss Account” below.

DEBIT PTE

INTEREST AND EQUIVALENT COSTS ......................................................................................... 95 078 179 208$30

Foreign liabilities .......................................................................................................................... 9 397 545 378$60

Domestic liabilities ....................................................................................................................... 85 680 633 829$70

Liquidity investments of credit institutions operating

in Portugal ................................................................................. 74 183 291 121$90

General Government investments .............................................. 11 497 342 707$80

COMMISSIONS AND OTHER BANKING COSTS ....................................................................... 3 237 041 165$10

Interest rate subsidies .................................................................................................................. 2 166 615 884$70

Commissions and other banking costs ...................................................................................... 1 070 425 280$40

LOSSES ON FINANCIAL OPERATIONS ....................................................................................... 4 171 160 712$30

Operations on other foreign assets ............................................................................................ 4 171 160 712$30

PROVISIONS FOR BANKING RISKS ........................................................................................... 77 924 672 573$00

COST OF ISSUING AND WITHDRAWING BANKNOTES ........................................................ 374 589 070$00

GENERAL ADMINISTRATIVE EXPENDITURE .......................................................................... 23 098 000 260$40

Staff costs ...................................................................................................................................... 15 321 018 803$10

Remuneration of the members of the Board of Directores and

Board of Auditors ...................................................................... 201 439 893$00

Employees' remuneration ............................................................ 9 897 216 352$90

Compulsory social charges .......................................................... 3 944 596 504$00

Voluntary social charges .............................................................. 1 059 155 491$70

Other ................................................................................................ 218 610 561$50

Suplies from third parties ............................................................................................................ 640 068 451$50

Services from third parties .......................................................................................................... 3 826 179 523$90

Depreciation for the year ............................................................................................................. 2 698 459 476$00

Provisions ...................................................................................................................................... 51 460 946$00

Taxes ............................................................................................................................................... 83 332 954$00

Other costs and losses .................................................................................................................. 477 480 105$90

EXTRAORDINARY LOSSES ............................................................................................................. 663 465 511$80

TAX ON PROFITS FOR THE YEAR ................................................................................................. 37 040 627$00

RESULT FOR THE YEAR................................................................................................................... 1 788 090 890$50

TOTAL ..................................................................................................... 206 372 240 018$40


CREDIT PTE

INTEREST INCOME AND EQUIVALENT.................................................................................................................. 131 305 684 496$20

Gold operations ................................................................................................................... 1 474 518 013$30

External operations ............................................................................................................. 114 141 927 111$40

Lending to credit institutions operating in Portugal ...................................................... 6 606 656 169$90

Domestic securities .............................................................................................................. 8 388 155 190$80

Other .................................................................................................................................. 694 428 010$80

INCOME FROM SECURITIES ....................................................................................................................................... 286 382 672$00

INCOME FROM FINANCIAL OPERATIONS ............................................................................................................ 69 346 343 958$80

Gold and foreign exchange operations ............................................................................ 69 346 343 958$80

REPLACEMENT OF PROVISIONS .............................................................................................................................. 2 327 773 366$00

COMMISSIONS AND OTHER INCOME AND PROFITS ......................................................................................... 706 013 324$90

EXTRAORDINARY GAINS............................................................................................................................................ 2 400 042 200$50

TOTAL .......................................................................................................... 206 372 240 018$40

HEAD OF THE ACCOUNTING AND PAYMENTS DEPARTMENT

Américo Sequeira


5.2.2 Analysis of the profit and loss account

The Banco de Portugal’s result for 1997 was positive to the amount of PTE 1,788.1 million,representing an increase of PTE 892.5 million on the 1996 result.

The table “Comparative synopsis of results”, appearing below, shows the trend of the majorcomponents of the “Profit and Loss Account” for 1996 and 1997.

Under INCOME AND GAINS, which shows an overall increase of PTE 20,799.5 million, thefollowing key developments are to be noted:

— An increase of PTE 2,886.4 million in Interest income and equivalent, fully justified by the gainsobtained from foreign operations, due to the increase in the average balance on deposits andplacements in foreign currency securities;

— An increase of PTE 22,596.5 million in Income from financial operations, chiefly due to a rise inthe exchange rate of the US dollar, a currency with a significant share in the Bank’s foreignexchange position.


Under COSTS AND LOSSES, which showed an overall increase of PTE 19,907 million, thefollowing changes should be noted:

— A reduction of PTE 10,746.2 million in Interest income and equivalent, reflecting chiefly adecline in the interest rates on liquidity investments of credit institutions operating inPortugal as well as on General Government investments and secondarily, the reduction ofthe respective average balances, with particular emphasis on Certificates of Deposit;

— An absolute change of PTE 4,171.2 million in Losses on financial operations, was chiefly due tothe re-estimation, at market prices, of the portfolio of foreign currency securities;

— A rise of PTE 33,642.4 million in the item Provisions for banking risks, chiefly warranted bythe increase in provisions referred to in the explanatory note on the balance sheetitem “Provisions”.


COMPARATIVE SYNOPSIS OF RESULTS

PTE million

Difference Amount %

INCOME AND GAINS

INTEREST INCOME AND EQUIVALENT........................ 128 419.3 131 305.7 +2 886.4 +2.2

INCOME FROM SECURITIES ............................................. 278.6 286.4 +7.8 +2.8

PROFITS ON FINANCIAL OPERATIONS ........................ 46 749.8 69 346.3 +22 596.5 +48.3

REPLACEMENT OF PROVISIONS ..................................... 5 156.5 2 327.8 -2 828.7 -54.9

COMMISSIONS AND OTHER INCOME AND PROFITS 783.9 706.0 -77.9 -9.9

EXTRAORDINARY GAINS .................................................. 4 184.6 2 400.0 -1 784.6 -42.6

TOTAL INCOME AND GAINS ................... 185 572.7 206 372.2 +20 799.5 +11.2

COSTS AND LOSSES

INTEREST COSTS AND EQUIVALENT ............................ 105 824.4 95 078.2 -10 746.2 -10.2

COMMISSIONS AND OTHER BANKING COSTS .......... 3 688.2 3 237.0 -451.2 -12.2

LOSSES ON FINANCIAL OPERATIONS .......................... 4 171.2 +4 171.2

PROVISIONS FOR BANKING RISKS ................................. 44 282.3 77 924.7 +33 642.4 +76.0

COST OF ISSUING AND WITHDRAWING

BANKNOTES ..................................................................... 521.9 374.6 -147.3 -28.2

GENERAL ADMINISTRATIVE COSTS ............................. 23 291.8 23 098.0 -193.8 -0.8

EXTRAORDINARY LOSSES ................................................ 7 041.0 663.4 -6 377.6 -90.6

TAX ON PROFITS FOR THE YEAR .................................... 27.5 37.0 +9.5 +34.5

TOTAL COSTS AND LOSSES ...................... 184 677.1 204 584.1 +19 907.0 +10.8

RESULT FOR THE YEAR ...................................... 895.6 1 788.1 +892.5 +99.7

1996 1997


5.3 PROPOSAL FOR THE DISTRIBUTION OF RESULTS

1996 profits, to the amount of PTE 895,571,990.90, were distributed as follows:

10% to the legal reserve .............................................................. 89 557 199$0010% to other reserves .................................................................. 89 557 199$0080% to other reserves, pursuant to the provisions of Article 63,

No. 2, c) of the Bank’s Organic Law ............................. 716 457 592$90

Pursuant to the provisions of Article 63, No. 2 of the Bank’s Organic Law, 1997 profits shallbe distributed as follows:

10% to the legal reserve (paragraph a)) ................................... 178 809 089$1010% to other reserves (paragraph b)) ....................................... 178 809 089$10

Pursuant to the provisions of paragraph c), the remainder shall be distributed as follows:

50% to the State, as dividends ................................................... 715 236 356$0050% to other reserves of the Bank ............................................. 715 236 356$30

Lisbon, 19th March 1998

BOARD OF DIRECTORS

GovernorAntónio José Fernandes de Sousa

Vice-GovernorsAntónio Manuel Martins Pereira MartaLuís Manuel Moreira Campos e Cunha

DirectorsAbel Moreira MateusBernardino Manuel da Costa PereiraDiogo José Paredes Leite de CamposCarlos Alberto de Oliveira Cruz


6 - REPORT AND OPINION OF THE BOARD OF AUDITORS

In accordance with the provisions laid down in the Organic Law of the Banco de Portugal, theBoard of Auditors submits its Report and issues its Opinion on the Report of the Board of Directors andthe Balance Sheet and Accounts for the year ended on 31st December 1997, which were approved bythe Board of Directors, at its meeting of 19th March 1998.

1. The Board of Auditors, in use of the powers conferred on it, and similarly to past years,monitored the day-to-day operation of the Bank, through the participation, without votingrights, of its members in the ordinary weekly meetings of the Board of Directors and throughthe documentation produced by the Departments of the Bank, in particular, by the Accountingand Payments Department, by the Audit Department, and by the Planning OperationalGroup, as well as through the information supplied by the Board of Directors and by theBank’s services.

Based on the accounting data, the Board of Auditors also monitored the management, theassets and financial position of the Bank.

The checks of existing assets and valuables held by the agencies continued to be made by theofficials in charge and by the Audit Department, with prior programming and on a randombasis. The Board of Auditors monitored the inspections carried out at the Bank’s head officein Lisbon, at its Oporto branch and in the Carregado complex.


With respect to the increase in the means of control, the work developed by the AuditDepartment should be highlighted as regards the survey and appraisal of procedures, aimedat analysing as comprehensively as possible the overall operation of the Bank.

The Board of Auditors appraised, at its regular monthly or at its extraordinary meetings, datareported to it, preparing working documents and issuing opinions or making recommenda-tions, whenever necessary.

The Board of Auditors also appraised and issued its opinion on the Operating Budget of theBank for the year 1998.

In addition to the functions entrusted to it by the Organic Law of the Banco de Portugal, theBoard of Auditors, pursuant to the provisions of specific legislation, continued to monitor theoperation of the Mutual Agricultural Credit Guarantee Fund, the Special Fund for theReconstruction of Chiado (FEARC) and of the Deposit Guarantee Fund. The Board alsoissued its opinion on the Reports and Accounts of these institutions.

2. The Report of the Board of Directors contains detailed information on the Bank’s activitiesas well as on the Balance Sheet and Accounts for the year 1997.

The analysis of the Balance Sheet shows that there was an overall positive change ofPTE 453,875 million when compared with the close of the 1996 fiscal year.

The main contributory items to that result were:

a) On the Assets side:

— An increase of PTE 139,835 million in the item “Gold” due to a rise in the US dollarquotation;

— An increase of PTE 337,120 million in the total of the items “Deposits and otherinvestments” and “Foreign securities”, resulting from an increase in investments inforeign currency;

— A decrease of PTE 149,830 million in the item “Credit to financial institutions” due toliquidity injection operations associated with repurchase agreements.

b) On the Liabilities side:

— A decrease of PTE 63,547 million in the volume of banknotes in circulation largely due tothe value of banknotes withdrawn from circulation and which have not yet beenpresented to the Bank for payment. The liability derived from this operation is enteredunder “Sundry liabilities towards residents”, which recorded a positive change of PTE101,373 million;

— An increase of PTE 332,476 million in the item “Non-resident credit institutions” chieflydue to the carrying out of gold swap operations against foreign currency with an ensuingincrease in the Bank’s liabilities;


— A decrease of PTE 315,946 million in the item “Deposits of credit institutions and financialcompanies” as a consequence of the redemption of “Certificates of Deposit” during theyear under review;

— An increase of PTE 173,095 million in the item “Provisions” due to the re-establishmentof or increase in the Bank’s provisions, particularly provisions for valuation risks, whichwere raised by PTE 97,539 million, in compliance with the minimum limit legally set;

— An increase of PTE 170,668 million in the item “Reserves”, with a PTE 169,772 millionincrease in the gold revaluation reserve. After this increase, the book-value of “gold”(official value less “Gold Revaluation Reserve”) reflects a safety margin of 20 per cent.

The coverage rate of the currency issue increased by 9.5 per cent in 1997 against 2.6 per cent in1996. This was chiefly due to a rise in “Net foreign exchange reserves”.

As regards the “Explanatory notes”, with respect to Assets it should be noted that:

— “Gold”, totalling 499.757 tons of fine gold (not including 124.946 tons earmarked for theEMI), was valued at PTE 951,429 million, on the basis of USD 323 per troy ounce, inaccordance with Article 1 of Decree-Law No. 229-H/88 of 4 July;

— With respect to “Foreign assets”, largely representing short-term operations, the items“Deposits and other investments” and “Foreign securities” as a whole totalled PTE2,363,703 million.

— As regards Liabilities, reference should be made to “Investments of credit institutionsand financial companies”, which totalled PTE 1,227,630 million, accounting for a PTE315,946 million decrease from 1996.

As already referred to above, the PTE 332,476 million increase in the item “Non-residentcredit institutions” is a direct consequence of swap operations.

Likewise, the items “Provisions” and “Reserves” have undergone some adjustments inorder to cover more adequately current requirements.

3. In 1997, the Banco de Portugal recorded a positive result of PTE 1,788.1 million, virtuallydoubling the result for 1996. The “Comparative synopsis of results” for 1996 and 1997 showsthe positions and changes recorded by the several items, leading to the final result.

The favourable evolution of the Bank’s foreign exchange position in the year under reviewtogether with the gradual fall of the interest rates on liquidity investments by creditinstitutions, were the major contributory factors to the result for the year.

At the close of the 1997 fiscal year, the item “Income and gains” recorded an overall increaseof PTE 20,800 million against a PTE 19,907 million rise in “Costs and losses”.


4. As regards the application of 1997 results, the Board of Directors proposes the followingdistribution:

- 10% to the legal reserve;

- 10% to other reserves.

The remainder shall be distributed as follows:

- 50% to the State, as dividends;

- 50% to other reserves of the Bank.

5. During the 1997 fiscal year, preparatory works were undertaken which led to the publicationof Law No. 5/98 of 31 January, which promulgated the new Organic Law of the Banco dePortugal, envisaging its integration in the European System of Central Banks. With thepublication of this Law some of the former provisions of the Organic Law were amended inorder to increase the autonomy of Banco de Portugal as the Central Bank.

Pursuant to the new Organic Law, the Banco de Portugal will have a new Chart of Accounts,which will be approved by the Minister of Finance.

6. In our opinion:

a) On the basis of analyses carried out and the information obtained, the Board of Auditorsraises no objection to the approval of the 1997 Balance Sheet and Accounts nor to theproposal for the distribution of profits.

b) The Board of Auditors wishes to express to the Governor, to the Board of Directors andto the staff of the Bank its appreciation of the collaboration given.

Lisbon, 26th March 1998

THE BOARD OF AUDITORS

Emílio Rui da Veiga Peixoto Vilar

Rui José da Conceição Nunes

Modesto Teixeira Alves

António Miranda

annual report - 1997 · 2016. 10. 11. · the es cudo re mained quite sta ble within the ex change...

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