Bloomberg News

Portugal Must Strengthen Spending Controls, Cut Waste, IMF Says

September 13, 2011

Sept. 13 (Bloomberg) -- Portugal needs to improve control over expenditure and cut spending to meet its budget-deficit targets as it aims to regain access to bond markets in 2013, the International Monetary Fund said.

“Fiscal targets under the program remain unchanged, but there is a need to strengthen spending control and reduce wasteful expenditure,” the Washington-based lender said in a staff report on its first review of the country’s financial aid program. “Faced with expenditure slippages, the new government was proactive in announcing offsetting measures upon taking office. The ambitious program is broadly on track, and the new government’s strong commitment is encouraging.”

Prime Minister Pedro Passos Coelho is implementing austerity measures to meet the terms of a 78 billion-euro ($107 billion) aid plan from the European Union and the IMF. The government has announced a one-time income-tax surcharge to help cover a budget shortfall this year. As borrowing costs surged, Portugal followed Greece and Ireland in April in seeking a bailout.

“We are particularly pleased with the government’s determination to accelerate reforms,” Poul Thomsen, head of the IMF mission in Portugal, said on a conference call today.

German Chancellor Angela Merkel today said Greece is taking the right steps to get its next bailout payment, warning against allowing a default because of the risk of contagion for other euro-area countries. An “uncontrolled insolvency” would further roil markets spooked by the prospect of a Greek default, she said.

“The global market turmoil has heightened risk aversion, and funding problems could intensify, especially for banks,” the IMF staff report on Portugal said. “Even if domestic adjustment continues in line with commitments under the program, there could be disruptive spillovers from deepening problems in Greece.”

The Portuguese government forecasts the economy will contract 2.2 percent this year and 1.8 percent next year, before expanding 1.2 percent in 2013. The Bank of Portugal revised its outlook on July 12, forecasting gross domestic product to shrink 2 percent this year and 1.8 percent in 2012, after growth of 1.3 percent in 2010.

With the austerity measures the government aims to trim the budget deficit from 5.9 percent of GDP this year to the EU ceiling of 3 percent in 2013 and to 0.5 percent in 2015. The government predicts public debt of 100.8 percent of GDP this year, rising to a peak of 106.8 percent in 2013, before it will start to decline.

“Portugal should regain access to sovereign medium- and long-term debt markets by 2013, assuming a sustained track record of strong policy implementation,” the IMF staff report said. “While turmoil in international capital markets has heightened contagion risks, revised staff projections suggest that public debt will still stabilize in 2013, in line with original program projections.”

--Editor: Alan Crosby

To contact the reporter on this story: Joao Lima in Lisbon at jlima1@bloomberg.net.

To contact the editors responsible for this story: Tim Quinson at tquinson@bloomberg.net


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