Bloomberg News

Portugal Says GDP to Shrink More Than Earlier Forecast

October 17, 2011

(Adds spending cuts relative to GDP in ninth paragraph, financing needs in 13th and minister’s comment in last. For more on the euro crisis, click on {EXT4 <GO>})

Oct. 17 (Bloomberg) -- The Portuguese government forecast the economy will contract more than previously estimated next year as it implements more spending cuts to meet budget deficit targets.

Gross domestic product will shrink 2.8 percent next year after a contraction of 1.9 percent this year, the Finance Ministry said in a statement about the 2012 budget proposal handed to reporters in Lisbon today. The government had previously forecast the economy would contract 2.2 percent to 2.3 percent in 2012. The Finance Ministry estimates the unemployment rate will reach 13.4 percent in 2012.

“The options followed in the 2012 budget are necessary to protect the economy and society against incalculable risks,” Finance Minister Vitor Gaspar said at a press conference. “The level of economic activity will recover in 2013 and the unemployment rate will start to decline.”

Prime Minister Pedro Passos Coelho is cutting spending and raising taxes to meet the terms of a 78 billion-euro ($107 billion) aid plan from the European Union and the International Monetary Fund. As the country’s borrowing costs surged, Portugal followed Greece and Ireland in April in seeking a bailout.

Doing More

To meet its budget goals, Portugal has to do more than it initially planned, Passos Coelho said on Oct. 13. The overrun in carrying out the 2011 budget, relative to the financial aid program’s forecast, exceeds 3 billion euros, he said.

“Portuguese authorities are committed from the start to taking the additional measures that are necessary to meet the targets of the aid program,” Gaspar said today.

Portugal is “on track” to meet its 2011 deficit goal, a team of EU and IMF inspectors said on Aug. 12. The IMF said in a Sept. 13 report that the government needs to improve control over expenditure and cut spending to meet targets as it seeks to regain access to bond markets in 2013.

Summer, Christmas Payments

The 2012 budget includes a plan to eliminate the summer and Christmas salary payments for state workers earning more than 1,000 euros a month. As mentioned in the financial aid program, tax deductions will be reduced and the government plans to increase the value-added tax rate of some goods.

Spending cuts in 2012 represent 4.4 percent of GDP and revenue increases represent 1.7 percent of GDP, according to a statement handed in to reporters in Lisbon today.

The austerity measures are intended to help the government meet its goal of trimming the budget deficit from 9.8 percent of GDP in 2010 to 5.9 percent in 2011, to 4.5 percent in 2012, and to the EU ceiling of 3 percent in 2013. Debt will reach 100.8 percent of GDP this year and peak at 106.8 percent in 2013 before starting to decline, the government predicted on Aug. 31. Debt was 93.3 percent of GDP in 2010.

2011 Forecast

The 2011 forecast for a 1.9 percent GDP decline compares with a previous prediction for a 2.2 percent drop. An increase in exports kept GDP unchanged in April through June from the previous three months, following two quarterly contractions.

The 2012 budget proposal will be discussed and voted on in parliament. The coalition government is backed by the Social Democrats and the People’s Party, which combined have a majority of seats in the legislature.

The government expects net financing needs of 17.4 billion euros in 2012, 1.3 billion euros less than last year. Financing needs will include 8 billion euros related to a capital buffer for the country’s banks, according to the document of the budget proposal.

Privatizations are expected to raise 4 billion euros for the state in 2012, the ministry said. The government next year plans to sell airline TAP - Transportes Aereos Portugueses SA and airport manager ANA - Aeroportos de Portugal and the freight branch of CP - Comboios de Portugal SA and postal operator CTT - Correios de Portugal.

It’s also selling stakes this year in power company EDP -Energias de Portugal SA and power-grid operator REN - Redes Energeticas SA.

Portugal won’t need to renegotiate its debt, Gaspar said in an interview on RTP1 television station. “I maintain the conviction that we will carry out the bailout program scrupulously” and that will allow Portugal to return to markets, Gaspar said.

--With assistance from Henrique Almeida in Lisbon. Editors: Jim Silver, Gail DeGeorge.

To contact the reporters on this story: Anabela Reis in Lisbon at areis1@bloomberg.net; 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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