Bloomberg News

Portugal Forecasts Deeper GDP Contraction, Wider Deficits

March 15, 2013

Portugal’s government forecasts the economy will shrink twice as much as previously estimated this year as the so-called troika gave its blessing to wider targets for the country’s budget deficit.

The government targets a deficit equivalent to 5.5 percent of gross domestic product in 2013, 4 percent in 2014 and below the European Union’s 3 percent limit in 2015, when it aims for a 2.5 percent gap, Finance Minister Vitor Gaspar said. GDP will contract 2.3 percent this year before growing 0.6 percent next year. The jobless rate will climb to 18.2 percent in 2013 and 18.5 percent in 2014.

“The recession is serious and unemployment is worrying,” Gaspar told journalists in Lisbon today. “It was a difficult and long review.” The new targets, contained in the seventh review of the country’s bailout program that began on Feb. 25, still require approval from EU finance ministers, he said.

Prime Minister Pedro Passos Coelho is battling rising joblessness and lower demand from European trading partners as he raises taxes to meet the terms of a 78 billion-euro ($102 billion) aid plan from the EU and the International Monetary Fund. Portugal was given more time in September to narrow its budget gap after tax revenue missed forecasts.

GDP contracted for a ninth straight quarter in the three months through December as exports dropped with the euro area’s deepening recession, and Portugal’s jobless rate rose to a euro- era record of 16.9 percent.

Spending Cuts

Portugal previously forecast GDP would shrink 1 percent this year before expanding 0.8 percent next year, and predicted joblessness of 16.4 percent in 2013. It earlier had a deficit target of 4.5 percent for this year and 2.5 percent for 2014. The government planned to cut spending by 4 billion euros through 2014, when it forecast debt would peak at 122.3 percent of GDP.

The government now plans to carry out those cuts in the three years through 2015 and forecasts debt reach 123.7 percent of GDP in 2014, said Carlos Moedas, the secretary of state to the prime minister. The sale of postal operator CTT-Correios de Portugal will begin in the second quarter and the sales of rail freight company CP Carga and carrier TAP SGPS SA will start by the end of the year.

The shortfall as measured for the EU’s excessive deficit procedure may have been equivalent to 6.6 percent of GDP in 2012 due to one-time items and the view of the EU’s statistics office that revenue from the sale of airport operator ANA-Aeroportos de Portugal SA can’t be used to calculate the gap, Gaspar said. The 2012 deficit was 4.9 percent according to the measurement used in the bailout program.

More Time

“The end-2012 fiscal deficit target was met,” the IMF said today in a joint statement with the European Commission and the European Central Bank. “The weaker growth prospects require an adjustment of the fiscal deficit path.”

The commission will propose to EU governments an extension to 2015 of the deadline for the correction of Portugal’s excessive deficit, Economic and Monetary Affairs Commissioner Olli Rehn said in a statement today.

EU finance ministers may next month commit to giving Ireland and Portugal more time to repay bailout loans, Rehn said on March 4. Both countries received loans from two different programs: the EU-wide European Financial Stabilization Mechanism and the euro-area’s temporary firewall, the European Financial Stability Facility.

‘Best Prospects’

“Continued strong program implementation and the envisaged adjustment of the maturities of EFSF and EFSM loans to smooth the debt redemption profile will support the government’s return to full market financing during 2013,” the EU, the ECB and the IMF said today. Portugal on Jan. 23 sold 2.5 billion euros of five-year notes through banks, its first offering of bonds since requesting a bailout in April 2011.

Gaspar said conditions are favorable for the sale of more securities. “Conditions seem propitious for the possibility of issuing bonds in the next few weeks,” he said. “At this moment we have the best prospects for accessing bond markets that we have had in the context of this program.”

The difference in yield that investors demand to hold Portugal’s 10-year bonds instead of German bunds has narrowed to 4.48 percentage points from 16 percentage points on Jan. 31, 2012. In January 2012, Standard & Poor’s followed Fitch Ratings and Moody’s Investors Service in cutting Portugal’s credit rating to non-investment grade.

The seventh review may conclude in May, allowing for the disbursement of 2 billion euros from Portugal’s rescue package, according to the statement on the IMF’s website. The next review is due to take place in May.

To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net; Anabela Reis in Lisbon at areis1@bloomberg.net

To contact the editor responsible for this story: Stephen Foxwell at sfoxwell@bloomberg.net


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