Portugal has been praised by the International Monetary Fund for the progress it has made towards regaining access to international debt markets. The IMF has also just approved payment of the next part of the rescue loan for Portugal, worth some €838.8 million.
The approval came as Lisbon has successfully completed its latest review. In spite of the praise given out, the IMF has also warned challenges still remain, and the Portuguese central bank recently forecast the economy would shrink by 1.9% this year which is slightly more than had been previously predicted.
Lisbon is due to gain access to the international debt markets this autumn, but is already considering an early return to the medium and long-term bond markets as it’s been buoyed up by the recent success of the Treasury bill auction. Last September the troika agreed to give Portugal an additional year to meet its deficit targets, as the budget deficit target last year was increased to 5% of national output, while the target for this year was increased from 3% to 4.5%.
This resulted in the government making stringent budget cuts as part of the necessary reforms. Although recent progress has been extremely good, the IMF is still warning that the Portuguese government needs to make sure structural reforms are pursued and met, as this is the only way to ensure long-term growth and employment, and an improvement in the country’s competitiveness. The IMF conceded that Portugal will need continued external support from the euro zone in order to achieve success.
Last autumn the Portuguese government launched an initiative to try to cut €4 billion worth of public spending through the state reforms, and asked the international Monetary Fund for help. The government has now released a report from the IMF, but it’s not likely to be very popular.
It suggests that large-scale layoffs should be made within the public sector, and has also suggested reductions in pensions, unemployment and health benefits and education to try to save money. Although these cuts are likely to be very unpopular, it’s quite clear the welfare state isn’t sustainable. The aim of these spending cuts is to prepare the public sector within Portugal for the expiry of the bailout from the IMF and the European Union.
Although Portugal received a €78 billion bailout, under the terms of the rescue plan it is scheduled to return to financing itself within the bond market in the second half of this year. However opposition to the Portuguese bailout has increased considerably during the past few months, and it’s likely any of these proposed cuts would further inflame the situation. Many Portuguese already feel the welfare state has been negatively impacted by austerity measures.
These cuts weren’t originally part of the country’s bailout plan which was signed in 2011, but are likely to be evaluated by the IMF and the European Union next month. One of the possible measures suggested by the IMF is a reduction in the number of civil servants of between 10% and 20% which could save up to €2.7 billion. Cutting pensions by 10% would save another €2.3 billion.
A plan worth €6.5 million has been approved to help boost tourism within the Algarve area. Around €4.3 million is to be invested in direct flights to Faro airport. These direct flights are to be promoted through joint campaigns with travel operators and airlines, and the general intention is to promote the Algarve to strategic markets worldwide next year.
These include Canada, France, Austria and Scandinavia as well as more traditional markets such as Britain, Belgium, Ireland and Germany. There is also to be an attempt to reinforce markets within Russia, Poland and Spain. The main aim of this plan is to boost the number of nights spent by tourists in the Algarve outside the height of the tourism season.
The neighboring region of Alentejo is also to promote its resources which are very similar to that of the Algarve. It’s hoped the two regions will work together, as someone staying in one region could be interested in lengthening their stay to explore the neighboring region which would prove beneficial for everyone. A major aim of the plan is to promote the relationship between the Algarve and the Alentejo regions, in the hope of attracting new markets and expanding existing ones.
There is to be an investment of €200,000 which will mainly be funded by the EU, to help consolidate the partnership between the two regions, although each region will contribute €15,000 towards this project. The project will take place over the next couple of years, and will include plans to produce a booklet detailing walking and cycling trails, eco-trails and bird watching as a way of boosting tourism.
Portugal recently passed its latest bailout review, the sixth to take place. This reviewed its performance and made the country eligible for the next €2.5 billion loan in spite of concerns over continued economic risks within Portugal.
The week-long review found the country to be generally on the right path towards financing itself in debt markets by next year. The economy is still expected to contract by 1% in 2013, and by 3% this year, a prediction that remained unchanged from the previous review in September. Growth is expected to return in 2014, although it will be very modest at just 0.8%.
The next payment means Portugal will have received 87% out of a total of €78 billion bailout, and confidence in the country’s prospects is increasing. However there are concerns that Portugal could be affected by the recession in Spain as this is its largest export market.
Portugal is currently looking at cutting corporate taxes to make it more attractive to foreign investment, and planned spending cuts of €4 billion for 2013 into 2014 will be discussed at its next review.
In 2013 Portugal is due to implement a large increase in taxes as this is necessary for it to meet budget goals, but economists think this could result in the economy contracting much more than expected due to a decline in consumer confidence.
Portugal is also suffering from record unemployment, as levels have reached a high of 15.8%. Unemployment is expected to increase to reach 16.4% by next year, but the EU and IMF considered the reforms as being necessary for sustainable growth and job creation.
Portugal still faces considerable challenges in meeting its current bailout program. It is struggling with high unemployment, and must implement steep increases in taxes to help increase its revenue. Not surprisingly these changes have been very unpopular with its citizens, but the country has been given more time to decrease its deficit and to get its economy back on track.
This year the IMF is forecasting the Portuguese economy will shrink by 3%, and by 1% next year. Its current target is to narrow the deficit for GDP to 4.5% in 2013, and to less than 3% in 2014 which is 12 months later than originally planned. It is anticipated the government debt will now peak at 124% of GDP in 2014, compared with a pre-crisis level of just 68.4% in 2007.
While this isn’t exactly great, there is better news on the horizon. Exports increased by 9.6% between January and August, while imports decreased by 4.3%. Exports have also increased to non-European Union countries and this should help prevent the crisis becoming even worse. The current account deficit used to be more than 10% of GDP, but is now close to becoming balanced.
Portugal is in a far better position than other countries such as Greece, and most importantly has the support of its lenders. It has already taken important steps towards returning to market financing, and much of the debt is now held domestically. It has swapped bonds that matured next year for debt in 2015, and experts think the chances of the country needing to restructure are quite remote.
The current crisis afflicting Portugal is creating a number of new investment opportunities, and the country’s appeal to overseas investors is increasing. The tough austerity measures have meant that many Portuguese homeowners have had no choice but to sell up completely or to downsize, and the recent budget will not help this situation.
Lack of access to financing is preventing those who are still financially stable from buying. All this has placed downward pressure on house prices, even in areas such as the Algarve which have traditionally been more expensive and in demand with overseas buyers. Even though the number of properties on the market is plentiful, it hasn’t been caused by overbuilding, and Portugal may well be a much better risk than other countries facing similar problems with their economy, such as Spain.
The key to investing in any foreign country is always to research the market and area thoroughly, and to learn as much as you can about property in the region. People considering living in Portugal full-time may be better off renting first of all, to really get a feel for the area.
Some areas are particularly good for retirees, while others such as Lisbon and Porto may be more suitable for those investors who hope to rent out their property. Buying property in Portugal is relatively straightforward, but it is important to have assessed whether the property is correctly priced, and to employ a good solicitor who is able to give the correct advice on taxes, procedures and other necessary legalities.