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.
According to Christine Lagarde, chief of the International Monetary Fund, Portugal is on track for meeting the targets set by international creditors even though the country is still at risk due to high unemployment. The Portuguese people received praise for being able to carry out such painful but necessary reforms.
In May 2011 Portugal received a €78 billion bailout from the International Monetary Fund and the European Union. In exchange the country had to agree to carry out a three-year reform programme that has resulted in unemployment increasing to more than 16%, and which has plunged the country into a deep recession. Although the IMF is concerned about the high unemployment levels, it is confident structural reforms will help increase growth levels, and will create jobs in the longer term.
The reform programme is now two thirds of the way through, and Portugal recently implemented even more tough measures, including tax increases. However the Portuguese president, Anibal Cavaco Silva, recently announced that he has asked the highest court in the country to decide whether or not this year’s austerity budget is constitutional.
He is concerned that the budget will result in a lower level of income for many citizens, as well as lower social payments. He feels that while everyone will be affected by these measures, that some will be far more affected than others, and that this may be unfair. He has pointed out that the tax hikes will lead to lower output and a decline in tax revenue. The average rate of income tax will increase by 3.4% this year as Portugal aims to cut its budget deficit by 4.5% in 2013, something that will mostly be achieved through tax increases.
Portugal has been struggling since it requested a bailout from the EU. The government recently announced that this year’s budget deficit would reach 5.3% of GDP, exceeding the 4.5% target agreed under the bailout deal.
However it is thought inspectors for the International Monetary Fund and EU will take a lenient view, and the IMF has already said it will keep an open mind on Portuguese targets. Further austerity measures for the country could prove to be counter-productive as it has already stuck rigidly to an austerity programme.
This has brought the country praise, and optimism over its recovery is increasing. The economy is predicted to contract by 3% this year before growing by 0.8% next year.
Although much of Europe saw a property boom from the mid-90s until the beginning of the financial crisis, this largely missed out Portugal. The only years to see significant price growth were from 2003 to 2004 when prices rose by an average of 6.2%. Between 2005 and 2007, prices rose by just 1.25%, and prices have yet to fully recover from the financial crisis.
This means there are some real bargains around for those looking for an overseas property and Portugal will always be a popular year-round holiday destination. Even in the Algarve property prices are still below values seen before the financial crisis.
Experts also think there is a great deal of pent-up demand for rental homes in Portugal due to stringent tenancy laws that have discouraged landlords. Laws intended to invigorate the rental market were passed six years ago, but the system is still overcomplicated and weighted in favour of tenants.