Portugal Says 2011 GDP Will Fall as Investment, Government Spending Drop
(Corrects deficit target year in third paragraph.)
The Portuguese government forecasts the economy will contract this year as investment declines and it cuts spending to narrow the budget deficit.
Gross domestic product will fall 0.9 percent in 2011 following a 1.4 percent increase last year, according to Portugal’s stability and growth program released last night. The forecast is less than the 1.3 percent contraction predicted by the Bank of Portugal in January and compares with an outlook of 0.2 percent growth included in the budget released last year. The new plan says the economy will expand 0.3 percent next year, 0.7 percent in 2013 and 1.3 percent in 2014.
The government forecasts debt as a percentage of GDP will climb to 87.9 percent in 2011 and 88.1 percent in 2012 from 82.4 percent last year. That ratio will start falling in 2013 to 87.4 percent, and will drop to 85.3 percent the following year, the plan showed. The government set a target for a budget deficit of 4.6 percent of GDP in 2011, before reaching the EU limit of 3 percent in 2012, then 2 percent in 2013 and 1 percent in 2014.
Portugal is raising taxes and implementing the deepest spending cuts in more than three decades, aiming to convince investors it can narrow its budget gap, curb its debt and avoid a bailout after the Greek debt crisis led to a surge in borrowing costs for high-deficit euro nations.
Risk Premium
The spread between Portuguese and German 10-year bond yields fell 1 basis point to 412 basis points today after reaching a euro-era record of 484 on Nov. 11. Ireland in November became the second euro country after Greece to seek a bailout and the first to request aid from the European Financial Stability Facility. Portugal’s 10-year bond yield climbed to a euro-era record of 7.70 percent on March 9, according to data compiled by Bloomberg.
The stability and growth program forecasts the average rate of Portugal’s 10-year bonds will be 6.8 percent in 2011, 6.9 percent in 2012, 6.8 percent in 2013 and 6.5 percent in 2014.
Portuguese Prime Minister Jose Socrates had said his government is available to discuss its deficit-cutting measures with opposition parties as he tries to avoid a “political crisis,” early elections and the possibility of a bailout. “If parliament decides on a motion against the stability and growth program, that means the government is not in a condition to make commitments internationally,” Socrates said on March 15.
Additional Measures
Finance Minister Fernando Teixeira dos Santos on March 11 presented additional deficit-cutting measures equal to 4.5 percent of GDP over the three years through 2013, including a reduction in pensions of more than 1,500 euros ($2,134) a month and further cuts in tax benefits. Teixeira dos Santos said yesterday that a political crisis would make it more difficult for the country to access financial markets.
Portugal’s Social Democratic Party, the biggest opposition group in parliament, has said it does not back the new measures presented by the government. The Social Democrats have said that they support Portugal’s plan to reduce its budget gap and meet the deficit targets.
Socrates became prime minister in 2005 and his Socialist Party won re-election in 2009 without a majority in parliament. The Social Democrats agreed in October to let the government’s 2011 budget proposal pass in parliament by abstaining.
Bond Redemptions
Portugal intends to sell as much as 20 billion euros of bonds this year to finance its budget and cover the cost of maturing debt. Portugal faces bond redemptions in April and June worth about 9 billion euros in total. It also faces bill maturities in July, August, September, October and November.
The government is already trimming the wage bill by 5 percent for public-sector workers earning more than 1,500 euros a month, freezing hiring and raising value-added sales tax by 2 percentage points to 23 percent to help narrow a deficit that amounted to 9.3 percent of GDP in 2009, the fourth-biggest in the euro region after Ireland, Greece and Spain.
Portugal will report a 2010 budget deficit of about 7 percent of GDP, narrower than the 7.3 percent gap the government had forecast,Socrates said on Jan. 28.
The government is estimating it will raise 2.18 billion euros in revenue from the sale of state assets this year. To strengthen the financial system, banks should have a core Tier 1 capital ratio of 8 percent by the end of 2011, according to the plan released yesterday.
GDP fell 0.3 percent in the final three months of 2010, the first quarterly contraction in a year. Portugal’s unemployment rose to 11.1 percent in the fourth quarter, the highest since at least 1998.
The government forecasts unemployment will rise to 11.2 percent this year from 10.8 percent in 2010, and inflation will accelerate to 2.7 percent in 2011 from 1.4 percent last year.
Portugal’s economic growth has averaged less than 1 percent a year in the past decade, one of Europe’s weakest growth rates.
To contact the reporter on this story: Joao Lima in Lisbon at jlima1@bloomberg.net.
To contact the editor responsible for this story: Tim Quinson at tquinson@bloomberg.net.
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