Portugal Raises 2014 Growth Forecast, Keeps Budget Deficit Goals

The Portuguese government forecast faster growth next year while keeping its deficit targets unchanged as it tries to exit its bailout program.

“There are early signs of a recovery in economic activity,” the International Monetary Fund said yesterday in a joint statement with the European Commission and European Central Bank about the completion of the eighth and ninth reviews of the Portuguese aid plan.

The government raised its 2014 growth forecast to 0.8 percent from 0.6 percent. It expects the economy will shrink 1.8 percent this year, less than its previous estimate of 2.3 percent. The unemployment rate will be 17.4 percent this year, lower than an earlier projection of 18.2 percent.

Prime Minister Pedro Passos Coelho has to trim spending by about 3.3 billion euros ($4.5 billion) in 2014 after relying mainly on tax increases this year to meet targets set in the aid program from the European Union and IMF. Portugal is trying to regain full access to debt markets with the end of the 78 billion-euro rescue plan approaching in June 2014.

“We now only have three reviews left,” Vice Premier Paulo Portas said at a press conference in Lisbon yesterday. Portugal’s economy expanded in the second quarter for the first time since 2010 as export growth accelerated.

The government kept its budget deficit targets of 5.5 percent of gross domestic product for this year and 4 percent for 2014. The 2014 budget proposal, including new government spending cuts, is due to be handed to parliament on Oct. 15.

Constitutional Court

If the country’s Constitutional Court blocks some measures planned for 2014 “the government would need to reformulate the draft budget in order to meet the agreed deficit target,” the EU and IMF said. “This, however, would imply increasing risks to growth and employment and would reduce the prospects for a sustained return to financial markets.”

The court on Aug. 29 blocked a proposal to end some state workers’ labor contracts. That was part of a government plan to “requalify” some public-sector employees. The government on Sept. 12 presented changes to that plan to address the ruling.

Portugal’s debt is forecast to peak at 127.8 percent of GDP this year, the EU-ECB-IMF “troika” said in the joint statement.

Public debt is “clearly” sustainable, Finance Minister Maria Luis Albuquerque said at yesterday’s press conference. The country plans to resume regular bond issuance next year and doesn’t rule out another bond sale this year, Albuquerque said. It also aims to do some debt exchanges, she said.

Bond Yield

Portugal’s 10-year (GSPT10YR) bond yield has climbed since May, when the rate reached the lowest since 2010 and the country last sold bonds. Portugal’s 10-year bond yield is at 6.6 percent and the country pays 3.2 percent on its bailout loans. Its debt is ranked below investment grade by Fitch Ratings, Moody’s Investors Service and Standard & Poor’s.

The nation’s debt agency said on July 12 that it plans to resume regular issuance of bonds “only if market conditions are conducive.” Financing needs for 2013 are fully covered, and in the second quarter the debt agency started to “pre-fund” for borrowing needs in 2014, IGCP said.

“Provided the authorities persevere with steadfast program implementation, euro area member states have declared they stand ready to support Portugal until full market access is regained,” the troika said in the joint statement.

Approval of the eighth and ninth reviews of the aid plan could take place in November, allowing for the disbursement of 5.6 billion euros from Portugal’s bailout package, according to the statement from the IMF, ECB and EU. The next review is also due to take place in November.

To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net; Henrique Almeida in Lisbon at halmeida5@bloomberg.net

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

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