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Portugal’s Program Is on Track, Challenges Remain, IMF Says

Portugal’s financial-aid program remains on track and the country should achieve its 2012 deficit target based on current forecasts for the economy, international auditors say.

“Portugal is making good progress toward adjusting its economic imbalances,” the International Monetary Fund said in a joint statement with the European Commission and European Central Bank after a review of the Portuguese plan. The 2012 budget-gap goal “remains within reach” provided that downside risks to the economic outlook do not materialize, they said.

Finance Minister Vitor Gaspar said in Lisbon that the review was completed “successfully,” allowing the country to receive the next rescue payment of 15 billion euros ($20 billion). The government forecasts that gross domestic product will drop 3.3 percent this year, the same as forecast by the European Commission.

Prime Minister Pedro Passos Coelho is cutting spending and raising taxes to meet the terms of the 78 billion-euro ($105 billion) aid plan. The IMF, the commission and the ECB said today that the economy “will continue to face headwinds” and that the pace of structural reforms must be “stepped up.”

“More efforts are needed to clear Portugal’s structural reform backlog in the network and sheltered services sectors,” the so-called troika said. “Long-standing entry barriers and a web of excessive rents are stifling economic dynamism.”

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Gaspar said Portugal’s unemployment rate will rise to 14.5 percent this year before dropping below 14 percent in 2013. He also said returning to bond markets in 2013 is a “difficult task” and reaffirmed that the government will not ask for more time or more money from its bailout partners as it implements the program.

Portugal narrowed its budget deficit to about 4 percent of GDP in 2011 from 9.8 percent in 2010 after the transfer of banks’ pension funds to the state. The government has forecast a shortfall of 4.5 percent in 2012 and forecasts that it will reach the EU ceiling of 3 percent in 2013.

The debt-to-GDP ratio is projected to “stabilize” at 112 percent in 2013 after reaching 111 percent in 2012, the commission forecast in November. Debt was 93.3 percent in 2010.

The next aid disbursement includes 2 billion euros for a recapitalization fund for banks, according to Gaspar. Of the total aid program, 12 billion euros have been earmarked for lenders should they need it.

The Portuguese state will guarantee a capital increase at state-owned bank Caixa Geral de Depositos SA that’s needed to fulfill required capital targets, Gaspar said. Caixa Geral won’t access the recapitalization fund.

He also said the state would “absorb” 3 billion euros in bank loans owed by state-owned companies and municipalities to help boost lending to the economy.

The government is also selling assets, and Secretary of State for Treasury and Finance Maria Luis Albuquerque said today it aims to complete the sale of carrier TAP SGPS SA and airport manager ANA-Aeroportos de Portugal SA this year.

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