The International Monetary Fund (IMF) recommends that the Government to apply austerity measures, which correspond to 0.5% of Gross Domestic Product (GDP), approximately 900 million euros, in the next year, focusing on salaries and pensions of the public role.
"The Government needs a credible fiscal strategy. (…) Measures are well specified, mainly on the expenditure side, and which result in a structural adjustment in the primary of 0.5% of GDP [around 900 million euros] in 2017 and 2018, would be a suitable path," argues the IMF.
The recommendation appears in the report on the fourth mission of monitoring post-programme and the mission to Portugal under article IV, which took place simultaneously at the end of June, and gains relevance in a time when the Government is preparing the State Budget for 2017 (OE2017), which must be submitted to the Assembly of the Republic in about three weeks, until October 15.
in This assessment, the IMF warns for the risk of a spiral effect that can hinder the access of Portugal to the markets and points to three weaknesses that are critical: the problems of banking, a sluggish growth and fiscal slippage.
In the document, the Background reminds us that the Stability Programme 2016-2020, presented in April by the Government, provides for adjustments of 0.3% of GDP in the medium term, but considers that this strategy depends on "assumptions macroeconomic unrealistic" and, therefore, stresses that "fiscal policy should be anchored to a structural adjustment in the primary annual 0.5% of GDP".
in This sense, he defends the institution led by Christine Lagarde, the authorities should proceed with a review of the expenditure, "focusing in particular on the best ways to track the social benefits, in the reduction of health care costs and in the control of the pensions and of the salaries of the public sector".
THE IMF recommends that the Portuguese Government to enter the "purposes of expenditure annual", to carry out a fiscal adjustment based on the rationalization of expenditure, and that "specify measures containment policies to meet the targets, with a focus on the salaries and pensions of the public sector".
The recipe that the IMF prescribes to the Portuguese Government to reduce the invoice to the salary of the public is clear: "to exempt the health sector from the application of the 35 hours of work weekly and to pursue the consolidation of the school network taking into account the decline of the school-age population, increase the rate of natural departures to gradually reduce public employment, reduce the wage premium in relation to the private sector, streamlining of subsidies and supplements, and limiting the deviation of the wage by a framework of the professional career and the maintenance of the freezing of progression in the careers in addition to 2018".
Recalling that the Stability Programme envisages savings in the bill with the salaries of the public sector, the Fund considers that there is a "little" specification of these measures, and even admits that it is "unlikely" that the planned measures in the Stability Programme, such as the maintenance of the rule of two outputs for each entry of workers in the public service, bring significant savings.
in addition, the IMF stresses that "fiscal policy should be more stable and predictable, and aim to boost competitiveness and growth, instead of consumption."
In response to the Fund that is contained in the document, the Government reiterated the commitment to the fiscal targets enrolled in the Program for Stability, a budget deficit of 1.4% of GDP in 2017 and a reduction of the invoice with the public sector through retirements and natural ceilings on the contracting and showed to be confident with the results of the newly released program review expense.
in turn, the Fund concludes that the fiscal targets for 2017 are "ambitious" and that achieving them will require "face significant implementation challenges".
THE IMF alert to the risk of Portugal being caught in the effect of the spiral, in the wake of problems in the euro zone that may have an impact on factors already vulnerable of the Portuguese economy. Considering that the country has been enjoying a "comfortable access" to the markets, supported by monetary policy of the European Central Bank, the Fund stresses that the interest of the obligations Portuguese have been contained due to the expectation of investors that the policies of expansion of the ECB will continue.
But even with the cushion of the ECB, Portugal faces a multitude of vulnerabilities that feed on each other. And points to the three areas of greatest danger: the banking system, public finances and economic growth.
Any development that degrades the trajectory of the public debt can trigger a sudden change in market sentiment. And this may be the result of slippage in the budget, which may, in turn, have their origin in the reversal of policies or shocks to macro, or from the materialization of contingent liabilities of large dimension, potentially originating in the bank.
A rise in sudden of the costs of funding would exacerbate the dynamic of the public debt and weaken the liquidity of the State. A revaluation negative prospects for the economy of Portugal, could also lead to a negative spiral. A slowdown in the world economy or a drop in the recovery of the savings rate, which does not have as a counterpart the increase of the investment, would penalize the public and private debt, and affect the fiscal consolidation.
The document warns that the situation of Caixa Geral de Deposits and any loss arising from the sale of the New Bank may imply "more injections of public money" in the sector and argues for a "greater consolidation" in the banking.
Stressing that "the banking system has required a series of interventions financed by taxpayers in recent years," including the recapitalisation of Banif in December 2015, the institution led by Christine Lagarde warns that "the capital needs of the largest bank, CGD, and possible losses arising from the sale of the New Bank may require more injections of public money", in accordance with the application of the european rules on State aid and with the directive on bank recovery and resolution.
The Fund noted that "concerns about two major banks are to weigh in the prospects of the sector" and that the markets are "cautious" and needs "significant capital" from the public bank, CGD, recalling that there are estimates of the public that these needs are approaching 3% of Gross Domestic Product (GDP), the value that is to be taken as "possibly indicative of the great problems of non-performing loans with other banks".
this is in addition To "another source of uncertainty": the dimension of the losses that other banks would have to bear if the process of sale of the New Bank, which received an injection of public capital of 3.9 billion euros (2.2% of GDP), "end up being dececionante", that is, if the institution that inherited the assets considered to be non-toxic of the old Banco Espirito Santo (BES) is sold for a lower value than the which there was placed in 2014.
therefore, the Fund admits that the progress of these two banks will be "a challenge" for the authorities and criticises that "there is little desire to cut costs aggressively and take measures to dilute the presence" of the State in the CGD and in the New Bank.
The directors of the fund argue that responding to the vulnerabilities of the banking sector should be the highest priority. The return of banking profits and the country’s economic growth, should pass through a clean-up of banks ‘ balance sheets, which implies to solve the problem of non-performing loans, which calls for more reserves and more capital.
banks should reduce operating costs and improve management standards in the sense of making decisions on the basis of criteria only business.
The directors of the IMF to consider the positive idea of finding a solution at the national level to the challenges that banks face in using the instruments foreseen in the framework of the regulation.
in This analysis of the economy of Portugal, the IMF warns that Uk is losing breath. The slowdown in economic activity began in the second half of last year, notwithstanding the macro-economic policies favourable.
The relaxation of budgetary and monetary policy of the European Central Bank had as a result a growth of the consumption. However, the economic growth is being held back by weakness in exports and weak investment, a weakness that has been reinforced by factors such as uncertainty, high levels of indebtedness of the companies and some structural bottlenecks.
THE IMF reviews the growth of Gross Domestic Product to 1% this year and to 1.1% in 2917. The deficit should stay within the 3% of GDP this year and next. The forecast puts the public debt above the 128% of GDP in the next two years. In an interview to the IMF News, the head of the mission to Portugal, Climb Lall, left the underscore:
With a low growth and a reduced investment, but with a sovereign debt high, that Portugal needs this is a time of fiscal consolidation, with accumulated 1% of GDP over two years. This would compensate for the relaxation of fiscal 2015 and the progress designed by the technicians for this year."
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