PARIS (MNI) – Standard & Poor’s on Monday strongly endorsed the
fiscal tightening measures announced last week by Portugal, saying they
represent a “strong step” towards stabilizing the country’s debt ratio
and show “the willingness of Portuguese authorities to tackle budgetary
pressures.”
The new deficit reduction, about two-thirds of which will be
accomplished by spending cuts, should improve the government’s general
balance by 4.6% of GDP, S&P said.
But the country will also pay a high price: S&P said it expects the
economy to contract by 1.8% next year and to stagnate in 2012 as
consumption slumps.
A verbatim of the S&P press release follows:
Portugal’s Fiscal Consolidation Program Is A Strong Step Toward
Stabilizing Debt
LONDON (Standard & Poor’s) Oct. 4, 2010 — Fiscal consolidation
measures for 2010 and 2011 announced by the Portuguese (A-/Negative/A-2)
authorities late last week represent, in our view, a critical step
towards stabilizing the general government’s debt-to-GDP ratio. Standard
& Poor’s Ratings Services estimates that, on the assumption that these
fiscal consolidation measures are approved as part of the 2011 budget in
mid-October, the resulting adjustment will represent an improvement of
4.6% of GDP in Portugal’s 2011 primary general government positions
versus 2010. Excluding non-recurrent items the net discretionary fiscal
tightening from these measures will amount to approximately 4% of GDP.
The extent of consolidation could be somewhat lower if real growth for
2011 contracts by just under 2%, as we now anticipate, weighing on
revenue collection. Two thirds of the consolidation from the latest
round of fiscal tightening will likely occur via expenditure cuts,
helping to insulate their impact on the budgetary position from any
further downturn in GDP next year.
Under Standard & Poor’s methodology for calculating general
government deficits, revenue items that increase general government
liabilities are accounted for below the line. For this reason, the 1.5%
of GDP cost to transfer of Portugal Telecom’s pension assets towards
general government revenues planned for 2010 will not be accounted for
as government revenues under our methodology. As a result we expect the
general government deficit to end 2010 at close to 8.8% of GDP, well
above the 7.3% of GDP target. Nevertheless, the positive development
from the latest fiscal measures, in particular the salary cuts and VAT
hike, appears to far outweigh the fiscal overshoot in 2010. In our view,
by the end of 2011 these efforts should bring the government to within
2.6 percentage points from operating a debt stabilizing primary surplus
of around 2.2% by 2013. We believe this is the case despite our
expectation that higher marginal interest rates on Portugal’s new
government funding will gradually push up interest expenditure to 4.4%
of GDP by 2013, compared to less than 3% of GDP in 2009.
We expect that despite its minority in parliament, the government
will continue to adjust policy to meet its budgetary targets over the
next several years. Our expectation is also that despite the
opposition’s well-known aversion to tax hikes, the Socrates minority
government’s budgetary proposals will be included in the 2011 budget,
which we expect to be passed though parliament once it is submitted on
Oct. 15, 2010.
Standard & Poor’s projection that Portuguese GDP will contract next
year by around 2% reflects our view that consumption will decline on the
back of fiscal drag and credit retrenchment in the Portuguese economy. A
near-term weakening of aggregate demand is part of the adjustment
process, as Portugal’s current account deficit (July 12-month rolling at
10.2% of GDP) is set to narrow quite rapidly. Net exports will be the
only contributor to GDP growth over the next two years. In our view,
Portugal’s concentration risk to Spain also means that the outlook for
growth will remain severe, particularly should Spanish GDP performance
be sedate between 2011-2013, as we anticipate.
From a macro perspective, in our view the decline in public wages
will operate as an important signaling effect to the private sector,
helping to accelerate the depreciation in Portugal’s wage-adjusted
exchange rate, which began in the first half of 2010. However, we
believe nominal wage declines are not necessarily the optimal way of
improving competitiveness, particularly if they occur in isolation from
productivity enhancing reforms. One key potential productivity boost
could come from higher foreign direct investment. Inbound foreign direct
investment into Portugal, which peaked at the beginning of the last
decade at just under 5% of GDP, averaged less than half that between
2005-2008. Were policies put in place to address that inflow, we believe
nominal wages could correct more gradually.
Our view remains that the likelihood of default on Portuguese debt
remains extremely low. We expect that this government would take further
appropriate fiscal consolidation measures to improve its balance sheet
should it believe such measures necessary. Indeed, the size of 2011’s
fiscal adjustment as a percentage of GDP, assuming that these measures
are approved by parliament, is the highest in the Euro zone even after
adjusting for one-offs. At the same time, however, even flawless
implementation of medium-term fiscal plans implies that gross debt to
GDP will only stabilize at just over 90% of GDP in 2013 compared to 77%
of GDP at the end of 2008. We believe that in the aftermath of 2011’s
sharp expenditure cuts, at least two more years of fiscal consolidation
lie ahead. How the real economy adjusts will be decisive in illustrating
to what degree the government can expect the tax base to stabilize over
the next few years.
–Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com
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