–Third Review Of Portugal Expected To Lead To Disbursement Of E14.9 Bln

BRUSSELS (MNI) – The European Commission, European Central Bank and
International Monetary Fund issued the following statement about
Portugal on Tuesday, summarizing the findings of the so-called troika,
which visited Lisbon from February 15-27:

“Staff teams from the European Commission (EC), European Central
Bank (ECB), and International Monetary Fund (IMF) visited Lisbon during
February 15-27 for the third quarterly review of Portugal’s economic
programme.

The programme is on track, but challenges remain. Policies are
generally being implemented as planned, and economic adjustment is
underway. In particular, the large fiscal correction in 2011 and the
strong 2012 budget have bolstered the credibility of Portugals
front-loaded fiscal consolidation strategy. Financial sector reforms and
deleveraging efforts are advancing, while steps are taken to ensure that
credit needs of companies with sound growth prospects are met. Reforms
to increase competitiveness, growth, and jobs have also progressed,
although many reforms still await full implementation. The broad
political and social consensus that is underpinning the programme is a
key asset.

Looking ahead, the Portuguese economy will continue to face
headwinds. In 2012, trading partner import growth is expected to weaken
further, while domestic demand adjusts, and unemployment and
bankruptcies are rising. As a result, GDP in 2012 is expected to decline
by 3.25 percent, following a fall of 1.5 percent in 2011. In 2013, a
slow recovery should take hold, mainly supported by private investment
and exports. External adjustment is proceeding.

The fiscal deficit target for 2012 remains within reach. The
deficit target of 4.5 percent of GDP is expected to be met with current
policies, provided that downside risks to the economic outlook do not
materialise. To contain fiscal risks, the government needs to strengthen
measures to prevent arrears accumulation and implement a strategy to
settle existing arrears. The government has also agreed an adjustment
programme with the autonomous region of Madeira and will continue to
reform state-owned enterprises, further strengthen tax administration,
and streamline public administration.

Further progress on protecting the banking system and ensuring
orderly deleveraging has been made. The rules for providing public
capital to banks have been clarified, and plans to ensure that capital
buffers of individual banks meet end-June 2012 targets are being
finalised. Given the recent monetary policy decisions by the ECB, banks’
liquidity constraints are expected to ease further. Furthermore, the
authorities are considering a range of measures to mitigate funding
strains for sound companies, including appropriate measures to
discourage ever-greening of doubtful loans. Any such steps should avoid
risks on public finances. Developments will be kept under close review
to ensure that the inevitable deleveraging does not deprive dynamic
enterprises of credit.

A number of promising growth-enhancing structural reforms are
falling in place. The recent tri-partite agreement on labour market
reforms underscores Portugal’s ability to take bold reform steps in the
context of social dialogue. Reforms are also progressing well as regards
unclogging the court system, promoting competition, privatizing viable
companies, and fostering an efficient housing rental market.

Nevertheless, more efforts are needed to clear Portugal’s
structural reform backlog in the network and sheltered services sectors.
Long-standing entry barriers and a web of excessive rents are stifling
economic dynamism. The resulting high non-tradable prices not only curb
external competitiveness, but also put socially unfair burdens on
consumers and taxpayers. First reform successes include measures to
level the playing field in the telecommunication sector, and meaningful
steps to reduce rents in energy markets, particularly electricity, are
underway. Both the pace and scope of these reform efforts should be
stepped up.

In sum, Portugal is making good progress toward adjusting its
economic imbalances. Determined implementation of reforms remains key to
ensure economic recovery and fiscal sustainability. These efforts will
be backed up by a strengthened EU economic policy framework. Moreover,
provided the authorities persevere with strict programme implementation,
the euro area member states have declared they stand ready to support
Portugal until market access is regained.

The government’s programme is supported by loans from the European
Union amounting to E52 billion and a E26 billion arrangement under the
IMF’s Extended Fund Facility. Approval of the conclusion of this review
will allow the disbursement of E14.9 billion (E9.7 billion by the EU,
and E5.2 billion by the IMF). These disbursements could take place in
April subject to the approval of the IMF Executive Board and ECOFIN and
EUROGROUP. The joint mission for the next programme review is expected
to take place in May 2012.”

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