Transcript of the Conference Call on the Release of the Staff Report on the 11th Review under the EFF for Portugal

April 21, 2014

Washington, D.C.
Monday, April 21, 2014

MR. SILVESTRE: Thank you. I'm Bruno Silvestre from the communications department of the IMF, and I'm glad to welcome you to this conference call on the 11th review of the Portugal IMF Program.

You will all have received the documents having to do with this program last Friday. These documents are under embargo, and let me remind you the embargo is lifting in one hour from now at 3:00 p.m. Lisbon time or 10:00 a.m. Washington time.

With me today is Mr. Subir Lall, Subir, S-U-B-I-R, Lall, L-A-L-L. Mr. Lall is a Mission Chief for Portugal, and together with two of his team members he'll have a few remarks and then take your questions.

Before I pass the floor to him let me remind you that this call is on the record, and everything you hear can be attributed to him. Subir, you have the floor.

MR. LALL: Thank you very much, Bruno. Good morning and good afternoon to all of you who have dialed in and welcome back from the Easter break.

The IMF's Executive Board completed the 11th review of the program last Thursday, as you know, paving the way for this disbursement under the program. This review was completed in the context of the turnaround of the economy and improvement in market conditions.

As you know, we've had three successive quarters of growth, and (inaudible) contractions in output in 2013 were smaller than we had anticipated at the time of the 10th review. So in 2014 we now project growth at 1.2 percent up against 0.8 percent expansion that we project at the time of the 10th review.

With the declining output having been arrested and uncertainty having abated business and consumer confidence have rebounded. Consumer confidence is higher than it has been at any time in the past four years which is very encouraging. Market sentiment has improved markedly with yields on Portuguese sovereign bonds going down to pre-crisis levels.

The outlook for relative improving driven by both exports and more recently a turnaround in investment and consumption. Portugal had a big market share over the past few years in the export market, and we expect these gains to be safeguarded. In the context of a broader turnaround in economic activity in Europe this bodes well for continued export growth.

Investment is also beginning to pick up. Although, it will remain constrained in the near-term by the high level of debt in the private corporate sector.

Consumption is beginning to recover from the very sharp declines which it suffered over the proceeding few years. We are pleased the government (inaudible)picture have also improved, but it is still -- unemployment is still too high and we need to do more. It is projected to remain around 15 percent in 2014 and decline only gradually over the medium-term given the still significant output gap and remaining rigidities in the labor market.

But there are important risks to the outlook. Any changes in market sentiment or renewed policy uncertainty could dampen that turn in domestic demand. A more medium-term risk is that growth, employment, and exports will need to continue improving, and this will depend on structural reforms paying off. So there is the long/medium term risk that this improvement may not be sustained if the effects of past reforms do not become more visible, and continued reforms need to be undertaken to ensure that competitiveness continues to improve, and the unemployment continues to fall.

What this means in terms of policy rules that we need to safeguard the recovery while ensuring that all the elements of sustained long-term growth are in place. Now is not the time to become complacent.

On fiscal policy the 2014 target for 12 percent deficit on the reformed 11th review, and it remains valid. The commitments made to reach the target of 2.5 percent of GDP for 2016 are appropriate. This will help ensure that public debt will be on a declining projection.

On the structural front, the review has concluded that rebalancing the economy to make Portugal an export-led economy is the way forward. This implies that improving competitiveness will be an ongoing process because that is how successful globalized economies remain successful.

In the near term we would like to see communal benefit from reforms such as in the electricity sector. That would limit the burden, especially on those who are less fortunate.

On labor markets we need flexibility for jobs to be created. A dynamic economy will be one where new sectors emerge and obsolete sectors decline. Flexibility in this context means workers should be easily able to move to where the jobs and opportunities are.

It is also important that wages should reflect productivity. This means that investing in one, productivity of the worker. Two, for example, education and training and skills is rewarded in the labor market. The wages should depend on skills and effort. High productivity should lead to high wages, and attract people to those sectors.

Let me also emphasize that corporate debt could restrain investment going forward. The clean-up of corporate balance sheets is not complete. We look forward to initiatives toward the credit (inaudible) in reducing the overhang of corporate debt in the Portuguese private sector.

Let's not forget that we cannot go back to the old policies that were there before the crisis and that got us into this situation in the first place. This means we need investment in exports, and not debt filled convention. Going back to the old policies would mean giving back some of the gains made and the sacrifices undertaken by Portugal. So we need to keep moving forward.

Finally, on the financial sector, Portugal has managed to maintain financial stability under very challenging circumstances. This is an important, necessary condition, of course, for strong and sustained growth to take place. Banks are better capitalized, and the liquidity condition has improved markedly since the beginning of the program.

We will begin the 12th review of the program from tomorrow in Lisbon. So, of course, this call is not the time to speculate on how those discussions will evolve as I have no information that I can share with you at this stage, but I will be happy to discuss your questions relating to the 11th review and to the documents that you received last Friday. This is the staff report.

Thank you very much. I will now hand back to Bruno.

MR. SILVESTRE: Thank you, Subir. We are ready now to take your questions. Before you do that, please, I would appreciate if you could identify yourself and the media you represent.

QUESTIONER: Thanks for taking my question. I was wondering if you're decided yet if you have any advice whether Portugal should get a standby loan after the agreement ends to kind of help support their recovery and provide an extra cushion, and if not, when do you think you might make that decision? Thank you.

MR. LALL: The decision is up to the authorities and the form of engagement, but they will choose to hand off to the current arrangement thing. What we do care about are good policies. The rebalancing of the economy, that I spoke about earlier, is necessary for both external and debt sustainability, so it's not an opt-in or something that is just nice to have. It is, in fact, essential.

So having the policies to support this rebalancing will be regardless of the type of program or engagement, either without a formal arrangement or with any kind of a follow on a successful arrangement such as a precautionary arrangement that the press has speculated on.

I think that the decision is clearly that of the authorities, but let me be clear, there should be no stigma in any of the options. You know, a backstop in the form of any precautionary arrangement should not be seen as a sign of weakness, but it's a sign of strength because it reaffirms commitments to policies. But just to be clear, either option can work. That is one, you know, without an assurance, backstop mechanism and the other with an insurance backstop.

It is, you know, the policies that will matter, and it is also on those basis of those policies that markets will judge the risks of Portugal and the access to yearly financing that Portugal would have going forward. Thank you.

QUESTIONER: Good morning, gentleman. I have a question about the pension assistance. Do you believe that the public sector pensions are still far too generous in comparison to the private sector?

MR. LALL: Obviously, as you know, the reform of the public pension system is something that has been looked at. Under this program, and in fact, in the documents you received, we do talk about some of the consecrations that go into the pension system.

In the case of Portugal, we do, and the report says there is hope for improving the system of the overall equity and efficiency. Steps have been taken in that regard, but there is indeed a difference in the benefits workers in the public and the private sector, and these needs to be done, obviously, in a fair and balanced way. But there is no question that reforms of pensions will remain a very important component of the broader economic reforms given that there are a large share, or in fact, the largest share of public spending in Portugal.

QUESTIONER: Hello. I was wondering if I could ask a couple of questions. One very simple, if you took a look at the measures that were settled to be delivered as a prior action for this review regarding the measures needed to bring the deficit down in 2015, how do you evaluate them in terms of quality of adjustment effort?

Another question, also related to 2015, you've seen the report that you are looking at the structural deficit reduction of about 40 percentage points of GDP, I was wondering how do you expect -- if you expect this effort to include some contribution from the changes that are expected both in the salaries of the public sector or in the pensions? There are measures being developed now. Should they contribute or not to the effort in 2015?

I'm asking these because the government has said, as you surely know, that there will be no further effort as to pensions and civil servants.

Finally, there is a thing that has been mentioned in the last months, last weeks, at least, this idea of reducing the compensation for unfair dismissal. So for fair dismissals we'll have 12 days by each year now. Would you expect this to be equal? Thank you.

MR. LALL: Thank you for your question. Now, in regards to the measure for the prior action, indeed, the 2015 deficit has been reaffirmed, as I mentioned earlier, and the 2.5 become (inaudible) deficit target of something that has been in the authorities' hands for quite a while, so these are the measures now.

We are, obviously, when we start the 12th review we'll have more of an opportunity to go into the details as the measures that underpin this reduction in the deficit. So at this point I think it's a bit too early to comment on the specifics of that because we haven't had an opportunity to engage with the authorities on those measures.

But what remains true is that, obviously the deficit for 2015 is a commitment, also with the European partners. You're right in terms of the structural (inaudible) that maybe around 1 percent of GDP.

Let me mention in this context that this is an additional 1 percent of GDP which is in the context of an economy that is expected to grow and gather steam. This year, adjustment is projected by us at this point to be around 0.7 percent of GDP.

Just to put things in perspective, this compares to a cumulative adjustment of 7 percent of GDP between 2011 and 2013, which was in the context of an economy that was contracting. So the conditions -- the background conditions for the remaining adjustment are much, much better. Unemployment is falling, GDP is rising. As I mentioned, the numbers in terms, structured in terms of 0.7 percent this year and 1 percent for next year.

So that's one of the issues, and we will discuss the details of the measures. They have to be in structural terms, so we will engage with authorities on the measures in detail in Lisbon.

Now, regarding labor markets, as I mentioned in my opening remarks, we have to ensure that policies are in place to reduce unemployment levels from where they are right now. This means more flexibility. Not only the discussion of measures given the context of a broader social dialogue which we're aware of, and any discussion needs to be seen in the context of including the opportunities for employment and in the end for hiring. We have an issue with long-term unemployment. Almost two-thirds of the unemployed are long-term unemployed. They have, essentially, more difficult time finding jobs. The youth, which also face an unemployment issue, which is more than the average.

So all we mention here will have to be looked at. We'd hope, again, another question for the 12th review coming up, that we want to look at the menu of options and what we think might work. Obviously, that is the question for the upcoming 12th review. Thank you.

QUESTIONER: Good morning. I would like to clarify some points about next month. What kind of compensatory measures could be implemented in Portugal to grant the execution of the budget?

In your opinion, this full market access will be possible in this current year. Can you detail a little bit more on the outlook for finance criteria? What is concretely the budget framework law? Thank you.

MR. LALL: I'm afraid I couldn't fully understand the questions. The line was not very clear. But I think your first question was about possible fiscal measures, compensating measures.

I assume that this is the idea about -- in case there is a ruling by the constitutional court on some of the budget measures for 2014. Because that's what we mention in the staff report. To that my answer would be that, obviously, as in the past the authorities remain committed to finding alternative measures to meet their budget deficit targets and the commitment. They have clearly demonstrated the ability to do so, and to remain in line with the constitutional requirements in the country.

That remains unchanged. So rather than speculate on any hypothetical we will expect to see that, going forward, should there be an issues with regard to the constitutionality of measures, then offsetting compensating measures will be found.

I'm not entirely clear on your question on the budget framework law, but I will pass on to my colleague Stephane Roudet, who can elaborate, maybe, I'm hoping that is the question you were posing.

MR. ROUDET: Let me first start by apologizing. I'm not sure I understood fully your question, but let me say a few words about our discussions about the BFL, the budget framework law.

As you know that the reform in this context has been done in several steps. In the past mission at the time of the last review we had mainly discussed the transposition of the opportunity and multi coordination and governance into the domestic law.

Going forward that does not mean that the reform is finished. The authorities continue to work on the budget from that law. They have many clear objectives in mind for the reforms. The first one is to streamline and to simplify the budget appropriations structure.

Second one is to strengthen the accounting standards. Then finally to strengthen -- broaden the focus of the analysis of fiscal rates. So these are the elements that we will discuss in the context of the upcoming review. Thank you very much.

QUESTIONER: Hello. I have two questions. The first one, in the report you express some concern regarding excessive rents in the tradable sector and mainly in the energy market. Would you say the reforms in this particular issue didn't work out?

My second question is about the labor market. Would you say wages are still too high in relation to productivity in Portugal? Will they have to come down in the future? Thank you.

MR. LALL: On the first issue, our view is that the non-tradable sector still has room to remove rents. The reform of the rents is important to improve the overall competitiveness of the economy which is needed to make Portugal into a dynamic export oriented economy. Because many have been wondering about how such an inputs ultimately will determine the outputs and the cost of the outputs of the tradable sector.

So measures need to be taken, they have been taken, but more needs to be done. You will see, for instance, there is a chart in the staff report on the mark ups in the tradable and the non-tradable sector. So to facilitate the reorientation of the economy, this type of reduction in rents needs to take place to help eventually the tradable sector become more globally competitive, and to attract more esteemed workforce, and to be able to pay them more.

The related issue of labor market reforms and let me be clear that, you know, ultimately an economy competing world-wide has to adjust. If not enough is done in the private segment, private markets of the non-tradable sector too much of the burden of adjustment will fall on labor. So that's why adjustment needs to be balanced between labor and product markets.

That being said, if it's true that there's also room for further reforms in the labor market, and the question is not one of average wages, for example, but that as we state in the report wages need to reflect productivity. So, high productivity needs to be rewarded with higher wages. But for that one needs the labor market to function in a way that wages truly reflect productivity.

Now, for example, coming back to the issue of rents, when there aren't excessive rents then there's often a case that high cost including labor may not reflect productivity, and then it would become very difficult for the tradable sector to attract people towards that.

So that's why the aim should be for people and workers to be able to invest in their skills and in their education, and have wages reflect that so that one does not meet a situation where a new entry to the job market who is better qualified than most gets paid less than someone who's far less skilled, but in an existing sector and has been there for a long time. Because when it is a difference in the people being less than skilled, it makes it difficult for them to find jobs. Ultimately any reform of the labor market while looking at equity concentrations and looking at wages also needs to be concerned about creating jobs. Thank you.

QUESTIONER: Just a couple of questions. First of all, I wanted to know if you have any official line, actually, on what Portugal needs or what it should have following the bailout exit. So does the IMF support a precautionary line or it doesn't care as long as the reforms are done? I'm asking because the European Commission clearly has a view. Wondering if the IMF has an official view?

Second question's about -- I don't know if you're heard, probably did, that there are talks about perhaps increasing the minimum wage in Portugal. I'm wondering what's the IMF's reaction to that considering unemployment is still very high and higher wages may, you know, have an impact on that or make it harder for unemployment rates to go down. That's all. Thanks.

MR. LALL: On the first question, the IMF if there to support its members and its membership, always. This is regardless of the formal engagement. So our official line is exactly this that, you know, it is up to the country authorities to choose what form of engagement they would like, and the IMF is there to support their decision.

Indeed, to reiterate what you just said, what matters for us is that the right policies are in place, and that the outcomes are safeguarded in terms of work, and in terms of jobs, and in terms of a sustainable recovery. So that's what is most important for us.

Now, it will be, you know, premature for me to speculate on the deliberation that may be going on with regard to wages. It is interesting because not that long ago the question I was asked was whether the IMF is asking for a cut in minimum wages, and now the discussion has moved onto increase that minimum wages.

Now, at the time we had said, and I had said at that time that we would not, and this was in December, in support of a cut in minimum wages. That still remains true. Now, as for how other things go, which is understandable from a social point of view that there is a debate on minimum wages, even that it has remained frozen for a few years now. But this discussion needs to be done beneath the fact that indeed many workers, and especially the low skilled ones, are finding it hard to get work. The longer one is out of work the harder it is to get reentry back into employment.

So, long-term unemployment is also an issue that greatly concerns us. So, of course, it is good to have the debate, and I'm not going to venture into that debate because I only read about it through the press. We have not yet begun our country review mission, but the way I would look at the problem is that the issue of wages needs to be put in the context of also looking at the outlook for the unemployed, especially the long-term unemployed and youth that I mentioned.

I have not yet seen the discussion around jobs. We cannot really talk about wages without talking about creating jobs. So we will, of course, engage in those discussions with our counterparts during that coming review. But all discussions have to be in the global context of not looking at one aspect of the labor market, but looking at all aspects because we are very much interested in policies that also create jobs. Thank you.

QUESTIONER: Hi. Mr. Subir, I would like to know your opinion about the free market access? Will it be possible in the current year for Portugal to gain free market access? Thank you.

MR. LALL: Your question is about free market access. Is that correct?


MR. LALL: Okay. As you know, Portugal has been quite successful in taping bond markets. Since the beginning of the year it has conducted successfully a swap operation and a syndicated bond issuance, and now there are simply reports that there could be an outward option. So this all bodes very well.

Market views are lower than pre-crisis level, so this is clearly very important progress on market access. Durable access going forward would mean that Portugal would be able to issue are reasonable yields to meet its funding requirements on a continuous basis.

So we're still in the early part of the process, but clearly the signs look very good. Market conditions are supportive. Now, of course, market conditions reflect both improvements in Portugal fundamentals, but they also reflect broader regional and financial factors.

Keeping that in mind, as long as policies remain strong and the commitment to reform is maintained then the options and the chances of having durable market access look very promising. Thank you.

QUESTIONER: Mr. Lall, first I just wanted to maybe go over a previous question again or elaborate a little more because at the time there was a lot of buzz, and I didn't hear your answer. The question was about the further reduction on the deficit for the next year. I would like to know if you expect further effort from pensions and salaries to help with that reduction.

Also, two more questions, one regarding the energy factor. The excessive rents on energy are the topic that has been discussed since the first arrival of the Troika, and I think not a lot of progress has been made since that. What leads you to believe that something more can be done after the Troika leaves the country?

Actually, in the report you mentioned some risks about a long period of very low inflation. Can you elaborate a bit on that? Do you think that the ECB needs to step up its efforts to avoid these kinds of risks? Thank you.

MR. LALL: Thank you. The issue of the deficit targets for 2014 and 2015 was reaffirmed in this review, so this years' target of 4 percent deficit and next year 2 1/2 percent of GDP. These will have to be underspent by measures. So what we will do in the 12th review actually is engage with the authorities on discussions on the measures that they have proposed and agreed on to underpin this reduction in the deficit. So it's actually a bit, as I said earlier, a bit too early for me to comment on the specifics of the measures because that's part of the content of the 12th review.

AT this point the question was just ensuring and reaffirming the commitment to the deficit target and that the measures will be there. But we'll discuss the details when we get there.

On the energy sector, yes, you are right, but, you know, the excessive rents and the excessive energy have been an ongoing issue. But, you know, we have to be realistic. It's a difficult issue to tackle at the same time when an economy is going through many reforms across many measures, including, of course, the (inaudible) to the (inaudible) of other structural reforms.

So, you know, one has to be realistic about what can be achieved over a short period of time. You know, the government has done a lot. That doesn't mean the job is done, but more needs to be done, so that's why the discussion has picked up now. Because we feel the economy recovering, and we feel that the fiscal targets being within reach it is time to broaden the focus, and take on some of the issues that, you know, need to be tackled.

So I remain hopeful that this issue will be dealt with. We're looking forward to discussing proposals with authorities at the time of the 12th review. But then as I said in my opening remarks, these kind of reforms will likely continue on an ongoing basis. The rents -- you know, there's not one single measure that will eliminate high rents. They have to deal often with competition. They have to deal with existing contract. So there are issues that have to continue even after the current program ends.

Really for external sustainability there is no choice on that. But to the answer of will it be done? Will the reforms continue after the program? Quite simply, they have to continue.

Now, on your final question on new inflation. We clearly mentioned that as a risk in our report, because having general low inflation creates additional challenges for Portugal. That being said, there are things that can be done domestically that can help in this environment.

For instance, I talked about the level of corporate debt. Part of the reason there is a risk premium on lending to extra corporate is because of the high level of corporate debt. So once the corporate debt issue is addressed, and risk premium for lending by banks to corporate are reduced because there's less uncertainty about some borrowers or their balance sheet, …once the debt overhang is reduced, that will improve the monetary transmission mechanism in Portugal. That's something that can be done in Portugal.

So that would help boost demand, and help increase investments. So there are things that can be done from that point of view to deal with some of these challenges.

I will not comment on Euro Area-wide policy. That's not part of my mandate, but certainly from the Portugal point of view, there are a few things that can be done to help include monetary transmission to these balance sheet related measures that we think could be helpful. Thank you.

QUESTIONER: Good afternoon. I have a question about the labor market, again. You're saying in your forecast the union of individual workers, is in practice difficult, even though labor reforms are being made easier. I was wondering if you could elaborate on what else failed in terms of practice, and if you have discussed with the government what can be done to change this. Thank you.

MR. LALL: Thank you very much for your question. So on the question of labor markets, it is clear that the broader point we're trying to make is there is a difference between legislative reforms and what happens in practice. So there are often reforms that I need done, but they don't necessarily translate into practice because practice has been around for a long period of time.

So, for instance, even in labor markets there are a lot of things that are legally possible, but it's taking time before they get internalized by both the employers and their employees. So one of the things we try to do in the report is point out that it is very important to look at -- and that wasn't meant to serve as an example of things. It's important to go and look back and see are there any remaining constraints to adjustment, and anything that needs to be done. I talked about the reform agenda and that needs to go forward, and it's an ongoing process going on for -- I believe, for every competitive economy the possible reforms should never end because the world is always changing, and the world is dynamic, and economy that is dynamic needs to adapt to that.

So in this case what I would do is looking back at the reform and see whether it translated into effective change. A framework needs to be in place to ensure that it does. You know, in Portugal many reforms have been done in the last three years. So it seems a good time to start looking back on these reforms in, for instance, labor markets. Have the legislative changes translated into the effect that we would like to see or that the economy needs?

So I think that was the point of that discussion. So in terms of your specific question on what needs to be done, I think, those are the kind of questions there are lots of little things that can be done to improve the function. But many of the big reforms have been done, but then now is the question of recalibrating, fine tuning, making sure legislative changes become effective changes.

In something that requires a different more lengthy approach through rather than a macro based top-down approach to reforms. Where we are at this stage, I think it's fair to say that those need to be done in-house, and done by the authorities. They need to be owned by a country. We cannot be 'imposed from the outside,' because they need to reflect the reality on the ground.

But we will, of course, be engaging in these discussions to try to understand where the things are, particularly the problems where the intended impact has not materialized, and see if there's something more that needs to be done.

You know, sometimes it could be as simple as awareness. Spreading awareness of options that might be available, for instance, on the corporate side. I think you said, there might be other roadblocks we talk about, for instance, in a different area of doing business.

A lot of the regulations have been simplified, but foreign investors have simply not been aware of them. So we need to now start embarking on the process of going over, continuously, over reforms and seeing whether they have resulted in meaningful change. Clearly much of the expertise will lie at the local level, but it is important to assess the broader objectives.

We are almost running out of time, so I will quickly turn to Bruno at this stage of the discussion. Thank you.

MR. SILVESTRE: Thank you very much, Subir. Well, this concludes our conference call on the 11th review of the Portugal program. Let me remind you that the embargo will lift in about 10 minutes from now.

Thank you, Subir, and thank you, Stephane, for your comments. Thank you all of the participants to be here this morning and asking those questions. We will reconvene again for the 12th and final review in about three months' time. Until then, good-bye.


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