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Transcript of a Conference Call with IMF Mission Chief Poul Thomsen on the IMF Executive Board’s Approval of an Extended Fund Facility for Portugal
May 20, 2011
MS. NARDIN: Thank you all for participating in this conference call. As you know, the IMF Executive Board has just approved the request of the Portuguese authorities for financial support from the IMF. With me is the IMF Mission Chief for Portugal, Mr. Paul Thomsen, as well as Hossein Samiei, who also works on the Portuguese desk and was part of the mission. Poul will offer brief introductory remarks and then we will open it up for questions.
MR. THOMSEN: Thank you very much and thank you for joining us. As Simonetta just said, the Board just concluded and recognized that this is a comprehensive and ambitious program. They noted that it has three main parts and is above all, focused on structural reforms, so it is very commensurate with the fact that Portugal’s problems are, above all else, of a structural nature. As we said before, even during the good years, Portugal was hardly growing. In addition, Portugal has a significant need for fiscal adjustment, as well as need to be sure that financial deleveraging does not take an excessive toll on credit growth and pose a risk to its economic growth.
Let me just say that the Executive Board realized that this program is, as I said before, bold but realistic. It has a fiscal adjustment that is strong and frontloaded, but it’s not excessively frontloaded. That’s why we have a target for 2011 that is somewhat higher than the government’s previous target. But it does maintain the target of getting to a deficit of 3 percent by 2013. I think this suggests that we strike a good balance between, on the one hand, making sure that we don’t have excessive downward pressure on growth in the near term until structural reform takes hold, but on the other hand, we need to restore market access, and we need to have relatively ambitious frontloaded fiscal reforms.
Let me just make four or five points on the fiscal program, very quickly. One, on the frontloading, as I said, half of the near adjustment of about 10 percent of GDP is upfront in the first year. Two, all the measures needed to get down to 3 percent by 2013 have been identified upfront. There are no fiscal gaps in the program going forward. Three, targets are supported by strong structural reforms to restore control over public-sector spending. As you know, one of the main problems has been runaway increases in spending, not least because of public-private partnerships (PPPs) and state-owned enterprises, and there’s much in the program to tighten control and scrutiny in these areas. Four, I think it’s well balanced between expenditure and revenue measures. About two-thirds of the adjustment comes from the expenditure side, which is in line with the fact that public sector’s demand on resources is much too high. And five, it’s socially well balanced with considerable efforts to try to alleviate the impact on vulnerable groups.
On structural reform, it was emphasized that there was a welcomed focus on trying to increase competition in non-tradable sectors. I think it is recognized by most that Portugal’s problem is really a lack of competition, in addition to inflexible labor markets, also a focus of the program. As you know, on the structural side, we have this potentially very important policy of trying to increase exports via a fiscal devaluation in the form of a sharp reduction in social security contributions, possibly in the order of 3–4 percent of GDP (offset by other appropriate tax and expenditure adjustments). This is something that will have to be calibrated in the coming months.
On the financial sector there are a number of measures to strengthen banks’ capital position and then try de-linking banks’ access to funding from the government’s access to funding. One of the problems has been that the government’s problems in accessing capital markets has spilled over into the banking system and created a problem for banks to access wholesale financing. And we hope we can de-link that by strengthening banks to market-based measures, but there are a couple of backstop mechanisms there to provide capital, to provide liquidity for banks that cannot rely entirely on market-based needs.
Let me just quickly also talk about the financing package. The authorities’ extraordinary program would be supported by financial support from the international community in the amount of € 78 billion from the EFF and from the IMF. The support is very frontloaded to allow a notable reduction in short-term liabilities of the government already at issue. This is critical to avoid damaging credit as least as far as small and medium enterprises are concerned. The financial package has also been calibrated with a rule to allow Portugal to stay out of the market for medium- and long-term bonds for slightly more than two years. So the financing package will give the government the breathing space needed to establish a strong record of policy implementation before having to return to the market, but undertaking the needed adjustment in a socially responsible way.
So let me just conclude by saying this is not going to be an easy program. There is going to be a difficult period of adjustment, and the economy is going to be in recession until early 2013 when we expect recovery to start taking hold. Important in this regard, it is a program that is very ambitious to boost output and employment in a lasting manner over the medium term and with a strong implementation of that, we do, as I say, see a recovery taking hold in 2013.
QUESTION: You mentioned that the economy will be in recession until early 2013. How is Portugal going to be able to recover from its difficulties while undergoing a recession as a result of the austerity measures?
MR. THOMSEN: Well, as I said, it’s inevitable, particularly with a fixed exchange rate. They’re dealing with a fiscal problem, and the problem of high leverage will entail downward pressure on output in the first year or two, and that will dominate. The program will have a lot of measures to improve competitiveness, and I’m sure you will start seeing very soon -- this year -- a response of exports to the program, but it will take some time for these close-enhancing measures to take effect. But I think it’s one of the strengths of the program that we acted very conservatively on growth. We won’t see any significant impact of these tough reforms assumed into the program until after the three-year period of the program. The program is unlikely to get any big negative surprises on the growth side. And I think that’s one of the strengths of the program, that it will be robust to different GDP assumptions.
QUESTION: I’m wondering whether you might go into more detail about the structural reforms to increased competition. And then I wonder if both you might talk a little bit more about how you’re going to de-link the bank access from funding away from government?
MR. THOMSEN: On competition, there are a number of issues. It is a question of trying to deal with what is an uncomfortable, close, relationship between government and some of the larger entities in the non-tradable sector, and there are several measures. They include regulatory reforms; that is a key measure. There is obviously also other things -- labor market reforms is essentially a question of allowing more entry, if you will, and a question of fairness, allowing those who are not inside the labor market, not the least the young, to compete for jobs.
In the financial sector, the increase in capital ratios from six to ten -- six to eight was already announced before the program was decided, but it was further increased to ten. We think that is an important strengthening of the capital base of the banks and that will make it easier for them to access external markets. It will simply make them more attractive for foreign borrowing. But it will also, I think, increase the chance as banks work to broaden or to strengthen their capital base, we hope that this process will bring in some strategic foreign investors that already have this market access. So this is -- I think this is a very important part of the program.
Question: Could you say if Mr. Lipsky led the discussion today on the Portugal loan and also how the discussion went in the absence of Dominique Strauss-Kahn? Did that hinder the discussion in any way? And just one final question would be did the Board also take up the leadership position in their discussion today?
MS. NARDIN: Thank you for this question. No, there was absolutely no problem. Mr. Lipsky as Acting Managing Director led the discussion, and no other issue other than Portugal came up. Thank you.
QUESTION: Okay, can you say anything about the leadership discussion?
MS. NARDIN: No, thank you. This is a conference call on Portugal.
QUESTION: You know we have elections on June 5. There are very important measures in the memoranda, on the housing markets and labor markets, with some objectives defined to be achieved in the third quarter of this year. My question is do you think we can, in fact, accomplish these objectives with the upcoming elections? And the second question is if we don’t accomplish these goals, what’s going to happen?
MR. THOMSEN: Indeed, there will be elections in early June and it might take some weeks to form a new government. I think we have tried to strike a right balance there. It is an ambitious schedule, but there is also urgency to dealing with these problems.
QUESTION: It’s a flexible schedule, okay?
MR. THOMSEN: I don’t expect there to be any problems in meeting these targets. We had very careful discussions, as I’m sure you know, with the main opposition parties in addition to the current government. And it’s quite striking how most of the key issues, at least on the structural reform side, have broad political support which to me is one of the encouraging things. So I hope that we can move ahead faster. I think even before the elections, there will be a technical assistance mission from the IMF to Portugal to get this technical work going. We are not waiting until the elections to start forming working groups and diagnose technical issues and move ahead.
QUESTION: How long is the reimbursement period? Is it seven and a half? Is it ten years? And I was just wondering now out of your region, Greece is the only country not to have this type of loan. When do you expect the switch to happen?
MR. THOMSEN: The repayment period for an EFF is up to 12 years, including the grace period. As far as Greece is concerned, we have said before we stand ready to convert to an EFF, but this is not about Greece, so I’m not going to go into a discussion about timing on that.
QUESTION: We are not talking about Greece, but can you say -- seeing the problems in Greece, can you say whether there is anything specific you have learned from the Greece case for the program you are setting up for Portugal?
MR. THOMSEN: I can assure you we learn as we go along. But the thing is we emphasize is that every country, every situation, is different, and Portugal and Greece are fundamentally different. Portugal’s problems are much more of a structural nature with less of a fiscal problem than in Greece. On the other hand, they have a much more leveraged banking system. So the challenges are different and, therefore, if you compare the programs and decide they are actually very, very different.
QUESTION: Can you tell us what will be the interest rates for the IMF loans?
MR. THOMSEN: Yes, this is a flexible rate, right now it will be about 3.25 percent for the first three years, and then it will be about 4.25 percent for amounts outstanding for more than three years.
QUESTION: Can you comment about the timing of the privatization process?
MR. SAMIEI: The privatization program in the agreement with the authorities is for the moment quite a bit based on their own plans and their own plans involve privatization in the transport, energy, communication, and insurance. And over the course of the coming two and a half, three years, this involves about 5 to 6 billion euros. What we are doing is we are encouraging and the authorities are planning to do reviews of the state-owned enterprises in order to see further scope for privatization. And they realize the importance of encouraging and accelerating the privatization program.
MR. THOMSEN: To conclude, let me just repeat why I think that this is a robust program, why this program will succeed. I think it will succeed because it has a very good policy mix, well tailored to the special problems facing Portugal, and it’s a frontloaded program. It will succeed because it is not only well balanced economically, but also socially with quite a number of measures to alleviate the impact on the most vulnerable groups. It will succeed because it’s an exceptionally large financing package by any measure for a program for an economy of Portugal’s size. And finally above all the program will succeed because I think from my meeting there that there’s broad political consensus in Portugal. And as I said, the opposition actually agreed with the main building blocks, the key objectives of the program, which offers a sense of a strong ownership on the part of Portugal, that this is the right program at the right time to get the country back on track. So I think this has a good chance, a very good chance, of succeeding.
MS. NARDIN: Thank you Poul, Hossein, and thank you all very much.
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