Transcript of a Conference Call on the Third Review under an EFF Arrangement with Portugalwith Abebe Aemro Selassie, IMF Mission Chief for Portugal, European Department
April 5, 2012
MS. MANASSEH: Good morning. Bom Dia. Thank you very much for joining this conference on the third review of the IMF-supported program with Portugal.
My name is Karina Manasseh, with the External Relations Department at the IMF, and here to conduct this conference call is Abebe Aemro Selassie, Assistant Director in the European Department and Mission Chief for Portugal, and we also have Stephane Roudet with us, the Senior Economist on the Portugal team.
I will now turn over to Mr. Selassie, who will say a few words.
MR. SELASSIE: Thank you, and good evening to you all.
So, you know, yesterday, we went to the Executive Board to report on the discussions that my team has had with the government in the context of the third review of the program.
Our findings basically were broadly positive. The economy, of course, is going through a difficult patch at the moment, but there are also signs of strength. On the weakness side, we see the rise in unemployment being a particularly problematic issue. We also see that, you know, the impact of the fiscal adjustment that’s being undertaken is very much evident.
This said, there have been some sources of strength for the Portuguese economy. Last year, perhaps the most notable one was the strong performance in exports, which helped avert an otherwise stronger contraction than would have happened.
So, you know, overall, we are encouraged by the way in which the government is implementing the program, but also in the outcomes, which are, so far, broadly in line with what we had expected under the program. So that’s very encouraging news.
On the program implementation side, I really need to congratulate the government on continuing to pursue the very, very tough policies that are needed -- that are required, really, to correct the imbalances from which the Portuguese economy has been suffering for some years now.
There’s been important progress in restoring fiscal discipline, in addressing some of the particularly problematic aspects of labor market regulation. And, you know, the benefits of this are already being seen. Last year, there was really substantial fiscal adjustment of structural primary adjustment of the order of 3.5 percentage points of GDP. This is after you take out the one-off measures. That’s a very strong adjustment by any country’s standards.
On the labor market side, a range of reforms have been done to try and enhance Portugal’s competitiveness.
So I think the government has really been doing its level best to address the very difficult situation it found, and, I mean, the problems have arisen out of many years of neglect, and it’s difficult to try and address it all in one year. But the government has made generally strong strides to try and address those.
So overall, you know, my main message would be that performance so far under the program has been good, and outcomes, really, have been broadly in line, as we envisaged.
I’m happy to take any questions that you may have.
Question: Hello. I would like to ask what you think about the growth in unemployment, and how could the government deal with that, and the consequences of that in the program overall. Can it put the program down?
MR. SELASSIE: I think that’s a very good question, a very good question.
We are very worried about unemployment, and it’s risen much more sharply than we had expected, particularly towards the end of last year. You know, to some degree, it’s a bit of a lagging indicator. It reflects the economic difficulties last year.
But given, you know, that output, this year, it’s expected to be -- we can still -- I think, unfortunately, it’s not unrealistic to expect unemployment to increase some more this year.
Now this said, I’ve also indicated this in other discussions I’ve had publically. You know, there’s no need to be fatalistic about this at all. I think particularly for very young workers -- youth unemployment, as you know, is very high -- and also for older workers, I think there is hope, you know, to do what we call active labor market type policies, to try and see through training programs, through better apprenticeship-type programs, to try and help these people get back into jobs.
You know, in the longer term, however, I think what will help ultimately Portugal to recover is trying to address the heavy indebtedness that companies have, the fiscal burden that’s weighing on the economy. Trying to address those things are the fundamental solutions. Those are the long-run solutions.
But in the near term also, I think, there are steps that can be done to try and ameliorate impact -- particularly on, as I said, young workers and more older workers.
Question: Yes, and I have two questions.
First one, you say in the report that some of the main goals of the program can enter in conflict with each other, mainly debt consolidation and the inquiries of the potential growth. Are we going towards the same situation that Greece has entered?
Also, the Prime Minister of Portugal said yesterday that he sees no need to go back and find an alternative on reducing the contribution that the employers -- the fiscal devaluation, exactly, to an alternative way of fiscal devaluation. He sees no need of that, but you, the IMF, says in this report that you really still want an alternative, and with some urgency. What should we do?
MR. SELASSIE: Two very good questions, I think.
You know, 2012 will be a very critical year for Portugal, I think. A lot of work was done last year, but this year, there’s, you know, more fiscal adjustment that’s being made.
And so, you know, one risk is that as the degree of adjustment that’s been undertaken this year begins to bite, one risk is that output could be even weaker than we’re envisaging now.
Now that’s not our central scenario at all. And as I noted in my remarks, there’s been surprising signs of resilience, particularly in the export sector last year, so it’s not inconceivable that you can have, you know, exports again, providing some, you know, more support to the economy than we’re projecting at this moment.
So the discussion that we have in the report, where we highlight the fiscals, it’s definitely a risk that’s out there, but that’s not part of our central scenario.
And this actually is related to the point on fiscal devaluation. One of the things that could be done to try and avoid this debt inflation-type spiral that can take hold in the context of internal devaluations is to try and improve competitiveness in a way that’s neutral to shrinking disposable income, which is why the fiscal devaluation was an attractive approach.
Now we understand why the government hasn’t proceeded with this, including because the tax handles that had been identified earlier were used for other purposes. But, you know, the point, and the discussion we have in the staff report regarding this is to say that with something akin to the fiscal devaluation, that kind of measure to try and bolster competitiveness, then we would have much more confidence, and I think -- you know, you increase greatly the chances of coming up with the outward task that we have. In its absence, we’re going to have to look at alternative ways to try and support output.
So the point about fiscal devaluation -- why it’s needed is really to give greater confidence in the path that we have for output at the moment in the program.
Question: I would like to ask -- you know, the report was very clear, saying there is a non-trivial risk that market access could be delayed for Portugal.
One question is whether September this year is still some sort of deadline that the IMF has, in terms of consistently and concretely finding out whether Portugal can access the markets in September 2013.
And the second question is, if Portugal can return to the markets next year if that’s established, is it the view of the IMF that financial support should be given beyond next year -- in other words, not only to cover the bond repayment next year, but 2014, perhaps 2015?
MR. SELASSIE: You know, on the issue of market access -- I think, you know, as I’ve said before, our central scenario continues to be that Portugal will regain market access next year.
You know, three or four months ago, when spreads were, you know, really -- had blown out really very wide, we, I don’t think, could have anticipated them declining to the levels that we see at the moment.
So as, I think, markets have become more aware of the progress that has been made on the fiscal front, on implementing the current account, I think, you know, the program has been getting traction, and our hope and expectation is that this trend will continue allowing borrowing costs to decline, allowing Portugal to return to markets next year.
So that really remains our basic scenario, our baseline scenario.
Now of course, you know, this is not something which is in within the control of the government. I think what the government can and needs to do is basically continue to implement this program, continue to address the imbalances. Those have to be addressed anyway, so I think that’s what the government needs to continue to do.
And if, you know, spreads haven’t come down sufficiently to allow Portugal to reenter markets, I think the fallback is the commitments that European leaders have made that they stand ready to support Portugal, providing the program continues to be implemented as envisaged. I think that’s an important fallback.
Again, you know, but one thing I would stress is, just in the last couple of days, we’ve already seen, you know, quite a significant development, including Portugal’s ability to, for the first time since the program -- you know, in about a year, year and a half, to issue borrowing bills which are for more than one year maturity. The 80 month T-bill that was issued yesterday, the borrowing cost on the six month bill relative to the previous one, I understand, also improved sharply.
So you are seeing some tangible signs of Portugal being able to re-access markets at the short end. This has improved dramatically, relative to where things were a year, year and a half ago.
So, you know, I don’t see, providing the program has been continued to implement well, I don’t see why this strength shouldn’t continue, allowing Portugal to be able to lengthen maturities.
Question: And just one more question. How do you see Spain -- the crisis there becoming increasingly obvious in spring -- heating Portugal, both in terms of the economy, and in terms of the visibility of going back to markets next year?
MR. SELASSIE: You know, last few days especially, we’ve been so busy with the board meeting, I haven’t focused much on Spain. But of course, Spain is an important market for Portugal.
But I think, really, right now, we see the risks for Portugal still kind of being weighed by the need to address the domestic imbalances, so I think that remains our focus, and that’s where we’re doing a lot of our work.
Question: Yes. Mr. Selassie, in terms of the fiscal deficit, what is the target for 2012? They borrowed from the pension fund last year.
And also, how long is it going to take for Portugal to regain its competitiveness?
MR. SELASSIE: I’ll say a quick word on the fiscal deficit, and then ask Stephane, who’s our fiscal economist, to comment on this.
I think one key thing that I would stress on the fiscal deficit is, you know -- and I mentioned earlier -- in a way, you know, the pension fund transfer has masked how much underlying fiscal adjustments the government was able to do last year.
Even if you abstract from those kind of one-off operations, you still had structural time readjustments of 3.5 percentage points in one year. That is, I think, really way larger than you’ve seen anywhere in the Euro area happening last year, I think.
And, you know, when I say structural fiscal, I’m talking about, of course, you know, taking into account the cyclical position of the economy, and also, again, removing the one-off transactions, including the pension fund.
So the pension fund did help overall deficits narrow, but underlying improvement really was very substantial. Stefan would perhaps say a word or two on this.
Mr.ROUDET: Yes, maybe to follow up on that, then I’ll say something about 2012, because it was the topic of your question.
So for us, the pension fund transfer is really something that took place in 2011, and we don’t expect such operations in 2012.
And our view is that the budget, which aims at a deficit of 4.5 percent of GDP for the general government for this year -- our view is that this objective is reachable under the current projections and micro framework.
Just to give you a sense of the necessary structural adjustment to reach this target, we had 2.5 percent primary structural adjustment last year, and meeting the target this year, we’ll need another 4 percent primary adjustment in 2012.
MR. SELASSIE: Okay, and turning to your competitiveness question -- we have, you know, some discussion of this in our staff report. I think there’s a box one, I believe, which looks at what’s been happening on competitiveness issues.
And I think the key is, you know, the imbalances have developed over, you know, 15-odd years -- since the mid to late 1990s, to leave Portugal as of around 2010 about, you know, 15 percent or so out of equilibrium in terms of competitiveness.
And what we’ve seen is more a leveling off, and really, a very, very small decline so far, in overall unit labor costs, for example -- economy-wide unit labor costs.
Somewhat more encouraging is the fact that when you break that out into sectors, you are seeing some of the, you know, non-tradeable sector -- some decline in competitiveness.
But there’s really a long way to go, in terms of competitiveness, before the Portuguese economy can be said to be competitiveness.
Now I have to also say that, you know, this is prices. I mean, this is kind of the measure of competitiveness. But ultimately, competitiveness matters, of course, for the outcomes, and there, you have a much more positive story.
Exports last year, as I keep harping on about, did very well. They grew, I think, 14 percent in nominal terms, and 7 percent in real terms. You know, it was across the board, both in terms of geographic areas to which exports went, but also kind of in the composition of exports.
So even though you haven’t seen kind of the competitiveness indicators increasing as much, the export performance really has been very, very strong, and so we’re encouraged by that development also.
QUESTION: Hi, and thanks for doing this. I have a question about the structural and the reforms you talked about earlier already, but just to be very clear, and to understand it right, do I understand that you would like to push the Portuguese government to do more supply side reforms? They don’t want to do that, and then you talked in the absence of that, we need other measures. What could these other measures be?
MR. SELASSIE: You know, there’s a twofold thing here. I think one is kind of to look at what -- I mean, basically the question that was asked earlier about the fiscal devaluation, and what can be done instead -- but more broadly, I think where we see the need for supply side reform, of course, is, you know, related very much to the competitiveness issue that we’ve touched upon, a little earlier on.
You know, I think there’s no doubt that Portugal needs to do a lot more structural reform. The government has undertaken a substantial amount of labor market reform so far and they are beginning to contain labor cost, and even bring it down in some sectors, as I just noted.
So I think the first round of labor market reforms, I think, has been welcome, and really, it has gone a long way.
And here, I should also note that in lieu of fiscal devaluation, the government did deepen reform somewhat, you know, in addressing -- for example, reducing overtime pay and the like.
So it’s not as if the absence of fiscal devaluation wasn’t fully compensated for. The issue is more that what fiscal devaluation does is kind of it tilts the incentive structure, but hopefully between tradeables and non-tradeables, whereas these more across the board cuts don’t quite tilt -- are not as effective or efficient, if you will.
Now coming back to supply side reforms, I think what the government has done is really very encouraging on the labor market front, but I think there’s still a lot more to be done on the product market front. And one of the areas of emphasis on the fed review was trying to deepen reforms here.
You know, I think electricity sector is one area where we looked at. Our understanding there was that there was substantial ranks in the sector -- substantial profit margins, if you will, and that those needed to be reduced to help contain the tariff deficit, but also, you know, electricity is one of these network industries, and high costs there will cascade throughout the rest of the economy. So it really was imperative to try and contain costs, and maybe even try to reduce them. So that network industry -- electricity is one area where we’ve started.
And going forward, we hope to do more work with the government to try and identify other areas where more reforms can be done to try and improve the supply side response.
QUESTION: And do you see signs that the government is willing to do that? You say you hope, and in the report, you wrote that there was an absence of supply side reforms, and you call on the authorities to continue exploring.
So what are we going to see? How much hope do you really have that we’re going to see these supply side reforms?
MR. SELASSIE: You know, these reforms are not easy, both from a conceptual perspective, but also kind of, you know, because there are a lot of -- there’s always going to be some pushback from the sectors affected.
You know, I think the bigger problem for all of those that are looking at these issues -- that the government is more at the conceptual level, trying to identify what are exactly the -- you know, in this incredibly busy environment for the government, where they’re, you know, implementing a gamut of reforms across the economy, what is -- you know, identifying what are the areas which will give you a big payoff and invest in political capital.
I think I see that more as the bigger challenge, rather than unwillingness to pursue reforms. You know, on that side, you know, really, I’m impressed -- I think one of the great things Portugal has going for it -- and will hopefully help avoid a deeper recession -- is the fact that you have a broad consensus across, you know, many parts of government and civil society on the need for these reforms.
The opposition party is supportive of this program, as you know. UGT, one of the key labor unions, is supportive of these reforms, and I think that’s really a very important aspect of the Portuguese program -- that you have a lot of broad-based political support for the program.
And as long as that’s in place, I don’t think the willingness to proceed with the reforms is an issue.
But it’s really more at the conceptual level, trying to identify the particular supply side reforms that will give you a big payoff in terms of competitiveness gains, and down the road improvements in labor, on top of active productivity. That really is the challenge in part.
MS. MANASSEH: We have time, perhaps, for two more questions,please.
Question: Mr. Selassie, I have a few questions.
The first one would be, you say in the report that perhaps if the unemployment persists to increase, that perhaps there is a need of more measures and more reforms regarding wage flexibility. I would like to understand, what do you mean by that? What type of measures could that be?
My second question is about the deficit targets. You say that in the case that the recession turns out deeper than projected, chasing after fixed nominal deficit targets may not be the best policy. So are you considering for a relief in the deficit targets?
And my last question would be about the reduction, the cuts in the bonus, and the Christmas and holidays bonus. The European Commission has suggested that they could turn permanent, and the government is refusing. What is the position of the IMF regarding this subject?
MR. SELASSIE: Okay, a lot of questions.
First, on unemployment. You know, I started by talking about our concern that unemployment is proceeding much -- you know, at the higher level than we had envisaged under the program, so it is a source of concern. And, you know, it makes me question the assumptions that we had about how much change in prices versus volumes there would be in this sphere.
So that’s what we are talking about, and if you see a lot more of the adjustment falling on the volume dimension, then that’s a source of worry, and, you know, that’s something we are trying to study, and we’re looking at. So that’s the emphasis that I would want to make.
On the deficit target for 2012, you know, when we come up with these deficit targets, again, they are contingent on the outlook for output, both in Portugal, and of course, Portugal’s trading partners.
So if we, going forward, you know, we find that output is going to be a lot weaker than we are envisaging now, or we find, you know, if the environment really is poor, then it may be that we have to revisit the fiscal target, because I don’t think, you know, as we know, it makes sense to run after nominal targets when you have more fiscal measures that you’re going to take, weakening output further, and so on.
So we are willing to revisit, but I have to also note, of course, the paramount importance of trying to adhere to these targets as much as possible, particularly in light of the need to contain the debt level and reduce the fiscal deficit. That’s the big challenge that Portugal faces in financing its fiscal deficit.
So, you know, we would only see the case for allowing automatic stabilizers to operate -- only in the case where, you know, that is triggered by automatic stabilizers rather than policy slippage, which must be avoided at all costs.
Then, lastly perhaps, on the 13th and 14th month wage issue -- I think Minister Gaspar has explained what the government’s position is, and I have nothing further to add on that.
Question: Thank you. I wanted to -- thank you for doing this, by the way.
I wanted to go back to the market access issue. You described the potential for market access under your baseline scenario, but did not talk about your estimations for market access under your alternative downside scenarios. Can you explain -- you yourself in the reports say there’s a nontrivial risk that additional financing would be required, but what sort of timeline are we talking about? How much longer would Portugal be potentially out of the market for debt refinancing under your alternative scenario?
MR. SELASSIE: You know, again, exactly because we, you know, we are working with our central baseline assumption, the alternative scenarios are not something that -- and possible financing needs and those scenarios -- is not something we’ve broached yet. But, you know, again --
Question: Well, you broached them in the report.
MR. SELASSIE: The alternative scenarios? Yes, in terms of debt sustainability analysis. Of course, we do that -- you know, we do robustness checks to make sure that our assumptions under, you know, under alternative assumptions, that we continue to have a declining debt path, and not an exploding one.
Now the point that we make about the nontrivial risk is really to also signal to Portugal’s European Union partners of the need to look at, you know, any potential financing need that might arise going forward.
But again, I would stress, you know, the central scenario remains that Portugal will be able to access markets in some fashion or other next year for longer maturities -- indeed, may already have for more than one year maturity, which technically falls under medium and long-term borrowing, as you know.
So I don’t see why further progress in that dimension should not be possible. So, you know, our hope really is to continue with the program assumptions as we have them.
MS. MANASSEH: Okay, thank you very much for joining this conference call. Again, thank you very much, and good night.