Portugal: Eighth and Ninth Reviews Under the Extended Arrangement and Request for Waivers of Applicability of End-September Performance Criteria

Publication Date: November 13, 2013
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Summary: EXECUTIVE SUMMARY Discussions for the combined eighth and ninth reviews were delayed by a political crisis and marked by new adverse Constitutional Court rulings. Reflecting in part austerity and reform fatigue, tensions within the ruling coalition led to two prominent cabinet members tendering their resignations. The crisis triggered a government reshuffling, but uncertainty was compounded by concerns about the predictability of policymaking following new unfavorable Court rulings against an important public expenditure reform as well as steps to soften strict employment protection rules. These developments led to elevated sovereign yields, delaying the government’s plans to follow up on successful bond issues earlier this year. The near-term economic outlook has nevertheless improved somewhat, and progress has been made toward the program objectives. Recent economic data signal that the economy may have bottomed out. Remedial actions were taken to address delays in reforms due to the reorganization of the government. All end-June performance criteria and all but one structural benchmarks underpinning the review have been met. Program review discussions focused on measures needed to keep the program on track. It was agreed that, in view of the now narrow path to full market access, adhering to the program strategy was critical to signal commitment to reforms and boost confidence. The fiscal targets were reaffirmed and fiscal measures were identified to underpin the targeted adjustment. Discussions also focused on steps to strengthen supervision in view of the still challenging conditions facing banks and on the structural agenda to boost competitiveness and growth. Nonetheless, implementation risks are high, and political cohesion remains critical. Renewed tensions within the government need to be avoided, as they would delay the recovery and increase downside risks to the program. There is also a risk that new Constitutional Court rulings will further complicate policy making and heighten economic uncertainty. Decisive policy responses in case this risk materializes will be essential since the room for maneuver under the program has become limited. Staff supports the authorities’ request for completion of the combined eighth and ninth reviews and for waivers of applicability of the end-September PCs. The purchase released upon completion of this review would be in an amount equivalent to SDR 1679 million.
Series: Country Report No. 13/324
Subject(s): Extended arrangement reviews | Economic growth | Fiscal policy | Fiscal consolidation | Public debt | Unemployment | Fiscal reforms | Privatization | Banking sector | Debt sustainability analysis | Economic indicators | Staff Reports | Press releases | Portugal

Publication Date: November 13, 2013
ISBN/ISSN: 9781475518405/2227-8907 Format: Paper
Stock No: 1PRTEA2013005 Pages: 88
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