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Portugal - Transcipt of a Conference Call on the Release of the Staff Report on the 8th and 9th Review under the EFF
November 13, 2013
Subir Lall, Assistant Director, Mission Chief for Portugal, European Department
Stephane Roudet, Senior Economist, European Department
Simonetta Nardin, Communications Department
MS. NARDIN: Thank you very much. Good morning, everybody. Good afternoon to those of you joining us from Lisbon. This is a conference call on the release of the staff report on the 8th and 9th review of the Portuguese program. The content of this call is embargoed until 12 noon Washington time, together with the content of the report, which you have already seen. Thank you.
MR. LALL: Thank you, Simonetta. Good morning and good afternoon, ladies and gentlemen. Let me begin by making a few remarks in conjunction with the release of the staff report for the combined 8th/9th review. And at the end of those remarks we'll be happy to take questions on the report.
The program with Portugal is on track. As you know, the IMF executive board concluded the review on Friday last week, on November 8, allowing for the associated disbursement to be made. Recent economic indicators have improved, suggesting that economic activity may be bottoming out, paving the way for a modest recovery in 2014. Unemployment has also begun to decline, as underscored by the most recent data for the third quarter of this year. It fell by 0.8 percentage points to 15.6 percent in the third quarter. This was the first time since 2008 that unemployment has fallen for 2 consecutive quarters.
Considerable progress has been made in advancing fiscal and external adjustment and on structural reforms. More than 2/3 of the structural fiscal adjustment has been accomplished with the remaining bit underpinned mostly by expenditure measures. The current account deficit is expected to reach positive territory this year at around 1 percent. Significant structural reforms are now in place—for instance, in the areas of labor market, the competition framework, and judicial reforms, to mention just a few areas.
Following some setbacks earlier in the year, in the summer, the authorities took decisive steps to keep the program on track, including by reaffirming the previously-agreed budget deficit target of 4 percent of GDP for next year. This has now been formalized in the budget that is being discussed in Parliament. The authorities also took remedial steps to ensure that the 5.5 percent of GDP budget deficit target for 2013 remains achievable.
The demonstration of the authorities' renewed commitment to adhere to the program targets and to implement the underlying policies has been reflected in the sharp decline in Portuguese government bond yields--which have declined by some 150 basis points since mid-September for the 10-year bond. And these are now close to 24-month lows across the yield curve. Moody's has also revised its outlook on the Portuguese debt from negative to stable. This is clear evidence that a demonstrated commitment to reforms and adherence to the required policies is recognized by financial markets.
Nevertheless, there remain implementation risks to the program and uncertainty surrounding macroeconomic and market financing prospects. Continued strong commitment to the program and political cohesion are therefore critical to strengthen the recovery, reduce unemployment, and regain full market access. This implies that the policies and reforms under the program, which we see as necessary to achieve the objectives of the program, including boosting growth and reducing unemployment, need to enjoy broad ownership and political consensus. This will ensure that Portugal's policy credibility with regard to enacting necessary reforms is firmly cemented.
Looking ahead, there remains sizable fiscal consolidation to implement, so as to bring Portugal's public finances on a sustainable footing. Following two years of substantial fiscal consolidation (of about 6-1/4 percent in structural primary terms), the pace of adjustment eased sharply in 2013—this year—to around half-percent, reflecting in part the need to adjust for the weaker macroeconomic environment. Looking ahead, an additional 2-1/2 percent of structural primary consolidation is needed over the next two years to reach the program's targeted structural adjustment, and this is spread roughly evenly between 2014 and 2015. In this context, full implementation of the 2014 budget and underpinning expenditure reforms is particularly critical. At the same time, further efforts are needed to address underlying weaknesses in public finances, including a large public sector in relation to the private sector, and ensuring long-term sustainability of the pension system.
The authorities have a strong track record in preserving financial stability and banks' liquidity and capital conditions remain adequate. Given the challenging economic environment, ongoing initiatives to improve supervision and monitor risks are welcome, including a further strengthening of banks' quarterly stress tests. Channeling credit to viable firms is key to support the recovery and employment. Equally important is the need to step up efforts to address the corporate debt overhang and stimulate companies' restructuring.
Reducing Portugal's high levels of debt requires, in addition to consolidation efforts, a vigorous push to increase the economy's growth potential and transform it into a dynamic and globally-oriented economy. Reducing debt requires both fiscal reforms and higher and sustainable growth. For Portugal, this means a dynamic and vigorous trade-able sector that creates the new jobs of the 21st century, while reducing the economy's dependence on the non-trade-able sector. The younger generation and the future generations' jobs need to be in the private and in the trade-able sectors, and policies need to ignite this engine of growth. Forceful implementation of structural reforms is, therefore, critical. This includes further advances to address nominal rigidities and supply-side bottlenecks. It will be essential to move economic resources from the lower productivity, non-trade-able sector to high-productivity trade-able sector. That is where Portugal's future lies, in terms of growth, sustainability of public finances, and creating higher income jobs for the younger generation.
With these remarks we will now be happy to take questions, and before you pose your question please identify yourself and the organization you represent. Thank you.
QUESTIONER: Good morning, Simonetta. Good morning, Mr. Subir, Mr. Stephane Roudet. I have two questions. The first one, the deficit goal for 2014 is 4 percent GDP but here in Portugal no one believes it will be met, not even the government, judging by the fact that they have asked for a 4.5 percent goal. What I ask you is, is the IMF willing to review this objective should the adjustment go not as well as planned?
My second question. One minister has recently said that in order to regain market access and avoid a second bailout we must have our 10-year treasury bond yields at no more than 5 percent -- 4.5 percent in the secondary market. Do you agree with this? What's the maximum yield limit we must have in order to regain market access by June? Thank you.
MR. LALL: Thank you very much for your questions.On the deficit goals for next year. As you know, we reached understandings on 4 percent, and this objective has been embedded in the budget that has been submitted to Parliament, so I find it a bit odd that you say that no one believes this, including the government. I do believe the government believes in this objective and it is reflected in the budget document. We understand the government is committed to that deficit target for next year. That was the outcome of our discussions and that's clearly been followed through.
And so, the question of what would be a different target and whether the IMF would be willing to adjust to that is a bit of a red herring, if you ask me. There is a full expectation that the target for next year will be implemented and will be met by the government, and that's their commitment.
Now on the question of market access. There is no magic number on yields in our view. Market financing means two things. One is that the yield has to be something that is considered sustainable, and the other is it has to imply durable market access over a period of time, which means that Portugal can go back to private market financing for its public debt.
So, the short answer is there is no magic number, and it depends on a number of factors, of course including the fact that it will depend on what GDP growth is expected to be and what nominal GDP growth will be, because that determines the sustainability -- the rate at which a government can sustainably borrow.
QUESTIONER: Hello. I would like to ask you about the staff report. On Page 24 you talk about some of these measures that may be ruled unconstitutional, in that the government would have to identify and implement measures to meet deficit targets. Given the limited room for maneuver this will prove to be extremely difficult. Nonetheless, it is a must for success.
I would like to ask if you have talked with the government about the Plan B because our government said that they have no alternative measures. And if you haven't talked with the government about the Plan B, what do you think should be the measures -- the alternative measures to be taken? Thank you.
MR. LALL: Thank you. Indeed, we do highlight the risk to the program and to the achievement of the targets in case there are constitutional court rulings that overturn some of the measures. But no, we have not discussed a Plan B with the government. However, we are of the view that there's no other way than to have to come up with alternative measures. What we signal in the staff report is our concern that these alternative measures -- we have tried to come up with what we think are first best measures under the circumstances, and the overriding priority is to meet the overall goals to bring public debt on a sustainable path-- and if you have to find other measures, we'll have to have discussions, obviously, with our counterparts on what those might be. But our concern is that those will be less helpful to the incipient recovery of the economy and of employment that we envisage. And so, clearly that would be a second-best option but you know, if we get there we'll have to discuss them. But it would be hypothetical right now to speculate on what those measures might be.
QUESTIONER: Hi. I have two questions for you. First of all, do you think there is room to lower taxes on personal income? Then, do you think wages in Portugal have been lowered enough or if -- even if they are lower than they were before and what can be done in this -- about this?
And lastly, if you think that the president should send the budget to the constitutional court as soon as possible. Thank you.
MR. LALL: Thank you. Let me begin with the first -- on the question of personal income taxes. You know, the overall situation we find ourselves in is one where fiscal space is very limited. Measures have had to be taken both on the expenditure and on the revenue side. Given that we have a binding deficit target that's absolutely essential, to ensure that targets are met -- to ensure that debt is on a firmly-declining trajectory and that durable market access is restored, there is very little room at the moment to consider a reduction in personal income tax.
Now on the question of wages, I would put that in the broader context of regaining competitiveness -- and I mentioned in my opening remarks it's about igniting an engine of growth which is in the trade-able sector and moving away from non-trade-able sector. And clearly, labor markets are one component of that.
As I mentioned in my opening remarks, a lot has been done, and clearly we are still looking very closely at all the factors that are necessary to engineer this shift toward a more dynamic outward-oriented economy. Obviously wage costs, I should say, and labor costs are one component of that. We are reflecting on all the measures that have been implemented and their impact and we are working on that, even as we speak right now. And during the next consultation, it will be an area of focus.
Now, regarding whether the budget should be sent by the president to the constitutional court. That is clearly the president's prerogative, and so obviously not something we would wish to comment on.
QUESTIONER: Hello, good morning to you all in Washington. I have one simple question. Do you have any estimate for the fiscal multiplier implied by this forecast of 2014 -- GDP forecast? Thank you.
MR. LALL: Thank you. On the question, obviously the GDP forecast you say you looked at takes into account the budget and the fiscal measures that are outlined in the staff report. However, you know, the fiscal multiplier, at least to me, seems like, you know -- it's in a way a concept that isolates one effect over all the others. So, we are looking at the overall impact and I don't have the number for you what an implicit fiscal multiplier would be, but that would also be a bit misleading because many factors have to come together to get us to our forecast for next year. So, the short answer is, no, I don't have a fiscal multiplier. Thank you.
QUESTIONER: Hi, hello to you all. I would like to make two questions. One is regarding the working paper that was published in the last two days by the European Department concluding that fiscal consolidations -- more rapid fiscal consolidations imply a higher fiscal multiplier. And I would like to know if that -- if you have taken that into account in the decision of now allowing 4.5 deficits that have -- the 4 percent deficit.
The other question is about financing. You say that you consider public debt to be sustainable over the medium term, but you say that it cannot be considered with the high probability. I would like to know a little bit more about what you want to say with this. Okay, thank you.
MR. LALL: Thank you. First on -- indeed, you know, fiscal consolidation and its impact on growth is clearly something that we keep in mind always -- but that cannot be the only consideration. At least two other considerations come to mind. One is that if debt levels are high as, for example, they are in Portugal and some other countries, the room for maneuver is somewhat limited. And also, given that we are looking to go to the path of durable market access, we have to make stronger efforts on consolidation than otherwise. So there are two elements to that. One is that the stock of debt matters and the other is market access matters. And I’ll go back to my opening remarks. If you look at -- and I’m, of course, aware of the discussion between the 4 percent and the 4.5 percent -- but if you look at how the markets have reacted in the last six to eight weeks, it seems to signal that the markets are comforted by the credibility that the Portuguese government has reaffirmed -- by reaffirming the 4 percent target and submitting a budget consistent with that. So I think you have to look at the evidence, at least even in the last few weeks, to show that this is something that widens the path to market access. And also as you can see from our report, we do believe in the baseline that it will bring debt on a downward trajectory.
Coming to your second question, our assessment on debt over the medium term has not changed and the language used of high probability is because if you read more closely, that subject to a certain combination of shocks then the debt might take a different path. But the bottom line is our assessment of public debt remains unchanged from before, and we do believe that the policies that are being put in place are the ones that are necessary to bring debt on a declining path. And again I will refer back and look at what the market is pricing in, and clearly investors are also of the same view that the policies are helping us to get to a position where real market access can be achieved. Thank you.
QUESTIONER: Hi, good morning to you all. My question is going back to financing and market return. The staff report does say that there is a narrow path for Portugal to regain full market access. Do you think that it’s more probable that Portugal will need help after this aid ends, this plan ends in June or May/June, and if that would be a precautionary plan or do you think it would need a full plan, a full second plan? Thank you.
MR. LALL: Yes, indeed, we say a narrow path, but I should say that the path is wider than it was a month ago and so there is a path to market access.Now, it is too premature to speculate on what might happen next year in terms of financing and the questions that you posed. And part of it is because it is, obviously, dependent on what happens in terms of market financing. So I think we will have to come back to this question sometime in the future and not right now. Thank you.
QUESTIONER: Hi, good morning to you all in Washington and good afternoon to my colleagues here in Lisbon Mr. Lall, sorry to keep insisting on the same question, but on the documents it said that should market uncertainty persist despite the successful completion of the next few program reviews, they -- the European partners -- could be called upon to fill their commitment to support Portugal. And I notice that this is something you don’t usually write on the documents; it was the first time I’ve seen. And I wanted to know if you now see a high probability that Portugal will need some kind of support, and I don’t know the asking what kind of support are you talking about also.
On the fiscal targets you were talking about the credibility of Portugal achieving the targets. My question is, is it not more damaging for Portugal in the markets to keep failing those targets and they do keep failing those targets.
And my other question is you mention here on the part of the agenda of the reforms something about labor market reform and I cannot understand this. Can you explain it to me a bit better? You are saying that the Portuguese authorities should ensure proper alignment of incentives to challenge dismissals in court. What are you exactly saying? That Portugal needs to make it harder for the workers to go to court and challenge dismissals? Thank you.
MR. LALL: Thank you for your questions. Now, since you asked the same question, I’m going to more or less give the same answer. Now, in terms of the language, actually that is not new language. If you look at the staff report for the previous seventh review and look at paragraph 42 and footnote 18, they are more or less the same language we have there. So there’s no new information there.
And then I’m not fully sure what exactly you implied by saying that the targets are repeatedly not being met. If anything, in fact, if you look at the staff report, the targets were met for the performance criteria and we reaffirmed the fiscal deficit target for next year. So I’m not entirely sure that you are fully accurate in the way you posed your question.
Now, on the labor market question, I’ll hand over to my colleague, Mr. Roudet, to give his response.
MR. ROUDET: So, on the labor market, speaking to your point, the reference in the staff report. This is mainly a reference to the fact that after the significant reforms that have been implemented in the area of severance compensation, severance pay, there’s now a significant discrepancy between severance that is paid for fair and for unfair dismissals and that generates opportunities of arbitrage and maybe incentives for employees to go to court more often claiming that their dismissal has been unfair. So this is a reference to that, and we see this as a potential area for investigation going forward, to see whether or not there are wrong incentives and whether they can be corrected.
QUESTIONER: Hello. I ask you if you please can clarify three points on the report. First one is point 13, page 17, in the report that says that banks’ capital requirements under the program have been recalibrated to ensure consistence with the development at the EU level. What does this mean to Portugal?
And the second is on page 25 that mentioned the public/private partnerships force and related to project description. And I ask you which way in Portugal public/private partnerships are allegedly involved with corruption in the past?
And the last one I am asking for a comment on the way the markets develop in 2013 related to Portugal. And thank you.
MR. LALL: Thank you very much for your question. I think the questions you have are fairly detailed, and we might have to take them up more bilaterally. But I would make the broad point that on the banking sector and capitalization, we are broadly satisfied with the capital in the banks and, obviously, we’re looking at various scenarios and we seem happy and we are happy with the state of the banking system. And, of course, as noted in the staff report, that capital requirements for the banks under the program will be set in accordance with CRD IV package, which no doubt you’re familiar with.
And that’s what we’re trying to align with, to make sure that the progress in the banking system is very much aligned with the European initiatives. And so this was just a statement on that because we have to ensure that there’s full harmonization between Portugal’s banking system and the euro area initiatives in banking systems.
Now, the question -- I’m afraid I did not catch your second question well, but if it’s a detailed question -- I think it was something to do with PPPs, but I missed that. We could take it up bilaterally.
Let me go to your third one on labor market developments. Well, the broad view is that you can see that after peaking in Q1 that unemployment has been falling and especially in the most recent quarter for which data came out just a couple of days ago, last week actually. And this is not just to do with the labor force, but, in fact, employment is rising and, in fact, the labor force side has been more or less stable for about three quarters now. So it is encouraging.
That being said, unemployment is still slightly above 15 percent and remains high and that’s why we need to take a careful look at what more can be done to reduce the unemployment rate. Thank you.
QUESTIONER: Sorry to insist, but in your answer there was nothing that kind of answered my question about if you think that wages in Portugal have lowered enough or if they are lower now than at the beginning of the program. As you know, that was a hot topic a couple of months ago here in Portugal. And what do you think about the report specifically by Bank of Portugal that said that wages have been falling for the last couple of years?
MR. LALL: Thank you. Let me restate or maybe clarify my answer, which is as I mentioned before wages is only one component of productivity. So to have a proper discussion on wages, productivity, and competitiveness, you need to look at everything, including wages and including productivity. So I will, obviously, not comment on specifics of one report because we are still discussing it, but we need to put the whole picture together. As I said before, there’s not one single magic bullet. And so when we put -- and keep in mind that a lot of measures have been taken and we are seeing a big turnaround in the current account. It is still too early to have a view on whether this turnaround is sustainable and permanent or not and the reason -- I’m not trying to evade an answer, but we have to be very careful in coming to an assessment. And as I mentioned before, we are still looking at this issue. We will really continue looking at it, including at the time of our next review.
And so if you want a simple yes-and-no or up-and-down answer, that’s going to be very difficult because it’s a far more complex issue than that. Thank you.
QUESTIONER: I asked you for a comment on judicial reform progress. Thank you.
MR. LALL: Oh, right, sorry. As we note in the paper, a lot of progress has been made on judicial reforms under the program and, in fact, so much so that we have highlighted that in the report in terms of a separate box as well. And clearly that has -- and this is a very concise summary which you see on page 30, but clearly it is one of the areas of major progress under the program on judicial reform. Thank you.
QUESTIONER: Hello, again. I have a follow-up question about wages again. In this report you state -- or at least that’s the way I read it and please correct me if I’m wrong -- but I think you state that wages in certain areas are still too high, especially wages for low-skilled workers. In your opinion how can this be changed? Does this imply reducing the minimum wage and how much should minimum wage be reduced in order to correct this? Thank you.
MR. LALL: Thanks for your follow-up question. What we’re doing in the report is in some sense pointing out some of the facts that we can all agree on. Now, the question what this implies with specific policies, and I will come back to, like I said before will require a little bit more in depth analysis. And we hope to discuss them in detail because there may be institutional factors that work as well and generate frictions in the labor market.
So, again, it’s going to be not possible to give a straightforward answer -- yes/no, this measure or the other -- but we have to look at the whole labor market, but also development and productivity and especially between the tradable and non-tradable sectors.
Before we develop precise policy prescriptions or policy advice on what more can be done, again let me reemphasize that a lot has been done already. And what we note in the report is that despite that, we’re not seeing as rapid an adjustment as we would have expected or hoped for. So this is clearly an item on the agenda to understand better labor market dynamics, but clearly in terms of -- it’s far too premature to speculate on specific measures that may or may not be needed going forward. Thank you.
MS. NARDIN: Very good. So we thank you all. We would like to thank you all for participating in this conference call on Portugal. As a reminder the content of the call as well as the report are still under embargo for another hour and 15 minutes, until 12 Noon Washington time.
Thank you very much for participating. The Operator will now let you know how, if you want to listen again to this call, how to do that.
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