Participation in the EMU will help

(1)

As Fases do ajustamento macroeconómico

• 1910-1926: Instabilidade política e militar

• 1926-1939: Reformas de Salazar

• 1939-1944: Excedentes na BP

• 1945-1958: Substituição de importações

• 1959-1973: Abertura e crescimento acelerado

• 1974-1985: Stop and go

• 1986-1992: Liberalização com apoio externo

• 1992-1998: Transição para o euro

• 1998-2008: Década perdida

• 2008-2013: Sudden-stop e bailout

(2)

2001: Gaiola Aberta

1990s: Change in regime

- End of financial repression (credit ceilings, capital controls) - Lower inflation rates

- Declining currency risk

- Prospects of faster convergence Implications:

- Demand expansion

- Large capital inflows (also to accommodate the fall in money velocity) - Real Exchange Rate (RER) appreciation

Future (as of 2001):

- Aggregate demand will fall back

- In the presence of price or wage stickiness, incentives have to be adjusted so as to favour the reallocation of resources from non-tradables to tradables and composition of the demand in the opposite direction.

- Critical choice: wages vs unemployment (for each productivity level)

The interesting thing is that in 2009 we are still discussing the same dilemma.

This is only possible because Portugal is in the EMU.

(3)

The reimbursement problem

No economic agent can sustain an increase in its debt to income permanently.

So sooner or later, this will translate into a primary surplus in the current account consistent with the stabilization of the external debt.

Participation in the EMU will help:

- There will be no sudden capital flow reversal (more time to adjust)

.

- There will be no sudden depreciation of the currency leading to higher costs in servicing the debt.

- Absence of currency risk translates into lower interest rates than otherwise, so a lower primary surplus will be required to stabilize the debt

- Nominal stability, fiscal discipline and capital mobility are expected to induce faster TFP growth, lowering the size of the required primary surplus.

- (…) Still:

To the extent that the return to external balance implies a change in relative prices, it may be interesting to measure the size of the required adjustment.

The Real Exchange Rate

(4)

In sum:

1. The demand expansion caused a RER appreciation

2. Workers moved away from low wage manufactures to high wage services 3. The Oil price shock called for a RER depreciation instead

4. Difference relative to 1976: real wages evolves according to productivity What next?

• The transition to the reimbursement phase is likely come finally, due to the tightening of financial conditions.

• Also agents became more risk averse.

• In 2009 there was a huge fall in private investment and households savings are already increasing. The domestic demand fell sharply.

• Synchrony during the crisis is likely to have caused an over-reaction: in the near future, a smoother adjustment is more likely to prevail.

• Still, tighter financial conditions and rising commodity prices will call for a higher production of tradables.

So incentives have to be in place for such a reallocation to occur.

• Otherwise, the aggregate demand adjustment will result in high unemployment.

• Technological change will definitely help: the faster the technological improvement in tradable goods sector, the lower will be the required shrink of the non-tradable goods sector.

Discussion

(5)

It depends on whether unemployed and businessman closing down non-tradable activities will find it attractive to engage in T production.

Blanchard (2007): real and nominal wage rigidities will prevent relative prices from adjusting fast, dooming the economy to a slow and painful process of competitive disinflation.

This is more likely to affect wages than prices of non-tradables

Note that new jobs do not necessary imply lower wages: in the ongoing process of structural transformation, new investments are expected to bring productivity levels higher than the average. Still, some unemployed may have to accept lower wages.

In the past, we had episodes of high real wage flexibility, but in the context of a different regime.

The trillion dollar question is whether wage bargainers today are incorporating all the implications of the new macroeconomic regime.

Policy has a critical role here: Incentives have to be properly designed.

In particular, it is the role of government to find an appropriate balance between protecting unemployed and the need to keep the incentives right.

Focus: remove the (natural or policy induced) barriers on the path of unemployed in their effort to search for a new job.

How painful?

Discussion

(6)

Discussion

A different question is whether business man in services will find it interesting to move:

(+) Domestic demand will fall (-) There are learning costs

(-) Increasing competition in the context of globalization is bringing down the prices of manufactures relative to other goods (ex. Commodities).

(+) Many tradable goods are services (1/3 of Portuguese exports + tourism revenues not accounted in the current account).

The government may help:

1. Breaking up with inertia by helping entrepreneurs to achieve their first internationalization

2. Adjusting the incentive packages so as to induce the allocation of resources to T 3. Use taxation

4. Promoting more competition in N

5. Providing vocational training for workers in transition, so as to assure the existence of qualified pool of human resources to sustain the industry upgrade.

6. Fastening the licensing process, reducing red tape, etc.

Of course, all intervention needs a careful understanding of the prevailing incentives.

(7)

1995-2005

• Capital inflows all over the period (credential)

• Capital inflows, Real exchange rate appreciation, current account deficits

• Banks borrowing abroad to lend to the private sector

• Government borrowing in financial markets

• Decade of slow growth

• Problems in resource allocation

• Incentives, distortions in financial system, policy

• Absence of fiscal consolidation

• 1995-2001: Fiscal adjustment without consolidation

• 2001-2006: fiscal adjustment against the cycle

• 2007: Portugal manages to meet the 3% deficit

(8)

60 62 64 66 68 70 72 74 76

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

EU15 =0.00

GDP per Capita Current PPS (EU15=100)

GDP per capita Constant Prices (EU15=100)

However, no break in convergence was observed, when

measured in current PPS:

 the real exchange rate

appreciation masked

the stagnation of real

output, giving domestic

agents the illusion of

convergence, and

softening the urge to

reform

(9)

Conference

“After the bailout: How programme countries have fared”

College of Europe Bruges, 24 February 2017

16:30-18:00 Panel 2

The national perspective: Did the adjustment programmes help or harm?

Portugal’s adjustment programme

Miguel Lebre de Freitas & Francisco Torres

afreitas@ua.pt; f.torres@lse.ac.uk

(10)

2008-2009

• Subprime crisis

• Collapse of world trade

• Global recession

(11)

0,000 0,001 0,002 0,003 0,004 0,005

2007 2008 2009 2010 2011 2012 2013 2014

3m euribor 3m eurepo

• Euribor (based on trust)

• EuRepo (collaterized)

Mistrust in the Euro Interbank Market

(12)

The 2008 crisis

• The freeze of the EMU interbank money market created liquidity problems

– Domestic banks started relying on ECB loans for

liquidity (3% of liabilities, compared to 1.3% in

2007)

(13)

2. Pre-Bailout period

– Across Europe, fears of bank insolvency caused the freeze in interbank money markets, and of a feed-back loops from bank failures to

governments generated an increase in government yields.

– Downgrades in Greece and Portugal (Jan 2009)

– In late 2008 and beginning of 2009, a first sign of tightening of external borrowing conditions showed up:

• The yields on 10yr government bonds increased in the EU periphery and in Portugal in late 2008 and early 2009

• Interbank loans to Portuguese banks started decreasing, implying a higher reliance on ECB for liquidity: ECB loans to Portuguese banks as a percentage of liabilities increased from 1.3% in 2007 to 3.0% in 2008, more than offsetting the 0.6p.p.

decline in the funding from other banks. In 2008, the loans to deposits rate was still increasing.

(14)

(15)

The financial crisis

• Portugal not hit directly

– Portuguese banks were not exposed to toxic assets – The real estate bubble had been avoided by the 2001

downturn

7.9 8 7.5

6.1

5.5 5.1 5.1 6.2

7.4 7.8

8.8 8.9 9.18.8 10.7

12 12.9

15.8 16.4

14.1 12.6

11.2

9

7.1

0 2 4 6 8 10 12 14 16 18

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

4000 4200 4400 4600 4800 5000 5200 5400

Employment Unemployment rate

2009: Collapse of world trade, global recession

• In 2009 exports fell by over 10% and 3p.p. of GDP.

• Unemployment surged

• Still: freeze of interbank money market created liquidity problems

• Domestic banks started relying on ECB loans for liquidity

• Two small banks failed

•

State guarantee to BPP

•

Nationalization of BPN

(16)

2. Pre-Bailout period

2.3. Crisis and policy response

– Portugal, as an exporting country, was seriously hit by the second wave of the global crisis: the fall in world trade : in 2009 exports fell by over 10% and 3p.p. of GDP. The unemployment rate, which had been

increasing since 2001 (small interruption in 2007), shoot up by almost 2p.p.

– The NIIP jumped from 88.8% in 2007 to 107.9% in 2009

increasing risks of sudden stop.

(17)

1.2 1.2

0.2

-0.5

-2.0

-3.2 1.4

-0.6

-4.1 2.1

1.5

-0.1

-1.9

-5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09

PIB

Data da Previsão

Previsões para a Zona Euro em 2009 FMI OCDE CE

0.2

0.1 1.2

-0.3 0.9

0.4

-0.4 -0.2 0 0.2 0.4 0.6 0.8 1 1.2 1.4

PIB

Data da Previsão

Previsões para a Zona Euro em 2010 FMI OCDE CE

(18)

2.2

1.4

0.1 1.8

-0.2 2.1

1.6

0.1

-1.6 2.8

-0.8 3

2

-2.0 -1.0 0.0 1.0 2.0 3.0 4.0

PIB

Data da Previsão

Previsões para a Portugal em 2009 ^FMI

OCDE CE PEC OE ROPO

2.1 2

1.3

0.6

2 2

1.6

0.5

2 2

1.7

0.5

0.2 2.2

0.3 1.4

0.8 2.4

1.5

0 0.5 1 1.5 2 2.5 3

PIB

Data da Previsão

Previsões para a Portugal em 2008 ^FMI

OCDE CE PEC OE ROPO

(19)

(20)

(21)

2007 2008 2009 2010

RealGDPgrowth ^{% ch} 2.5 0.2 -3.0 1.9

RelativetorestofEU15 ^{% ch} -0.6 -0.3 1.3 0.0

GNIatcurrentPPSperheadofPopulation PPS, EU=100 70.3 70.1 71.4 71.6

TFPGrowth ^{% ch} 1.6 -0.8 -1.8 2.4

OutputGap ^% 1.3 0.9 (1.9) 0.0

Employment ^{% ch} 0.3 0.5 -2.9 -1.4

Unemploymentrate ^% 9.1 8.8 10.7 12.0

Ofwhich:ShareofLong-term ^% 47.3 44.2 47.8 52.4

GDPdeflator ^{% change} 3.0 1.7 1.1 0.6

CPIinflation ^{% change} 2.4 2.7 -0.9 1.4

Nominalcompensationperemployee ^{% ch} 3.5 2.6 2.4 2.1

NominalULC (totaleconomy) ^{% ch} 1.0 2.8 2.7 -1.2

RER ULC(relativetoEU15) ^1995=100 113 113 113 112

Exportsofgoodsandservices ^{% ch} 7.3 -0.3 -10.2 9.5

Importsofgoodsandservices ^{% ch} 5.4 2.5 -9.9 7.8

CurrentAccount ^{% of GDP} -9.7 -12.1 -10.4 -10.1

(22)

European Recovery

• European Commission November 2008 Plan

• European Council December 2008

 Encouraged coordinated fiscal stimulus

… by those countries with “fiscal space”

Portugal

• Plan to protect employment and household income

– Credit to SMEs, Incentives for investment and employment – Government investment in infrastructures

– Social expenditures

• 2009 was a year of elections

– Decrease in VAT rate

– Increase in public sector wages

The fact that the 2008 deficit was forecasted below 3% might have given the government the illusion of fiscal space.

…but tax revenues

decreased 1.5% of GDP

in 2009

(23)

Medidas do Governo

Orientadas para o Investimento e o Emprego

• OE 2009 e IIE 2009

– Investimento Público

• Em 2009, reforço do investimento público em 13,1% em relação a 2008 – Modernização das Escolas

– Modernização da Infraestrutura Tecnológica: Redes de Banda Larga – Energia Sustentável

» Apoio Extraordinário à instalação, em 2009, de painéis solares ( 300 000 m2) e de unidades de microgeração (12 500), designadamente mini-eólicas

» Antecipação do investimento na infra-estrutura de transporte de energia

» Melhoria da Eficiência Energética dos edifícios públicos (hospitais, Universidades tribunais, repartições públicas)

» Investimento em redes de telecontagem de energia – Emprego - Apoio ao Emprego e Reforço da Protecção Social

• apoio à manutenção do emprego

• apoio aos jovens no acesso ao emprego

• apoio ao regresso de empregados ao emprego

• alargamento da Protecção Social

(24)

(25)

Portugal 2009

• Collapse of world trade

• Plan to protect employment and households income

– Credit to SMEs

– Incentives to investment and employment – Government investment in infrastructures

• Elections year

– VAT, public sector wages, minimum wages

(26)

Fiscal response 2009

– The fact that Portugal reached a deficit if 3% in 2008 gave the government the illusion of fiscal space.

– Because of automatic stabilizers, the recession itself should have caused an increase in the government deficit.

– But there was a significant discretionary stimulus, to counteract the effects of the recession.

– EU council decided .

– In plus, 2009 was a year of elections.

– In addition to the exceptional measures to support

employment and firms, the government decided to

increase investment, decrease the VAT tax rate, to

increase the public sector wages

(27)

30 35 40 45 50 55

1995 2000 2005 2006 2007 2008 2009 2010

% of GDP

Total revenue: general government :- ESA 2010

Total expenditure: general government :- ESA 2010

Total expenditure excluding interest: general government :- ESA 2010

• Tax revenues decreased 1.5p.p. of GDP in 2009 (note the GDP declined)

• Social expenditure increased 1.8p.p.

• Compensation of employees increased 0.9p.p.

• Government investment increased to 4.1% of GDP (from 3.2% in 2007)

• In 2009, the government cyclically adjusted primary structural deteriorated

by 4.8p.p. of GDP, and the government debt ratio jumped to 96.2.

(28)

Em 2009

verificou-se um aumento

significativo das despesas com funcionários públicos (ano eleitoral) e também das despesas sociais

(29)

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Total revenue: general government 41.5 41.6 40.4 40.6 42.6 42.9 45.1 44.6 43.8 42.8 42.7

Total expenditure: general government 44.5 45.3 50.2 51.8 50.0 48.5 49.9 51.8 48.2 44.8 45.7

Total expenditure excluding interest 41.5 42.2 47.2 48.9 45.7 43.6 45.1 46.9 43.6 40.6 41.8

Of which:

Subsidies 0.8 0.6 0.7 0.7 0.7 0.6 0.6 0.7 0.6 0.5 0.4

Social transfers in kind supplied to households 2.0 2.1 2.4 2.2 1.9 2.0 1.9 1.9 1.9 1.8 1.8 Social benefits other than social transfers in kind 14.1 14.6 16.4 16.4 17.0 17.6 18.5 17.8 17.4 17.0 16.5

Compensation of employees 13.1 13.1 14.0 13.7 12.8 11.7 12.5 11.9 11.3 11.2 10.9

Intermediate consumption 5.4 5.5 6.2 5.9 6.0 5.8 5.6 5.7 5.6 5.5 5.4

Other current expenditure 2.4 2.4 2.7 2.8 2.9 2.7 2.7 2.7 2.6 2.5 2.3

Gross fixed capital formation 3.2 3.7 4.1 5.3 3.5 2.5 2.2 2.0 2.2 1.5 1.8

Other capital expenditure, including capital transfers 0.4 0.1 0.8 1.9 0.9 0.8 1.0 4.2 2.0 0.4 2.6

Componentes da despesa pública em % do PIB

(30)

2007 2008 2009 2010 2011

Total revenue: general government 41.5 41.6 40.4 40.6 42.6

Of which: Total tax burden (inc. Social Contrib.) 35.0 34.9 33.4 33.6 35.5

Total expenditure: general government 44.5 45.3 50.2 51.8 50.0

Total expenditure excluding interest 41.5 42.2 47.2 48.9 45.7

Of which:

Subsidies 0.8 0.6 0.7 0.7 0.7

Social transfers in kind supplied to households 2.0 2.1 2.4 2.2 1.9 Social benefits other than social transfers in kind 14.1 14.6 16.4 16.4 17.0

Compensation of employees 13.1 13.1 14.0 13.7 12.8

Intermediate consumption 5.4 5.5 6.2 5.9 6.0

Other current expenditure 2.4 2.4 2.7 2.8 2.9

Gross fixed capital formation 3.2 3.7 4.1 5.3 3.5

Other capital expenditure, including capital transfers 0.4 0.1 0.8 1.9 0.9

(31)

-5.2 -4.7

-3.7 -4.4

-3.0 -3.2

-4.8 -3.3

-4.4

-6.2 -6.2 -4.3

-3.0 -3.8

-9.8

-11.2

-12.0 -10.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Governmentbudget(%ofGDP)

BalanceofGeneralGovernmentexcudinginterest (adjustedforthecyclicalcomponent,%ofGDP) StructuralBalanceofGeneralGovernmentexcuding interest(adjustedforthecyclicalcomponent,%ofGDP)

With the global financial crisis and agreed stimuli the deficit jumped to 9.8% in 2009.

Government budget

(32)

-12.0 -10.0 -8.0 -6.0 -4.0 -2.0

0.0 Título do Gráfico

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

O défice

orçamental que mais revisão sofreu foi o de 2009

E essa revisão deve-se a efeitos de recassificação apenas em 0.6p.p.

Já em 2010 e 2011 os efeitos de

reclassificação foram

importantes (3.4p.p. e 4.9p.p. respect)

Revisões do défice orçamental

(33)

A história dos indios

Estava-se no Outono e, os Indios de uma reserva americana perguntaram ao novo Chefe se o Inverno iria ser muito rigoroso ou se, pelo contrário, poderia ser mais suave.

Tratando-se de um Chefe Indio mas da era moderna, ele não conseguia interpretar os sinais que lhe permitissem prever o tempo, no entanto, para não correr muitos riscos, foi dizendo que sim senhor, deveriam estar preparados e cortar a lenha suficiente para aguentar um Inverno frio.

Mas como também era um lider prático e preocupado, alguns dias depois teve uma ideia. Dirigiu-se à cabine telefónica pública, ligou para o Serviço Meteorológico Nacional e perguntou: "O

próximo Inverno vai ser frio?" -"Parece que na realidade este Inverno vai ser mesmo frio"

respondeu o meteorologista de serviço.

O Chefe voltou para o seu povo e mandou que cortassem mais lenha.

Uma semana mais tarde, voltou a falar para o Serviço Meteorológico: "Vai ser um Inverno muito frio?" "Sim," responderam novamente do outro lado, "O Inverno vai ser mesmo muito frio".

Mais uma vez o Chefe voltou para o seu povo e mandou que apanhassem toda a lenha que pudessem sem desperdiçar sequer as pequenas cavacas.

Duas semanas mais tarde voltou a falar para o Serviço Meteorológico Nacional: "Vocês têm a certeza que este Inverno vai ser mesmo muito frio?" "Absolutamente" respondeu o homem

"Vai ser um dos Invernos mais frios de sempre.“

"Como podem ter tanto a certeza?" perguntou o Chefe. O meteorologista respondeu "Os Indios estão a aprovisionar lenha que parecem uns doidos."

(34)

Equilíbrio múltiplo

• A taxa de juro depende do risco

• O risco depende da taxa de juro

Um saldo primário de 2 UM consegue estabilizar uma dívida de 100 UM?

- Se a taxa de juro for 2%, sim - Se a taxa de juro for 5%, não.

Sunspots (Jogo de coordenação).

Contágio.

(35)

Taxas de juro das obrig. Tesouro

^(Sinn,

2Ag2011)

• January 2009

– Downgrades of Spain, Greece, and Portugal

(36)

Ten-year government bond yields of Eurozone countries

(monthly averages; percentages per annum; January 2007-March 2009)

(37)

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Título do Gráfico

ECB loans/Liabillities % of asset Funding from other banks % of asset.

Liabilities of Portuguese banks

(38)

2. Pre-Bailout period

2.3. Crisis and policy response

– Assessment:

• In a context of high levels of debt, an expansionary

policy ic counterproductive

(39)

Spring 2011

• March: Rating downgrades

• March: PEC IV rejected in the parliament

• Government resigned

• April: spreads increase to 500 basis points

• Government becomes reliant on domestic banks for financing

• Banks pressed the government for financial

assistance

(40)

(41)

Portugal’s adjustment:

run-up to the crisis, programme design, implementation and legacy

Francisco Torres & Miguel Lebre de Freitas

Católica Lisbon SBE & Univ. of Aveiro

ftorres@ucp.pt & afreitas@ua.pt

Conference “Euro@20: The European Semester and Eurozone Governance”

Católica Lisbon School of Business and Economics, Lisbon, 13-14 May 2019

(42)

Bailout

• April 7 – Request for financial assistance

• Sources: (26bn each)

– IMF

– EFSM: European Financial Stabilization Mechanism – EFSF: European Financial Stability Stability

– Including a 12bn backstop for banks

• Entities (Troika)

– IMF, EC, ECB

• Tenure: May 2011-June 2014

• Ownership: high at the beginning

– General understanding that a change was needed

(43)

Programme design

(May 2011-June 2014)

• Structural reforms to boost potential growth

– Labour market, product markets (competition, energy, transport, telecommunications, regulated professions)

• Fiscal consolidation

– 1/3 revenues, 2/3 expenditures – Including fiscal devaluation

– Better control over PPP and SOEs (dismissals in public administration not foreseen)

• Banking sector recapitalization and deleveraging

– 12bn euro backstop (BSSF)

• opportunity to address reforms that had not been implemented before the crises;

• supported by structural fiscal measures, such as improvements in tax administration and on spending procedures.

Ownership: high at the beginning

General

understanding

that a change

was needed

(44)

(45)

Fiscal developments

(46)

Fiscal policy measures

• Structural fiscal

– New Fiscal Council

– Expenditure commitments in 2012 – Tighter controls over SOES and PPPs

• Public administration

– Merges, transfers of workers

– Entropy, no significant savings (demotivation)

(47)

Fiscal policy

• Fiscal adjustment

– Suspension of 13

^th

and 14

^th

monthly salary payments to public servants and pensions (+exemptions), freeze of promotions, limits to staff admissions

– Higher tax rates (VAT on electricity, capital gains, excise taxes, surcharge on PIT top bracket)

– Lower tax benefits (allowances, exemptions on property taxes) – Savings on social spending, healthcare system,

pharmaceuticals

– Suspension of infrastructure projects

– Lower transfers to SOEs, funds, and local governments

(48)

Recession deeper than expected

0.0

-2.5

1.3

-2.2

-1.8

1.2

2.5 2.2

2.0

0.2

-3.0

1.9

-1.8

-4.0

-1.1

0.9

1.8 1.9

-5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

2008 2009 2010 2011 2012 2013 2014 2015 2016

GDPgrowthforecast (IMF,2011)

GDPgrowth

(49)

(50)

Updates of the fiscal deficit:

-12.0 -10.0 -8.0 -6.0 -4.0 -2.0 0.0

20072008 20092010 20112012 2013 2014

• 2011

• One off support to CGD, BPN and some PPPs in 2011

• 2012

• Deeper than expected recession

 Lower VAT revenues

• 2013

• Constitutional Court rules cuts in 13

^th

and 14

^th

month components of wages and pensions illegal

• Effect in 2013

Fiscal slippages

(51)

Policy response -

• Higher personal income taxes

2013

– Increase in tax rates – Temporary surcharge

 This change in strategy extended the austerity measures beyond the more protected public sector to other groups already penalised by the economic downturn

 Erosion of public support for the programme

 Redistributive concerns start dominating the political

debate (at the spence of structural reforms)

(52)

Fiscal devaluation

• Low VAT revenues turned impossible to

replace social security contributions by higher VAT rates

• The government proposed a shift of social contribution from employers to employees

• Widespread protests and abandonment of the measure

• Few months (July 2013) later Gaspar resigns

(53)

Political developments

• National ownership of the adjustment programme:

– Initial phase of relative national consensus among the major political actors; support to “structural reforms”.

– Institutional and political dissent (President, Const. Court, Opposition), deteriorating international conditions (slower growth, policy uncertainty), popular backlash against austerity and reform fatigue.

– Poor management of expectations

(54)

Loss of reform impetus

• Return to markets

• Most of the bailout loan received

• Adjustment fatigue

 Constitutional court

 Failed fiscal devaluation

 PS, President (deflationary spiral), UGT, Disagreements in the government coalition, disagreements within Troika

 The reform program is practically abandoned in 2014

 The government opted to let the arrangement expire without trying to find additional measures to

complete the final review

(55)

Financial envelope

(56)

-15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0

1995 2000 2005 2010 2015

National saving Investment

Current Account

(57)

Crowding out

• When foreign capital stops flowing in, the current account is forced to a sharp adjustment

• In the case of Portugal, external lending contracted much more than the IMF expected

• Still, the official financial envelope remained the same

• Lack of external funding implied a sharper contraction of domestic absorption than that predicted in the plan,

aggravating the recession

• The following table presents the IMF estimates of savings and investment as of June 2011, compared with the revised figures at the time of the 8th/9th review, in 2013.

Centre for European Policy Studies •

www.ceps.eu 57

(58)

Portugal

Centre for European Policy Studies •

www.ceps.eu 58

Portugal 2011 2012 2013 Sum

Plan(June2011)

GDPnominal 170.6 169.8 174

Privatesavings 18.9 21.7 25.9 66.6

Governmentsavings -5.6 -4.1 -2.3 -12.0

Investment 30.7 29.0 30.1 89.8

Currentaccount -15.4 -11.4 -7.1 -33.9

Reality(October2013)

GDPnominal 171.1 165.1 165.3

Investment 31.5 27.6 24.5 83.5

Currentaccount -12.0 -2.5 1.7 -12.8

Difference

GDP(%diff) 0% -3% -5%

Investment 0.8 -1.5 -5.6 -6.3

Currentaccount 3.4 8.9 8.8 21.1

All in all

- a sharper than expected contraction in foreign lending - Plus a larger than expected government deficits

…. translated into a huge crowding out of private investment and consumption.

• Not surprisingly, nominal GDP fell more than expected

• In June 2011, the IMF estimated the current account to reach a deficit of €7.1bn in 2013, but the reality was a €1.7bn surplus.

• Along 2011-2013, the cumulative forecasting error in the CA

amounted to €21.1bn.

• At the same time, government savings underperformed relative to the initial plan by

some €11.4bn, cumulative (this figure does not include SOEs outside the budget perimeter).

(59)

Achievements

(60)

Achievements

• Fiscal adjustment

– Though slower than planned

• Current account adjustment

– Faster than planned

• Improvement in NIIP

• Return to markets

– Jan 2013: Portugal successfully floats a 5-year (syndicated) bond – April 2014: 10-year bond

-130 -120 -110 -100 -90 -80 -70 -60

2005Q1 2006Q3 2008Q1 2009Q3 2011Q1 2012Q3 2014Q1 2015Q3

Net International Investment

Position, Portugal

(61)

-6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0

1996 2001 2006 2011 2016

Nominal Bond-Yields

Implicit nominal interest rate Nominal GDP Growth

(62)

Portugall

• From 2009 to 2011, the NIIP increased from -107.9% of GDP to - 100.7%.

• In 2010-11, however, the current account deficits accumulated 20%.

• So, roughly 27p.p. of the change in NIIP was explained by capital gains.

• Along 2011-2012 the reverse has occurred: the CA deficit was 6% of GDP and the NIIP deteriorated by 16p.p. So, there was a valuation change amounting to -10p.p.

• The valuation changes were related to changes in the market

perception regarding the Portuguese credit risk, which impacted on the price of government and corporate bonds

2008 2009 2010 2011 2012

Current Account

^{% of GDP}

-12.1 -10.4 -10.1 -6.0 -1.8

Net International Investment Position

^{% of GDP}

-95.1 -107.9 -104.3 -100.7 -116.5

(63)

Fiscal achievements

• Debt started to decrease in 2014

• Most of the adjustment was achieved through revenues (2/3 rather than 1/3)

• Horizontal expenditure cuts

– No differentiation according to merit

• Expenditure repression rather than expenditure elimination

– Pressures for reversals after the bailout

• Public administration

– Merges, transfers of workers

• Entropy, no significant savings (demotivation)

• Fiscal devaluation failed

58.3 59.5 55.2

51.8 51.0 50.3 53.4 56.2 58.7 62.0 67.4 69.2 68.4 71.7 83.6

96.2 111.4

126.2 129.0 130.6 128.8 129.2 124.8 121.5

0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0

1995 1996

1997 1998

1999 2000

2001 2002

2003 2004

2005 2006

2007 2008

2009 2010

2011 2012

2013 2014

2015 2016

2017 2018 Government debt (% of GDP)

(64)

(65)

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Overdue credit (households) Overdue credit (NF corporations)

Banks

• Liquidity problem accommodated by LTRO

• Still, banks were lacking capital

– Tighter capital requirements, imparities – No conditions to raise capital in the market

 Strong deleveraging

• 2012:

– Recap of BPI and BCP (CoCos, funded by the backstop)

– Recap of CGD (funded by the budget) – Loan-to-deposit ratios declined

– Banks slowly returned to debt markets

• Still:

– High levels of NPL

– Failures of BES and BANIF after the programme reveal weak supervision

80.0 130.0

180.0 Loans to deposits ratio

(66)

(67)

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Título do Gráfico

ECB loans/Liabillities % of asset Funding from other banks % of asset.

Liabilities of Portuguese banks

(68)

Structural reforms

(69)

Product markets

– New competition law

– New framework law for regulators (more independence) – Privatisation of ANA, EDP, REN, CTT, TAP

• Revenue concerns came at the cost of competition

• Privatization of TAP was partly reversed

– New regime for house leases

However:

– By-laws for 18 regulated professions postponed

– Failure in tackling rents in electricity (feed-in tariffs)

– PPP contracts renegotiated at the cost of less investment

– More favourable labour contracts in ports translated into higher rents, rather than passing-through consumers (markups increased in general)

Structural reforms

(70)

Structural reforms

• Labour market

– Individual Bank of hours – Lower severance pay

– Reduction in the maximum duration of unemployment benefits to 18 months

• However:

– Extensions of collective agreements to non-participating firms were back at the end of the programme

– No progress on individual dismissals

• OECD indicator: Portugal remains in the last position

(71)

Unit 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Strictness of employment protection

Strictness of empl. Protection - Individual ^Rank/34 34 34 34 34 34 34 NA NA NA NA NA

Strictness of empl. Protection - Collective ^Rank/32 7 7 6 6 6 6 NA NA NA NA NA

Product Market Regulation

Product Market regulation ^Rank/29 24 NA NA NA NA 11 NA NA NA NA NA

State Control ^Rank/29 26 NA NA NA NA 19 NA NA NA NA NA

Barriers to entrepreneurship ^Rank/29 17 NA NA NA NA 7 NA NA NA NA NA

Barriers to trade and investment ^Rank/29 ⁸ ^NA ^NA ^NA ^NA ¹¹ ^NA ^NA ^NA ^NA ^NA

Ease of Doing Business

Ranking doing business ^Rank/174 NA NA 32 27 28 27 29 24 25 27 29

Starting a business ^Rank/174 29 27 33 36 24 25 18 34 37 42 47

Dealing with construction permits ^Rank/174 ¹²⁴ ¹³² ¹²⁰ ⁹⁴ ⁷⁰ ³⁶ ³⁵ ³⁴ ³⁵ ³⁹ ⁴²

Getting electricity ^Rank/174 NA NA 84 84 96 90 94 94 99 96 100

Registering property ^Rank/174 73 73 61 23 23 21 23 23 24 24 25

Getting credit ^Rank/174 74 81 88 91 94 97 98 85 91 96 101

Protecting minority investors ^Rank/174 ³⁹ ⁴⁴ ⁴⁴ ⁴⁹ ⁵² ⁴⁹ ⁴⁶ ⁴⁹ ⁵¹ ⁵² ⁵⁵

Paying taxes ^Rank/174 46 51 57 49 50 50 50 57 56 42 53

Trading across borders ^Rank/174 23 26 26 26 27 23 28 29 15 15 15

Enforcing contracts ^Rank/174 61 54 30 30 31 31 27 28 19 19 18

Resolving insolvency ^Rank/174 ²⁰ ²¹ ²¹ ²² ²⁴ ²² ²² ³² ³¹ ³⁰ ³⁵

(72)

60 70 80 90 100 110 120 130 140 150 160

1995 2000 2005 2010 2015

Employment - Agricultures

Employment - Building and construction Employment - Services

Employment - Manufacturing industry

Pós-troika O emprego nos serviços cresceu mais do que nas manufacturas

(73)

2007 2013

2013

80.0 85.0 90.0 95.0 100.0 105.0 110.0 115.0 120.0 125.0

70.0 75.0 80.0 85.0 90.0 95.0 100.0 105.0

Exports(Volume)

TotalEmployment

Exportsofgoodsvsemploymentinmanufacturesandagriculture (2007=100)

Portugal Greece Ireland Italy Spain

exports of “goods” vs employment in “agriculture” plus “manufactures” (2007-2013)

Exports of goods have recovered in GIPS

In Greece they already surpassed the 2007 level

But, by 2013, employment in manufactures and in agriculture did not increase

(Except in Ireland)

(74)

1999 2001

2004 2008

2014

1992 1992 2001 2009

2004

1996 2014

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

-20% -15% -10% -5% 0% 5% 10%

Realexchangerategap

Output gap

Output gap and RER gap

• In both countries expenditure

reducing polices dominated

expenditure

switching

(75)

A TCR em ULC desvalorizou, mas em P não.

Ou seja, os markups aumentaram