COMMISSION STAFF WORKING DOCUMENT The Economic Adjustment Programme for Portugal Eight and Ninth Review – Autumn 2013 Accompanying the document Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision 2011/344/EU on granting Union financial assistance to Portugal
Date: 2013-10-23
Institutions: European Commission
Subjects: Community loan, Portugal, administrative reform, budget deficit, economic reform, financial intervention, financial planning, financing plan, public debt, stability programme













EUR-Lex - 52013SC0435 - EN











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52013SC0435

COMMISSION STAFF WORKING DOCUMENT The Economic Adjustment Programme for Portugal Eight and Ninth Review – Autumn 2013 Accompanying the document Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision 2011/344/EU on granting Union financial assistance to Portugal /* SWD/2013/0435 final */









        EUROPEAN   ||        EUROPEAN COMMISSION DIRECTORATE GENERAL ECONOMIC AND FINANCIAL AFFAIRS   
The Economic
Adjustment Programme for Portugal
Eight and
Ninth Review – Autumn 2013
Executive summary
A joint EC/ECB/IMF mission met with the Portuguese
authorities in Lisbon between 16 September and 3 October to assess compliance
with the terms and conditions set out in Memorandum of Understanding as updated
following the Seventh Review of the Portuguese Economic Adjustment Programme.
The objectives of the Programme are to restore sound public finances, improve
competitiveness and put Portugal’s economy back on the path of sustainable
growth and job creation. This report provides an assessment of compliance and
summarises the findings of the mission. 
Amid early signs of a recovery in economic activity,
programme implementation remains broadly on track. External adjustment is
ongoing, with Portugal gaining export market shares for the third year in a
row. Against this background, the Portuguese authorities remain determined to
achieve the objectives of the programme despite increasingly challenging
circumstances in the third year of implementation.. Building on the significant
achievements since the beginning of the programme, the authorities persevere in
their efforts to complete the remaining required fiscal adjustment and
important and wide-ranging structural reforms continue to be implemented.
Nevertheless, the government’s financing conditions have deteriorated since the
summer, after the political crisis in July has raised market concerns about the
government's commitment to the reform programme while its capacity to continue
the economic adjustment has been  put into question by a series of far-reaching
Constitutional Court rulings against key policy measures. 
Following the favourable growth surprise in the
second quarter, economic activity is now projected to contract by 1.8 percent
in 2013 before expanding by 0.8 percent in 2014. This represents an upward
revision of 0.5 and 0.2 percentage points, respectively. The situation in the
labour market stabilised in line with economic activity, with total employment
increasing by 0.8 percent in the second quarter and unemployment, after peaking at 17.6 percent in
February/March, falling back to 16.5 percent in August. However, labour-market
conditions remain a source of major concern, notably with a youth unemployment
rate in excess of 40%. The steady rebalancing of the economy towards the tradeables
sector continues and the current account balance is forecast to reach a surplus
of about 1 percent of GDP this year via a combination of impressive growth in
exports and a sustained compression of domestic demand. 
The programme’s 2013 fiscal deficit target of 5.5
percent of GDP (not accounting for the cost of bank restructuring) is within
reach. Budget execution has been generally supported by solid revenue
performance and improved expenditure control. Nevertheless, underperformance in
some parts of the budget is posing challenges. The government is addressing these
challenges with a combination of permanent and one-off measures, including by drawing
down the provisional budget allocation, reducing the funds available to line
ministries, and setting up a one-off tax and social security contribution debt
recovery scheme. Public sector reforms continue with a view to, amongst others,
strengthening financial management, reforming the revenue administration
including reinforcing the fight against tax evasion, streamlining public
administration, restructuring state-owned enterprises, improving the efficiency
of the health sector and reducing costs of public-private partnerships.  
Fiscal adjustment will continue in 2014 and the 4
percent of GDP deficit target for 2014 will be maintained, as agreed in the
context of the Seventh Review.. In view of  an expected negative net carry-over
from the 2013 budget execution, the adjustment needs in 2014 have increased.
Nevertheless, reflecting a thorough assessment of the balance between the
necessary fiscal adjustment, economic growth, and financing prospects, it was
agreed to reaffirm the fiscal deficit target of 4 percent of GDP, underscoring
the authorities’ commitment to successfully achieving the objectives under the
programme. To enhance the equity and efficiency of public spending, the key
consolidation measures to be proposed in the budget for 2014 appropriately aim
at rationalising and modernising public administration, improving the
sustainability of the pension system, and achieving cost savings across
ministries. A rigorous implementation of the 2014 draft budget will be a
decisive step in the transition to a post-programme environment. In the event
that some of the measures were to be found unconstitutional, the government
would need to reformulate the draft Budget in order to meet the agreed deficit
target. However, in view of the rapidly shrinking room of manoeuvre in
identifying appropriate consolidation measures this would imply increasing
risks to growth and employment and reduce the prospects for a sustained return
to financial markets. Possible changes to the 2014 budget would have to be
re-assessed in the context of the next programme review.
Portuguese banks have significantly improved their
capital ratios and, with a more balanced funding structure and available
liquidity, are in a good position to withstand short periods of uncertainty and
cope with a potential further deterioration in asset quality. Banks continued
to experience negative net profits in the first half of 2013, burdened by the
recognition of impairments and provisions, the negative evolution of net
interest income and high funding costs. On the positive side, deposits have
been stable throughout all segments and deposit rates in the system have
gradually decreased. Borrowing from the Eurosystem is mainly through long-term
facilities and represents about 9 percent of Portuguese banks' liabilities by end-September.
The financial sector continued its deleveraging at an elevated pace on the back
of weak loan demand and reached a loan-to-deposit ratio of 122 percent at the
end of the second quarter. Low consumer confidence and the reluctance of the
corporate sector to leverage keep new lending volumes under pressure. Measures
to ensure adequate funding for viable small- and medium-sized companies are being
implemented, including initiatives to encourage the diversification of
financing sources. 
The programme's agenda of structural reforms is well
advanced and effective implementation will be key to sustaining competitiveness
gains. Important progress has been made in the areas of labour markets. The
reform of severance pay for fair dismissals marked a significant step, and the
government is committed to working on amendments to the important labour code
provisions that were recently declared unconstitutional. The reform of the
judiciary is near completion and some of the measures such as the new Code of
Civil Procedure and the adoption of the Judicial Organization Act represent
milestones in improving the efficiency of the court system and speeding up claims
enforcement. The authorities are also committed to stepping up efforts to reduce
rents in the sheltered sectors, particularly network industries and regulated
professions. A comprehensive reform of corporate income tax is being
implemented which, while respecting fiscal consolidation targets, will help
improve Portugal's investment and growth perspectives. Progress is being made,
although with some delays, in the reduction of barriers to doing business via
easing of administrative burdens and licensing procedures. The authorities are
also committed to exploring the scope for new initiatives, which will be
especially important in view of the need to foster competitiveness and job
creation.
The combined eighth and ninth reviews confirm that
programme implementation continues. Public debt remains sustainable; it is now
expected to peak at 127.8 percent in 2013 and to decline thereafter. Portugal
successfully sold 10-year bonds in May, the first long term bond sale since the
programme's start. Having spiked toward 8 percent in July, the current yield on
10-year bonds is somewhat above 6 percent. However, trading volumes in
Portuguese debt are thin and the outlook for debt market access by mid-2014
remains challenging. Reaffirmed ownership and resolute  implementation of the
programme will be essential to ensure the country's return to full market
financing. 
The successful completion of the combined Eight and Ninth
Reviews will release EUR 3.7 billion from the EU and EUR 1.9 billion from the
IMF, bringing overall financing to around EUR 72 billion (more than 90 percent
of the total envelope). These disbursements could take place in November 2013
subject to the approval by ECOFIN and Eurogroup for the EU loans and the IMF
Executive Board for the IMF loan. The government’s programme is supported by
loans from the European Union amounting to EUR 52 billion and a EUR 26 billion
Extended Fund Facility with the IMF.
I.   Introduction

                                                                
1.       The report assesses compliance with the terms and conditions set out
in the Memorandum of Understanding as updated following the Seventh Review of
the Portuguese Economic Adjustment Programme. The
assessment is based on the findings of a joint European Commission
(EC)/European Central Bank (ECB)/International Monetary Fund (IMF) staff mission
to Lisbon from 16 September to 3 October.[1] In
accordance with the Council Implementing Decision amending Implementing
Decision 2011/344/EU on granting EU financial assistance to Portugal[2],
the mission assessed compliance with the conditionality associated with the eighth
disbursement and progress towards the key objectives of the programme of sound
public finances, restoring competitiveness and putting Portugal’s economy back
on the path of sustainable growth and job creation. It also revised the specific
policy conditionality while keeping unchanged its main objectives.
2.       The Economic Adjustment Programme was agreed by the Ecofin Council
on 17 May 2011 and by the IMF Executive Board on 20 May 2011. The programme, which covers the period 2011-2014, entails an
external financing by the European Union, the euro-area Member States and the
IMF of some EUR 78 billion[3], for possible fiscal financing needs and support to the banking
system. One third will be financed by the European Union under the European
Financial Stabilisation Mechanism (EFSM), another third by the European
Financial Stability Facility (EFSF), and the remaining third by the IMF under
an Extended Fund Facility. 
3.       A successful completion of the combined Eighth and Ninth Review will
pave the way for the release of the next loan instalment of around EUR 5.6 billion. This instalment will bring EU and IMF financing to around EUR 72 billion,
representing more than 90 percent of total available financial assistance. 
Ii.  economic developments and outlook
macroeconomic outlook 
4.       Economic growth in the second quarter surprised on the upside,
increasing by 1.1 percent quarter-on-quarter (q-o-q), following a 0.4 percent
contraction in the first quarter. Growth in the
second quarter was primarily driven by domestic demand, of which 0.3 pp was
contributed by private consumption and 0.5 pp by changes in inventories. Gross
fixed capital formation (GFCF) was flat in the second quarter; however, this
figure was boosted by an aircraft purchase, excluding which the contribution of
GFCF would have been of around -¼ pp. The growth contribution of net exports
fell from 1.9 pp in the first quarter to 0.4 pp in the second as continued
strong export growth was offset by fast growing imports partly explained by the
afore-mentioned aircraft purchase but also by crude oil stocking in light of
the relatively low oil prices. Hard and soft short-term indicators have continued
their upward trend since the beginning of the year, pointing to a progressive
bottoming out of the recession.
5.       The macroeconomic outlook has been moderately revised upward
compared with the forecast of the 7th programme review. While recent short-term indicators are consistent with the projected
turnaround of economic activity towards the end of this year, the acceleration
of GDP in the second quarter was to a large extent driven by one-off factors.
The macroeconomic outlook has therefore been revised upward only moderately
compared with the previous projection, largely reflecting the mechanical impact of the better-than-expected
second quarter growth on the annual average growth rates. Real GDP is
now forecast to contract by 1.8 percent in 2013 and to expand by 0.8 percent in
2014, corresponding to an upward revision by 0.5 pp and 0.2 pp respectively (see
Table 1 for comparison with other projections). Growth is expected to be
predominantly driven by net exports while the negative contribution of domestic
demand is forecast to shrink from 3.7 pp in 2013 to 0.2 in 2014.
The labour market situation eased in
the second quarter. Total employment increased by
0.8 percent, following a cumulative decline in employment of 4.3 percent in the
previous two quarters. However, tourism and agriculture
were the main contributing sectors to the employment expansion, raising questions
regarding its durability. After peaking at 17.6 percent in February and March,
the unemployment rate has fallen back to 16.5 percent in August. Unemployment
would have been higher had the fall in employment not been partly offset by a
concomitant decline in labour market participation. Youth unemployment, while
also retreating from its April peak of 40.4 percent, remains of particular
concern. Employment is forecast to contract by some 4 percent in 2013 and by
another ½ percent in 2014, unchanged from the outlook of the 7th programme
review. By contrast, the unemployment rate has been revised down by some 1 pp
in 2013 and ¾ pp in 2014 and is now forecast to average at 17.4 percent in 2013
and 17.7 percent in 2014.
  Table 1: Selected real GDP projections 
   || 2013 || 2014 
 EIU (October 2013) || -1.5 || 0.5 
 PT authorities State Budget 2014 (Sept 2013) || -1.8 || 0.8 
 OECD (May 2013) || -2.7 || 0.2 
 Consensus (October 2013) || -1.9 || 0.1 
 COM 8-9th review (November 2013) || -1.8 || 0.8 
 Banco de Portugal (October 2013) || -1.6 || 0.3 
6.       Rebalancing towards the export sector continues at a faster than
expected pace. Exports have been booming since the
beginning of the year with a broad-based contribution of various sectors and
significant gains in market shares for both goods and services exports. However,
the surprisingly large increase in imports in the second quarter is likely to
have been driven by various one-off factors (aircraft purchase, crude oil) and
should subside in the forthcoming quarters. The current account balance is now
forecast to reach a surplus of about 1 percent of GDP this year, revised up
from 0.1 percent in the outlook of the 7th programme review, and to
continue improving over the forecast horizon. 
  Table 2: Macroeconomic projections of the 8th and 9th programme reviews 
7.       Inflation in consumer prices is decreasing. HICP inflation dropped to 0.7 percent in the first half of this
year, significantly below the euro-area rate of 1.6 percent. Annual average
inflation is forecast to remain at 0.6 percent this year and to reach 1 percent
in 2014. The re-instatement of two monthly bonus payments for public-sector
wages (equivalent to a 16.7 percent increase in public sector wages) has a discernible effect on total-economy labour costs and will also
impact on the GDP deflator in 2013. 
8.       Uncertainties with regard to the macroeconomic outlook are high. On the one hand, the on-going broad-based improvement of high
frequency indicators suggests that the economy may have posted positive growth
in the third quarter of this year, again beating expectations. In addition,
important progress has been achieved in reforming the corporate income tax
regime, the judicial sector and cutting red tape, which may pave the way for more
dynamic investment. These factors would imply a slight upside risk to the
headline growth forecast for 2013 and 2014. On the other hand, the
sustainability of the projected recovery in 2014-15 is contingent on positive
developments in trade flows and financial markets , which remain fragile. The
ability of Portugal to progressively regain access to the sovereign bond market
at more favourable interest rates remains a key forecast assumption, also
underpinning confidence in the broader economy; a failure or significant delay
in re-accessing markets would have a significant negative impact on the
prospects for economic growth. In addition, household and corporate
deleveraging pressures could weigh more heavily on private consumption and
investment than is assumed in the baseline forecast, while the export
performance strongly hinges on the assumed recovery in the euro area economy.
Fiscal developments    
9.       In cash terms, budgetary execution in the
first eight months of the year was in line with the supplementary budget
targets. Budget execution up to August recorded an
improvement in the government cash deficit (net of extraordinary factors) by
about 0.6 percent of GDP, compared with the same period of last year,
supported by a solid performance of state tax revenues and a generally tight
execution of expenditure. At the same time, shortfalls in non-tax revenues and overspending
in some specific expenditure categories weigh on the outlook for budgetary
execution. 
10.    State tax collection in the first eight months
of the year was robust. The
good performance is driven by direct taxes, which up to August grew by 19
percent whereas indirect taxes fell by 2.3 percent, compared with the same
period of last year. Both personal income and corporate income tax collection were
ahead of target as a result of enhanced revenue
collection efforts (e.g. efficiency of the large
taxpayer office), as well as policy measures introduced earlier this year, such
as the changes in the advanced payments mechanism or the introduction of limits
to loss offsets for corporate taxation. A better-than-expected macroeconomic
performance may also have contributed to the improved collection of these
taxes. VAT revenues up to August fell by 2.1 percent, in line with the
projections of the supplementary budget. It is worth noting, however, that VAT
collection has improved in some of the sectors where incentives were introduced
for final customers to ask for invoices (notably, in the restaurant and hotel
sector). A decline was also recorded for other indirect taxes except for the
circulation tax and the tax on alcoholic beverages. Stamp duties were clearly
below target, mainly owing to the low execution of the newly introduced tax on
high-value properties. 
 Graph 1. Budget execution: Tax Revenues, Cost of Employees and Primary Expenditure: January-August (cash-data) || Graph 2. Budgetary outturn for Social Security in 2012: January – August (cash-data) 
 || 
 Note: includes non-consolidated data for the State and Autonomous Funds and Services. Primary expenditure includes data for the State subsector only. Source: Ministry of Finance and Commission services   || Note: includes data for Social Security Source: Ministry of Finance and Commission services   
11.    Expenditure execution in the first eight months
of the year was broadly in line with the supplementary budget projections, but  overruns
are likely in the rest of the year. Risks of overruns stem, in particular, from interest payments (which
are paid mainly in October), the outstanding 14th salary bonus
payment (as the share of public sector workers who
opted for deferred payment in November could be high) and some delays in the
execution of other expenses. In addition, receipts
from some non-tax revenues (sales and other current and capital revenue) have
been below expectations while some outlays, such as the contribution to the EU
budget, have turned out higher than projected. The fiscal gap implied by the
expected over-run in expenditure and shortfall in non-tax receipts will be
compensated by a number of ad hoc measures (see below).
12.    Social Security recorded a positive cash balance
in the first eight months of the year. This is explained by the extraordinary transfer from the State agreed in the supplementary budget
and increased transfers from the European Social Fund. Social security
contributions are broadly in line with the estimates of the supplementary
budget. However, one of the measures introduced in 2013, namely social
contributions from unemployment and sickness benefits above minimum levels, is
yielding less than expected due to technical implementation problems following
its redesign after the ruling of the Constitutional Court in April.
Nevertheless, the overall collection of social contributions is in line with
projections due to the over-performance of the "extraordinary solidarity
contribution" (CES) on pensions, the better macroeconomic environment and
increased collection efficiency. On the expenditure side, unemployment benefits
and subsidies to employment support are now expected to be lower than initially
planned on the back of a more favourable labour marketsituation. Social
transfers are expected to be substantially larger than in the previous year due
to the reinstatement of the two bonus pension payments, but this effect was
already budgeted. The public sector pension regime (Caixa Gral de Aposentações
– CGA) is expected to require additional state transfers to compensate for the
underperformance of one of the measures introduced in the 2013 budget (the
inclusion of cash supplements in the contributions' base). 
13.    Budget execution in other sectors of general government is broadly in
line with expectations. The balance of state-owned enterprises continued
improving up to August owing to cost-reduction efforts and voluntary redundancy
programs and despite strains from the reinstatement of the 13th and
14th bonus salaries. On the other hand, receipts
from the reprogramming of EU funds have turned out lower than planned. In the
health sector, significant cost reductions since 2010 have been partially
reversed in 2013 as a result of the reinstatement of the 13th and 14th
bonus salaries and the increase in contributions to the public sector pension
system. The reduction in budget transfers to the sector as a whole which also
translated into a significant reduction of transfers to SOE hospitals has led
to an underfunding and resulted in a renewed build-up of arrears (see below).
Local governments' budget execution is in line with projections, despite the
somewhat subdued collection of the recurrent property tax (Imposto Municipal
sobre Imóveis, IMI) up to August. However, it has to be taken into account
that 2013 is the first year that the IMI collection is based on three
installments instead of two, which makes the accurate intra-annual profile of
IMI collection difficult to assess. At the regional level, budgetary execution of the Autonomous Region of
Açores is in line with projections and that of the Autonomous Region of Madeira
better than expected, supported among other factors by a good performance of
corporate income tax and strict expenditure control.   
14.    In national account terms, the government deficit in the first half
of 2013 reached 7.1 percent of GDP. Excluding the
extraordinary capital injection to BANIF, the deficit in the first semester
amounted to 6.2 percent of GDP, which represents an improvement by 0.6 pp of
GDP compared with the deficit in the same period of last year - if one-offs are
excluded. The attainment of the 5.5 percent of GDP deficit target for the whole
year is contingent on overcoming a number of challenges, as some deviations
from the national accounts estimates underlying the supplementary budget were
identified during the mission (see below).
Arrears
15.    Whereas the overall amount of arrears is lower than at the beginning
of the year, progress in preventing new arrears from accumulating is mixed. The implementation of the 'Support Programme for the Local Economy'
(PAEL) is behind a large drop in local government arrears. The overall envelope
of the programme amounts to about EUR 800 million, which is below the EUR 1
billion initially envisaged. The Court of Auditors already cleared most of the
programmes submitted by the municipalities and about EUR 400 mn have already
been transferred, while another EUR 200 million still awaits approval by the
Court of Auditors. It is likely that a part of the remaining EUR 200 million
will not be disbursed until the end of this year. All in all, local government
arrears should at least be halved by the end of the year compared with the EUR
1.2 billion outstanding in January. The Autonomous Region of Madeira is gradually
implementing its strategy to pay arrears after the European Commission's
Competition Directorate General cleared the operation involving a EUR 1.1
billion state-guaranteed loan. In the health sector, after successfully
concluding the negotiations with the pharmaceutical industry in September, the
second debt settlement programme, worth EUR 432 million, will soon take off.
Even if a substantial decrease in the stock of arrears is to be expected by the
end of the year, new arrears are still being accumulated in some sectors – particularly
SOEs hospitals – in spite of the commitment control law. SOEs hospitals
accumulate about EUR 34 million of new arrears per month which compares with
about EUR 75 million last year. Although the reduction is significant, more
efforts are needed to reach the overall target of halting any further accumulation.
In the coming weeks, a follow-up IMF-led technical assistance mission will
analyse the functioning of the commitment control law, particularly in problem
areas such as SOE hospitals.  
Table
2: Stock of arrears January-July 2013 (in EUR million) 
Financial markets and financial sector developments
16.    The provision of bank lending to the non-financial private sector
continues to decline, although at a slower pace.
New corporate lending over the last 12 months has
been 20 percent below the past decade's annual average, while new loans under a
EUR 1 million ceiling are about 25 percent below the corresponding average.
Fresh monthly mortgages amount to roughly a sixth compared with the decade's
average which is partly explained by the high interest rates on mortgages
compared to pre-Lehman years, but mainly by low consumer confidence. As housing
loans typically have a longer maturity than loans to non-financial corporations,
the mortgage stock fell by 3.6 percent between July 2012 and July 2013 whereas
loans to companies contracted by 5.5 percent. New consumer credit was a bit
more than half the previous decade's average causing the stock of outstanding loans
to fall by 8.7 percent over the same period (Graphs 3 and 4).
 Graph 3: Loan stock evolution per segment Source: Bank of Portugal || Graph 4: Yearly growth per loan segment   Source: Bank of Portugal 
17.    Reduced remuneration of deposits has fed through to lower loan
rates. Due to better
capitalisation and increased system liquidity Portuguese banks have reduced
deposit remuneration rates thus contributing to reduce their overall cost of
funding. The improved funding situation has led to higher competition in
lending, in particular for lower risk SMEs resulting in slightly declining
lending rates for this corporate segment compared with the situation one year
ago (Graph 6). This can be
traced in the average loan mark-up on Euribor, expressed as a difference
between the latter and the interest banks earn on aggregate loans (Graph 5).
 Graph 5: Nominal interest rate earned by loan stock segment and average loan mark-up  Source: Bank of Portugal || Graph 6: Interest rate for new loans, evolution per segment Source: Bank of Portugal 
 Graph 7: Lower deposit remuneration slowly brings down the cost of funding Source: Bank of Portugal, || Graph 8: Deposit growth by segment   Source: Bank of Portugal, 
18.    Household deposits are growing again, while corporate deposits are
no longer declining.
Deposit interest rates continued to come down in 2013. In Portugal, the share
of longer term deposits in the deposit base is higher than in other euro area
countries. Consequently, it takes relatively longer for the flow of new
deposits to influence the stock's average interest rate (Graph 7). The weighted
cost of deposits fell below 2 percent in July. Overall, deposits have been growing
again since the start of the year when the decline in company deposits stopped.
Due to the reinstatement of the 13th and 14th salary in
the public sector, household deposits reached a new all-time high in July, with
the underlying upward trend presumably driven by precautionary savings (Graph 8).

Table
3: Soundness indicators
(1) Income before minority interests /Average
shareholders equity before MI
(2) Excluding the banks in resolution
(3) The Core Tier 1 ratio according to Programme
definition and excluding the banks in resolution
 Profitability
prospects remain weak for most Portuguese banks. Subdued
economic activity and high unemployment in recent years has put pressure on the
balance sheets of banks. The banking sector has accumulated losses for an
extended period, recording only one quarter of positive net profits over the
past two years. Over EUR 1 billion of losses in the first half of 2013, of
which EUR 765 million alone in the second quarter, clearly highlight the
strains under which the banking sector remains, with a meaningful portion of
the losses explained by the recognition of losses associated with
non-performing loans. In addition to the gradual deterioration in the quality
of assets, banks have experienced a squeeze on net interest income (down by 29
percent yoy) as a result of a combination of persistently low interest rates
and falling new lending volumes.(see Table 3). The costs of CoCos have added to
the already high funding costs since the beginning of 2013. Going forward,
asset quality may deteriorate further, although at a slower pace, while net
income is projected to recover from 2014 onwards. The net interest margin of
banks should remain low also due to the banks’ limited scope for re-pricing
their assets. However, the major improvements in capital and  funding structures
coupled with the available liquidity put the banking sector in a better
position than a year ago.
19.
 Banks have become less restrictive in
financing the economy[4]. In a context of improved solvency and
more available liquidity, credit spreads on new loans have been gradually
declining, although a relatively high risk perception remains one of the main
drivers of supply constraints as reported by banking sector sources. In
parallel, credit standards and terms applied to new lending have not shown any
major changes. However, there is a general tendency towards adopting slightly
less restrictive criteria in terms of lending margins and non-interest charges.
These affirmations are also reflected in the perception that non-financial
corporations convey when applying for new or rolling over their credit; only 10
percent of firms active in the services sector or manufacturing industry
mention bank credit access as a major hurdle for their business development
plans. However, that number rises to 55 percent for construction and real
estate related firms. Lending to households  remains depressed midst low
consumer confidence and general reluctance to spend both on housing and on
durable goods. Nonetheless, credit standards and conditions in the household
segment remain broadly unchanged and the view of banking sources is that the
decline in new household lending is mostly justified by demand side factors,
including the low albeit improving consumer confidence levels and the continued
subdued situation in the real estate market.
Iii. programme implementation 
20.    The joint EC/ECB/IMF staff mission concluded that the implementation
of the programme is broadly on track. 
Table
4: Summary of compliance with policy conditionality for the Eighth and Ninth Review

   || Status 
   Fiscal policy || For 2013, the Q3 quantitative performance criteria on the general government cash-adjusted deficit and debt are within reach. In national accounts terms, some deviations on the budgetary execution with respect to the supplementary budget have been identified, but the government has taken corrective measures to secure the 5.5 percent of GDP deficit target. However, the improvement of the structural balance will be lower than initially expected due to the incomplete implementation of some measures and replacement by one-offs. Part of the 2013 slippage will carry over to the next year, partially shifting the fiscal effort necessary to continue the consolidation path. The fiscal adjustment towards the 4 percent of GDP deficit target in 2014 will predominantly proceed on the basis of the public expenditure review and other smaller-scale measures as defined in the draft Budget. 
 Fiscal-structural || Public finance management: The reform of the Budget Framework Law is ongoing, although with some delays with respect to the original schedule. Given the envisaged scope of the reform, the deadline for submission to Parliament was postponed to the first quarter of 2014, following a report identifying the main areas of reform. In order to ensure a rapid and complete implementation after approval, an action plan identifying the operational changes necessary will also be prepared. The authorities are executing the action plan for public financial management defined in the 2013 budget. Revenue administration: The recent VAT e-invoicing reform is improving efficiency in the fight against tax evasion and supporting tax collection. The information gathered following recent reforms on data transmission will underpin further analysis of the current tax compliance situation and prompt targeted audits. Ongoing projects to strengthen compliance are making good progress, whilst there are some delays in the recruitment of tax inspectors and the restructuring of the local tax administration network. Regional and local administration reform: The new regional and local finance laws were approved and will enter into force at the beginning of 2014. The reduction of the number of parishes from 4050 to 2882 became effective after the local elections as the newly elected officials took office. Budget execution in Madeira and Azores is in line with expectations. Public administration reform: The process of staff reduction is ahead of the programme objective (reducing staff across all layers of government by 2 percent per year from 2012 to 2014) as a 6 percent reduction relative to end-2011 was already achieved by June 2013. The application of shared services for financial resources in the central administration ('GeRFiP') and for human resources in the Ministry of Finance ('GeRHuP') is improving management efficiency. State-owned enterprises (SOEs): The new legal regime for SOEs was published (Decree-Law 133/2013, 3 October) and shall enter into force by 3 December. The shareholder's role is given to the Ministry of Finance and a new dedicated taskforce will be appointed to carry out the tasks that are now centrally monitored by the Ministry. Debt management, risk derivative instruments and cash position of SOEs shall be centrally managed by the treasury agency. Health: Policy implementation continues broadly in line with programme deadlines. Reforms have delivered substantial efficiency gains and related savings and a large stock of overdue debt will be paid by the end of this year (though not fully eliminated). Increased labour costs have nevertheless absorbed some of these savings and, as a result, the authorities will have to intensify existing reforms. The authorities reconfirmed their commitment to implement a hospital reform which is ongoing and to continue to fine-tune the set of measures concerning pharmaceuticals, notably in hospital settings where savings have been slower to materialise. 
   Financial sector || Monitoring banks’ potential capital shortfalls: Further to the reflection the OIP findings in the implementation of the SIP recommendations on asset quality and stress testing methodologies, the update of the treatment of collective impairments was finalised. Results of the review of the impairments in the credit portfolios of the eight largest national banking groups (only components more strongly affected by business cycle) confirmed the adequacy of the level of impairments booked in the balance sheet and the resilience of the banking system with respect to solvency. Supervisory organisation: BdP is carrying out the preparatory work leading to the conclusion of a thematic review of banks' operational capacity in the area of loan restructuring and asset recovery. A new supervisory function was set up within the BdP and the assessment of the distressed loans management framework is ongoing. Ex-BPN legacy management: Parvalorem concluded the competitive bidding process to outsource the management of the credits currently held by Parvalorem, having awarded the contract to two contractors. Early intervention, resolution and deposit guarantee framework: BdP concluded the analysis of the recovery plans of the eight largest banking groups. Guidelines to the system are being finalised. The Resolution Fund is up and running since Q1 2013 and received due contributions from the banks. A dedicated resolution unit was set up within BdP. Financing alternatives for the corporate sector: The preliminary detailed assessment on the grouped issuance of corporate debt has been submitted but issuance was postponed to mid-2014. The first draft of the amendments to the rules governing the commercial paper market was submitted and discussed. Government-sponsored credit lines: An external audit of the National Guarantee System was conducted and a roadmap presented with a set of milestones to be accomplished. The first quarterly monitoring report on the allocation of government-sponsored credit lines was submitted. Corporate insolvency: The authorities released in July the first quarterly monitoring report on the implementation of the new restructuring tools. The results of a survey of insolvency stakeholders were presented.   
   Reform of labour, goods and services markets || Labour market and education: The third stage of the severance payments reform was implemented on 1 October 2013. It reduces severance payments up to 12 days per year of work. The measures taken to further facilitate the conclusion of agreements at firm level have not yet produced effects. In addition, the Constitutional Court ruled against part of the revisions of the definition of fair dismissal introduced by the revised Labour Code in August 2012. In the area of education, the monitoring tool has been further enriched and the number of trust agreements signed is beyond expectations; the setting up of the professional schools of reference is behind schedule. Energy: Implementation of the electricity costs reduction and tariff debt elimination by 2020 is on-going. The new update report of the energy tariff debt dynamics shows that the elimination of the tariff debt by 2020 would require real electricity price increases of close to 2 percent per year and even then the tariff debt will not be eliminated without additional measures. The negotiations on the Sines and Pego power plants have reached an impasse. Following the submission of the report on the CMEC scheme and the process for extension of the concession of the public hydro resource, further analysis of, and discussions on the consequences of the report and the potential need for additional measures will continue in the next review. The remuneration scheme for co-generation facilities that do not use a renewable source of energy was revised. A new energy levy on generators is under preparation. Its impact on the tariff debt and end user prices will have to be monitored. Transport: There is little progress to be highlighted as most reforms are delayed. Policy reforms in ports are urgent to increase their efficiency and ability to be competitive in international markets. Further progress is required to ensure operational balance of the rail infrastructure manager by 2015. A clear long-term strategy for the transport sector is still missing. The transfer of the CP Carga terminals to REFER is expected by the end of the year. Services and professions: Progress on the adoption of the legislative amendments to align legislation with the principles of the Services Directive has continued steadily. However the Construction laws have further delays. The submission of the revised bylaws to the Parliament following the adoption of the horizontal framework law on public professional associations is delayed. Some progress is observed in making the Point of Single Contact fully operational. 
   Reform of framework conditions || Housing market: The process of updating rental contracts signed before 1990 and their gradual transition to the general system has started. The Monitoring Committee which has been set up to monitor the impact of the reform has already delivered its first quarterly report. Competition and sectorial regulators: The framework law setting the main principles of the functioning of the main National Regulatory Authorities (NRAs) was published in August 2013. The corresponding amendments to the bylaws of the NRA will be approved by the government by end of November. Judicial system: Remarkable progress has been achieved in implementing the ambitious programme of judicial reform. Significant headway has also been made in reducing the backlog of court cases. Business environment: The recently introduced VAT cash accounting regime is expected to improve the financial and cash flow situation of businesses. The Commission considers that Decree Law 62/2013 of 10 May adopted by the government is not fully in line with the New Late Payments Directive 2011/7/EU. Licensing: A draft Base Law for Soils, Territorial Planning and Urbanism has been submitted to Parliament and some other pieces of legislation have been adopted to make a more business-friendly regulatory system. However, most legal reforms envisaged to ease licensing requirements to businesses are behind schedule. 
   Data submission ||   Requirements under the Programme have been observed. Work is ongoing to improve further data submission.   
fiscal policy 
Fiscal
consolidation in 2013
21.    The general government cash-adjusted deficit for
programme purposes reached EUR 4,795 million up to August. This is well below the third quarter target of
EUR 7,300 million established in the performance criteria of the Memorandum of
Economic and Financial Policies (MEFP), and leaves room for accommodating the cumulative deficit of the month of September. The
achievement of this cash position was possible due to relatively robust tax
revenue growth and expenditure control in the first eight months of the year,
as described above. However, the remainder of the year will put substantial
strain on some items, especially on the expenditure side (e.g. interest
payments, reinstatement of 14th bonus salary and pension). Budgetary
challenges have also been identified as a result of lower-than-expected non-tax
revenues.
22.    The mission has revised the 2013 fiscal
projections in national accounts terms and identified some deviations with
respect to the supplementary budget. These include a capital injection into BANIF (0.4 percent
of GDP), which is however not considered for programme purposes. The remaining
deviations stem from shortfalls related to the reprogramming of EU funds and
the postponement of the sale of a port concession  and other factors such as
the underperformance of some non-tax revenues, the transfer to Greece of
dividends from Greek bonds holdings in Banco de Portugal's investment portfolio,
lower than expected contributions to the public employees' pension scheme and expenditure
overruns on the wage bill and on intermediate consumption. The net effect of
these slippages is estimated to increase the 2013 deficit by 0.5 percent of GDP
(excluding the capital injection into BANIF). The net effect would have been
higher had the provisional budget allocation of 0.3 percent of GDP not been
used to partly offset the overruns.
23.    The government has taken corrective measures (equivalent
to 0.5 percent of GDP) to ensure that the 5.5 percent of GDP deficit target
(net of bank recapitalisation costs) is met. These include, notably, the reduction of available funds
for investment and tighter control on intermediate consumption of line
ministries amounting to an overall 0.1 percent of GDP. In addition, the
government has announced a debt recovery scheme for taxes and social security
contributions to be implemented before year end and expected
to yield about 0.4 percent of GDP in 2013. Overall, the budget deficit target
of 5.5 percent of GDP for 2013 remains in reach subject to the successful
implementation of the corrective measures as well as continued tight
expenditure control during the rest of the year, as announced by the government.

24.    The fiscal effort as measured by the improvement in the structural
balance is expected to be limited to 0.5 percent of GDP this year. This falls slightly short of the 0.6 percent envisaged at the 7th
review. The expected underperformance is explained by budgetary overruns as
detailed above and the delayed implementation, and/or the overestimation in the
yields, of some consolidation measures, especially the measures introduced with
the supplementary budget in response to the Constitutional Court (CC) ruling of
April 2013. The government had reacted promptly to the CC ruling in April by proposing
replacement measures, but some of these measures, such as the reprogramming of
the EU funds or the changes to the unemployment and sickness benefits, proved
to be technically difficult to implement within the necessary timeframe. The
negative opinion of the CC at the end of August on the requalification scheme
also required the modification of the relevant proposal to accommodate the
concerns of the Court. The political crisis in July and the subsequent
government reshuffle also delayed the implementation of some measures. In
addition, in purely mechanical terms the improvement in the macroeconomic
conditions has enhanced the cyclical component of the deficit reduction at the
cost of the structural component. 
Fiscal
consolidation in 2014
25.    The government has reaffirmed its commitment to the 4 percent of GDP
deficit target for 2014. The fiscal projections are
underpinned by consolidation measures with an estimated net amount of 2.3
percent of GDP, including permanent measures and some one-offs. In net terms,
more than 70 percent of the measures are expenditure reducing (80 percent in
gross terms). In spite of a projected improvement in the macroeconomic outlook,
these measures are needed to cater for a negative primary balance drift of 0.5
percent of GDP reflecting, amongst others, the carry-over from the slippage in 2013
to 2014 and the rebuilding of the provisional budget
allocation (see Table 5). Offsetting this effect will therefore require
a higher consolidation effort in 2014 than envisaged at the 7th
review. In fact, the cumulative value of the consolidation package necessary to
achieve the agreed fiscal targets has not changed (i.e. about EUR 4.7 billion
over 2013-2014). However, a part of the effort has been shifted to 2014 since
the initially planned frontloading to 2013 of about 0.8 percent of GDP of the
consolidation package has been achieved only partially. All in all, the
structural balance is expected to improve by 1.1 percent of GDP in 2014 (see
Table 6).
Table
5: Arithmetic of the government deficit: from the deficit in one year to the
next 
26.    The fiscal consolidation is predominantly based on the savings measures
identified in the framework of the public expenditure review (PER). The PER package is an important element of the broader reform of
the State with the objective of increasing equity and efficiency in the
provision of public services and social transfers. The PER aimed at identifying
savings and the potential for streamlining processes in the public
administration with the direct involvement of line ministries. The savings
identified include permanent expenditure-reducing measures of EUR 3.1 billion 
(1.8 percent of GDP)] in 2014. The PER measures act along three main axes: (1)
reduction of the public sector wage bill; (2) pension reform and (3) sectoral
expenditure cuts across line ministries and programmes. The reduction in the
wage bill in 2014 aims at diminishing the size of the public-sector work force
while shifting its composition towards higher-skilled employees, aligning the
public sector work rules with those of the private sector and making the
remuneration policy more transparent and merit-based. Specific reforms include
the implementation of a requalification scheme that would allow to adjust the
skills of the workforce to the public sector needs, aligning public sector
working hours with those in the private sector (i.e. increase from 35 to 40
hours work week), introduction of a bank of hours, reduction in holiday
entitlements, the implementation of a mutual agreement redundancy scheme (which
is estimated to generate one-time upfront costs of slightly more than
0.1 percent of GDP) and the introduction of a single wage scale as well as
the streamlining of wage supplements. A comprehensive pension reform will
generate another important part of the savings and will be based on equity
principles and income progressivity, thereby protecting the lowest pensions.
Specifically, the reforms aim at reducing the current differences between the
civil servants' system (CGA) and the general system and at increasing the
statutory retirement age by changes to the sustainability factor. The
'extraordinary solidarity contribution' introduced in 2013, worth 0.3 percent
of GDP, will be maintained. However, this measure will be adapted to take into
account the cumulative impact of other pension reforms . Survivors' pensions of
both CGA and the general pension regime will be streamlined, in particular in
cases where these accumulate with other pensions. Finally, savings in
intermediate consumption and expenditure programmes across line ministries will
be substantially stepped up.   
Table
6: Fiscal targets and structural adjustment 2011-2015
27.    In addition, the government will implement some smaller-scale
permanent revenue consolidation measures worth about 0.4 percent of GDP. These measures aim at further improving the efficiency and equity in
the current tax and benefit system and reducing excessive rents in some
sectors. These include an increase in the corporate tax rate on expenses
related to company cars, higher excises for tobacco and alcohol, a surcharge on
the car tax on diesel passenger vehicles, removing fiscal exemptions in
property taxation for pension and real state funds as well as caps to the
social security contributions of members of statutory bodies. In addition, a
special levy on energy will be imposed to boost tax receipts and with the
additional effect of curbing excessive rents from the energy sector. Part of the
revenue generated by this levy will be used to reduce the tariff debt. The levy
on financial institutions (banking system) will be increased and the fee on media
spectrum will be introduced. Finally, the government plans to sell online
gambling licences and to tax this activity, regularising a growing market that
is currently not properly regulated. 
28.    A number of one-off measures also aim to contribute to the achievement
of the deficit target, more than offsetting the one-off costs related to the
mutual agreement termination of public sector employment contracts.  These measures consist of the transfer of the CTT (postal service) health
fund to the government sector, the sale of aport and silos concessions as well
as special dividends earned on the sale of excess oil reserves from a public
company. 
29.    The legislative processes underpinning the PER reforms are underway
but some measures have suffered setbacks.  The
mutual agreement redundancy scheme is already in place for the less qualified
public sector employees. Other schemes targeted to specific public sector
functions are currently under preparation. The implementation of the 40-hour
work week has already started while simultaneously being assessed by the
Constitutional Court. The requalification scheme has been revised to address
the constitutional concerns raised by the Court at the end of August. Overall,
several of the legislative and regulatory amendments necessary to implement the
PER reforms are already in force or await Parliamentary approval. Other
legislative changes were submitted to Parliament in October or are implemented
through budget provisions and should enter into force as of 1 January 2014. In
order to mitigate the political and legal risks, it will be important to seek
broad political support. The President of the Republic has the right to submit
reform proposals which are potentially contestable from a constitutional point
of view to a prior legal review by the Constitutional Court which has to be
completed within four weeks. Should some of the measures be found
unconstitutional, either following such a review or after a legally binding Court
ruling, the government would have to reformulate the Budget in order to meet
the agreed deficit target. However, in view of the rapidly shrinking room of
manoeuvre in identifying appropriate consolidation measures this would imply
increasing risks to growth and employment and would reduce the prospects for a
sustained return to financial markets.
30.    As part of the reforms to boost competitiveness and growth, the
Portuguese government is undertaking a comprehensive reform of the corporate
income tax (CIT), due to come into force as from 2014. The reform, ambitious in scope, has been carefully designed by a
reform Committee and submitted to public consultation over the summer. It
encompasses a substantial simplification of the tax structure, reduces
compliance and administrative costs and revamps the tax code to make Portugal
more attractive to foreign investment, whilst applying strict anti-abuse
provisions. Notably, it also aims at gradually lowering the marginal tax rate
to stimulate higher investment and growth. It reduces the strong debt-bias of
the Portuguese corporate tax system and extends the loss carry-forward-period.
Simulations of the EU Commission's QUEST model (calibrated for Portugal) show a
positive impact of the CIT reform on the Portuguese economy in the medium term.
Yet, it will also generate overall revenue losses in the early years that need
to be financed within the existing budgetary envelopes.  
Fiscal
consolidation over the medium term 
31.    Sustained fiscal consolidation beyond the programme period should
bring the deficit below 3 percent of GDP in 2015. Under
the current macroeconomic scenario permanent fiscal consolidation measures
amounting to about 1.2 percent of GDP will be necessary to reach the 2.5
percent deficit target in 2015. This translates into a fiscal effort, as measured
by the change in the structural balance, of 0.9 percent of GDP and an improvement
in the  structural primary balance from 1.7% of GDP to 2.5% of GDP (see Table
6). The package adopted by the government on 2 May already defines about 0.3
percent of additional measures through further reductions in the wage bill and
expenditure cuts across line ministries and programmes. Going further, the
government is committed to fulfil the requirements of the fiscal compact of a
structural deficit of 0.5 percent of GDP by 2017. 
Debt developments
32.     The debt-to-GDP ratio is expected to peak at 127.8 percent in 2013
and to decline thereafter.
The upward revision with respect to the 7th review is
explained by the correction of the 2012 debt data, which is now slightly
higher, and the non-realisation of some short-term debt reducing operations. In
particular, the Social Security Financial Stabilisation Fund is now expected to
increase its holding of Portuguese Government Bonds more progressively and
privatisation receipts will be mostly retained in Parpublica as the company
will possibly be reclassified within the general government in September 2014
when the new ESA 2010 enters into force. Moreover, the Treasury cash balances
at the end of the year are estimated to be higher by about EUR 2 billion. These
effects are somewhat mitigated by a better nominal GDP projection. Assuming
further that the Medium Term Objective (MTO) of a structural deficit of 0.5
percent will be reached from 2017 on, the debt-to-GDP ratio would be on a steeper
downward path falling below 100 percent in the second half of the next decade.
fiscal structural REFORMS
Fiscal policy framework
33.    Portugal remains committed to further strengthening Public Financial
Management. The Ministry of Finance has set up a
Reform Unit with the broad remit of revising the Budget Framework Law, which is
currently fragmented, imprecise in some areas and too detailed in others. An
IMF-led technical assistance mission took place in July 2013 recommending a
deep restructuring of the law to be organised along the major phases of the
budget preparation and execution cycle, reducing the detailed requirements of
budget documentation and improving the provisions of cash management and
auditing. The new law should also reform the organisational structure by
empowering programme coordinators and modernising the financial departments in
line ministries. Finally, the classification structure of the budget should be
simplified. Given the scope of the reform, the deadline for submission to
Parliament of a draft law was postponed to the first quarter of 2014 following
a report by the Reform Unit assessing the strengths and weaknesses of the BFL
and providing suggestions for amendments including a new structure. Adequate
implementation of the law will be key to success; therefore, an action plan
operationalizing the implementation of the law will be prepared by the eleventh
review. A follow-up technical assistance mission is expected before the end of
the year. In parallel to the preparatory works to reform the BFL, the
authorities are executing the action plan for public financial management
defined in the 2013 Budget and reinforcing the implementation of the commitment
control. 
                    Box 1: Public Debt and Fiscal Sustainability in Portugal Under the programme scenario, government debt is projected to peak at 127.8 percent of GDP in 2013 before starting a gradual decline. The baseline long-term calculations shown below incorporate the programme scenario up to 2017. The programme scenario includes fiscal consolidation measures up to 2015 and showing no-policy-change for the outer years. More details on these figures are shown in Table 7 in the annex. The turning point in 2014 is the result of achieving a small primary surplus, combined with a positive, albeit still modest, GDP growth rate. After 2017, it is assumed that: (i) the structural primary fiscal balance remains unchanged at a surplus of 2.6 percent of GDP; (ii) nominal interest rates are around 4.5 percent; (iii) nominal GDP growth  fluctuates between 3.5 and 4 percent; (iv) ageing costs are taken into account following the Commission's 2012 Ageing Report projections; and (v) the expected fiscal impact of PPPs costs and bank recapitalisation costs of EUR 12 billion over the programme period are factored into the analysis. Full compliance with the programme's consolidation path ensures a gradual decline of the debt ratio over the longer term. Nevertheless, for a significant number of years the debt ratio would remain higher than before the current crisis. The graphs in this box present a sensitivity analysis with respect to macro-economic risks, the effect of alternative fiscal consolidation paths, and the potential impact of contingent liabilities such as reclassifications and other changes in the government perimeter.   Graph I illustrates the sensitivity of the debt trajectory to macro-economic assumptions by considering a shock to real GDP growth and hikes in interest rates as from 2016. A lower GDP growth rate by one percentage point or a higher interest rate on maturing and new debt by two percentage points would put at risk the declining trend over the medium term, although the effect of these shocks are now mitigated compared with the analysis of the previous review reflecting more favourable growth prospects during the programme timeframe. An interest shock of 1 percentage point would slow down the  pace of debt reduction but keep the declining trend. Conversely, a positive shock to growth in the medium-term on account of the structural reforms undertaken may result in visibly lower debt-to-GDP ratios and a faster pace of debt reduction.   Graph I: Macroeconomic risks-growth and interest rates (debt as percent of GDP) || Graph II: Fiscal consolidation and ageing costs (debt as percent of GDP) 
 || 
 Source: Commission services || Source: Commission services 
Additional fiscal consolidation beyond 2015 and the programme horizon
  would clearly accelerate the debt reduction path (Graph II).  In particular,
  reaching the Medium Term Objective (MTO) of a structural deficit of 0.5
  percent in 2017 as per Fiscal Compact requirements  would require a
  cumulative fiscal effort of about 1.2 percent in 2016 and 2017 and reaching a
  primary surplus of nearly 4.0 percent. Maintaining the MTO over the longer
  term horizon will require primary surpluses of up to 3.9  percent up to 2020,
  declining gradually to close to 3.0 percent over the following decade. Under
  these assumptions, the debt to GDP ratio would accelerate its decline already
  in 2016, falling below 100 percent in the second half of the next decade and
  maintaining the sustainable downward path thereafter. A slower pace of
  consolidation but aiming at a more ambitious MTO of 0 percent would also
  bring down the debt-to-GDP ratio in the long run. On the other hand, if
  ageing costs are allowed to rise significantly (simulated as a 20 percent
  increase)*, the fall in the ratio would be severely curtailed,
  stabilising at a high level in the absence of compensating fiscal
  consolidation. 
 Graph III: Changes in general government perimeter (debt as percent of GDP) 
 Source: Commission services 
Graph III illustrates the impact of changes in the
  government perimeter. The inclusion of all gross costs of PPPs and the debt
  of all state-owned enterprises (SOE) classified outside general government
  would lead to an increase in  government debt, especially if further
  increases in SOE debt are not reined in. The ongoing renegotiation of PPPs
  contracts will limit the cost of a reclassification scenario. The envisaged privatisation
  programme combined with the necessary reforms to reduce SOEs operational
  costs and a strategy to reduce their debt burden will also contain the risks
  stemming from SOEs. By the same token, a quick repayment of the bank
  recapitalisation funds to the government would quicken the adjustment towards
  lower debt-to-GDP ratios
Overall, the debt sustainability analysis
  reveals that the debt reduction path of the baseline is robust across a wide
  range of scenarios. Even in a setting which combines a number of adverse
  shocks, a solid reduction path is attainable if fiscal responsibility is
  maintained after the end of the programme period.
   * According to the EU ageing report Portugal is part of the low risk countries where the increase in age related expenditure is amongst the lowest in Europe. 
 
Revenue administration
34.    The recent tax administration reforms have improved efficiency in
the fight against tax evasion but further efforts
are required. . The government has successfully put in place the VAT
e-invoicing reform that introduced mandatory invoicing and electronic transfers
of invoice data for all businesses and transactions. The information gathered
in the centralised database allows improving the effectiveness of the tax
administration in fighting tax evasion by, for example, tracking potential mismatches
between the VAT amounts invoiced and the amounts deducted/paid by taxpayers and
better targeting audits when irregularities are detected. It is now important
to enhance the operational capacity for analysing the data in a timely and
effective manner. The scheme that introduced tax incentives for consumers to
ask invoices in certain sectors is also proving successful, as demonstrated by
the growth of the VAT base and collection in those sectors in the last months
(which compares to the negative evolution in the aggregate collection of all
other sectors). Whilst these have been promising steps forward, fighting fraud
and evasion must  remain a top priority, all the more because incentives for
tax and social security evasion may increase against the backdrop of a still
weak economy and liquidity constraints of taxpayers.
35.    Most revenue administration initiatives are progressing as planned. The pilot compliance projects for high-net-wealth individuals and
self-employed professionals continue to be reinforced, as well as plans for
phasing in a risk management unit. The improved information from the unified
monthly tax returns and the unified form on independent workers' annual revenue
will be key inputs for a risk analysis of the compliance situation. The operational
plans for the rationalisation of the local tax administration network are ready
and the authorities remain committed to the target of closing 25 percent of
local tax offices by the year end. There are delays in the target of increasing
the number of tax inspectors to 30 percent of the tax administration staff,
which should be achieved by the end of 2013.
36.    The scheme for the settlement of tax debt and overdue social
contributions approved in early October could have a short-term positive impact
on tax collection but has potential downsides. Moreover,
by normalising the tax situation of debtors it may alleviate financial hardship
and facilitate access to community funds requiring a regularised tax situation.
The frequent repetition of such schemes, however, would undermine tax
compliance and the government's credibility in enforcing the tax law, thereby
eroding tax morale and promoting evasion. The government has committed to
forego any such tax debt recovery schemes in the future (the last such scheme occurred
in 2002).
 
Regional and local governments
37.    Regional and local policy frameworks have been strengthened. The new regional and local finance laws have been approved and will
enter into force at the beginning of 2014. As laid down in the Memorandum, they
adapt the local and regional budgetary frameworks to the principles and rules of
the revised Budgetary Framework Law, strengthen fiscal accountability, limit
the scope for lower tax rates in the Autonomous Regions, strengthen the
auditing and enforcement powers of the central tax administration, and include
requirements for data provision to support the revenue projections. The
revision of the laws was done in close consultation with stakeholders. The
reduction of the number of parishes from 4050 to 2882 became effective after
the local elections as the newly elected officials took office. While most of
the jobs in the parishes are on a voluntary basis, the authorities estimate
that direct savings of EUR 8.8 million per annum will be attained from the elimination
of bodies and functions, but more important yet hard-to-quantify gains are
expected from economies of scale and a better quality of merged services. 
38.    Budget execution and public sector reforms in the two autonomous
regions are on track. In Madeira, budget execution
is in line with expectations, both due to increasing revenue – reflecting higher
tax rates and a good performance of the regional economy - and contained
expenditure. Arrears accumulation has been reversed in the summer following
some repayment of the stock of arrears. Negotiations on the two motorway PPPs with
the aim of achieving important savings have started and the regional
authorities are, despite some initial difficulties, confident of reaching
agreement later this year. There is also some progress on the restructuring and
privatisation of Madeira's SOEs. In the Azores, due to good expenditure control
and strong revenues – following a good season of tourism and agriculture as
well as higher tax rates – the budget (in terms of public accounts) showed a
small surplus of EUR 1.2 million in August and arrears have come down to EUR 3.7
million. A small budget deficit of EUR 27 million is expected at end-2013, and
for 2014 the objective is to reach a balanced budget, in spite of lower State
transfers. SOEs in the Azores have undergone a process of consolidation and are
overall in balance.
Public administration reform
39.    Public administration reform continues to make good progress. In addition to the respective measures in the context of the public
expenditure review, the process of staff reduction is ahead of the programme
objective (staff reduction across all layers of government by 2 percent per
year in 2012-14) as a 6 percent reduction relative to end-2011 was already
achieved by June 2013. This resulted essentially from early retirement, the
termination of fixed-term contracts (mainly teachers) and restrictions on new
recruitment. The application of shared services for financial resources in the
central administration ('GeRFiP') and for human resources in the Ministry of
Finance ('GeRHuP') is improving management efficiency, but will take more time
than expected for the about 10,000 employees of the tax administration across
the country. The Labour Law for Public Workers, of which a draft was submitted
to the Parliament by end-October [prior action], consolidates the fragmented
legal bases for public administration employees and facilitates a more
consistent application. A programme measure to review the regulation of
associations and observatories was modified to take into account, on the one
hand, the legal heterogeneity of observatories with only few being public and,
on the other hand, the high number of 40,000 private associations. Now it is
foreseen that authorities will review public financial support to private
associations on the basis of information becoming available through a new legal
obligation to regularly report on benefits granted by the public administration
to the private sector (Law 64/2013).
SOEs, PPPs and privatisations
40.    The new framework law for state-owned enterprises (SOEs)[5] has been published and will enter into force on 3 December. It encompasses a set of changes including the Ministry of
Finance's enhanced shareholder role (and similarly municipalities' role vis-à-vis
local SOEs) and the creation of a new taskforce inside the ministry to cope
with the enhanced responsibilities for the whole SOEs spectrum, particularly the
consolidated financial planning and monitoring and the first level legality
checks. At the same time, SOEs indebtedness is now subject to clear limits for
long-term debt and risk derivative instruments, with the public debt agency
(IGCP) assuming a key monitoring role. The SOEs cash position will also in the future
be centrally managed by IGCP.
41.    The SOEs overall operational balance was achieved by end-2012 but this
is not assured for 2013 and beyond. SOEs, in
particular in the transport sector, have been undergoing a comprehensive
restructuring programme including the optimisation of services, an update of
tariffs (prices and system) and a significant reduction in personnel since the
beginning of the programme. However, further restructuring will be necessary to
ensure that operational balance at sector level is also assured by 2013 and
beyond, given that the reinstatement of the 13th and 14th
salaries in the public sector is posing significant new challenges to
expenditure reduction. At the same time, the government is working on strategies
to deal with the heavy indebtedness of several SOEs. Águas de Portugal (AdP),
the holding company of several inter-municipal water companies, is undergoing a
significant restructuring, including mergers to foster the sustainability of
the sector in the mainland, while the regulatory framework is being adapted to
the future corporate framework in the sector.  
42.    Privatisation plans continue even though the programme target in
terms of proceeds has already been achieved. The
Council of Ministers decided on 10 October to privatise up to 70 percent of the
postal company CTT through an initial public offering until the end of the
year, hand in hand with – and subject to – the revision of the postal sector's
regulatory framework and the definition of the concession. The sale of EGF, the
waste management company within AdP, is delayed by one quarter with binding
offers now expected for early 2014. The privatisation of CP Carga (freight
subsidiary of CP) and of TAP (national air carrier) will proceed as soon as
market conditions allow. Meanwhile, efforts to improve their operational balance
and profitability will continue. Public transport services in Lisbon and Oporto
(Carris and Metro de Lisboa; STCP and Metro do Porto) are being restructured with
a view to opening their concessions to private operators. 
43.    The administrative capacity to deal with PPPs is improving. Revised contracts on the basis of the preliminary agreements
regarding [nine] road concessions that were successfully renegotiated between
the Grantor and the Concessionaires remain to be approved by the lending
consortia and the Court of Auditors. The revised contracts are expected to
achieve important savings in 2013 and beyond. The preliminary agreements bring
sustainability and certainty back to the sector, with a fairer burden sharing
between public and private partners thereby correcting errors from previous
renegotiations. More than half of the savings to the budget result from a
decrease in shareholders’ internal rates of return. Lower costs from operation,
maintenance and major repairs – also stemming from a downward revision of
regulatory requirements in line with EU standards (completed by end of October)
– play a crucial part in the expected savings. Lending banks are to contribute
with more flexible guarantees and alternative risk mitigation tools (e.g. the
State gives real tolls collection as collateral to compensate for lower debt
service coverage ratios) that enable lower cash flow requirements to each
project without jeopardising its financial soundness. The Ministry of Finance's
PPPs central unit (UTAP) is playing a pivotal role in delivering valuable
financial and legal expertise to these renegotiations. UTAP is also providing
consultancy services to road PPPs renegotiations in the Autonomous Region of
Madeira and is helping the Ministry of Internal Affairs in auditing the
technical performance of the joint emergency and security network system
(SIRESP). The tender for the new Hospital Lisboa Oriental PPP, launched in 2008
but suspended before awarding, was reassessed and terminated. Nevertheless, the
importance of the project to the on-going hospital reform was confirmed and
UTAP, together with the Ministry of Health, will now assess if the project
should be developed as a typical public investment project through a
traditional public procurement procedure or alternatively as a PPP (which would
be the first project to which the PPPs framework law approved in 2012 is
applied).
Healthcare sector
44.    Policy implementation is continuing broadly in line with programme
deadlines. The ongoing reforms have already produced
important savings: in 2013, with expenditure in the National Health Sector (NHS)
 expected to be about 14 percent lower than in 2010 (corresponding to EUR 1.3 billion
in savings). In a context of reduced budget transfers to the sector (-11
percent since 2010), all cost categories show a consistent reduction and the
consolidated deficit of the sector (Central Government and SOEs together) shows
a significant reduction from EUR 818 million in 2010 to a forecasted EUR 65
million in 2013. In addition, by the end of 2013, an important stock of overdue
debt will have been paid through the debt settlement programme (about EUR 1.9 billion).
While arrears have not been fully eliminated (a stock of about EUR 500 million
remains to be paid), their accumulation rate and payment time have been
reduced. 
45.    The healthcare sector faces major challenges related to increasing labour
costs and lower State transfers. Given the high
share of wages in overall expenditure, the reinstatement of the 13th
and 14th bonus payment has led to significant cost pressures in 2013.
In addition, in 2014 the sector may face additional budget cuts (of about 160
million) if alternative horizontal expenditure-reducing measures do not
materialise. This limits the sector's ability to tackle the existing stock of
arrears and may even lead to their renewed increase. As a result, the authorities
will have to intensify ongoing reforms, notably the centralised purchasing of
goods and services and the on-going hospital reform. A further agreement with
the pharmaceutical industry may also be crucial to contain spending in this
area.   
46.    Revenues from moderating fees (co-payments) and fees charged to
cross-border/foreign patients have continued increasing in 2013. While the increase in revenue was somewhat lower than expected,
these fees presumably also dampened expenditure since the number of unnecessary
emergency consultations have apparently decreased at the same time. The
authorities continue improving the billing and collection process and have set
a goal of 90 percent collection for SOEs.  
47.    Regarding pharmaceuticals, the authorities continue fine-tuning the
set of measures adopted since 2011. These measures have
led to important savings on spending on outpatient pharmaceuticals. Public
spending fell by 11.6 percent in 2012 and by an additional 7 percent in the
first half of 2013. Private spending associated with cost-sharing saw a 12
percent reduction in 2012 and an additional 11 percent reduction in the first half
of 2013. Savings on inpatient pharmaceuticals in hospitals have been slower to
materialise. In 2012, spending stayed around EUR 930 million, once discounts
are accounted for, and therefore slightly above the target of about EUR 840
million. The target can still be achieved with the collection of about 94
million due to the claw-back agreement with the pharmaceutical industry. In
2013, spending remained broadly unchanged (0.5 percent reduction in the first half
of the year). The overall (outpatient plus inpatient) spending targets for 2012
(1.25 percent of GDP) and 2013 (1 percent of GDP) are to be achieved through a
combination of measures including the application of an international price
reference system in the hospital sector, administrative price reductions and
the implementation of the claw-back agreement with the industry for 2013. 
48.    The share of e-prescription is now more than 99 percent in NHS
facilities and 83 percent in private practices. Additional
steps are planned to further reduce the cases for manual prescription.
Regarding compulsory INN (active substance) prescription, concerns raised by the
observed increase in the use of exemptions to INN prescriptions are being
addressed of the authorities. The improved e-prescription system allows for
both prescription and dispensing information on the basis of which the authorities
can investigate divergent behaviour of both pharmacies and doctors. In about 44
percent of all cases the 5 cheapest medications are dispensed, which represents
a slight reduction from earlier in the year, probably related to the increase
in exemptions. Therefore, the authorities are considering an additional set of
measures that are to enhance a greater dispensing and use of outpatient generic
medicines in order to achieve the 2013 target of 45 percent of all outpatient
prescription reimbursed by the NHS (currently at 39 percent). Regarding
inpatient generic medicines, centralised purchasing, the implementation of the
national formulary and a 40 percent target for generics in hospitals are among the
measures currently in preparation. 
49.    With regard to primary care, the authorities continue to take steps
to create new family care units (USFs), ensure that all the population is
served by family doctors and implement patient medical records. These measures aim at reducing the current share of patients not
covered by family doctors. In addition, the system of electronic medical
records can improve safety of care and avoid the duplication or unnecessary use
of services such as diagnostics.  
50.    Regarding the hospital sector, important savings were realised in
2012 and authorities continue to focus on further cost reductions and
efficiency increases. Operational costs went down
by 6 percent in 2012 compared with 2011 (about EUR 316 million). In 2013,
overall operating costs may remain more or less at the level of 2012, mostly
because of the increase in the remuneration of employees (reinstatement of 13th
and 14th salary bonus payment). All other categories of costs show a
reduction in the first half of 2013 compared with the same period of 2012. In
this context, authorities reconfirmed their commitment to implement the ongoing
hospital reform. The main concern now is to finalise the 3-year strategic plans
for hospitals which are to deliver important cost reductions from now to 2016.
These plans are based on the general targets for hospital reorganisation by
region and the respective overall savings of EUR 400 million in the best case
scenario. These additional savings will be the result of further merging,
restructuring, closing or redistribution of departments and the consequent
reduction of beds and reallocation of staff. While unavoidable, this remains a particular
difficult reform which is unpopular with both the population and staff.
51.    The use of centralised purchasing is advancing, but there is still
room for further extension, notably in areas outside medicines and for which
centralised procurement is not compulsory for SOE hospitals. The on-going centralised tenders now cover a substantial list of
goods but also services and IT and the authorities have presented a plan for
further centralised purchasing. The authorities also continue to develop a
uniform coding for medical devices and, as a consequence of which more
centralised tenders will become possible. This is important as medical devices
constitute an important share of hospital costs and have not seen as
substantial a reduction as other cost items. Centralised purchasing is expected
to contribute significantly to the further reduction in hospital costs in 2014.
financial sector 
52.    Banks' solvency levels are adequate for the current needs. Banks' own funds increased substantially in the past year boosted
primarily by capital injections of EUR 5.6 billion ??? from the Bank Solvency
Support Facility (BSSF) by which a total of EUR 12 billion has been earmarked
for possible bank recapitalisations. However, the central bank remains vigilant
and continues to closely monitor the banks' capital positions through regular
stress tests and both onsite and offsite thematic assessments. At banking sector
level, the Core Tier 1 ratio stands at a comfortable 11.9 percent, enough to
cover immediate bad debt costs and weather the foreseen deterioration of the
loan portfolio and short periods of volatility surrounding the sovereign. This
capital buffer remains considerable across the board when using the new CRD IV
rules for evaluating banks' own funds. In a hypothetical scenario of a full
implementation of the CRD IV/CRR guidelines, only two out of the top eight
banks would not be able to meet the 7 percent Common Equity Tier 1 (CET1)
ratio. Banco de Portugal is currently developing a transition approach to
introduce the new capital rules applicable from January 2014.
53.    The crisis management toolkit has been improved allowing effective
intervention in troubled banks. Portugal, similar
to many European countries, lacked domestic resolution tools. This restricted
the authorities' intervention powers in failing banks, ultimately exposing
taxpayers to major losses. The key objective of the newly created resolution
framework is to make resolution feasible without systemic disruptions and
without burdening the State. Hence, the Resolution Fund, entirely financed by
local lenders through yearly contributions and proceeds from the bank levy, is
an integral part of the new framework and has been operational since end Q1-2013. It held about EUR 55 million by end-September 2013.
Banco de Portugal has put in place a dedicated bank resolution team that can
quickly borrow staff resources from other divisions of the bank if the need
arises. The resolution framework is supplemented by a recapitalisation law
(adopted by the Parliament in May) enabling Banco de Portugal to propose
mandatory recapitalisation operations. The recapitalisation legislation is
currently adjusted to the new European state aid rules.
54.    Taking advantage of new regulatory tools, the corporate and
household debt restructuring is proceeding, thus contributing to a smoother
deleveraging of the private sector. Further to the
implementation of the banking sector legislation aimed at monitoring and
mitigating excessive credit risk and at promoting an orderly debt restructuring
of bank household clients, the Banco de Portugal presented aggregated system
data on the out-of-court debt settlement of defaulted bank loans. While
preliminary figures suggest that the legislation actually encourages the
voluntary settlement of debts overdue, a key goal of the framework is to
promote the restructuring of debts via agreement between the parties (under the
general regime). The Banco de Portugal remains vigilant in regard to the
correct application of the framework., The authorities have completed a survey
of insolvency stakeholders to inquire about the appropriateness of the existing
corporate debt restructuring tools and possible gaps or bottlenecks. The survey
findings allow the authorities to consider possible incremental improvements to
the new corporate insolvency and recovery system implemented in 2012. To
support the efforts aiming at the successful restructuring of viable companies
facing temporary financial difficulties, three state/bank-funded investment
vehicles worth EUR 220 million were set up («Revitalizar» funds). 
55.    Steps were taken to expand the use of commercial paper as an
alternative financing source for companies, notably
SMEs. A detailed draft legislative proposal to modify the regulatory
environment applicable to the commercial paper market was prepared. Concrete
taxation measures forming part of the enhancements to the commercial paper
regime are still to be presented, as well as an assessment of the respective
budgetary implications. The final proposal is expected to be approved by the
Council of Ministers by end-November. 
56.    Proposals to improve the governance of the National Guarantee System
and the allocation of government-sponsored credit lines to SMEs were presented.
The NGS has contributed to the financing of SMEs in
Portugal since its inception in the mid-nineties and, through its guaranteed
credit system, has approximately EUR 2.9 billion of outstanding exposures in
guarantees to SMEs.. However the system shows some deficiencies at the level of
pricing mechanisms and risk management capabilities which hinder a fully
efficient allocation of the dedicated financial resources to SMEs. Furthermore,
while the financial supervision of the system's mutual guarantee societies and
the management company of the counter guarantee fund follow a model in line
with international best practice, weaknesses were found in the supervision and
public disclosure of the counter guarantee fund, which are an obstacle to the
effective management and monitoring of the State's exposure to the NGS
operations. The system's scrutiny mechanisms in place from a public accounting
perspective remain unclear. Therefore, building on the recent external audit to
the NGS and on a set of policy recommendations, the authorities submitted a
plan containing measures to improve the performance of the government-sponsored
credit lines and the governance of the NGS. These measures will be implemented by
January 2014. Regular reporting on the implementation of the above measures
will be carried out. With these changes in place, it is expected that the
credit lines will bring further advantages for SMEs, budgetary risks for the
state will be reduced and, more generally, the credibility of the system will
improve. The authorities prepared the first quarterly report on the allocation
of these credit lines.
57.    The stock-taking exercise aiming at streamlining and centralising
the management of EU structural funds continues. By
Resolution of the Council of Ministers, the authorities approved in June a new
institutional model for the governance of the European structural funds aiming
at a better political??? coordination of the funds as a whole, and at the
concentration of the programming, coordination, certification and payment
functions in a single institution. Accordingly, in August, the IFDR, IGFSE and
QREN Observatory were abolished and merged into a new body, the Development and
Cohesion Agency (Agência para o Desenvolvimento e Coesão, I. P.), At the
same time, the authorities continue developing an
initiative that aims at improving the effectiveness of structural funds for the
2014-2020 programming period, to be allocated to the private sector. This
entails setting up a 'specialised financial institution' on the basis of
existing structures. The potential fiscal risks linked to  the implementation
of such an initiative  will be monitored closely, while the fulfilment of the
relevant EU competition law will be observed. 
58.    The authorities are exploring possible additional initiatives to improve
financing opportunities for SMEs. The authorities
are actively contributing to the current EU-level discussions on the setup of
new innovative risk sharing financial instruments to support the provision of
finance to SMEs in Europe, including Portugal. Such instruments rely on public
and private resources. On the public side, the instruments being explored
resort to the combination of national allocations under the ESIF, EU programmes
dedicated to SMEs (COSME and Horizon 2020) and resources from the EIB and the
EIF. The public participation aims at boosting private sector resources and
incentivising capital market investments in SMEs. Furthermore, building on the
recent agreement on a State guarantee for existing and future exposures of the
EIB to the Portuguese economy, the EIB is expected to step up its efforts to
facilitate the financing of the corporate sector in Portugal, in particular the
economically viable SMEs operating in the tradable sectors. 
structural reforms 
Reform of labour, goods and services
markets
Labour market
59.    The labour market performance in the second quarter showed some
positive signs. According to the National
Statistics Office, unemployment decreased by 66,200 persons and employment
increased 72,400 persons in the second quarter. According to the authorities,
only a quarter of the change in unemployment can be explained by seasonal
effects (strong employment effects in the agriculture and tourism sectors).
Active labour market programmes, such as 'Impulso Jovem', could have
contributed to the strong fall in youth unemployment.. Furthermore, around a quarter of all new employment contracts were
permanent ones. In terms of qualifications, absolute increases were strongest
up to secondary education, with tertiary education flat. However, the youth
unemployment rate remains very high at 36.8 percent  and, in order to foster the integration of young people in the labour
market, the Government is further committed to implement a Youth Guarantee.
60.    The third stage of the severance payments reform was implemented on
1 October 2013. Severance payments for open-ended
contracts were reduced from 20 to 12 days per year of work. For temporary
contracts, severance payments were reduced from 20 to 18 days during the first
three years of contract. Accumulated rights up to the date of the entry into
force of the new rules are preserved. Simultaneously, the government has
enacted two compensation funds that will cover part of the severance payments.
Employers will contribute with 1 percent of the wage of new hires to the
compensation funds. Three quarters of the contribution will be used by the
employer upon dismissal of the employee (or will revert to the employer in case
of contract termination without right to severance payment). The remaining quarter
of the contribution is allocated to a mutual fund which will be used by the
social security when employers fail to meet their obligations under the severance
payments rules. Until 2015, firms can apply for reimbursement from the State of
their contributions to the funds.
                      Box 2: Cost Competitiveness Developments in Portugal This Box describes recent cost competitiveness developments in Portugal. The appreciation of the Real Effective Exchange Rates (REER) based on unit labour costs GDP deflators peaked in 2009 (Graph 1). Since the peak until 2012 the ULC-deflated REER depreciated by about 6 percent. This was determined by a fall in ULC of about the same magnitude, which was a result of a cumulative productivity increase of about 4.5 percent and a fall in the nominal compensation per employee of about 1.4 percent (Graph 2). The adjustment in REERs was accompanied by a strong decline in the employment rate and a sharp increase in the unemployment rate. The recent wage adjustment has been determined by wage cuts in the public sector and has been market-driven in the private sector, in light of high unemployment rates. Collective agreements at sectoral level have almost stagnated, while the number of firm-level collective agreements has been similar to the previous years, thus covering a relatively low proportion of workers. However, collective bargaining has an important role to play for the adjustment of the Portuguese economy. Portugal recorded a very significant adjustment in the current account, which declined from a deficit of 12.6 percent of GDP in 2008 to a forecast positive balance in 2013. This process was mostly linked to demand contraction. Nonetheless, the export sector grew at an accelerated pace, and REER developments could have played a role. However, the adjustment in the current account balance has to be seen against a very high negative Net International Investment Position (NIIP), which needs to decrease over the medium term. Portugal’s negative NIIP was around 116 percent of the GDP in 2012 and have not yet entered on a declining path. Going forward, REER adjustment needs to continue to make current account adjustment durable once demand recovers and to bring NIIP at prudent position. Wage moderation is still needed.  Major nominal wage decreases might not be needed, but, as long as the market-driven process towards wage moderation persists, wage floors need to evolve in such a way to make this process possible, with a view to facilitate the absorption of unemployment while ensuring external rebalancing.   Graph 1 – Broad and narrow measures of REERs in relation to a group of 37 countries. || Graph 2 – Unit labour costs and components, y-o-y growth rates. 
 || 
Source: DG ECFIN AMECO database and
  Eurostat.
61.    The Constitutional Court ruled that part of the revisions of the
definition of fair dismissal introduced by the Labour Code revision of August
2012 were not in line with the Portuguese Constitution. In case of redundancies, the Labour Code revision had eliminated a
tenure rule that an employer needed to follow (in case of a redundancy in a
section with multiple identical posts) and established that the employer
decides on which worker(s) to dismiss, based on objective and
non-discriminatory criteria. The revision had also abolished the need for the
employer to prove that there were no other suitable positions in the firm for
the employee at risk of being dismissed. In addition, the Labour Code had
introduced changes to the definition of dismissal based on unsuitability,
making them possible without prior changes to the work place and abolishing the
need for the employer to prove that there were no other suitable positions in
the firm for the employee at risk of being dismissed on grounds of
unsuitability. These three important changes to the Labour Code in terms of
improving labour-market flexibility have been ruled unconstitutional by the
Court. The authorities are now looking into alternative
reform options that can achieve a similar impact as the provisions ruled
unconstitutional while respecting the Court ruling. Several other changes to
the labour code were deemed constitutional, notably performance-related
dismissals, the bank of hours, the reduction in overtime compensation, the
suspension of four public holidays, and the elimination of up to 3 days of
leave, even though some of these changes – as foreseen in the revision to the
labour code – cannot prevail over arrangements in collective agreements if not
changed within two years. In addition, the authorities are considering possible
changes in the definition of unfair dismissals with a
view to tackling labour market segmentation and improving employment creation
of open-ended contracts. 
62.    Measures taken to further facilitate the conclusion of agreements at
firm level have not yet produced effects. Following
the tripartite agreement of March 2011 and the MoU, the Labour Code revision of
August 2012 introduced the possibility that sectoral collective agreements
regulate the conditions under which the agreement could be changed at firm
level on matters related to functional and geographic mobility, working time
and remuneration. In addition, the firm-level threshold for unions to be able
to delegate the conclusion of firm-level collective agreements to works
councils has been reduced from 500 to 150 workers. A report prepared by the
authorities has concluded that no use has been made yet of these new
provisions. In fact, collective bargaining at sectoral level decreased drastically
since 2010, while firm-level collective bargaining remained stable. The sharp
decline in the overall number of new collective agreements is problematic in
view of the important role of collective bargaining in absorbing the high
unemployment levels. 
63.    The authorities continued to implement measures to improve the role
of Active Labour Market Policies. The authorities
have presented a description of the functioning of the job counselling / job
search assistance and the activation / sanctions systems. It was considered
that there is further scope to improve the role of these systems in
facilitating the transition from unemployment to employment, in particular by
improving the profiling and strengthening activation. There was good progress
in implementing the action plan to revamp the Public Employment Services, with
the majority of the measures already concluded. There are some positive results
in terms of job placements and job offers. The authorities are also preparing a
plan to increase the cooperation with the private sector in placing the
unemployed. Training is being adapted to the changing profile of the unemployed
and there is an attempt to reinforce short training modules to reduce risks of
lock-in effects, while maximising the number of unemployed that receive
training. Dual-apprenticeship systems and education and vocational training
will continue to be important priorities. More efforts will be made to monitor
the extent to which training contributes to increasing employability.
Education
64.    Reforms in the education sector are advancing
well even though some measures are somewhat delayed. The monitoring tool aimed at enhancing the information
available regarding the national education network has been further
enriched. This tool is expected to be an essential source of information for
better targeted and more efficient policy decisions and is now fully
operational. The authorities have also approved a very significant number of
additional school autonomy agreements. Once signed, the total number of
agreements will be more than 200, going much beyond the initial objective of 80
agreements for the school year 2013/2014. As a result, around 25 percent of
public schools will enjoy enhanced autonomy. The government is still working on
possible improvements in the financing of schools in order to take better
account of evaluation and performance criteria. The setting up of the
professional schools of reference is behind schedule. They will not be
operational before the next school year as the government is still drafting the
relevant legislation and negotiating protocols with the business sector. Reporting on the latest developments in the apprenticeship system and
the latest cycle of external evaluation of schools is
of sufficient quality. The government will outline in future programme reviews options
for improvements of the system of external evaluation.  
Energy
65.    The measures ensuring energy regulator's independence and its
capacity to guarantee an efficient and competitive functioning of the energy
sector are being gradually phased in. Important amendments
to the ERSE bylaws were published in June 2013. Following the publication in
August of the framework law on functioning of National Regulatory Authorities,
ERSE's bylaws will be further amended to ensure compliance with the framework law's
provisions. 
66.    Rent-reducing measures implemented so far to
eliminate the tariff debt by 2020 and ensure the sustainability of the system appear
to be insufficient. The June
update of the energy tariff debt dynamics up to 2020 shows a clear worsening
relative to the forecasts presented in 2012 and more recent figures indicate
that the elimination of the tariff debt by 2020 would require real electricity
price increases of close to 2 percent per year, ½ percentage point above
initial projections and raising further concerns about the  impact of the
tariff on competitiveness. The report also shows that the increase in the real
electricity price would not be sufficient to eliminate the tariff debt and additional
measures would need to be taken despite the fact that the government has
already implemented most of the measures agreed by the Council of Ministers in
May 2012. The most significant additional measure envisaged by the government
is the introduction of a
contribution on energy generators preventing windfall profits resulting from
the increase in electricity prices in the MIBEL market caused by the levy on
the Spanish generators. This
measure, though welcome to counter a perverse effect on wholesale prices, is
not a cost reducing and sustainability-enhancing measure. Meanwhile, negotiations
on the Sines and Pego power plants, which were expected to achieve some
savings, reached an impasse. The remuneration scheme for co-generation was
revised and establishes that existing co-generation facilities that do not use
a renewable source of energy will transition into market remuneration after 10
years, receiving in the meantime the new tariff set by executive order. A new
energy levy on generators is under preparation. EUR 100 million of the levy's
revenue will stay in the state budget while the remainder will be channelled to
reduce the electricity tariff deficit. At this stage the details are not known
and two aspects need to be closely monitored: i) ensuring that this levy will
not translate into further end-user price increases; ii) gauging the
implications of the this levy in terms of the impact and feasibility of other
cost-reducing measures foreseen to address the sustainability of the electrical
system. Annual audits of co-generation plants to ensure that plants which do
not fulfil the requirement for co-generation do not receive support are
on-going. Finally, the report on the CMEC scheme and the process for extension
of the concession of the public hydro resource has been delivered. Further
analysis on the implication of the report and potential measures to address the
points identified as sources of distortion will be presented at the next
review.
67.    The authorities have presented the plan to create a single logistics
operator for switching suppliers (OLMC). According
to this plan the single platform will be created no sooner than October 2014. This
long delay is explained by the necessity to create the electricity platform
from scratch. An independent logistics operator is important to ensure a
non-discriminatory treatment of all electricity providers and a smooth supplier
switching process. Until the electricity suppliers switching platform is fully
unbundled from the incumbent, the responsibility to ensure a level playing field
for the new entrants will fall to a large extent on the energy regulator and
the competition authority.
Telecommunication
and Postal
68.    
Significant steps towards compliance with
the Court of Justice ruling of 7 October 2010 have been undertaken recently. The tenders for the designation of the universal service provider(s)
through an efficient, objective, transparent and non-discriminatory mechanism
were launched. The activities under tender 1 (universal service connection to a
public communications network at a fixed location and telephone services to the
public) and awarded to independent operators. The activities under tender 2 –
public pay phones – were awarded to the incumbent. The third tender
'providing a comprehensive directory and a full-service inquiry' was not
completed due to the lack of proposals. At the time of drafting the report, the
final assignments for tenders 1 and 2 are still pending and the historical
contract with the incumbent operator has not yet been cancelled. The contract
for activities under tender 3 will be directly awarded for a maximum period of
1½ years. Meanwhile, the authorities will redesign the terms of the tender so
as to make it more attractive for the bidders.
69.    The amended framework for the provision of universal service for
postal services is about to be adopted. These
amendments will bring the postal law and the concession contract with the
incumbent operator - CTT - in line with the European Directives. This is an
important milestone in the opening-up of the postal sector to competition. The
new framework also ensures that after the year 2020 the postal universal
service will be subject to competitive pressure as in 2020 the current
designation period for the incumbent operator will expire. 
Transport
70.    
The implementation of some of the transport
measures is delayed. With regard to ports, policy
decisions are urgently required to ensure that efficiency gains and
cost-savings are passed on to port customers and that the port operation
concession holders respect minimum performance criteria as provided for in the
5+1 Plan presented last year. As to railways, the unbundling of CP Carga
freight terminals are dependent on a final valuation of these assets and will
then be transferred to REFER, the rail infrastructure operator, by the end of
the year. REFER is expected to present a coherent strategy towards reaching
operational balance for discussion at the next review, as significant
additional effort is needed in this respect. The launch of public transport
concessions in Lisbon and Oporto has been postponed and is not expected before
the first quarter of 2014. The adoption of the long-term vision for transport,
setting out and prioritising medium-term transport infrastructure investments,
is waiting for input from the recently created Working Group on this matter;
this group is expected to present a final report on key transport projects for
the coming multi-annual financial framework 2014-2020 shortly. Lastly, the
government is drafting the by-laws for the new transport regulator due by the
end of November. The timely adoption of the by-laws is essential to ensure an
effective regulatory oversight in the transport sector. 
Services and
professions
71.    Work on the improved sector-specific legislation has progressed but
the adoption of the regulatory framework for the construction sector is
delayed. The construction laws were originally
foreseen to be sent to Parliament by the end of 2012 and are now expected to be
sent to Parliament only by15 October 2013. The fees charged for authorisations
and certificates as well as the value of the yearly regulatory taxes in the
construction sector will be revised in order to ensure their proportionality in
time for the adoption of the construction laws. Concerning the other sector-specific
legislative amendments, progress in aligning legislation with the principles of
the Services Directive has continued steadily. 59 out of 68 legal regimes have
been submitted by the government for publication or for subsequent adoption by
the Parliament, as required by the legislative framework. Legislative
amendments for the remaining sectors should be adopted by the end of the year. 
72.    The report compiling the final results of the second phase of
investigation of regulated professions without professional associations has
been finalised and submitted as required. Following
the recommendations of the Commission for the Regulation of Access to
Professions, this second phase report identified requirements on access to
professional activities that are no longer justified or proportionate.
73.     Following the adoption of the horizontal framework law on public
professional associations the professional bodies' bylaws and internal rules
are being amended accordingly. The law is a first
step towards ensuring a more open access for the exercise of some highly
regulated professions and an improvement in the legal framework applicable to
public professional associations. To complete the reform on highly regulated
professions, the amended professional bodies' statutes and internal rules will
be approved by the government and subsequently submitted to Parliament with the
aim of bringing them in conformity with the principles laid down in the law and
removing requirements that are not justified or proportionate. However, the
submission of these revised bylaws to the Parliament is delayed and is now
expected by the end of the year.
74.    Progress has been made on the work to improve the functioning of the
Point of Single Contact ("Balcão do Empreendedor"). A clear roadmap and work programme is in place and updated monthly.
The operational deliverables needed for this reform will be completed by the
next review. The "Zero Authorisation" project that abolishes
authorisations/licensing and substitutes them with a declaration to the PSC is
fully operational and the platform is available to all levels of
administration, including all municipalities. Some further simplification may
be needed to ensure better usability by businesses.
Reform of framework conditions
Housing market 
75.    The process of updating rental contracts signed before 1990 and
their gradual transition to the general system has started.  The full implementation of the system was dependent on information
relating to tenants' personal income in 2012, which was made available in June.
In addition, all complementary legislation following the publication of the
Housing Rental Market has been adopted. The "Balcão do Arrendamento"
is fully operational; it has already dealt with more than 2 000 requests of
eviction. The Monitoring Committee which has been set up to monitor the impact
of the reform has already delivered its first quarterly report. The data and
information regarding the impact of the reform are still limited given the
short time elapsed since its full implementation. A fully-fledged first
evaluation of the impact of the reform is expected by early 2014. The
revaluation of the housing stock has been completed, giving rise to an increase
of 115 percent in the cadastral value of the housing stock.
Competition and
sectoral regulators
76.    Progress to ensure the functioning of the Competition authorities
and National Regulator Authorities has been steady. The framework law setting the main principles of the functioning of
the main National Regulatory Authorities (NRAs), including those relating to
their independence and autonomy, was published in August 2013. The proper and
timely implementation of the new by-laws of the respective regulators is
essential to confirm that the new legal framework is a significant step
forward. The corresponding amendments to the bylaws of the NRA will be approved
by the government by end of November.
Judicial system
77.    Considerable progress has been made in the ambitious programme of
judicial reform. Several major structural changes
to the judicial system have already entered into force or are about to do so.
Among them are the comprehensive new Code of Civil Procedure that came into
force in September and aims at speeding up civil and commercial litigation, a
new Judicial Organisation Act to streamline the court system, and improved
regulation of enforcement agents.
78.    Significant headway has also been made in reducing the backlog of
court cases. A special task force was created to
examine pending cases and has successfully closed 45 percent of the cases
existing up to May 2011. In addition, the resolution rate has greatly improved.
In the first quarter of 2013, the number of cleared enforcement cases has
increased by 158 percent compared with fourth quarter of 2012.
79.    The efficiency of the enforcement system will continue to be further
enhanced by the measures adopted in the new Emergency Law 4/2013. This law introduced a set of urgent measures to combat the
remaining backlog of cases, and were included in the new Civil Procedure Code.
Another proposed law (Procedimento Extrajudicial Pré-Executivo) will create a
pre-trial triage which will, in particular, be able to identify cases to be
settled out of court.
80.    New laws will strengthen the authority and financing structure of
the oversight body for enforcement agents and insolvency administrators. Together with the new fee structure that incentivises speedy
enforcement, these bills will significantly strengthen the discipline and
efficiency of the enforcement profession, and hasten the clean-up of
long-pending cases.
81.    The new Code of Civil Procedure that came into force in September is
the most comprehensive re-think in almost a century, and has been widely
praised by legal professionals. Among the Code's
provisions are a limit of 10 on the number of witnesses that each party can call
in civil cases, and tight new restrictions that make it harder for parties to
delay hearing dates. The proper implementation of the new Code of Civil
Procedure is supported by an extensive team of IT specialists, who, on the
request of judges, court clerks and other members of legal profession introduce
the necessary changes in the instantaneous fashion. Also, a task force of
experts provide rapid answers on the new procedures prescribed by the Code.
82.    The Judicial Organisation Act was adopted by Parliament in June and
will enter into force in 2014. The law sets out a
major streamlining of the judiciary, reducing the number of courts and
improving efficiency through the creation of court clusters to allow for
greater economies of scale and professional specialization. It also sets
workload standards and performance targets for courts and judges, and makes it
possible to allocate resources, including judges, where bottlenecks occur. The
law constitutes a significant change in the organisation and management of the
judiciary with a greater focus on performance accountability and service
delivery, bringing Portugal in line with best practice elsewhere in Europe.
83.    The Competition Court, set up in 2012 has been properly resourced
and is fully operational, responding well to an increased workload.
                      Box 3: Reforms in the Judicial Sector The scope of the judicial reforms was stipulated in the "Justice" part of the Memorandum of Understanding. The reforms were possible thanks to good cooperation between the Portuguese authorities and the EC, ECB and IMF. The MoU foresaw several cornerstone reforms: the new regulatory framework for the enforcement agents, the new Code of Civil Procedure and the Judicial Organisation Act which triggered changes in by-laws, kick-started new IT systems and applications, and necessitated various temporary task forces. New Code of Civil Procedure The Code of Civil Procedure (Law 41/2013) came into force in September 2013. The Code facilitates the swift conduct of the proceedings by the judges and the parties. The new Code limits the number of witnesses for each party to a maximum of ten and makes it harder for parties to delay the hearing date. It foresees the closure of civil and commercial cases that are inactive for 6 months due to the inactivity of the parties. The Code also foresees the closure of enforcement cases wherein debtor’s assets have been searched for 3 months without success and neither the creditor nor the debtor have been able to indicate specific assets to be seized. The Ministry of Justice allocated significant human resources to the implementation of the Code. Programmers, technicians, technical coordinators and project managers dedicated 17,820 hours to this project. The IT system (CITIUS) was installed on over 13,000 clients’ computers and 335 servers in 1½ months. A helpdesk of 85 technicians provides direct support to the courts. A task force of experts provides rapid answers and training on the new procedures prescribed by the Code. Since the publication of the Code on 26 June, 3 decree-laws and 7 ordinances have been enacted to further implement specific aspects of the new Code. The Judicial Organisation Act The Act adopted by Parliament in June (Law 62/2013 replacing Law 3/99) will enter into force in 2014. It provides for a streamlining of the judiciary, reducing the number of courts of first instance from 234 to 23. By enlarging each first instance court’s territorial jurisdiction and aligning them with the administrative districts, it aims at improving efficiency through the creation of court clusters to allow for greater economies of scale and professional specialisation. It foresees setting annual and triennial strategic objectives agreed upon between the Ministry of Justice and the Councils for the Judiciary. Other reforms include the introduction of process management, improvement and clarification of the function of court managers, and a possibility of electronic processing of the same process for the secretarial acts at various points of the court. The Enforcement Agents’ Framework The MoU put a particular stress on the efficiency of the enforcement process which complements the declaratory process in debt recovery. Specially constituted task forces audited all civil and commercial enforcement cases all pending 1,208,842 cases in May 2011 and closed 541,775 (45%). The courts and enforcement agents also stepped up clearance of all enforcement cases, including those filed after May 2011. These efforts were aided by the enactment of Decree-Law 4/2013. The functioning of the Commission for the Efficiency of Enforcement Procedure (CPEE) has been improved through more effective IT tools. The CPEE has, on the basis of ordinance 2/2012, access to several IT systems, i.e. of the courts (CITIUS) and of the enforcement agents (SISAAE). This resulted in a tighter supervision. In Q2 2013, 266 enforcement agents were inspected vs. 16 in Q2 2012. In Q1 2013, 22 disciplinary proceedings were concluded by imposing penalties. CPEE will be replaced by the Comissão de Acompanhamento dos Auxiliares de Justiça (CAAJ) which will supervise and regulate enforcement agents and insolvency administrators. CAAJ will be an independent entity focussing on the efficiency of the enforcement and insolvency judicial systems and on the quality standards of the legal professions at stake. Ordinance 308/2011 introduced a more transparent regime for the bank accounts of enforcement agents, enabling an easier identification of all transactions performed through bank accounts related to an enforcement case. The new fee structure of the Ordinance 225/2013 aligned the costs of the enforcement action to the tasks of the enforcement agent. Alternative Dispute Resolution (ADR) Several ADR regimes were revised, i.e. the civil and commercial arbitration regime (Law 63/2011) and the justice for the peace court regime (Law 54/2013) while others were created, i.e. the mediation regime (Law 29/2013) and the tax arbitration regime (Decree-law 10/2011 and Ordinance 112-A/2011). The promotion of ADR is in line with out-of-court mechanisms envisaged in other areas, i.e. in the field of companies’ and debts’ restructuring (PER and SIREVE). High value cases (cases above EUR 1 Million) One of the reforms undertaken on the basis of the MoU focussed on the issue of the high number of outstanding high value tax cases. All the efforts put by the courts, special task forces and the Tax Administration started to bring positive results in 2013. While the number of filed cases show a decreasing trend, the ration of cases won by the tax office increases. A significant role in the increase of the efficiency of tax courts in terms of cases over EUR 1 Million was played by the special task forces of judges assigned to tribunals in Lisbon and Oporto by Law 59/2011. The number of pending cases in the courts of 1st instance decreased although the number of appeals is increased. A permanent solution dealing in a structured way with this category of tax cases is currently under discussion. 
Business
environment
84.    Liquidity constraints on non-financial corporations continue to be an
issue of concern. The Decree Law 62/2013 of 10 May
adopted by the government is not fully in line with the New Late Payments Directive 2011/7/EU. The main provision which is considered not to
be in line with the Directive is Article 12 of the Decree Law, which provides
that the deadline of a maximum of 60 calendar days to proceed to the payment of
commercial transactions involving public entities providing healthcare will not
be fully applicable until 31 December 2015. Microcorporations and small firms
are however outside the scope of this exception. The Directive states that, as
from 16 March 2013, Member States must ensure that in commercial transactions
in the health sector the period of payment does not exceed 60 days following
the receipt of the invoice by the debtor. The argument provided by the
Portuguese authorities for such an exception is that full compliance both with
the Directive and with the ongoing strategy for the settlement of arrears,
which was agreed in the context of the programme, would entail a very
significant cash disbursement with a very negative fiscal impact. The
Commission has requested additional information to the Portuguese authorities
and could launch an infringement procedure in the coming months for
non-compliance.
85.    The recently introduced VAT cash accounting regime will improve the
financial and cash flow situation of businesses.
Companies opting for this regime will pay/deduce the VAT when the payments from
their customers/to their providers take place, rather than when the invoices
are actually issued, as is currently the case. The measure applies to companies
from all sectors of the economy with a turnover of up to EUR 500,000 and it
entered into force on 1 October.  
Licensing
86.    Most legal reforms envisaged to ease licensing requirements to
businesses are behind schedule. This delay concerns
almost all sectors in which reforms are awaited such as territorial planning,
industry, geology, commercial or tourism activities. The recent changes in some
of the Secretaries of State dealing with these various reforms seem to be a main
reason for this delay. Moreover, in some cases the government has decided to
change the approach and therefore legal texts do not build on the work that had
been carried out by the previous teams. The high number of legal provisions to
be adopted poses some concerns regarding the administrative capacity to adopt
all of them over the next months. The New Legal Regime on Urbanism and Building
(RJUE), which is expected to be adopted by November 2013, is a critical piece
of complementary legislation on which progress in other areas depends. Progress
has been achieved in some areas, such as (1) a draft Base Law for Soils,
Territorial Planning and Urbanism submitted to Parliament; (2) the adoption of
a Decree Law which fast-tracks the decisions regarding licensing requirements
of investment projects over EUR 25 million; (3) the adoption of a new
Environmental Impact Evaluation regime, whose compliance with the European
legal is being assessed by the Commission; and (4) two ordinances on industrial
licensing. 
Iv.     Programme financing
87.    Since late spring, when sovereign bonds traded at pre-programme
levels, market sentiment towards Portugal has deteriorated significantly. Global
factors became less favourable for vulnerable sovereigns over the summer as the
expectation of upcoming Fed "tapering" led to upward pressure on
sovereign yields more generally. Real money investors started exiting riskier
investments by shifting into safer sovereigns, which now offered a more
attractive yield. The political crisis in Portugal, which erupted in early
July, also raised investor concern about the government's stability and its commitment
to the reform programme. Another Constitutional Court ruling against an
important fiscal measure raised further doubts about the government's capacity to
push through the necessary reforms. As a consequence, investors demanded higher
premiums to reflect increased sovereign risk and Portuguese bond yields decoupled
from other European sovereigns.
88.    The Portuguese Treasury has tapped the domestic
market for sovereign financing. Since
May, the Treasury has increased the net issuance of Treasury bills by
EUR 2.4 billion, mainly concentrating on longer maturities in this segment.
Sales of retail debt products also made a small contribution to sovereign
financing, and the Treasury expects this trend to continue. To that end, the
Treasury introduced a new medium-term product in early October for the retail
market, which is expected to deliver cost savings in relation to the current
pricing of 5-year bonds. Privatisation receipts amounting to EUR 1 billion were
recorded in September. Furthermore, in July the Social Security
Financial Stabilization Fund was granted permission to invest up to EUR 4
billion of its foreign reserves into domestic sovereign debt.
 Graph 9. 10-Year Government Bond Yield || Graph 10. 2-Year Government Bond Yield 
 || 
 Source: Bloomberg || Source: Bloomberg 
89.   
Portugal's market
access depends heavily on the governments' commitment and ability to implement
the programme. The very low
liquidity in the market seen in September, particularly in the short end on the
yield curve, showed that investors were waiting to see whether the government
was willing and capable to pursue the programme or whether, on the contrary,
declining social support and adjustment fatigue would force it to step down its
ambition and slow the implementation of reforms. Past experience shows that market
sentiment reacts very quickly in response to policy choices affecting the
country's economy and sovereign debt level. The government's restated
commitment to the fiscal deficit targets and planned reforms have already
triggered positive reactions in the market and brought more risk-tolerant investors
back to Portuguese bonds. However, implementation of the agreed measures and
policies in the coming months will be crucial in restoring the prospects for
regaining full market access.
 Graph 11. Short-term auctions issuance amounts || Graph 12. Short-term auctions weighted average yield 
 || 
 Source: || Source: 
90.    Assuming full disbursement of programme
financing, Portugal is fully funded for the remainder of the programme period,
but restoration of market access is nevertheless vital for the Portuguese economy.
The Treasury has accumulated a
fairly large cash buffer, which stood at nearly EUR 15 billion by end-September.
Together with the remaining official loan disbursements and assuming broad
roll-over of Treasury bills, the funding – under current assumptions - will be
sufficient to cover the sovereign needs until at least the middle of next year.
The use of the above-mentioned domestic market sources could extend the
coverage period further. At the same time, considerable down-side risks to the
public finances exist, stemming from the accumulation of arrears, losses of
state owned enterprises or budgetary slippages. While regaining market
access at sustainable yields is  not urgent for the sovereign, it is imperative
for the wider economy, as Portuguese banks' and corporates' access to finance
is closely linked to that of the sovereign. Looking to the post-programme
period, restoring market access is essential  in light of debt redemptions
falling due in the second half of 2014.
91.    The successful completion of the combined 8th
and 9th reviews will pave the way for the disbursement of around EUR
5.6 billion, of which some EUR
3.7 billion will come from the EU and around EUR 1.9 billion from the IMF. With
the disbursement of this tranche, more than 90% of the total financing envelope
under the programme will have been disbursed.
ANNEXES
                    
                   ANNEX 1: ASSESSMENT OF COMPLIANCE:
MONITORING TABLE
 2.7. The BdP will continue to strengthen its supervisory organisation […]. Launch a thematic review of banks' operational capacity in the area of loan restructuring and asset recovery to be completed by [October 2013]. || Observed. New organizational structure in the supervision departments. The assessment of distressed loans management framework is currently ongoing. 
 2.9. The BdP continues to monitor on a quarterly basis the banks’ potential capital […]. In this context, banks reflect the OIP findings in the implementation of the SIP recommendations on asset quality and stress testing methodologies [ongoing], with the update of the treatment of collective impairments expected to be finalised at the latest by [end-June 2013]. || Observed. The review of the impairments in the credit portfolios of the eight largest national banking groups have confirmed the adequacy of the level of impairments booked in the balance sheet and the resilience of the banking system in what concerns its solvency. 
 2.12. Outsource the management of the credits currently held by Parvalorem to a professional third party […] through a competitive bidding process by [mid-2013], at the latest. || Observed. Loans in Parvalorem were split into four specific asset segments. Two successful bidders were awarded the contracts (on 14 August) to manage two segments each.   
 2.13. The early intervention, resolution and deposit guarantee framework has been strengthened. Conclude the implementing measures, in particular: (a) analyse the recovery plans of the top 8 banks [end-June 2013] and of the remaining banks [Ongoing]; (b) issue guidelines to the system on recovery plans by [September-2013]; (c) prepare resolution plans on basis of the reports to be provided by banks [Ongoing]. The resolution fund was set up and its funding arrangements concluded. The initial contributions by banks will be settled by [mid-June 2013] and the annual contributions by [end-September 2013]. || Observed. Recovery plans analysis has been completed and gaps were identified. System guidelines are being finalized. The Resolution Fund is up and running since Q1 2013 and received from banks both the initial contribution (June) and yearly contribution (September). BdP dedicated a unit of six employees (full time equivalents) for resolution and plans to add further staff. The unit will formulate the resolution plans based on the reports provided by the banks. 
 2.16. […] Prepare quarterly reports on the implementation of the new restructuring tools with the first report due by [end-June 2013]. Conduct a survey of insolvency stakeholders to inquire about the appropriateness of the existing debt restructuring tools and possible gaps or bottlenecks by [end-July 2013]. […]. || Observed. The authorities delivered in July the first quarterly monitoring report on the implementation of the new restructuring tools. A survey of insolvency stakeholders was conducted and its results presented in a report. 
 2.18. The Ministry of Finance, the BdP, and other stakeholders, have put forward a set of measures to encourage the diversification of financing alternatives to the corporate sector. i. focus the scope and prioritise the measures to be implemented [Ongoing]. ii. finalise a detailed assessment of the grouped issuance of corporate debt to obtain capital market financing [end-April 2013]. iii. prepare a first draft of the necessary amendments of the rules governing the commercial paper market by [end-June] and review any potential tax implications. || Partially observed. The preliminary detailed assessment on the grouped issuance of corporate debt has been submitted. The issuance was postponed to mid-2014. The first draft of the amendments to the rules governing the commercial paper market was submitted and discussed. The draft text already underwent a set of restricted consultations. The review of tax implications is pending.   
 2.19. Assess scope for improving the performance and governance of existing government-sponsored credit lines […]. Establish a quarterly monitoring and reporting mechanism on the allocation of the government sponsored credit lines aimed at facilitating access to finance to SMEs, with the first report due by [end-June 2013]. Conduct an external audit of the National Guarantee System, with a report of the main findings and policy recommendations to be submitted by [end-April 2013]. || Observed. The authorities delivered in July the first quarterly monitoring report on the allocation of government-sponsored credit lines. The external audit of the National Guarantee System has been duly conducted and policy recommendation presented in a roadmap with a set of milestones to be accomplished. 
                   ANNEX 2: COMMISSION SERVICES
MACROECONOMIC PROJECTIONS 2012-2017

ANNEX 3: INDICATIVE FINANCING NEEDS AND SOURCES

Table 9: Planned quarterly disbursements (EUR
billion)
                   Annex
4: Provision of data (reporting requirements)
During the programme, the following indicators and reports
shall be shared with the European Commission, the ECB and the IMF by the
authorities on the agreed periodic basis. Data for past periods should also be
included in subsequent transmissions in case of revision. Other indicators may also be requested to and reported by the
Portuguese Authorities. 
 To be provided by the Ministry of Finance (or INE) 
 1.              Data on cash balances of the State Budget. Data will include detailed information on revenue and expenditure items, in line with monthly reports that are published by the Ministry of Finance (MoF). Data on tax revenue should be decomposed in gross tax revenue received and tax reimbursements paid by the State (detailed per main individual taxes)  || Monthly, 3 weeks after the end of the month 
 2.              Data on the cash balances of the other parts of General Government (Autonomous Funds and Services, Social Security and Other entities, including Incorporated State-owned enterprises (ISOEs) or extra-budgetary funds (EBF) not part of the State Budget, but which are, under the European System of Accounts (ESA95) and ESA95 Manual on Government Deficit and Debt rules, classified by the National Statistical Institute (INE) as part of the Central Government; [Regional and Local Governments (Administrações Regionais and Locais); Regional and local government-owned enterprises or companies, foundations, cooperatives, and other agencies and institutions, which are, under the ESA95 and ESA95 Manual on Government Deficit and Debt rules, classified by the INE as Local Government, as defined in paragraph 4 of the TMoU) – progressively enlarged || Monthly, as soon as the data are available and no later than 7 weeks after the end of the month 
 3.              Accrual data on budget execution of the National Health System (NHS) || Monthly, 3 weeks after the end of each month 
 4.              Consolidated cash data on the General Government budget execution initially comprising the Central Government and Social Security and enlarging progressively the scope as in indicated in the TMoU, MoU and MEFP || Monthly, 7 weeks after the end of each month 
 5.              Publish information on: number of general government staff on a quarterly basis (no later than 45 days after the end of the quarter); stock and flows over the relevant period per Ministry or employment entity (i.e. new hiring, retirement flows, special mobility condition flows, and exit to other government service, private sector or unemployment); average wage, allowances and bonuses. The regional and local administration will transmit the necessary information. Information on employment in SOEs (central, local and regional) and other public entities and/or bodies will also be compiled || Quarterly, no later than 30 days after the end of the quarter (as of March 2012) 
 6.              Consolidated account on an accrual basis of the non-financial SOEs that are classified within the Central Government || Quarterly, 90 days after the end of the quarter (as of March 2012) 
 7.              Data on the past and projected financing needs of SOEs, including for the major SOEs details on the financing needs for the operational balance, capital expenditure, interest payments and debt principal repayments || Monthly, 4 weeks after the end of the month 
 8.              Data on arrears of: ·     the General Government, detailed by subsector ·     the incorporated (SOEs) government-owned hospitals that are not part of the General Government ·     other non-financial SOEs that are not part of the General Government || Monthly, 7 weeks after the end of each month (as of September 2011) 
 9.              Information on Public-Private Partnerships (PPP) related revenue and expenditure, for those PPP reclassified within the General Government (in line with paragraph 5.2 of the TMoU) || Monthly, 30 days after the end of the each month 
 10.           New guarantees granted by the State to SOEs, PPPs, banks and the non-financial private sector || Monthly, 30 days after the end of each month 
 11.           Detailed information on called guarantees of the State || Monthly, 30 days after the end of each month 
 12.           Data on proceeds from asset sales by the Central, Regional and Local Government || Monthly for Central Government Quarterly for Regional and Local Government 30 days after the end of reference period 
 13.           Quarterly data on General Government accounts as per the relevant EU regulations on statistics, showing also the main items of  the transition from cash balances to the General Government balances in national accounts || Quarterly, 90 days after the end of each quarter 
 To be provided by ESAME 
 14.           Report on progress with fulfilment of economic policy conditionality on a quarterly basis. In addition, a short summary report should be sent on a monthly basis || Quarterly (report), two weeks after the end of each quarter. Monthly (short summary report) two weeks after the end of each month for which a report is not due. 
 To be provided by the Debt Management Office 
 15.        Accrual data on interest spending of the State || Quarterly, 7 weeks after the end of the quarter 
 To be provided by the Ministry of Labour 
 16.        Data on labour market as follows: a.   layoffs by type b.  collective agreements by type and number of collective agreements that are  extended by the Ministry of Labour to non-signatory firms c.   number of collective agreements that regulate the use of the Bank of Hours working time arrangement d.  proportion of unemployed receiving unemployment benefits e.   distribution of the unemployed in terms of amount of benefits received (mean of benefits received, median, number of unemployed receiving an unemployment benefit amount equal to the IAS and number of unemployed receiving the maximum amount of unemployment benefits allowed) f.    unemployment duration || Every six months, 6 weeks after the end of each semester 
 To be provided by Ministry of Justice 
 17.           Publishing quarterly reports on recovery rates, duration and costs of corporate insolvency cases || Quarterly, starting in 2011 Q3, within four months after the end of each quarter. 
[1] The cut-off date for
the macro-economic and fiscal projections of this report is 15 October 2013.
[2] OJ L 269 of 14.10.2011
[3] The IMF share of the Programme was set in
Special Drawing Rights (SDR). Due to a weakening of the Euro against the SDR
compared with May 2011, the projected pay-out by the IMF in Euro has become
higher, so the current projected Programme total is around EUR78.5 billion.
[4] See also the conclusions from the Bank Lending Survey, July 2013,
Banco de Portugal.
[5] Decree-Law 133/2013, of 3 October.