EUROPEAN COMMISSION

MEMO
Brussels, 16 December 2013

Statement by the EC, ECB and IMF on the Tenth Review
mission to Portugal
Staff teams from the European Commission (EC), European Central Bank (ECB), and
International Monetary Fund (IMF) visited Lisbon during December 4-16 for the tenth
quarterly review of Portugal’s economic adjustment programme.
Further signs of recovery have emerged since the last review. Growth is broadly in line
with projections, while unemployment has fallen by more than expected. External
rebalancing has continued, although imports have picked up, reflecting stronger-thanexpected domestic demand.
The programme’s fiscal targets have been confirmed. With tax collections performing well,
the 2013 deficit target of 5.5 percent of GDP is achievable. The 2014 budget was
approved by Parliament with only a few changes. It includes important steps towards
rationalising and modernising public administration, improving the sustainability and
fairness of the pension system, and lowering costs across ministries. If some of these
measures are determined to be unconstitutional, the Government has re-affirmed its
commitment that it will then identify and implement compensatory measures of high
quality to meet the agreed deficit target of 4 percent of GDP. Such measures, however,
could heighten risks to growth and employment and reduce the prospects for a sustained
return to financial markets.
The banking sector is stable, but low profitability signals that challenges remain. Capital
buffers are broadly adequate and liquidity conditions are improving. However, profitability
remains weak, and the corporate debt overhang is a source of vulnerabilities for the
banking sector that must be addressed so as not to put a brake on medium-term growth
prospects. Credit conditions remain challenging, notwithstanding recent improvements for
lower-risk companies.
Continued structural reform efforts will have to be the centrepiece of a credible strategy
for sustainable growth in the coming years. The Government has already made important
progress in implementing challenging structural reforms, but more evidence of their
impact on the functioning of the economy is needed. Accordingly, the implementation of
reforms must be continuously evaluated to ensure that they deliver the desired results.
Further efforts to facilitate a sustained rebalancing of the economy from the non-tradable
to the tradable sector should focus on increasing competition and flexibility in product and
labour markets, against the background of a more efficient and streamlined public
administration, so as to promote the flexible reallocation of resources. Articulating credible
and time-bound reforms towards this end would reassure investors that improvements in
Portugal’s economic fundamentals are becoming entrenched.

MEMO/13/1158

The programme remains on track, and the authorities are determined to ensure continued
programme compliance. Market sentiment towards Portugal's sovereign debt has gradually
improved, as also evidenced by robust demand for a debt exchange in early December,
which reduced remaining financing needs in 2014. Public debt remains high but is
sustainable provided programme implementation and reaffirmed ownership remain
resolute, thereby supporting the Government's return to full market financing. Provided
the authorities persevere with steadfast programme implementation, euro area member
states have declared they stand ready to support Portugal until full market access is
regained.

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