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Interview: IMF official warns next year not to be cakewalk for Portugal

English.news.cn   2013-12-28 08:33:34            

by Marina Watson Pelaez

LISBON, Dec. 27 (Xinhua) -- Portugal seems to be ending 2013 on a good note. Earlier this month the Portuguese central bank improved its 2013 and 2014 economic outlook and on Friday the national institute of statistics (INE) unveiled that Portugal might have reached the target it agreed with its international creditors commission for this year.

However, Portugal's implementation of the bailout program with the troika of the European Union, the International Monetary Fund (IMF) and the European Central Bank next year "won't be a cakewalk", IMF Resident Representative in Lisbon Albert Jaeger told Xinhua in a recent interview.

"The economy is still at the early stages of recovery following a pretty long slump in activity,"he said,"so big challenges are still to be tackled."

BIGGEST THREAT FOR NEXT YEAR?

"I would say a premature sense of 'Mission Accomplished', followed by slipping back to Portugal's pre-crisis policy mode,"Jaeger said.

"And maybe the temptation to do this is understandable at the level of political parties that have their eyes on upcoming elections. But the temptation needs to be resisted."

Earlier this year Portuguese President Anibal Cavaco Silva called for early elections, proposing a cross-party agreement between the ruling coalition and the Socialist Party to gain support for a widely contested austerity program necessary to avert a second bailout.

And he is currently facing backlash by the opposition after his decision not to send the state budget for 2014 to the constitutional court to be assessed for fairness, as Portugal nears the end of its program scheduled for mid 2014.

However, further rulings by the country's Constitutional Court on the 2014 state budget would come to no surprise to Jaeger, who said these have become a "repeated game."

But whatever the rulings, Jaeger said Portugal has a target and must stick with it.

"We have a firm understanding that the 4 percent deficit target for 2014 will be respected, whatever the constitutional court's rulings,"Jaeger said.

"By now, this (court rulings) has become a repeated game. The government took corrective measures in the past. Maybe the measures will not be as good as the original ones from an economic point of view. But it's up to the government to figure out the best response to the ruling given its constraints,"he said.

Jaeger overall has a fairly optimistic view of the country's progress this year but stressed that the improvements are merely tentative and that Portugal still has yet a lot of work to do.

"It was a difficult year again, there is no doubt about that. However, we also saw first convincing signs that the economy is turning the corner,"he said.

"Unemployment is still exceptionally high by Portugal's past standards, many firms are struggling with high corporate debt levels, and the consolidation of public finances still needs to be completed in 2014 and 2015."

However, Jaeger pointed out to economic data from the second quarter, when both GDP and employment data staged a turnaround.

"It saw the highest quarter-on-quarter growth in the euro area, and the unemployment rate started falling instead of going up, as was projected by everybody. It was a bit of surprise for everybody,"he said.

"The economy has turned around, but recoveries from long slumps always tend to be tentative, and there is still lots of structural reform homework to do."

SECOND BAILOUT?

Portugal seems to be doing everything in its hands to avoid a second bailout but analysts are still trying to figure out whether Portugal will manage to stabilize its debts without an additional aid by its international lenders.

Jaeger said it was too early to know which option is best.

"There are several possibilities. We'll see what happens in the first part of the year,"he said.

"But our message has been that everybody should focus on completing the current program successfully, and that should be the best base for whatever the government wants to do."

He also thinks it will take longer for the country to address its structural challenges than the government thinks.

PORTUGAL MUST UNDERGO AT LEAST 2 YEARS OF AUSTERITY

Portugal's ruling Social Democrat Party recently criticized the IMF for imposing further tough budget cuts and refusing to further relax the target for next year, shortly after admitting that too much austerity could be damaging.

However, Jaeger said the adjustment speed is much slower than it was in the early phase of the program, and will have to carry on for at least two more years.

"At the start of the trip, it seemed like a reasonable way to go about it. When there was a sense that the adjustment may be going too fast, the speed was decisively lowered in 2012 and 2013. But'adjustment postponed'doesn't mean 'adjustment done', and the fiscal adjustment journey will have to continue for at least another two years.

"Some people would like to take a break from fiscal adjustment and structural reforms. But then it's very hard to see how Portugal in only three years can overcome the legacy of deep-rooted economic distortions that are decades old. That just doesn't sound realistic,"he added.

He also said that although every fiscal adjustment inevitably affects citizens, the government has done a good job in making sure the adjustment burden is spread out in a fair way.

"The government needs to mitigate the negative effects as much as possible, especially on groups that are already vulnerable. Country experiences suggest that it is very important that people sense the adjustment burden is spread across different stakeholders in society in a reasonably fair way,"he said."And I think the government managed to do that to an appreciable extent."

Jaeger gave as an example cuts in public wages and pensions, which he said were designed to protect those with lower wages and pensions.

The country was expecting to save around 388 million euros (531 million U.S. dollars) through 10 percent cuts in pensions for retired civil servants earning over 600 euros per month, but this measure was recently ruled out by the Constitutional Court which claimed the measure violated the principle of trust."

Next year, government employees earning more than 600 euros a month will see their salaries cut by up to 12 percent.

"MISSION ACCOMPLISHED"10 YEARS DOWN THE LINE

Jaeger thinks the only realistic way Portugal can repair its fragile economy is via an export revival.

"I think the alternative is to adopt the growth model of other successful small open economies in Europe, which are based on competitive export sectors,"he said.

"With Portugal's export sector lacking competitiveness in the past, foreign savings had to be used to mask the country's inconsistent policies."

He also said Portugal might not be able to say "Mission Accomplished" until perhaps 10 years down the line.

"The big question is what Portugal still needs to do to change its growth model in a sustained way. Transformations of growth models take time. That's why posting the 'Mission Accomplished'sign may still be 10 years down the line,"Jaeger said.

"Next year's implementation of the budget will certainly not be a cakewalk. And there are many other challenges ahead."

Jaeger concluded that Portugal must continue to prove that it is serious about switching to a growth model that is sustainable.

Editor: chengyang
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