In May 2011, Portugal signed a €78 billion bailout agreement with the Troika (IMF, EU and ECB). Since then, the Iberian country has pushed trough a series of brutal reforms, and more hardship is still to come.
It is no fun to be a Portuguese taxpayer. In 2013, pensions will be cut by up to 10%, unemployment benefits by 5%, taxes on cars, fuel, cigarettes, homes and income will be increased.
Portugal is considered a poster-reformer. IMF President Christine Lagarde said the other day that Portugal is on track and does not need any debt restructuring. Nevertheless, the country has not been able to meet its budget deficit target for 2012. The 2011-bailout agreement includes a budget deficit target of 5% for 2012 and of 4.5% for 2013. By the end of the third quarter of 2012, Portugal’s deficit had already reached 5.6%.
At the end of 2012, the Portuguese unemployment rate reached a record 16.4%. In the last year, due to the austerity measures, the economy shrank. As long as the growth rate remains negative, Portugal will probably not be able to comply with the bailout terms.
In recent days, the IMF recommended further downsizing of the public sector. More state employees should be fired, among them up to 50,000 teachers, but also police officers, soldiers, doctors and judges. The brutal shake-out proposed by the IMF mentions cuts of up to €800 million in 2013 as well as permanent budget cuts of €4 billion (1.6% of GDP) in 2014.So far, the Portuguese population has accepted most of the austerity measures. However, additional spending cuts and lay-offs of public workers will be difficult to implement. In his New Year’s Speech, President Anibal Cavaco Silva announced that the Constitutional Court will examine the controversial 2013-budget. He has signed it, but wants the highest court to have a closer look at it regarding the constitutionality of its austerity measures.
Portugal needs more structural reforms regarding the labor market and the education of its workforce. Structural reforms will take a few years to be implemented and to show positive effects.
The Portuguese government expects the economy to shrink 1% in 2013. The OECD Economic Outlook published at the end of November 2012 mentions a contraction of 1.8% of GDP. Not everything looks dark. Portugal has already implemented some harsh reforms. It gets worse before it gets better.
In 2012, Portugal managed to sell its state airport operator ANA to the French company Vinci for some €3 billion. Earlier, the Portuguese government sold 21.35% of its stake in the energy corporation EDP and 40% of the energy grid company REN. The sales brought in €2.7 billion respectively €0.6 billion. More privatizations are to come, including the state airline TAP.
The goal is to comply with the 3% Maastricht deficit target in 2014. The Troika and the Portuguese government hope that the Iberian country will be able to finance itself again on the capital markets in 2013.
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Article added on January 10, 2013.
