1. Portugal
Programme Assessment
European Commission, DG ECFIN
15 May, 2014
1

2. Root causes of Portugal's initial
imbalances and need for assistance
 Low GDP and productivity for more than a decade
 High household, corporate and public debts
 Subdued implementation of structural reforms
 Deterioration of confidence and rating downgrades
provoked rates incompatible with long-term fiscal
sustainability
 Banking sector lost international market funding
and started reliance on the Eurosystem for funding
Macro-
economic
imbalances
Trigger for
financial
assistance
request
2

3. EU-IMF Economic Adjustment Programme
 Restoring investor confidence via consolidating public
finances, enabling sustainable growth and safeguarding
financial stability
 Executing a credible, balanced fiscal consolidation strategy
 Rebalancing the economy from non-tradable to tradable sector to
improve Portugal's net external position
 Further supporting the financial sector through more robust
supervision and strengthening bank capitalisation
 Implementing an ambitious structural reform agenda to boost
potential growth, improve labour market outlook and regain
competitiveness
 Mitigating negative social impact of the adjustment process
3

4. Key Programme Achievements
4

5. Output Recovery Gaining Momentum
Real GDP growth projection for 2014 in line with EA
Source: Eurostat, DG ECFIN
-5
-4
-3
-2
-1
0
1
2
3
4
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014f
Portugal EA-18
% change y-o-y
5

6. Government Bonds at Pre-Crisis Yields
Note: Daily data as of 14 May 2014
Source: Bloomberg
Financing costs have been reduced in recent issuances
0
50
100
150
200
250
France Ireland Spain Italy Slovenia Portugal
Spread 10-year Germany Government Bond
bps
0
2
4
6
8
10
12
14
16
18
20
2007 2008 2009 2010 2011 2012 2013 2014
Portugal 10-year Bond Germany 10-year Bond
in %
6

7. Transition to Export-Oriented Growth Model
Exports as % of GDP have improved but remain below comparable EU MS
Source: Eurostat; DG ECFIN
20
25
30
35
40
45
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014f
Exports as % of GDP Imports as % of GDP
% of GDP
0
20
40
60
80
100
120
Ireland The
Netherlands
Belgium Austria Portugal
Nominal exports as of 2013
% of GDP
7

8. Competitiveness Is Recovering
Keeping reforms on track will be crucial to maintain the upward trend
Note: NULC and REER series are inverted
Source: DG ECFIN
96
98
100
102
104
106
108
110
112
114
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
NULC EA18 REER 37 Countries
index 2005=100
8

9. External Adjustment Is Ongoing
Further improvements in the external balance are necessary to reduce NIIP
Source: Eurostat
-140
-120
-100
-80
-60
-40
-20
0
-14
-12
-10
-8
-6
-4
-2
0
2
4
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Net lending/ Net Borrowing as % of GDP
Net International Investment Position as % of GDP (rhs)
% of GDP
9

10. Labour Market Has Bottomed Out
High youth and general unemployment remains concerning
Source: Eurostat
15
20
25
30
35
40
45
5
10
15
20
2009 2010 2011 2012 2013 2014
General Unemployment Rate Youth Unemployment Rate (rhs)
% %
10

11. Fiscal Adjustment Has Been Substantial
Note: For the purposes of the Programme, the budget deficit in 2012 excludes the impact
of CGD recapitalisation (about 0.5% of GDP), and in 2013 BANIF recapitalisation (about
0.4% of GDP).
Source: Eurostat; DG ECFIN
-12
-10
-8
-6
-4
-2
0
2
4
2009 2010 2011 2012 2013 2014f 2015f
Deficit - Programme purposes
Structural balance
Structural primary balance
% of GDP
11

12. Public Debt High but Sustainable
Source: Eurostat; DG ECFIN
60
70
80
90
100
110
120
130
140
2010 2015 2020 2025 2030
Baseline
Shock : -1p.p. GDP growth from 2016
Shock : +1pp GDP growth from 2016
Interest rate shock : +1p.p. from 2016
Combined shock (growth -1 pp, interest +1pp) from 2016
Combined shock (growth +1 pp, interest -1pp) from 2016
% of GDP
12
12

13. Banks Have Adjusted Significantly
Note: Core Tier 1 ratio according to Programme definition and excluding the banks in resolution
Source: Banco de Portugal
60
80
100
120
140
160
180
2009Q4 2010Q4 2011Q4 2012Q4 2013Q4
0
2
4
6
8
10
12
14
Core Tier 1 Ratio (rhs) Loan-to-deposit ratio
% %
13
13

14. Corporate Sector: Slow Deleveraging
and High NPLs
Note: Indebtedness refers to lending and securities other than shares in the domestic banking sector
Source: Banco de Portugal; DG ECFIN
0
2
4
6
8
10
12
14
60
70
80
90
100
110
120
130
140
2007 2008 2009 2010 2011 2012 2013
NFCs Indebtedness Total NFCs NPLs (rhs)
% GDP %
14
14

15. Key Structural Reforms Were Undertaken
 Key labour code changes to improve flexibility, reduce
segmentation and increase incentives to work
 Implementation of strategic plan to fight youth unemployment
Labour
market
 Comprehensive reform of pre-university education system to
increase school autonomy and accountability
 Vocational training reforms to enhance labour market matching
Education
 New urban lease law to increase access to rental housing and
improve labour mobility
 New incentives for renovations
Housing
market
15

16.  Liberalisation of electricity and gas markets
 Several wide-ranging reform packages aimed at reducing
excessive rents and cutting the electricity tariff debt
Energy
markets
 Modernization of regulatory framework, including creation of AMT
 Reform package in ports sector to reduce end user costs,
including new port labour law and elimination of port use fees
 Various cost-saving and liberalisation measures in railways
sector
Transport
sector
 Liberalisation and opening up to competition of telecoms and
postal sectors, including privatization of postal services company
 Strengthening of regulatory framework for telecoms sector
Telecoms
& postal
sector
Key Structural Reforms Were Undertaken
16

17.  Simplification of licensing procedures for businesses, moving to
a zero authorisation approach
 Establishment of Single Point of Contact for entrepreneurs
 Introduction of "one-in/one-out" rule for burdensome new
regulations
 Compilation of inventory and cost analysis of regulations
Business
environ-
ment
Services &
regulated
professions
 Sector-specific amendments to liberalise a wide range of legal
regimes governing the services sector
 Framework law and new by-laws (in progress) to remove
unjustified barriers to entry in key regulated professions
Key Structural Reforms Were Undertaken
17

18.  New Code of Civil Procedure to expedite court process
 Court system reform to improve efficiency and accountability
 Various measures aimed at speeding up debt enforcement cases
Judicial
system
 Adoption of new legal framework to strengthen role of key
sectorial regulators and Competition Authority and to ensure
their independence
Regulatory
framework
Key Structural Reforms Were Undertaken
18

19. Ease of Doing Business Improving
*Note: "Distance to Frontier" measures performance relative to the best performance ever observed for
any country. Index values ranges from 0-100, with 100 being the best.
Source: World Bank "Doing Business" reports, 2010-2014
"Distance to Frontier*" evolution for selected "Doing Business" indicators
(Portugal versus average for other EU countries)
71
72
73
74
75
76
77
2010 2011 2012 2013 2014
DistancetoFrontier(*)
Overall ease of doing business
PT
EU26 exc. PT
84
86
88
90
92
94
96
98
2010 2011 2012 2013 2014
DistancetoFrontier(*)
Starting a business
PT
EU26 exc. PT
60
65
70
75
80
85
2010 2011 2012 2013 2014
DistancetoFrontier(*)
Dealing with construction permits
PT
EU26 exc. PT
19

20. Much Achieved But Challenges Remain
 GDP growth still not robust and unemployment is unacceptably
high
 High debt levels suggest Portugal could be affected by a turn
in bond market sentiment
 Corporate sector indebtedness and high NPLs continue to
weigh on bank profitability and growth
 Concern that reform momentum has slowed in key areas
A continued strong commitment to structural
reforms and fiscal consolidation is essential
20