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MINISTÉRIO DAS FINANÇAS 1

MINISTÉRIO DAS FINANÇAS

Portugal: policies, achievements and challenges

Vítor Gaspar

CIMB, Geneva June 05, 2012


1. On the way to become the difficult Portuguese case 2. The Economic Adjustment Program 3. Fiscal consolidation 4. Deleveraging and financial stability 5. Structural transformation 6. Conclusion: how will it work?

Outline


ON THE WAY TO BECOME THE DIFFICULT PORTUGUESE CASE


Portugal’s imbalances exposed in the context of the economic and financial crisis

Macro-economic

imbalances and

structural weaknesses

that have been

accumulated over more

than a decade

3. Anemic economic growth and low productivity

1. Unsustainable public finances

2. Over-indebtedness

10-year Government bond yields Spread against Germany in basis points

Source: Bloomberg

0

200

400

600

800

1000

1200Austria ItalyBelgium SpainFrance IrelandNetherlands PortugalFinland Greece


Persistent government deficits and increasing public debt Fragile public finances

Structural Current Primary Balance As a percentage of GDP

Unsustainable public finances

Deficit and public debt As a percentage of GDP

Source: AMECO and Ministry of Finance Source: INE, Bank of Portugal and Ministry of Finance

-4

-3

-2

-1

0

1

2

3

4

5

6

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Portugal Euro Area

0

10

20

30

40

50

60

70

80

90

100

0123456789

101112131415

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Net borrowing of Gen. Govern.Public debt - right axis


0

20

40

60

80

100

120

140

160

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Non-financial corporations

Households (a)

0

50

100

150

200

250

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Increasing indebtedness of the private sector Increasing external debt

Portuguese gross external debt As a percentage of GDP

Over indebtedness

Debt of the Households and Non-financial Corporations As a percentage of GDP

Source: Bank of Portugal (*) Financial Debt Source: Bank of Portugal


Insufficient attraction of direct foreign investment

Capital accumulation in non-tradable goods and services sectors

Lack of competition in several sectors

Low levels of innovation and productivity growth

High levels of youth and long-term unemployment

Restrictions on the market for corporate control

Protection of several sectors of the economy

Weak conditions to entrepreneurial activity

Poor functioning of the justice

system

Rigidity of the labor market

Insufficient conditions to foster economic growth

Obstacles Consequences


Disappointing performance of the Portuguese economy

Source: Eurostat

In the period 1999-2010, the GDP of Portugal grew at an annual average rate of 1%, compared with 1.4% in the euro area

GDP – Portugal and some of its European partners 2000 = 100

90

100

110

120

130

140

150

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Germany IrelandGreece SpainFrance ItalyEA -17 Portugal


THE ECONOMIC ADJUSTMENT PROGRAM


Statement by the EC, ECB and IMF on the Fourth Review Mission to Portugal: http://www.imf.org/external/np/sec/pr/2012/pr12203.htm

After the 4th Review (completed in June 4) the program

implementation was on track

Adjustment Program agreed with the IMF, EC and ECB in April 2011

The Economic Adjustment Program covers the financing needs of General Government for the period 2011 to mid-2014.

It comprises a financial package amounting to EUR 78 billion in loans, including EUR 12 billion for banking sector recapitalization.

Each disbursement depends on the technical mission’s quarterly assessment about Portugal’s performance on the implementation of the Adjustment Program.

(1) Net issuances Source: IGCP, May 2012

Financial package EUR Billions Key facts

(1)

20,6

4,1 53,3

To be disbursed 5th Disebursement (July 2012) Already disbursed

EFSF

18,4 IMF

EFSM

14,9

20,0

http://www.imf.org/external/np/sec/pr/2012/pr12203.htm

http://www.imf.org/external/np/sec/pr/2012/pr12203.htm


A balanced Program to cope with the major challenges of the Portuguese economy

The Economic Adjustment Program protects Government financing from market pressures, allowing an orderly adjustment of imbalances and time to build up confidence and credibility.

Fiscal consolidation Putting fiscal policy on a

sustainable path

Structural transformation Implementing structural reforms to contribute to potential growth

Deleveraging and financial stability

Reduction of debt and financing needs of the economy

The Economic Adjustment Program


Main macroeconomic indicators 4th Review, June 2012

Source: Ministry of Finance, June 2012

2011 2012 2013 GDP and components (in real terms, %) GDP -1,6 -3,0 0,2 Private Consumption -3,9 -6,0 -0,5 Public Consumption -3,9 -3,2 -2,6 Investment (GFCF) -11,4 -12,2 -0,5 Exports of goods and services 7,4 3,5 3,5 Imports of goods and services -5,5 -6,2 0,9 Prices (%) HICP 3,6 2,7 1,1 Current and Capital Account (% GDP) Current Account -6,4 -3,9 -3,4 Current plus Capital Account -5,2 -2,7 -2,2 Labor market (%) Unemployment rate 12,7 15,5 15,9 Fiscal accounts (% GDP) Budget balance -4,2 -4,5 -3,0 Public debt 107,8 114,4 118,6


At the start of the Program (in May 2011), Portugal faced a very uncertain outlook

Reducing uncertainty: Portugal is delivering in all fronts

Weakening of political support for the Program

Unfavorable macro-economic developments

Missing the fiscal targets

Uncertainty regarding the stability of the financial sector

Insufficient pace of structural reforms

Broad political consensus Social support to the Program

Milder recession than expected Stronger than expected external adjustment Dynamic exports

Major reduction in overall and structural

deficits Progress in institutional reforms

Increase in banks’ capital Reduction of credit-to-deposit ratio Increase in transparency: on-site inspections

Success of privatizations process Labor market tripartite agreement Broad range of implemented measures

1

2

3

4

5

Main risks Major outcomes


A turning point in Treasury financing Portuguese Treasury Bills

(1) The first auction maturity is 11 months Note: Auction announcement date Source: IGCP

Weighted average yield Percentage

2012 2011

4,1

4,34,3

4,95,05,05,04,95,0

4,95,05,04,94,9

5,0

2,2

3,8

4,9

2,9

4,34,5

5,35,35,2

5,05,05,0

2,9

4,7

3,73,9

4,95,0

4,5

2,0

2,5

3,0

3,5

4,0

4,5

5,0

5,5

Oct 05

Sep 21

Sep 07

Aug 17

Aug 03

Jul 20

Jan 18

Feb 15

Feb 01

Jul 16

Jun 15

Oct 19

Apr 04

Mar 21

May 02

Dec 07

Jan 04

Oct 19

Nov 16

Nov 02

12 months 6 months 3 months

18 months

(1)

First T-Bill issue not totally covered by program funding


Bonds prices not representative

(1) Intra-day quotes Source: IGCP

Yield to maturity(1)

Percentage

March 15

April 13

Maturity date

T-Bonds

2,2 2,3

4,9

2,4 2,7

3,1

3,7

11,6

16,0 16,1 15,6

16,6 16,2 15,9 16,0 15,6 15,0

1,7 2,2 2,3

2,3

2,9

3,1

3,2 3,7

9,7

4,5

14,0

13,8 13,5

14,7 13,7 14,1 14,5

14,6 13,8

2,5

2,1

4,9

2,4 2,5 2,8

3,1

3,2

3,7

5,5 4,5

10,2

14,2 13,6

13,7 13,7 13,6 14,4

13,8

0,0

2,0

4,0

6,0

8,0

10,0

12,0

14,0

16,0

18,0

April 17

High volatility in bond market prices

Bond prices distorted by low liquidity


FISCAL CONSOLIDATION


Nether-lands

4,7

France

5,2

United Kingdom

8,3

Spain

8,5

Greece

9,1

Ireland

13,1

Germany

1,0

Austria

2,6

Belgium

3,7

Italy

3,9

Euro Area

4,1

Portugal

4,2

Overall deficit in 2011 close to euro area average

Source: Eurostat, “Excessive Deficit Procedure”, April 2012

General Government Deficit 2011

As percentage of GDP

Without the partial transfer of banks’ pension funds, overall deficit would be 7,7% of GDP


Austria

1,2

United Kingdom

1,5

Ireland

1,9

Germa-ny

2,2

Portugal

2,8

Greece

3,3

Belgium

-0,5

Nether-lands

-0,3

Italy

0,4

Spain

0,7

Euro Area

1,2

France

1,2

Portugal’s fiscal adjustment was sizable in 2011… Fiscal Adjustment 2010-2011 Change in general government cyclically adjusted overall balance Percentage points of GDP

(1) Portugal cyclically adjusted deficit in corrected for the transfer of banks’ pension funds (3,5% of GDP) Source: IMF, "Fiscal Monitor", April 2012

(1)


-0,1

Ireland

1,8

Greece

2,2

Italy

2,4

Spain

3,0

Portugal

4,2

Austria Germany

0,6

France

0,7

United Kingdom

1,2

Euro Area

1,4

Nether-lands

1,5

Belgium

1,7

… and will be stronger in 2012 Fiscal Adjustment 2011-2012 Change in general government cyclically adjusted overall balance Percentage points of GDP

(1) Portugal cyclically adjusted deficit in 2011 corrected for the transfer of banks’ pension funds (3,5% of GDP) Source: IMF, "Fiscal Monitor", April 2012

(1)


93

107 112

115 114 113 111

103

80

90

100

110

120

130

140

150

160

170

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

93

107 112

115 114 113 111

103

145

165 163 167

161

153

145

138

130

123

117

80

90

100

110

120

130

140

150

160

170

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

93

107 112

115 114 113 111

103

93

105

114 118 118

115 113

145

165 163 167

161

153

145

138

130

123

117

80

90

100

110

120

130

140

150

160

170

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Portuguese public debt is sustainable…

(1) Request for Extended Arrangement; March 9, 2012 (2) 5th Review; February, 13 2012 (3) 3rd Review; March 21, 2012 Source: IMF, Staff Reports

Feb-Mar 2012 projections Government Debt Sustainability Framework: Baseline As percentage of GDP

Portugal - 3rd Review(3)

Ireland - 5th Review(2)

Greece - 2nd Program(1)


90

95

100

105

110

115

120

2010 2011 2012 2013 2014 2015

Portuguese public debt is sustainable… Jun 2012 projections

Government Debt Sustainability Framework: Baseline As percentage of GDP

Source: (1) IMF, Staff Report, 3rd Review; March 21, 2012 (3) Ministry of Finance, Jun 2012 (2) IMF, Staff Report, 5th Review; February, 13 2012 (4) DOF EDP & SPU Return, Jun 2012

93,3

107,8

114,4 118,6 117,7 115,7

92,5

108,2

117,5

120,3 119,5 117,4

90

95

100

105

110

115

120

2010 2011 2012 2013 2014 2015

3rd Review(1) Portugal:

5th Review(2)

4th Review(3)

6th Review(4) Ireland:


GDP growth scenarios Annual percentage changes

Sources: Eurostat and ECB calculations; ECB Monthly Bulletin March 2012

… under different growth scenarios Baseline scenario Adverse growth scenario Impact of structural reforms Baseline with smaller consolidation effort

Public debt scenarios As percentage of GDP

ECB Projections

Government debt dynamics for Portugal quickly stabilize in all scenarios

Without taking into account the impact of structural reforms on growth: debt fall below 100% of GDP in 2020

In an adverse scenario of higher GDP decline in the short-term: debt reach a maximum of 124% of GDP in 2013 and decline to below 110% of GDP in 2020;

Taking into account the impact of structural reforms:

- Real GDP growth increases from 2015 onwards (3% after 2017 against 1.6% in the baseline scenario)

- Large impact on debt dynamics that fall below 80% of GDP in 2020


Important progress in the institutional reform front NON-EXHAUSTIVE

Public financial manage ment

Public Adminis tration

SOEs and PPPs

Approval of the Spending Commitments’ Control Law

Adoption of medium-term expenditure ceilings Establishment of the Portuguese Public Finance

Council Adjustment Program for the Autonomous Region of

Madeira Creation of the new Tax and Customs Authority

Improve budgetary control across all levels of Public Administration

Reduction of arrears Changes to national law in order to include

the golden rule and the debt reduction rule from the Treaty on Stability, Coordination and Governance in the EMU

Develop a public financial management strategy for the next three years

Next challenges Major actions

Reduction of management positions (27%) and administrative units in central administration (40%)

Negotiations with public sector labor unions on working time flexibility and geographical mobility

Extend streamline measures to regional and local administration

Comprehensive review of public pay scales

Significant cost reductions in SOE (e.g.: voluntary redundancy programs)

New fiscally-prudent PPPs institutional framework: enhanced role of MoF

Ongoing revision of all PPP contracts by a top-tier accounting firm (to be completed by end-June)

Operational balance for SOEs as a whole by end-2012

Conditional on audit results, renegotiation of PPP contracts


DELEVERAGING AND FINANCIAL STABILITY


-6000

-5000

-4000

-3000

-2000

-1000

0

1000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

Capital accountCurrent and capital accountsCurrent account

-9,9 -9,0

-6,7

-4,1 -3,4

-2,7 -2,2

-10,0

-6,5

-12,0

-10,0

-8,0

-6,0

-4,0

-2,0

0,02010 2011 2012 2013 2014 2015 2016

Stronger than expected external adjustment

(1) Bank of Portugal, BP Stat, March 2012; (2) IMF, Staff report: Request for a Three-Year Arrangement Under the Extended Fund Facility, May 2011

Forecast(2)

Actual(1)

Better performance of current account than initial projections Current and capital account close to balance

Balance of payments EUR Millions

Current account As a percentage of GDP

2010 2011 2012


-8,4%

-4,0%

0,1%

-12,9%

-7,2%

-3,7%

0,5%

3,5%

-9,9% -9,0%

-6,7%

-4,1% -3,4%

-2,7%

-10,0%

-6,5%

-14,0%

-12,0%

-10,0%

-8,0%

-6,0%

-4,0%

-2,0%

0,0%

2,0%

4,0%

t-1 t t+1 t+2 t+3 t+4

1st Program (1)(t=1978)

2nd Program (1)(t=1983)

3rd Program - Forecast (2)(t= 2011)

3rd Program - Actual (3)(t= 2011)

Fast correction of external imbalances under adjustment programs

Current account As a percentage of GDP, t = first year of the Adjustment Programs

(1) Bank of Portugal, Long series (2) IMF, Staff report: Request for a Three-Year Arrangement Under the Extended Fund Facility, May 2011 (3) Bank of Portugal, BP Stat, March 2012


Significant contribution from exports growth

Source: Bank of Portugal

Strong exports growth Exports’ market share is recovering

External demand and market share Annual rate of change

Exports Index (2006=100)

(p)

131

120

111

122

116

100

122

108

95

113 110

100

119

103

89

109 107

100

75

85

95

105

115

125

135

201120102009200820072006

Services

Total Exports

Goods

Source: Bank of Portugal, Economic Bulletin, Spring 2012


4% 4% 4%

6%

3%

5%

4%

6% 5%

19%

14%

20%

5% 5% 5%

8%

5% 4%

4% 4%

2%

13% 14%

19%

6% 6% 7%

8% 9%

3% 3% 4%

5%

9%

13% 14%

Pharmaceuticalsand OtherChemicals

Prepared Foodand Tobacco

Plastics, Rubberproducts

Base Metals Oil and OtherMinerals

Wood, Cork Ceramic, Stoneand Glass

Footwear,Others

Pulp, Paper Textile Products Vehicles andparts

Electrical andMechanicalMachinery

2000 2005 2011

Export profile is considerably changing

Source: National Statistics Office

Export composition by product, Goods As percentage of total

Increase in weight

Higher product diversification

Higher diversification: no group representing more than 15% of total

Traditional industries substituted by more technology intensive industries (Portugal is not a “pajama republic”)


68%

33%

28%

13%

11%

7%

22%

17%

20%

8%

13%

18%

4%

-7%

1%

-3%

14%

3%

4%

1%

1%

1%

3%

4%

4%

5%

6%

12%

14%

25%

1%

1%

3%

6%

4%

7%

3%

13%

13%

28%

China

Brazil

Belgium

UnitedStates

Italy

UnitedKingdom

Angola

France

Germany

Spain

1%

1%

3%

4%

4%

5%

6%

12%

14%

25%

1%

1%

3%

6%

4%

7%

3%

13%

13%

28%

China

Brazil

Belgium

UnitedStates

Italy

UnitedKingdom

Angola

France

Germany

Spain

Export profile is considerably changing Higher geographical diversification

Exports destination by country, Goods As percentage of total

Average annual growth rate

2006-2011 2010-2011

Source: National Statistics Office

2006 2011


Export profile is considerably changing

Source: INE and GEE, “Boletim Mensal de Economia Portuguesa”, April 2012

Export composition by technological intensity, Goods As percentage of total

Higher technological intensity

12

2002

44

15

31

10

2001

45

14

44

11

2000

36

22

31

11

2006

36

22

31

12

2005

30

38

2007

14

31

10

20

31

12

2004

39

17

31

12

2003

42

16

31

Low

Medium- low

Medium- high

High

2011

35

25

31

8

2010

37

24

31

8

2009

39

23

29

8

2008

36

23

31

11


International investment position is reversing

Source: Bank of Portugal and INE

International Investment Position As a percentage of GDP

-104-107-111

-96-89

-79-67-63-58-55

-46-39

-120

-100

-80

-60

-40

-20

0

20

40

2004 2003 2002 2000 2001

Monetary Authorities

General Government

Financial Sector

Total Economy

Non-financial corporations and households

2011 2010 2009 2005 2008 2006 2007


In 2012 Q1, exports of goods continued dynamic

Source: GEE, “Sintese Estatística de Comércio Internacional”, May 2012

Exports of goods, 2012 Q1 y-o-y growth (%)

8,3

13,513,6

X

Mar Feb Jan

3,9

2,0

1,9

1,7

1,20,9

11,6

Machinery Transport equipment

Mineral fuels

and oils

Jan-Mar Others Agricultural products and food

Ores and metals

73,8 14,5 13,1 14,5 11,4

Top contributors to growth Percentage points

Jan-Mar y-o-y %


Markets outside EU are being the main contributors

Source: GEE, “Sintese Estatística de Comércio Internacional”, May 2012

2,60,41,4

1,4

1,70,40,6

0,61,0

1,5

7,5

4,1

USA Extra EU

Others Belgium United Kingdom

France Angola Others Morocco China Germany Intra EU

Total

11,6

5,4 10,7 7,6 11,4 20,1 32,3 50,5 29,8 186,2 53,9

Jan-Mar y-o-y %

Exports of goods, Jan-Mar 2012 Contribution to growth (p.p.)


Measures contributing to a more favorable environment to credit expansion

Liquidity support at longer maturities and broadening of eligible collateral Banks capital augmentation plans of three major banks already announced Payment of arrears in the health and regional/local administrations sectors in the context of the partial transfer of banks pension funds to the State Measures to discourage evergreening of doubtful loans

Action

ECB measures

Banks capitalization

Partial transfer of banks pension funds’

BdP supervision

Outcome

Help to improve banks liquidity position Help to improve banks solvency Positive impact on the finance of others sector Channel funds to more productive sectors of the economy


0,00

0,25

0,50

0,75

1,00

1,25

1,50

1,75

2,00

2,25

ECB repo rate 1m

3m

12m

Reduction of the reserve requirements ratio: from 2% to 1%

Broadening of eligible collateral

Easing of bank liquidity pressures

Source: Bank of Portugal, May 2012

ECB Measures (8 December) Euribor Percentage

Longer-term refinancing operations: 36 months

(December 22 and March 1)

ECB LTRO 36m


Recapitalization of the banking system

Note: BSSF – Bank Solvency Support Facility Source: Ministry of Finance, June 2012

Injection of core tier 1 capital

Each bank will exceed the EBA’s capital requirements coming into force at end-June

The participating banks will become amongst the most highly capitalized in Europe

They will be well positioned to

ensure the continued access to credit for productive and tradable sectors of the Portuguese economy

BCP and BPI will also each commit at least €30 million per year to invest in the equity of SME

€1.65 bn

Banks

€3.5 bn

€1.5 bn

(BSSF)

(BSSF)

Ministry of Finance Announcement: June 4, 2012

The State remains prepared to support any other banks that meet the BSSF’s criteria and will analyze any recapitalization plans that may be presented


Core Tier 1(1), Portuguese Banking System

Percentage

6,8 7,8 7,9 7,8 8,1 8,7

9,6

Q4 Q2 Q4 Q2 Q4 Q2 Q42011 2010 2009 2008

End-2012 target: 10%

Core Tier 1 target of 9% (EBA criteria) to be reached by end-June 2012, following a prudent evaluation of sovereign debt exposures

Special on-site inspections confirmed the robustness of capital adequacy

Regulatory framework was improved: legislation on early intervention, resolution and deposit insurance

Key achievements

Portuguese banks are stronger than before the crisis

(1) Excluding BPN Source: Bank of Portugal, April 2012


151 152 152 157

147

137 129

162 162 163 167

158

149

139

Q4 Q2 Q4 Q2 Q4 Q2 Q4

Adjustment is progressing as planned

Important contribution of higher deposits and sizeable asset sales

Deleveraging process is ongoing

Key achievements

120

Loans-to-deposits ratio, Portuguese Banking System Percentage

(1) About 85% of credit market share Source: Bank of Portugal, April 2012

Other banking groups contribution

Top 8 banks (1)

2011 2010 2009 2008

Indicative target in 2014


150000

170000

190000

210000

230000

250000

270000

Greece Ireland Portugal

Depositors’ trust in the Portuguese banking system

Note: BS reference sector breakdown- MFIs excluding ESCB; BS counterpart sector- Non-MFIs; Data type- Outstanding amounts at the end of the period (stocks) Source: ECB; May 2012

Total deposits (excluding deposits from financial institutions) EUR Millions


STRUCTURAL TRANSFORMATION


Economic growth: importance of the Structural Transformation Agenda

Opening to foreign investment and to the challenges of international competition

Competitive location for physical and human capital

Fully integration in the Single European Market

Development of a stability culture

Judicial system

Broad range of reforms Structural transformation

Confidence, credibility and justice

Openness, competition and competitiveness

Entrepreneurship, innovation and labor market flexibility

Limited State and economic democracy

Network industries: energy, telecommunications, transports

Competition Housing Market

Labor market Education and training

Privatizations Special rights of the State Public procurement Administrative burden

Pillars


Portugal needs a broad transformation agenda

(1) The heatmap is constructed based on a variety of structural indicators from alternative sources in order to flag areas where a country has the greatest need to implement structural reforms. For a discussion of the methodology and detailed components, see IMF, 2010d, “Cross-Cutting Themes in Employment Experiences During the Crisis”, IMF Report SM/10/274 Source: OECD; World Economic Forum; Fraser Institute and IMF staff calculations

Structural reforms gaps in European economies: a heatmap(1)

Labor market inefficiency

Business regulations

Network regulation

Retail sector regulation

Profess. services regulation

Institutions and contracts

Human capital

Infrastructure

Innovation

Medium term

Long term

DE FR NL BE IT ES PT GR AT FI IE DK SE UK US JP Selected comparators Euro area countries


0

5

10

15

20%

Structural reforms: long-run potential impact

Source: Bouis and Duval (2011), OECD Economics Department Working Paper n.º 835; Gomes et al (2011), Banco de Portugal Working Paper n.º 13

2 empirical studies for Portugal

Approach

No model: use empirical results from several studies

Broad range of reforms that include reforms in product and labor market and reforms of benefit, tax and retirements systems

Multi-country DSGE Model

Reforms of labor and services market

Bouis and Duval (2011)

Gomes et al (2011)

GDP per capita, increase in level in percent at 10-year horizon

PT ~13% (> 5% after 5 years)

20

15

10

5

0

Results

Increase in long-term output of 7.8% , after 7 years (8.6% in case of cross-country coordination of reforms in the euro area)


In-depth labor market reform Agreement on Growth, Competitiveness and Employment

The agreement between the Government, Unions and Enterprises Associations: an important step to implement reforms in an environment of social dialogue

Implemented measures

Tackle labor

market segmentation

Foster job creation

Ease transition of workers across firms and sectors

Objectives

Reduction of 4 national holidays Elimination of 3 extra days of vacation Decrease in 50% of compensation for overtime

work and eliminate compensatory time off (previously 25% of overtime worked hours)

Restrictions on automatic extension of collective agreements

Implementation of individual and group working time management mechanisms

Reduction of restrictions to individual dismissal Reduction of severance payments to align with

EU average Implementation of labor arbitration mechanisms

“Estímulo 2012” program with incentives for

hiring of medium and long term unemployed in return for on job training

“Impulso Jovem” program specifically designed to help youth unemployed

Reducing labor costs

Labor market flexibili zation

NON-EXHAUSTIVE

Active Labor Market Policies


Reduce mobile termination rates Broad access of all operators to existing

networks Auction access to new networks (4G mobile

network)

Speed up liberalization of Gas and Electricity Revise remuneration scheme of co-generation

to accelerate converge to market-based pricing Redesign Power Guarantee mechanism Foster cross border market integration to

increase competition

Revise margins of pharmacies Set targets for reduction of pharmaceutical

profit margins Increase share of generic drugs

Increasing tradable sector competitiveness by reducing non-tradable sectors excessive costs cascaded through the economy


Broad product market reform

Reduce excessive mark-ups in network industries and non-tradable

Telecommunications

Energy

Health

Objective

NON-EXHAUSTIVE



Improving business environment

Foster investment and innovation

Incentive a more efficient use of resources

Targeted measures to accelerate the resolution of the backlog: 50,000 enforcement cleared since November

Adoption of a law on arbitration to facilitate out-of-court settlement New insolvency code and corporate recovery, focusing on speed,

simplification and creation of an extra-judicial phase of corporate recovery

Approval of a new Competition Law harmonized with the EU legal competition framework which will come into force early July

Strengthen the power of the Competition Authority Set up of a specialized court on Competition, Regulation and

Supervision (already in operation)

Liberalization of regulated professions’ access and exercise Fostering the development of the European single market for services and

labor: already transposed 32 out of 69 legal acts regarding services and have completed all aspects of the qualifications directive

Reduction of firms’ administrative burden: licensing requirements and other legal formalities

Approval of a new Urban Lease Law which is expected to come into force in October

Judicial system

Competition

Other services

Objective

NON-EXHAUSTIVE


Privatization program as a flagship in the agenda

(1) Sale of “Caixa Geral de Depósitos” participation of 1%;; sale yet to be materialized but already decided: tag along to another shareholder’s sale (2) Concession (3) Expected completion date by “Caixa Geral de Depósitos” Source: Ministry of Finance, June 2012

Electricity distribution

Energy retail and production

Mail distribution

Water distribution

Air infrastructure

Railway logistics

Seguros

Insurance

Seguros

Energy retail and production

2011 2012 2013 Q1

Air transport Television broadcasting

(1) (2)

Q3 Q2

(3)

Q4


40%

Asia: State Grid Arabia: Oman Oil Company

EUR 593M: average premium of 33.6% per share1

EUR 1,000M through Chinese

banking entities

Strategic plan for national economy development (e.g. I&D center construction)

21,35%

Asia: China Three Gorges Europe: E.ON Latin America: Eletrobras

and Cemig EUR 2,693M: premium of

53.6% per share1

EUR 2,000M through

Chinese banking entities

EUR 2,000M until 2015 in wind farms

Privatization results above expectations

Bidders

Revenue

Financing

1 Considering the closing price of the day before the Council of Ministers decision

Investment

% Equity

The proceeds amount to about 60% of the initial estimate of privatizations revenues foreseen in the Adjustment Program

Selected bidders


CONCLUSION: HOW WILL IT WORK?


The Program addresses fundamental imbalances and deficiencies

Restoring credibility and confidence

(1) Ministry of Finance”, February 2012

The adjustment is inevitable

Solid starting point for the Program

Broad popular

and social support for adjustment

Elimination of budget deficit on a durable way – supported by a new fiscal policy framework (at national and European level)

Elimination of external deficit – current and capital account is projected to be in surplus in 2014(1)

Deep and frontloaded

structural reform agenda that will boost potential output and competitiveness

Robustness of the overall Program

The Program works disregarding positive impact of structural reforms on potential growth

Structural reforms are likely to speed up adjustment

Gradual credibility buildup

The Program shelters government financing from the vagaries of financial markets

Quantitative objectives and targets steered and monitored over time (9 reviews until Sep. 2013)

Compliance with the Program will push for a gradual change in markets’ expectations and perceptions

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