The Financial Times today published an article which identified the top 5 risks that could threaten the success of Portugal’s exit from the adjustment programme and its fiscal life thereafter.
"The meetings this week between Portugal and its creditors should be tense after Lisbon rejected the proposal to move forward with new wage reductions" according to the FT which was analysing the penultimate Troika review of Portugal's progress.
1. Wage levels are still too high
Unit labour costs have fallen 5.3% since 2010, but the Troika says that Portuguese wages are still too high, by between 2% and 5%.
Deputy PM Paulo Portas has flatly rejected further wage cuts in the private sector despite recommendations from the Troika, but the FT says that this response "seemed to leave open the question of further cuts in public sector wages."
2 . Export growth may prove unsustainable
Portugal has achieved a huge turnaround in its current account balance from a deficit of 12.6% in 2008 to a small surplus last year. But the IMF warns that this can not be sustainable without further competitiveness gains. An increase of 5% in exports in the first 10 months of 2013 was "primarily driven by fuel exports" while imports began to grow in line with the recovery in domestic demand.
3 . Structural reforms have not been deep enough
The IMF says Portugal has yet "decisively to address" the persistence of excessive rises in cost for energy, transport and other areas crucial to international competitiveness, "In the absence of such reforms, the burden would fall excessively on the workforce."
4 . Companies need more credit
Portugal needs to intensify efforts to "reduce excessive private debt and to release credit for loans on better terms" to help increase private sector investment. There have been "substantial losses" in the banking sector in 2013 and increasing levels of insolvency are "an important source of vulnerability" for Portuguese lenders.
5 . Constitutional Court can still block progress
The IMF warns that legal challenges to fiscal measures have intensified in recent months and the state budget for 2014 is still being examined by the Constitutional Court. Fears "undermine the quality" of fiscal adjustment and introduce "high political uncertainty," with a negative impact on output and unemployment, which "remain at unacceptable levels." Portugal also remains susceptible to sudden changes in sentiment in the bond market, says the IMF.
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The government PR machine is on a roll at the monment sending out messages that all is well as the country nears the May deadline for its exit from the austerity programme, but the very real failures by the current executive can not be hidden from the international community upon whom Portugal soon may depend for funding at sensible interest rates.
