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OECD urges Portugal to keep up pace of reforms

Published on 06/02/2017

Slow-growing Portugal faces mounting economic challenges and its financial system remains fragile, leaving little room for Lisbon to slow down the pace of its reforms, the OECD warned Monday.

“The main message we want to stress today is that Portugal’s reform momentum must continue,” OECD chief Jose Angel Gurria told a news conference in Lisbon called to present the Paris-based body’s latest economic survey of Portugal.

“There are many pending problems. There is a lot of homework to do,” he added.

A minority Socialist government that came to power at the end of 2015 with the backing of the Communists and far-left Left Bloc has set out to reverse some of the austerity measures imposed as part of a 2011-14 international bailout.

It has raised the minimum wage and the lowest retirement pensions, cut crisis-time tax surcharges and reintroduced four public holidays in an effort to return more income to workers and boost demand.

The Organisation for Economic Co-operation and Development predicted growth would remain sluggish as private consumption lost steam. That was because weakening global trade was slowing the pace of job creation, it explained.

The OECD expects the economy to expand by 1.2 percent this year, the same as in 2016, and by 1.3 percent in 2018, a more pessimistic view than recent government estimates.

“Growth has been slow and faces renewed headwinds, posing difficult policy choices, especially for fiscal policy,” it said in its report.

“Putting off fiscal consolidation to support growth implies risks as fiscal sustainability remains weak.”

The OECD predicts exports will grow less than in previous years, partly due to dampened demand from China and oil-rich Angola, a former Portuguese African colony whose economy is reeling because of the collapse in global crude prices.

– Banking sector woes –

Portugal’s banking sector, which underwent two bank rescues in 2014 and 2015, remains fragile and corporate debt is high, limiting credit growth, it added.

At the end of 2015 non-performing loans accounted for 11.9 percent of total bank lending, one of the highest rates in Europe.

“The fragility of banks needs to be resolved sooner rather than later to reduce fiscal risks and restore credit growth. Reducing the amount of non-performing loans on bank balance sheets is key,” the OECD said.

It warned that bank problems could result in more government liabilities, pushing up Portugal’s public debt-to-gross domestic product ratio, which at about 130 per cent is the third highest in the EU after Greece and Italy.

“Further distress in the banking sector could have significant one-off fiscal costs with permanent effects on debt,” the report said.

Portugal’s borrowing costs have surged as investors renewed concerns about the southern European nation’s outlook and finances as the European Central Bank begins to reduce the amount of stimulus it injects into the eurozone economy.

Yields on the country’s benchmark 10-year debt have risen above 4.0 percent in recent weeks, the highest level since the country exited its bailout programme in 2014.

Portugal’s public deficit shot up into the double digits during the global economic crisis, and despite an international bailout it had difficulty bringing it back down to 4.4 percent in 2015.

The government expects the 2016 deficit will be “clearly” below 2.3 percent in 2016, under an EU limit of 3.0 percent.