Portugal roundtable participants
SB, Euromoney Let’s start with the macro-economic situation. What are Portugal’s present challenges?
PS, Fitch Our current sovereign rating for Portugal is AA but with a negative outlook. This outlook was assigned last year, and mainly reflects our concern that the public sector deficit remains very high, and while the government is proposing to reduce it, we feel there has not been sufficient progress made. Some of what has been achieved seems to have been more a result of increasing taxes and with the economy in its present condition, we do not feel that that is what is required. What is required is reducing the cost of the public sector.
SB, Euromoney And what about the level of domestic indebtedness?
PS, Fitch Broadly speaking we’re less concerned, since to a very large extent, indebtedness is mortgage-related. We’d be more concerned if it were consumer-finance related. There has been huge expansion of home ownership in recent years, and that has fed through into mortgage borrowing, but we don’t see that individuals will be unable to service that debt.
SB, Euromoney Fernando, are those the concerns of the investment community?
FR, F&C Yes they are. Also, investors look at the ratings first and foremost. If the three main agencies all have a negative outlook for Portugal then they will demand larger spreads on Portuguese government debt. Portugal has suffered from lack of political stability and economic competitiveness and has a small internal market. So it is crucial to improve the competitiveness of the economy if it is to be successful and its companies are to succeed in this ever more globalized world.
SB, Euromoney Secretary of State, perhaps you could give us the view from the other side.
Room for optimism
CCP, Secretary of State I am more optimistic. Obviously, we have a problem with low growth and with competitiveness. These two points are at least partly to be addressed by the private sector. The public sector’s main mission is to consolidate the budget deficit. And the government has committed itself to reducing the deficit from 6% to 4.6% in 2006, and then to 3.7% in 2007 and 2.6% in 2008. These figures are included in the growth and stability programme, and were deeply scrutinized before being accepted by the European Commission. Obviously we need measures on both the expense and the tax revenue side, and obviously it’s quicker to adjust tax revenues first. The budgets for 2005 and 2006 include measures for the reduction of expenses as a percentage of GDP. This is not an easy task, so we have developed PRACE – Programa de Reestruturação da Administração Central do Estado. We will see the effects of this programme over the next few years in terms of a reduction in the number of public servants and fewer redundant services. We think we are on the right path.
SB, Euromoney What’s the European Investment Bank’s view?
PEA, EIB Well, the Portuguese state is one of our shareholders, so we cannot have views about them as an institution. Personally of course I have my own opinions. Recent reports from the Bank of Portugal, the OECD and the IMF have portrayed the economic situation as gloomy. That’s nothing new. It’s just that these analyses coincided and stressed the imbalances of the Portuguese economy. The main problem is that behind them lie structural problems. It is my understanding that the government is working very hard at solving these problems and we expect the economy to reposition itself on a growth path. So, unlike Fernando, I’m optimistic.
FR, F&C I’m not really pessimistic. I was just making an assessment of the current situation. The government is stable, with no general election foreseen for almost the next four years, no municipal elections for the next three years and no presidential election for the next five. There is a majority in parliament, so there is no excuse but to turn things around. And as Pedro was saying, the ingredients are all in place and I see the will. It’s now a question of execution and a track record to show to investors.
CCP, Secretary of State It is important to note that government policy has been a success so far, because for the first time in a long while we have had a reduction in expenses in the budget. Yes, part of the improvement is in tax revenues, but one-third comes from a reduction in costs. We are also interested in redefining the nature of those costs. One important measure is the technological plan, which will provide higher levels of funding for research and development. And the government is fully committed to central administration reform. For example, we think that by reducing the presence of the state in the economy through privatization, we are making more resources available to the private sector and the government is also stimulating exports and the presence of Portuguese companies in other economies.
Plans for privatization
SB, Euromoney The privatization plans seem to have been just that – plans – for some time. What is the concrete programme for the next 12 months?
CCP, Secretary of State We have many companies in which we want to reduce or to remove public participation. We no longer have any reason for the state to be present in the paper sector, for instance, and so we want to sell our stakes in Portucel and paper distributor Inapa. We think we can conclude the privatization of around 25% of our stake in Portucel this year, and this year or next year, the stake in Inapa. We are also preparing the privatization of Galp Energia in which we will sell a minimum of 20% of the share capital of the company, and this will take place in this year. We also want to continue the privatization of EDP in the electricity sector, and of REN, the electricity grid operator of which we currently own 70%. For the next year we plan also to sell part of our stake in TAP, our national airline. In addition, we are also working to define a privatization model for ANA-Aeroportos de Portugal, the airport handling company. We are strongly committed to this programme and expect privatization proceeds of around G1.6 billion this year, and around G800 million next year. This will make an important contribution to public debt reduction.