VITOR CONSTÂNCIO, the Governor of the Bank of Portugal, has praised the government for its “courageous” efforts to bring Portugal’s swollen budget deficit under control, reports The Resident’s Chris Graeme.
Speaking last week at the Ministry of Finance to Lisbon’s key movers and shakers in the national banking community, Constâncio, who was re-elected to head the nation’s bank, said that the measures taken had succeeded in getting the six per cent budget deficit down to 4.8 per cent. However, he warned that Portugal still had “a long and difficult journey ahead” in order to get the budget deficit down to nearer the three per cent mark stipulated by the European Union’s Economic Stability Pact.
“In 2005, we had an unrealistic and unworkable budget, with significant sub-budgets, which, had we not begun to take urgent measures, would have quickly resulted in Portugal having a deficit of enormous proportion,” he said. “This was extremely worrying, calling for more responsible examination of the Portuguese economy, while the European Union warned us to get our house in order. Despite various immediate measures, the deficit climbed to six per cent – the highest seen in the last few years.”
Talking after the official swearing-in ceremony of the Bank of Portugal’s Board of Directors and Administration, which was confirmed and countersigned by the Minister of Finance, Fernando Teixeira dos Santos, the governor said that “the strict measures would continue to demand a lot of determination”.
Constâncio talked about the situation in 2000, when easy lending by the banking sector helped fuel massive internal spending, followed by “an imbalance in the banking system”.
“In 2000, we were still enjoying euphoric growth, and witnessing an explosion in internal spending. Following on from 2000, the first signs of a loss in competitiveness and the frightening budget deficits to come, started to appear.
“Clearly, the key economic agencies, including the State, realised that spending could not continue at the same rhythm as it had been a few years before. The public finance situation got worse from 2000 onwards, until Portugal had to adapt to the new economic paradigm in which it finds itself (vis-à-vis increased competition from Eastern Europe and the Far East),” he said.
However, the governor stressed that the period of weak economic growth in the past two years could not simply be explained by belt-tightening budgetary spending controls. He said the slowdown in internal economic growth and public spending were the inevitable results of the fact that the Portuguese economy had “overheated” – thanks to the lowest interest rates the country had ever seen – and then “cooled”.
Constâncio added that the overall sharp fall in investment was made worse by a 20 per cent decrease in housing investment in 2003, and a slowdown in Portuguese internal demand from 2001 increasing, as optimism and expectations ebbed away with the budgetary crisis of 2002.
The governor of Portugal’s Central Bank went on to say that Portugal’s budget deficit, and lack of consumer and investor confidence were compounded by external international factors, such as the enlargement of the European Union, soaring petrol prices and globalisation, and its effects on Portugal’s exportation quotas.
He said the solution did not lay in further slashing manpower or production and investment costs, but rather, Portugal, and its economy, needed to develop a new range of specialisations instead of trying to compete in established areas already flooded by competition.
“The solution is not to try and compete by making the same products already produced by other countries, as we did when we enjoyed a period of economic equilibrium. What is required is a general increase in the production of innovative products and processes linked to goods and transactional services; in other words, we must change our production strategy,” he said, adding that the government’s spending programme until the end of the year (2006) would be decisive in order to execute the plan laid out by the EU’s Stability Pact.
Constâncio stressed it was necessary to pursue reforms that improved the dynamic activity of the economy, while cutting red tape and encouraging innovation. However, he did say a lot depended on the reaction of both Portuguese and foreign business.
Yet, despite the external oil crises and the challenges of new European Union markets, the growth rate in 2006 for Portugal was expected to be near the European Union average.
“We will have to wait for the results of the second quarter to better evaluate the signs of modest recovery, and see if it will be above one per cent. I hope that, as from 2008, we will see a return to recovery and the end of recent negative trends, with the economy returning to growth within the European context,” he concluded.