Chasing deficit targets might no longer be Portugal’s best policy if its economic slump deepens more than expected, the IMF said on Thursday.
It stopped short of calling for targets set under an EU/IMF bailout to be eased, but signaled concern over waning external demand and the recessive impact of bailout austerity.
However, it also said that this year’s targets remained in reach.
Portugal’s lenders from the EU have so far said sticking to stringent fiscal targets and reforms is the answer to the country’s woes.
In a staff report following a mission to Portugal in February last year, the IMF also agreed with the European Commission that the bailout’s size of 78 billion euros (US$102 billion) was sufficient and considered Portugal capable of returning to the bond market late next year as the program envisages.
Some investors remain concerned that Portugal will have to follow Greece in seeking a further bailout that could involve losses for private sector creditors.
The IMF quoted its new mission chief for Portugal, Abebe Selassie, as saying that “the main risk is that the recession turns out deeper than projected,” partly due to a mild recession in the eurozone where Portugal sells most of its products.
“In that case, we think that chasing after fixed nominal deficit targets may not be the best policy,” Selassie said.
Still, Selassie made clear that Portugal could not afford to miss any targets due to policy slippages as that would damage the program’s credibility.
Right now, this year’s targets of 4.5 percent of GDP deficit “remains within reach,” he said.
Portugal is in its worst recession since the 1970s, with the government and the lenders expecting a 3.3 percent slump this year and only meager growth of 0.3 percent next year.
The IMF has said it will release 5.17 billion euros to crisis-stricken Portugal under the bailout program aimed at helping it come to grips with its high budget deficits, lauding good progress made already.
Selassie said markets were “not yet fully convinced” that the adjustment challenges can be met even though bond spreads have eased somewhat from the beginning of the year.
However, the IMF believed that “the challenges can be met as long as the government stays on course.”
Portugal’s 10-year bond yields have increased since last week to about 12.2 percent, but are a long way below 17.4 percent highs seen at the end of January.