Portugal sees brighter economic outlook, passes bailout review

LISBON Fri Feb 28, 2014 3:09pm EST

Women walk past a shop window announcing sale prices along a street in Mafra, north of Lisbon August 20, 2013. REUTERS/Jose Manuel Ribeiro

Women walk past a shop window announcing sale prices along a street in Mafra, north of Lisbon August 20, 2013.

Credit: Reuters/Jose Manuel Ribeiro

LISBON (Reuters) - Portugal passed the penultimate review on Friday of its fiscal and economic performance under an EU/IMF bailout, and the government raised its forecast for economic growth in an encouraging sign for the country's post-bailout future.

The economy is now expected to grow 1.2 percent this year, up from the previous projection of 0.8 percent growth. Portuguese GDP began to recover from its worst recession since the 1970s last year, but it has yet to register a full year of growth.

"Portugal ends the eleventh evaluation in a positive fashion and this is important ... because now there is only one review left to conclude our program with the 'troika'" of lenders, Deputy Prime Minister Paulo Portas told reporters.

"The revision of the macroeconomic setting points to a year with more growth, jobs, exports and investment," he said.

Lisbon should exit the 78 billion-euro bailout program in May, but it still has to meet a budget deficit target of 4 percent of GDP this year and 2.5 percent in 2015. It met 2013's 5.5 percent target with some room to spare, officials said.

In a statement, the lenders from the European Commission, European Central Bank and the International Monetary Fund said that "led by investment and exports, economic growth is somewhat ahead of projections, employment is increasing" and the jobless rate is declining from very high levels.

The government also revised its unemployment forecast for this year to 15.7 percent from 16.8 percent, which means the jobless rate peaked last year at 16.3 percent.

The positive review means Portugal should get a 2.5 billion euro tranche from the lenders who nevertheless called on Lisbon to deepen structural reforms to eliminate remaining excessive rents in the non-tradable sector and rigidities in the labor market.

They said that the improved economic outlook implied "more evenly balanced risks" around this year's fiscal target, and although there were implementation risks, the government has promised to compensate for any shortfalls with measures of equivalent size and quality.

The risks are mainly legal. The country's Constitutional Court has in the past struck down several key austerity measures and is now evaluating spending cuts worth about 1 billion euros from the 2014 budget.

But the lenders said the program remains on track, "as also reflected in improved market sentiment." Yields on Portugal's debt have fallen to their lowest levels since May 2010, a year before the bailout, and the country met all its 2014 financing needs after two bond issues this year.

Finance Minister Maria Luis Albuquerque said the macroeconomic outlook was "prudent and realistic", singling out an improvement in investment that surpassed earlier projections.

The review shed no new light on whether once the bailout ends, Lisbon will request a precautionary loan or make a "clean exit" as Ireland did in December. The government has previously said such a decision may come in April.

(Additional reporting by Sergio Goncalves and Patricia Rua; Editing by Larry King)

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