By Sergio Goncalves and Daniel Alvarenga
LISBON, Oct 3 (Reuters) - Portugal’s international lenders approved the country’s performance under a bailout in their latest review on Thursday, but rejected government requests to ease fiscal goals.
The European Union and International Monetary Fund said Lisbon was moving to meet the lending programme’s goals and that there were early signs of recovery after the worst economic downturn since the 1970s.
“The programme remains broadly on track, with the authorities determined to achieve its objectives,” the lenders said in a statement.
“Provided the authorities persevere with steadfast programme implementation, euro area member states have declared they stand ready to support Portugal until full market access is regained.”
With no change in next year’s budget deficit goal, the government is set to push ahead with spending cuts of 4 billion euros ($5.5 billion) next year, which are likely to be detailed in the draft budget to be presented later this month. Business groups have argued these cuts could compromise a fledgling recovery.
The first signs of economic growth prompted the government and creditors to raise next year’s growth forecast to 0.8 percent from 0.6 percent. This year’s gross domestic product (GDP) contraction is now seen at 1.8 percent compared with the previous estimate of a 2.3 percent decline.
Portugal’s 78-billion-euro bailout is due to expire in mid-2014 but many economists expect that the country will continue to need some form of aid after that, possibly through a precautionary loan programme from the European Union.
Finance Minister Maria Luis Albuquerque said Portugal would not rule out bond issues this year and the goal was to resume regular issuance in 2014.
“It is our objective (bond issuance in 2014), it is a condition of the conclusion of the bailout, and it is also our intention to carry out some bond swaps,” next year, she said.
But the lenders said the government could find it hard to attract investors if the government can’t ensure austerity measures are enacted next year.
Portugal’s Constitutional Court has shot down several government austerity measures over the past 14 months.
The prospect of further measures being declared unconstitutional, forcing a change to the 2014 draft budget “would reduce the prospects for a sustained return to financial markets,” the lenders warned.
Albuquerque said the approval of the latest review by the creditors was positive.
“We are still in a period of uncertainty which with this announcement today will be reduced substantially,” she said. “What the markets like the least is uncertainty.”
Portuguese bonds rose strongly on Thursday, with 10-year yields falling to 6.64 percent from 6.80 percent.
The bailout terms have deepened two and half years of recession and sent unemployment to record levels. However, Portugal’s economy grew in the second quarter of this year.
The government said unemployment would keep rising this year and next from last year’s 15.7 percent, but revised the joblessness forecast lower to 17.4 percent for this year from 18.2 percent previously. Next year, the jobless rate should peak at 17.7 percent, it said.