LISBON May 15 Portugal's economic progress made under its international bailout is insufficient and further reforms are needed to ensure sustained economic growth, the Bank of Portugal warned on Thursday, just two days before the formal end of the bailout.
In its financial stability report, the monetary authority also said banks will have to "continue efforts to reduce costs and reinforce own capital" in order to cut their dependence on ECB liquidity and return to debt markets.
It pointed to many remaining structural weaknesses exposed by the financial crisis and stemming from a huge public and private debt stockpile and weak current and potential growth.
The high indebtedness of the economy in general affects the leveraging of the country's banking sector, it said.
Portugal will exit its 78-billion euro bailout on Saturday after three years of austerity imposed by the rescue programme assembled by the European Union and IMF in 2011.
It has regained debt market access and the economy returned to growth, but, in a reminder of how fragile the economy remains, annual growth slowed in the first quarter and GDP unexpectedly shrank from the previous three months, according to data released earlier on Thursday.
The Bank of Portugal said that despite important progress made in terms of fiscal and economic adjustment, and banks deleveraging and increasing financing flows for the exporting sector, "the progress registered in the Portuguese economy is still insufficient."
"It will be necessary to continue with the reforms started under the bailout programme in order to ensure a sustained improvement of the economy and living standards of the Portuguese," it said, calling for "credible policies that would reinforce competitiveness and external accounts balance".
"With the end of the bailout programme, (new) financing will be particularly dependent on government policies and behaviour of domestic economic players," it said.
It said banks would "continue to face important challenges" with new, stricter European requirements being applied as Europe moves towards a banking union, which it said could involve operating risks and might trigger short-term problems.
In a sign that the sector is already moving to raise capital, market regulator CMVM said on Wednesday it was analysing a request for a yet unspecified capital increase by BES, the country's second-largest listed bank. (Reporting By Andrei Khalip, editing by Axel Bugge)