LISBON (Reuters) - Portugal's international lenders have approved the country's progress in the latest review of its bailout, pushing the euro zone member closer to a smooth exit from the lending program in mid-2014.
Portugal emerged from its deepest downturn since the 1970s in the second quarter and has begun to win back investor confidence as it prepares to return to financing itself in markets next year after the three-year bailout.
"The lenders agreed that our targets were met and our objectives are within reach," Finance Minister Maria Luis Albuquerque told a news briefing on Monday. "It was a very smooth evaluation ... that envisages the end of the bailout program on the agreed date" in mid-2014, she added.
Economists say the country is likely to be able to leave its bailout but may need some kind of precautionary loan from creditors before standing on its own two feet. Lisbon carried out a bond swap this month which drew strong investor demand.
Portugal's 'troika' of creditors - the European Commission, the European Central Bank and the International Monetary Fund - said the economy was improving.
"Further signs of recovery have emerged since the last review," the lenders said in a statement. "Growth is broadly in line with projections, while unemployment has fallen by more than expected."
Portugal would follow Ireland, which last week became the first bailed-out euro zone member to complete its lending program.
The biggest threats to Lisbon exiting its bailout are potential decisions by the country's constitutional court that could challenge austerity measures adopted under the bailout.
The three lenders said the government had identified alternative measures if the court shoots any measures down.
"Such (alternative) measures, however, could heighten risks to growth and employment and reduce the prospects for a sustained return to financial markets," they said.
ECB president Mario Draghi said Portugal's track record was improving.
"Up to now, the track record has been very satisfactory and the authorities continue to show strong commitment to the program's quantitative targets," Draghi told the European Parliament. "Incoming data on macro and fiscal variables clearly indicate that the situation is improving."
He said it was too early to "express forecasts" on Portugal's exit from its bailout.
"On the transition period, there will be a program adapted to the situation at that period of time and we have to see what sort of shape this program will have," Draghi said.
But Finance Minister Albuquerque and Deputy Prime Minister Paulo Portas said there were no plans for alternative measures.
"We see no reason to presume that there will be negative decisions from the constitutional court," Albuquerque said.
Portas said the "evaluation was positive" and Lisbon was likely to meet this year's budget deficit target of 5.5 percent of gross domestic product.
Portas also said the country would meet its fiscal targets until the end of the program regardless of any upsets by the court.
Portugal's economy is expected to return to growth next year, and expand 0.8 percent, after contracting by an estimated 1.8 percent this year.
Reporting by Sergio Goncalves and Andrei Khalip; Editing by Axel Bugge and Susan Fenton