Portugal to cut debt, boost potential growth

LISBON (Reuters) - Portugal hopes to cut its total debt to 120 percent of gross domestic product by 2019 from 130 percent last year, Finance Minister Mario Centeno told Reuters, a change that could help boost the country’s creditworthiness.

Portugal's Finance Minister Mario Centeno speaks during an interview with Reuters in Lisbon, Portugal May 24, 2017. REUTERS/Rafael Marchante

Portugal’s total debt is the third-highest in the euro zone, after Greece and Italy, and is seen as one of the economy’s biggest weaknesses. The country took a three-year bailout from its euro zone peers in 2011, during the bloc’s debt crisis.

In its 2018 draft budget presented on Friday, the Socialist government promised to continue cutting the debt, to 123.5 percent of GDP from 126.2 percent this year. Centeno said the administration would go further in its remaining term.

“If we manage to cut gross debt below 120 percent of GDP at the end of the legislature (in 2019) it would be an excellent indicator,” said Centeno. “I think that sustained trajectory is what Portugal should aim for and implement.”

Such a reduction could help rating agencies Fitch and Moody’s follow Standard & Poor’s decision last month to upgrade Portugal’s creditworthiness to investment grade, taking it out of “junk” status for the first time in 5-1/2 years.

“We hope Fitch and Moody’s will do it (follow S&P)” said Centeno.

The minister said he hoped Portugal could follow the sustained debt reduction achieved by Belgium, which cut its debt to 85 percent of GDP in 2007 from 130 percent in 1985.


Portugal’s debt crisis led to huge challenges for its financial sector, which remains lumbered with non-performing loans. But measures to clean up its banks could raise the country’s potential growth by 0.5 percentage points, to 2 percent, the minister said.

Portugal finally sold state-rescued Novo Banco on Wednesday and its leading banks have agreed a scheme to reduce NPLs.

Centeno said that with the gains from improvements for its banks and if exports and Europe continue growing, Portugal “could grow 2 percent (per year) during the next five years.”

Portugal’s exports now represent about 43 percent of GDP, up from 31 percent in 2008.

International observers, including the IMF, have consistently said in recent years that Portugal’s potential growth remains low, hobbled by high debts, bad loans and an inflexible labour market. Portugal was one of the slowest growing economies in the euro zone after it adopted the single currency.

The country is also grappling with wildfires that have killed more than a hundred people and burned some 350,000 hectares of land this year, and which prompted the interior minister to resign on Wednesday.

While the government sees slightly lower economic growth next year, 2.2 percent after this year’s projected 2.6 percent, Centeno said 2018’s rate would still be the third-highest since 2000. If growth turns out higher the government would use it to reduce debt faster, he said.

Asked about the risks of a reversal of quantitative easing by the European Central Bank, Centeno said he was not worried as the ECB already holds the limit of Portuguese bonds that it can own under its asset purchase programme.

“Technically this is already priced into our debt as we haven’t had the support of the ECB for a year,” he said. “As such, this is a point which gives us comfort going forward.”

Reporting by Axel Bugge; Editing by Catherine Evans