Portugal says 2017 budget gap halves with bank injection discounted

LISBON (Reuters) - Portugal’s budget gap rose last year to hit the EU threshold for excessive deficits of 3 percent of GDP due to a massive capital injection in state-owned bank CGD, but halved when that one-off impact is discounted and should remain around 1 percent in 2018.

FILE PHOTO - A tram is seen in downtown Lisbon December 2, 2014. REUTERS/Rafael Marchante

Finance Minister Mario Centeno, who also chairs the Eurogroup of euro zone counterparts, said on Monday the recapitalization of Portugal’s largest bank by assets would have no impact on the evaluation of public accounts “because in 2017 Portugal had met all its targets.”

“Today, Portugal presents its best economic and financial performance in decades,” Centeno said referring to National Statistics Institute (INE) data showing that the deficit reflecting regular spending and revenue, without one-offs, had narrowed to just 0.92 percent in 2017.

In 2016, the overall budget deficit was 2 percent - already the lowest in over four decades of Portugal’s democratic history. Economic growth had since accelerated, stoked by growing investment and exports, to reach its strongest pace since the turn of the century, at 2.7 percent last year.

The budget gap this year is expected to total 1.1 percent, the INE said, confirming an earlier forecast by the government. It also said public debt should end this year at 123.1 percent of GDP, down from last year’s 125.7 percent.

Last year, once bailed-out Portugal delivered the biggest cut in the debt-to-GDP ratio in 19 years, from almost 130 percent in 2016.

This is still a huge debt; the European Union wants it at, or heading down towards, 60 percent.

Brussels last year removed Portugal from the list of the countries with excessive deficits although it knew about the 4 billion euro recapitalization of CGD, or Caixa Geral de Depositos, by the state worth 2 percent of GDP. The European Commission has itself used projections without the CGD impact.

European Commission vice-president Valdis Dombrovskis said earlier this month that if the 2017 deficit was not substantially higher than 3 percent and if it was expected to be clearly below 3 percent this year, then Portugal should avoid the renewal of the disciplinary process.

Centeno said Portugal’s budget rigor had guaranteed it would stay below the EU deficit threshold in the coming years even in a less favorable economic setting.

Portugal exited an international bailout program in 2014 with many European officials holding the country up as a success story in reforming its economy. Last year, the country won back investment-grade credit ratings from two of the three largest rating agencies.

The complex CGD operation, which the state deems an investment done at market terms, was needed to shore up the bank, which ended up with massive bad loans on its books following Portugal’s 2010-13 economic and debt crisis.

Reporting By Andrei Khalip; Editing by Richard Balmforth