LISBON (Reuters) - The International Monetary Fund warned on Wednesday the risks to Portugal’s bailout plan are still high and that the country’s Constitutional Court could further complicate policy- making when it is called to scrutinize next year’s budget.
In its staff report following approval of the latest payment to Portugal’s bailout, the IMF said a political crisis early in the summer and recent local elections were “reminders of increased opposition to further consolidation and reforms.”
IMF Portugal mission chief Subir Lall told a conference call risks were still present.
“There remain implementation risks to the program and uncertainty surrounding macroeconomic and market financing prospects,” Lall said.
“Continued strong commitment to the program and political cohesion are therefore critical to strengthen the recovery, reduce unemployment and regain full market access.”
The government nearly collapsed in July after the finance and foreign minister resigned over austerity measures introduced under the bailout, which sent Portugal into its worst downturn since the 1970s.
The IMF said the country’s Constitutional Court could still upset reform progress. The court has ruled against a number of reforms aimed at streamlining the economy.
“There is also a risk that new Constitutional Court rulings will further complicate policy making and heighten economic uncertainty,” the IMF report said.
Several key cost-cutting elements of the government’s 2014 budget, including wage cuts for public sector workers and reductions in pensions, are either awaiting decisions in the Constitutional Court or to be formally challenged in the court after the opposition vowed to do so.
“No, we have not discussed a plan B with the government,” Lall said, when asked what would happen if the court shoots down any measures, adding that alternative measures would be necessary. “Right now, it is hypothetical as to what those measures might be.”
Portugal’s government is hoping that it can smoothly exit its bailout as planned in mid-2014 and return to financing itself in debt markets, although it has said that it expects to request some sort of precautionary loan from creditors after that.
“Despite some recent retrenchment in yields, markets remain wary of Portugal’s ability to exit the current arrangement in May 2014 without further official support,” the IMF said.
When asked at what level Portugal could finance itself again in markets, Lall said “there is no magic number on yields in our view.”
The IMF also said the economy may have bottomed out after Portugal registered its first positive quarter of growth in the second quarter since the end of 2010.
“Activity is projected to remain stable for the remainder of this year before picking up gradually in 2014,” it said, projecting a full-year contraction in GDP this year of 1.8 percent followed by 0.8 percent expansion next year.
Reporting By Axel Bugge, editing by Andrei Khalip