1) macroeconomic imbalances - IGCP

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1) macroeconomic imbalances - IGCP

PORTUGAL: MOVING AHEADNovember October 2013 12

ContentsCore issues on the Portuguese economyPage1) Macroeconomic Imbalances2) Economic Structure3) External Adjustment4) Structural Reforms5) Public Finances6) Banking Sector Challenges7) Debt Management8) Appendix3122334445766822


1) Macroeconomic ImbalancesHigh external deficit and negative international investment positionExternal DeficitNet international investment position[% GDP] [% GDP]4%40%2%20%0%0%-2%-20%-4%-40%-6%-60%-8%-80%-10%-100%-12%-120%-14%1996 1998 2000 2002 2004 2006 2008 2010 2012 2014Current AccountCapital AccountCurrent and Capital Account-140%1997 1999 2001 2003 2005 2007 2009 2011 Mar-13Direct investmentPortfolio investmentOther investmentReserve assetsTotalSource: Statistics Portugal, Ministry of FinanceSource: Banco de Portugal4

1) Macroeconomic ImbalancesHigh private sector indebtednessPrivate corporation indebtedness[% GDP] [%]Households indebtedness200108126180160106105,9124,512414070 82104122120102120100803029100100,411860312998116,9116402048 45961140Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Dec11 Jun12 Jun1394112Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 Jun-12 Mar-13Micro corporationsMedium corporationsSmall corporationsLarge corp. and non-financial holdingsSource: Banco de Portugal% GDP (LHS) % gross disposable income (RHS)Source: Banco de Portugal5

1) Macroeconomic ImbalancesPersistent government deficitsPortuguese average fiscal deficit around 5% of GDP[Net lending/Net Borrowing, % GDP]Increasing public sector indebtedness[General Government Debt – Consolidated Gross Debt, % GDP]412520100-2-4ItalyEuro area75Euro area (average 1995-2012)Portugal (average 1995-2012)-6-8Portugal5025-10Spain-121995 1998 2001 2004 2007 2010 201301995 1998 2001 2004 2007 2010 2013Source: AMECO, Ministry of FinanceSource: AMECO, Ministry of Finance6

198019821984198619881990199219941996199820002002200420062008201020121) Macroeconomic ImbalancesPoor performance of the Portuguese economy since 2000, mainlyexplained by low Total Factor Productivity (TFP) growth…Convergence towards euro area average in the 80sand 90s gave place to divergence in the last decade[Real GDP index, 1998=100]Excessive reliance on consumption[GDP components and GVA by industry, % total]1301201101009080706050EU (15)PortugalAggregate demand compositionGDP composition1995 2000 2005 20102012Q4Euro areaaverage(2010)Private consumption 63,1 63,1 64,7 66,7 63,5 57,3Public consumption 19,7 19,6 21,1 21,6 20,8 21,7GCF 22,6 27,0 23,5 20,4 16,1 19,2Exports 22,3 25,5 27,7 31,7 36,9 41,8Imports -28,0 -35,1 -37,1 -40,6 -37,5 -40,0GVA decomposition by sectorAgric., forestry and fishing 3,9 3,0 2,7 2,6 2,7 1,9Industry (except construction) 17,9 18,6 18,0 17,6 18,0 19,2Construction 8,8 9,0 7,5 5,7 4,1 5,5Wholesale and retail trade, transport,accomodation and food service activities22,4 23,3 23,2 23,7 24,0 19,3Information and communication 3,1 3,2 3,8 4,1 3,8 5,4Financial, insurance 3,4 4,7 6,3 8,0 7,6 5,7Real estate activities 8,6 8,3 8,0 7,8 8,6 10,7Public administration, defence, education,human health and social work activities23,3 21,8 22,1 21,2 21,7 19,2Other services activities 8,6 8,2 8,4 9,3 9,4 13,1Source: AMECOSource: Eurostat7

1) Macroeconomic Imbalances… due to an imbalanced allocation of resources in low productivity nontradablesectors …Employment and productivity by sector[average annual % change]531-1-3-5-71950-1973 1973-19901990-1999 1999-2009-9Agriculture Industry Services Agriculture Industry ServicesEMPLOYMENTPRODUCTIVITYSource: Pereira, A. S. and P. Lains (2010)8

1) Macroeconomic Imbalances… while exports suffered from competition from Asia and EasternEuropeConstant Market Share Analysis – Breakdown of Total Effect[Portuguese manufacturing exports (excluding energy), %]Study concludes that:1086420-2-4-6-81968-71 1972-76 1977-81 1982-86 1987-91 1992-96 1997-01 2002-06Market Share Effect Combined Share Effect Total Effecta) Market Share Effect: Impactresulting from effective changes inmarket shares in individual marketsb) Combined Share Effect: Influenceresulting from the relativespecialization of the countryc) Authors identify:a) Since 1997 Portugueseexports suffered significantlosses in market shareb) Traditional sectors were themost affected (e.g. textiles,clothing, footwear)c) New competitors: China andEastern EuropeSource: Amador and Cabral (2008)9

1) Macroeconomic ImbalancesThe Economic and Financial Assistance Programme tackles thesemacroeconomic imbalances...Frontloaded structural reforms Balanced fiscal consolidation Strengthen the financial sectorPromote competitiveness andproductivityEnsure fiscal sustainabilityImprove capacity to finance theeconomyReforms on:Outcome:Objectives:• Labour market• Judicial system• Competition framework• Government budget on aupward path• Improved efficiency andmonitoring of the publicsector• Orderly deleveraging• Improve capitalization• Re-open access to interbankand bond markets10

1) Macroeconomic Imbalances… supported by a stable social cohesionAverage working days lost due to strikes 1990-2008An absolute majority favours a successfulexecution[# days per person in 1 year] [Composition of the Portuguese Parliament, MPs]3,02,52,0741081,51,0168240,50,0Source: Pordata* Data for Greece available only until 199811


2) Economic StructureA recovery based on an exports-driven growthMain indicators for the Portuguese economy[yoy, %, unless otherwise stated]Macroeconomic scenario2009 2010 2011 2012 2013 P 2014 P 2015 P 2016 P 2017 PReal GDP (yoy %) -2,9 1,9 -1,6 -3,2 -1,8 0,8 1,5 1,8 2,2Private consumption -2,3 2,5 -3,8 -5,6 -2,5 0,1 0,9 1,0 1,2Public consumption 4,7 0,1 -4,3 -4,4 -4,0 -2,8 -1,9 -2,0 -0,9GFCF -8,6 -3,1 -10,7 -14,5 -8,5 1,2 5,5 6,1 6,5Exports -10,9 10,2 7,2 3,3 5,8 5,0 4,8 5,0 5,0Imports -10,0 8,0 -5,9 -6,9 0,8 2,5 4,0 4,2 4,4External sector (% GDP)Goods -10,0 -10,6 -7,8 -4,6 -2,6 -1,7 -2,2 -1,8 -1,6Current account -10,8 -10,4 -7,2 -1,9 0,5 1,9 0,8 1,1 1,3Current and Capital account -9,6 -9,0 -5,6 0,4 2,3 3,5 2,2 2,4 2,6Unemployment (% labor force) 9,5 10,8 12,7 15,7 17,4 17,7 18,1 17,5 16,7GDP deflator (yoy %) 0,9 0,6 0,5 -0,1 1,9 0,9 1,2 1,7 1,5Source: Ministry of Finance (2014 Budget for 2013-14; Budgetary Strategy Document, Apr-13, for 2015-17)13

2) Economic StructureConsistent change to growth through net exports to compensate forinternal adjustmentContributions to GDP Growth[Real terms, yoy, %]86420-2-4-6-8-10Private consumption Public consumption GFCF Change in inventories Exports Imports GDPSource: Statistics Portugal, Ministry of Finance14

2010.I2010.II2010.III2010.IV2011.I2011.II2011.III2011.IV2012.I2012.II2012.III2012.IV2013.I2013.II2) Economic StructureGDP contraction in 2012 in line with expectationsNet External Demand contribution to GDP growth is robust and steady[Contributions to yoy real GDP Growth, %]1086420-2-4-62,1 4 2,420 -2201,8 0 1,512-2-0,154-0,8-5 -5-1,47-10-2,95 5-2,4-7-9421-5-3,2 -6-7 -3,6 -3,8 -4,10-3-2,1-8-10-12Domestic demand Net external demand GDPSource: Statistics Portugal15

2) Economic StructureJob-losses are more pronounced in the labor-intensive non-tradablesectors…Labour market also showed evidence of an earlystabilization in the second quarter of 2013Employment losses highly concentrated on theconstruction sector[Unemployment rate, % labor force] [Employment variation by main sectors, yoy, %]20Statistics PortugalEurostat51816141210864216,9 17,714,9 15,0 15,8 16,414,012,4 12,1 12,410,6 10,9 11,10-5-10-15-200-251Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 Jul-13 Jan-11 Abr-11 Jul-11 Out-11 Jan-12 Abr-12 Jul-12 Out-12 Jan-13 Abr-13 Jul-13Retail TradeConstructionIndustry (excluding construction)ServicesSource: Statistics Portugal, EurostatSource: Statistics Portugal16

2) Economic Structure… and wages are adjusting, leading to competitiveness gainsCompensation per employee is decreasing...[yoy, %]…and progressively repositioning the economy ineuro area competitiveness[Nominal unit labor costs – differential vis a vis euro area, p.p.]GEIR432SPFRIT10-1-2-1,1-0,7-1,5NE-3-4PTUK-5-6-5,6-4 -2 0 2 4 6 8-71996 1998 2000 2002 2004 2006 2008 2010 20122011 2012 2013Source: AMECOSource: Statistics Portugal, Banco de Portugal17

2) Economic StructureCoincident indicators point to an improvement of the economic activityover the short-term: return to a positive growth is expected in 2013 Q3Despite the expected contraction in consumption, activitycoincident indicators reversed the negative trend…[GDP and Coincident Indicators, %]… and domestic savings are consistently improvingrelative to euro area peers[National savings rate as % of GDP]635430225020-215-4-6Activity Coincident Indicator (three month moving average)Private Consumption Coincident Indicator (three month movingaverage)GDP (year-on-year percent change)105Greece Ireland ItalyPortugalSpain-82000.I 2001.III 2003.I 2004.III 2006.I 2007.III 2009.I 2010.III 2012.I01982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012Source: Banco de Portugal, Statistics PortugalSource: IMF18

2) Economic StructureHigh frequency indicators show a positive trend in the first months ofthe yearIndustrial production yoy growth rate turned positive Retail sales declined 3.5% yoy in April, from a bottomfor 2 consecutive months for the first time since 2010 of -9.3% in Dec-12[%] [%]10Industrial production6Retail sales54200-5-2-4-10-6-15yoy (%)12m MA yoy (%)-8-10yoy (%)12m MA yoy (%)-20-12Source: Statistics PortugalSource: Statistics Portugal19

2) Economic StructureIn 2012 total net borrowing improved 5.9pp (on top of 5.8pp between2008 and 2011). In 2013Q1 it improved around another 1pp.Net lending (+)/ Net borrowing (-) by institutional sector[% of GDP , accumulated sum of 4 quarters]1087,764203,41,22011 Q42012 Q12012 Q22012 Q3-2-4-6-2,82012 Q42013 Q1-8Non financialcorporations-7,1Financial corporations General government Households Total economySource: Statistics Portugal20

2) Economic StructureRoughly 2/3 of the structural primary balance adjustment and 4/5 of theexternal adjustment initially programmed were achieved in the end of 2012Fiscal and external adjustments[% of initially projected 2010-2014 adjustment]10090Remaining adjustment807060504030Adjustment completedby end 201220100Structural primary balanceCurrent account2010-2012 2013-2014Source: IMF21

2) Economic StructureEconomic Adjustment compares favorably with European peersIndicators’ variation since the beginning of the economic crisisVar. Real GDP 1Var. PrivateConsumption 1Var. DomesticDemand 1Var.UnemploymentRate 2Var. PrimaryBalance 3Var. Currentand CapitalAccount 2GreeceIrelandItalyLatviaPortugalSpain-20,1% -22,6% -27,6% 16,6 p,p, 11,9 p,p, 13,3 p,p,-8,2% -8,6% -23,1% 10,0 p,p, 6,6 p,p, 9,4 p,p,-6,9% -5,0% -9,6% 4,6 p,p, 3,1 p,p, 2,5 p,p,-21,2% -27,1% -34,4% 13,3 p,p, 4,8 p,p, 31,5 p,p,-5,7% -9,1% -13,5% 7,4 p,p, 6,3 p,p, 11,8 p,p,-5,0% -6,7% -12,6% 16,7 p,p, 2,0 p,p, 9,4 p,p,1Peak to trough between 2007 and 20122Trough to peak between 2007 and 20123Trough to peak between 2007 and 2012 (except for Ireland, where 2010 outlier is not considered)Source: AMECO22


3) External AdjustmentStronger and faster external adjustment than initially projected: current andcapital account improved more than 10 p.p. of GDP in the last 2 yearsExternal flows are under a strong correction[Current and Capital Accounts, % of GDP]2000 2005 2008 2009 2010 2011 2012Current Account -10.3 -10.3 -12.6 -10.9 -10.6 -7.0 -1.5Trade Balance -12.9 -11.8 -13.4 -10.6 -11.1 -8.3 -5.2Services, net 1.7 2.5 3.8 3.6 3.9 4.5 5.3Income, net -2.0 -2.5 -4.5 -5.2 -4.6 -4.9 -3.9Current Transfers, net 2.8 1.5 1.4 1.3 1.3 1.7 2.3Capital Account 1.3 1.1 1.5 0.8 1.1 1.2 2.3Current Account + Capital Account -9.0 -9.2 -11.1 -10.1 -9.4 -5.8 0.8Source: Banco de Portugal24

19961997199819992000200120022003200420052006200720082009201020112012201320143) External AdjustmentBalance of Goods and Services has reached the turning point, on theback of a strong exports performanceSurplus on the balance of goods and services expected Change until 2012 mainly justified by strong exportsin 2013growth[% GDP] [contribution to balance of goods and services change, p.p. GDP]422,61,8867,10-2-0,5422,73,34,43,33,80,83,0-4-60-2-0,3-1,1-8-4-4,4-3,6-10-10,1-62009 2010 2011 2012-12Imports Exports Change in BGSSource: AMECOSource: Statistics Portugal25

3) External AdjustmentBalance of Goods and Services has reached the turning point, on theback of a strong exports performanceBalance of Goods and Services[nominal terms, %]50Exports and Imports[Index: 2009=100, %, 12m.m.a.]150403020140130100-10120110-20100Exports of goods and servicesI II III IV I II III IV I II III IV I II III IV I II2009 2010 2011 2012 2013Deficit (% GDP)Exports yoyImports yoyTotal Exports (% GDP)Total Imports (% GDP)-30Source: Banco de Portugal9080Imports of goods and servicesSource: Banco de Portugal26

3) External AdjustmentThe adjustment has started before the Economic Assistance ProgramSignificant growth rates in Goods and Services…[Portuguese exports, EUR bln] [Exports-to-GDP, %]… will increase exports weight on GDP2008 20092010 20112012+34%626442403812pp39+43%43374557485536343232+17%301816181919282624200820092010201120122013EGoods Services ExportsSource: Banco de PortugalSource: Eurostat27

3) External AdjustmentGeographic diversification is boosting Portuguese exportsMajor contribution from Intra and Extra-EU exports[%, yoy change of 1 year ending on Aug 2013]Aug -13yoy 0 4 5 0 4 -5 -3 7 7 -14 1 10 50 72.2 Intra EU Nethe UK France Spain Germany Others Extra EU Angola China US Brazil Morocco OthersSource: Statistics Portugal28

3) External AdjustmentHigher geographic diversification: Extra-EU exports account up to 30%Exports diversification is increasing at a fast pace[Portuguese goods exports by destination, %][Portuguese goods exports by majordestination and major product, 2012,% total exports by destination]20803070362824541 2 20 1 112 12 14 122005 Aug-13Extra EU Angola USA Brazil Morocco China Others8TurkeyMozambiqueRussia…5 4 4 4 3Intra EU Spain Germany France UK Netherlands Italy Others1115Intra EUSPGEFRExtra EUANGUSMachineryVehicles andparts10TextileProducts14% 14% 11%Textile ProductsBase MetalsPlastics andRubber13% 12% 9%MachineryVehicles andpartsPlastics andRubber27% 26% 7%Vehicles andpartsMachineryTextileProducts18% 11% 10%Mineral products Machinery Base Metals19% 18% 10%MachineryPrepared Foodand TobaccoBase Metals25% 16% 15%Mineral productsMachineryTextileProducts38% 11% 10%11Source: Statistics Portugal29

3) External AdjustmentHigher industry diversification on Portuguese goods exportsSectors’ weight on the Portuguese goods exports[%]19201911121314141115456457688793544654 43 345259Chemicals(incl.Pharma.)Plastics andRubberBase Metals Fish, Fruits,Veg.,Tobacoand WineMineralProductsCement,Ceramic andGlassWood andCorkFootwareand otherproductsPulp ofWood andPaperTextileProductsVehicles andparts,AircraftElec. andMec.Machinery2000 2005 Aug-13Source: Statistics Portugal30

3) External AdjustmentPortuguese goods exports evidence world market share gains on fastgrowing industries, especially on high-weight GVA sectorsGrowth of Portuguese exports and World imports[%]21CAGR PT exports 07-12CAGR WORLD imports 07-121513121112101091192476 67352743274PaperMineralsFuelsPharma.Vegetab.and FruitsVeg. Oils(incl. OliveOil)Plastics Fish Structure,Manuf. andBars ofMetalsFurnitureYarn andTextileFabricsVehiclesand partsMachineryRubberSource: UNCSTAD31

3) External AdjustmentTourism and transport sectors strongly contribute to the services exportgrowthPortuguese exports structure[July of 2013, %] [%]Services exports growth10071382011 2012 Jan-Jul 2013% of totalservices24296,512,20,8 1,0 8,21076 6481334-1Maritime andAerial TransportTourismComputer andInformationServicesArchitectural,engineering andother technicalservicesSource: Banco de PortugalSource: Banco de Portugal32

3) External AdjustmentMarket share gains allowed to reverse losses during the last decadeCumulative market share variation on goods and services[annual % change]151050-5-10-151999 2001 2003 2005 2007 2009 2011 2013Cumulative Market Share WORLD Demand PT ExportsSource: Banco de Portugal, Autumn 201333


4) Structural ReformsGovernment presented in April a new strategy to promote growth,employment and industrial developmentThe Ministry of Economy defined a set of main areas of action, announcing concretemeasures for each one, as well as the intention to set up an Industry Council to monitor allthe targets outlined.1. Qualification: education and training• Strengthen the system of dual learning, vocational education and promote protocols between schools and companies;2. Financing• Set up a new financial development institution (with the technical assistance of KfW) specialized in SME’s financing toredesign the instruments available and improve SME’s financing conditions;3. Industrial Revitalization and Consolidation• Creation of the Revitalize Fund: with an allocation of EUR 220 million;4. Investment Promotion• Make investment easier;• Simplify the industrial licensing process and reduce “Red Tape”;• Reduce companies fuel costs and promote higher competitiveness in the natural gas market;5. Fiscal Competitiveness• Deep and comprehensive reform of the Corporate Income Tax;6. Internationalization• Line “SME Exports” launched during the 1st half of 2013 with an amount that can reach up to EUR 1.000 million;7. Logistics Infrastructure• Promote the adequacy of the national railways network to the efficient transport of cargo;• Development of a ports’ plan and reduces ports tariffs by an additional 50% (they have been already reduced by 20%).35

4) Structural ReformsLaw for an extraordinary tax credit to investment was submitted toParliament and is expected to concentrate investment intentions in 2013H2Two important measures to promote investment and mitigate SME’s liquidity problems are beingapplied already in the current year:1. Extraordinary tax credit to investment (submitted to Parliament in May):• Allows a deduction of 20% of an investment to the corporate income tax collection, with a cap to 70% ofthe tax collection amount.• The amount not used in 2013 may still be deducted in the following 5 years, giving in practical terms asignificant tax benefit for new investments.• In an extreme case, companies with a strong investment policy in 2013 could achieve a reduction of17.5pp on the corporate income tax effective rate (from the standard rate of 25% to a rate of 7.5%).• The eligible investment projects must be implemented between June 1st and December 31st of 2013,which may help concentrate in this period investment intentions that would otherwise be delayed.2. VAT cash-based regime (already approved by the Government; to be operational from October onwards):• Optional scheme that allows companies with an annual turnover below EUR 0.5 million to pay VAT onlyafter receiving from their clients and not at the time invoices are issued.• Option is available for all activity sectors and for all kind of transactions with the State.36

4) Structural ReformsStrong willingness to put in place the measures envisaged in theEconomic Adjustment ProgrammeImplementation of the Economic Adjustment Programme’ measures46%7% 8% 11%5%14%16%15%43%32%21%92%54%50%60%74%79%65%Not met/DelayedOngoingMet/partially Met1st review2nd review3rd review4th review5th review6th reviewSource: European Commission37

4) Structural ReformsProgress in institutional reforms is being madeProgress in the institutional reform:a. Commitments’ Control Law:– ability of public entities in assuming commitments is constrained to the quarterly available funds;– establish strong incentives for suppliers to closely watch infringements.b. Fiscal Council:– contribute to bring transparency and accountability on fiscal policy;– review government revenue projections and multi-annual fiscal plans.Restructuring State Owned Enterprises:a. SOEs with commercial activity will reach operational balance by Q4-2012, through downsizing, cuts inoperational costs, and investment restrictions;b. Most subsidiaries and shareholdings in non-core activities will be eliminated by 2014;c. Realignment of wages or employment reduction;d. Implement a tight reporting framework on SOE;e. New governance model – Ministry of Finance has stronger power.38

4) Structural ReformsLabour Market Reforms: boost flexibility and improve productivityDecreasing rigidity in the labour market[Strictness of employment protection legislation, Scale from 0 (least stringent) to 6(most restrictive) 1 , 2009]3,5Agreements with Social Partners:32,521,510,502012 2 2009a) Increase incentives to work:cut unemployment insurancebenefitsb) Ease employment protectionlegislation: reducerequirements for individualdismissals and continue todiminish severance paymentsc) Reform working timearrangements: introduceindividual “bank of hours”1Weighted average of three sub-indices: protection of permanent workers against (individual)dismissal, regulation on temporary forms of employment and specific requirements for collectivedismissal.2Assuming that changes to the Labour Code recently approved in parliament come into force.d) Boost flexibility on wagesetting: decision at workingcouncils in corporationsSource: OECD39

4) Structural ReformsFoster competitiveness and remove hurdles to investmentHigh rigidity in the product marketHigh level of backlog cases[Integrated Product Market Regulation] [Backlog/Ruled cases, %]3,53,02,52,01,51,00,5250200150100502008 1998Promote a competitive environment:Source: OECD01980 1990 2000 2010Source: PORDATAImprove the functioning of the judicial system:a) New Competition Law;b) Specialized court for Competition;c) Strengthen the power of the CompetitionAuthority.a) Strengthen alternative dispute resolutions toremove workload from courts;b) Implementation of a new judicial map;c) New Insolvency and Corporate Recovery Code;d) New Code of Civil Procedure.40

4) Structural ReformsLabour and product market reforms combined can have a positiveimpact on GDP per capita of 6% in the medium termImpact of labour and product market reformsPotential yields of reformsReforms Shock variables In 5 years In 10 yearsLabour-Product market combined GDP per capita, level +6% +14%Labour market Unemployment rate -0.8p.p. -1.7p.p.Labour market Labor productivity, level -0.7p.p. +1.7p.p.Product market Total factor productivity, level +4% +8%Source: Bouis and Duval (2011), IMF41

4) Structural ReformsContext cost are being addressedHigh mobile telephone prices[For 300 calls 1 , includes VAT, August 2010, USD PPP]Evolution of electricity prices[USD per megawatt hour]140120300250100806040200200150100500Portugal OECD Portugal OECD19982003200820111: Voice calls including SMS messages: 140 SMS for 100 calls or 225 SMS for 300 callsSource: OECDReduce telecommunication costs:HouseholdsIndustrySource: OECDRemove excessive mark-ups in the energy sector:a) Reduce mobile termination ratesb) Broad access of all operators to existingnetworksa) Speed up liberalization of Gas and Electricityb) Accelerate convergence to market-based pricingc) Foster cross border market integration toincrease competition42

4) Structural ReformsInvestment in human capital in the past two decades should provide thenecessary resources to sustain economic recovery moving forwardNumber of researchers in R&D activities[Full Time Equivalent per 1,000 active persons]The evolution of education inthe past couple of decades…9876543a) Upper-secondary educationschooling rate increasedfrom 10% in 1980 to above70% in 2010;b) Number of graduates withhigher education more thandoubled since 1994 (of whichabout 25% in science andengineering);2101986 1989 1992 1995 1998 2001 2004 2007 2010EU-27Portugalc) Number of PhD graduatesmore than doubled since2000 (increased 14 timessince 1980), of which morethan half in natural sciences,health sciences andengineering;Source: Pordata43


5) Public FinancesA sizable structural fiscal adjustment is at work, with an overall primarysurplus in 2014, for the first time since 1997Overall balance[% GDP] [% GDP]Primary balance421,500-0,30,3 0,20,50,1-4-8-12-4,3-4,0 -4,1-5,9* -5,8-5,8-6,4*-9,1-9,8-10,2 -10,2Overall balance-7,3Overall balanceexcluding one-offs-8,9-8,7-6,5-3,9-4,2Structural overallbalance2009 2010 2011 2012 2013 2014-2,9-2-4-6-8-1,6-2,1-7,0-7,3 -7,3Primary balance-6,3-3,3-1,5 -1,5Primary balanceexcluding one-offs-5,9-6,1-2,5Structural primarybalance2009 2010 2011 2012 2013 2014* In 2012, the overall deficit compatible with Program criteria stood at 4.7%(within the target of 5%) and in 2013 stood at 5.5% (in line with the target).Source: Ministry of FinanceSource: Ministry of Finance45

5) Public FinancesBudget execution 2013Central Gov. and SS consolidated account total revenuesCentral Gov. and SS consolidated account total expenditures[%, p.p.] [%, p.p.]Total revenues (yoy, %)Main contributions (p.p.)-1,52,3Total expenditures (yoy, %)Main contributions (p.p.)0,74,8Direct taxes3,73,3Employees0,71,4Indirect taxes-1,6-1,2Other current expenditure-1,70,6Current non-fiscal revenue1,82,7Interest and other charges-0,60,0SS contributions1,62,4Current transfers3,93,7-7,0Capital revenue-4,9Capital expenditures-1,6-0,9Source: DGOExecution until August 132013 Supplementary Budget46

pp GDP5) Public FinancesBy 2014, the primary balance will have improved by 7.6pp of GDP fromthe 2009 peak: around 60% from the expenditure side…Primary balance adjustment 2014 vs 2009[p.p. GDP]877,69%0%5%628%558%424%42%3244%- 11% 1%10PrimaryBalancePrimaryexpenditureCompensation Social benefits Other currentof employeesprimaryexpenditureCapitalexpenditureTotal revenue Current taxeson income andwealthTaxes onproductionand importsOther currentrevenueCapitalrevenueSource: Statistics Portugal, Ministry of Finance, and IGCP calculations47

5) Public Finances… with primary expenditure declining €2.6 bn in 2014 (€12.7 bn since2010)Primary Expenditure[EUR bln]Capital expenditureOther currentprimary expenditure84101578714717471513514414Social benefits3838373838Compensation ofemployees21 1917 18 162010 2011 2012 2013 P 2014 PSource: Ministry of Finance48

5) Public Finances2014 Budget envisages the rebalancing of the adjustment towards expenditurereduction, summing up a reduction of 4.4pp of GDP in primary expenditure since2009General Government Accounts[% GDP]General Government Account (accrual basis)(% GDP) 2009 2010 2011 2012 2013 2014 2014 vs 2009Total revenue 39,6% 41,6% 45,0% 40,9% 43,2% 42,8% 3,2ppCurrent revenue 38,9% 38,8% 40,5% 39,4% 42,0% 41,7% 2,8ppCurrent taxes on income and wealth 9,0% 8,8% 9,9% 9,3% 11,2% 11,1% 2,1ppTaxes on production and imports 12,7% 13,3% 13,7% 13,7% 13,3% 13,4% 0,7ppSocial contributions 12,5% 12,3% 12,3% 11,6% 12,0% 11,6% -0,8ppOther current revenue 4,6% 4,4% 4,6% 4,9% 5,6% 5,5% 0,9ppCapital revenue 0,7% 2,8% 4,6% 1,5% 1,2% 1,1% 0,4ppTotal expenditure 49,8% 51,5% 49,3% 47,4% 49,1% 46,8% -2,9ppCurrent expenditure 45,8% 45,8% 45,4% 44,5% 46,4% 44,7% -1,1ppSocial benefits 22,0% 22,0% 22,1% 22,5% 23,2% 22,8% 0,8ppCompensation of employees 12,7% 12,2% 11,3% 10,0% 10,6% 9,4% -3,3ppInterest 2,9% 2,8% 4,0% 4,3% 4,3% 4,4% 1,5ppIntermediate consumption 5,0% 5,2% 4,6% 4,5% 4,8% 4,6% -0,4ppSubsidies 0,7% 0,7% 0,7% 0,6% 0,7% 0,8% 0,0ppOther current expenditure 2,5% 2,8% 2,6% 2,6% 2,7% 2,8% 0,3ppCapital expenditure 4,0% 5,7% 4,0% 2,9% 2,8% 2,1% -1,9ppGross fixed capital formation 3,1% 3,8% 2,6% 1,5% 1,9% 1,8% -1,3ppOther capital expenditure 0,9% 1,9% 1,4% 1,4% 0,9% 0,3% -0,5ppOverall balance -10,2% -9,9% -4,3% -6,5% -5,9% -4,0% 6,1ppMemo itemsPrimary expenditure 46,9% 48,7% 45,3% 43,1% 44,8% 42,5% -4,4ppPrimary balance -7,3% -7,0% -0,3% -2,1% -1,6% 0,3% 7,6ppSource: Ministry of Finance.49

5) Public Finances2014 budget envisages a fiscal consolidation effort amounting to €3.9 bn(or 2.3% of GDP), of which €3.7 bn have a permanent impactPermanent fiscal consolidation measures in 2014[EUR million]35003000Expenditure reduction measures(gross values)Impact of all measures onrevenue side(gross values)250020003.1841.320150089110005000ExpenditurereductionPersonnelexpendituresSocial Benefits972OthesExpenditures*994Total revenuemeasures- 459Fiscal revenuelosses535Revenue increase* Social benefits in kind, intermediate consumption, subsidies, investment and othercurrent expenditureSource: Ministry of Finance.Source: Ministry of Finance.50

5) Public FinancesThe adjustment will be focused on the expenditure side (more than80%), with public permanent expenditure cuts amounting to €3.2 bnExpenditure cuts mainly aimed at the two largest components of public expenditure: compensation ofemployees (€1.3 bn) and social benefits (€0.9 bn)Compensation of employees (€1.3 bn):i. Wage reduction between 2.5% and 12% applicable to all public sector employees with a monthly incomeexceeding €600 (€643 mln);ii. 40-hour work week, reduction in the number of public servants through retirements and reduction of thepayments for extra hours of work (€153 mln);iii. Mutual agreement termination program (€102 mln) and employees requalification scheme (€59 mln);iv. Structural reforms on education and other sectorial measures (€363 mln).Social benefits (€0.9 bn):i. Convergence between public (CGA) and private sector (SS) pension systems (net effect €388 mln);ii. Retirement age adjustment based on a sustainability factor, being raised from 65 to 66 years (€205 mln);iii. Introduction of means-testing on survival pensions (€100 mln);iv. Other measures targeted to specific sectors (€198 mln).A wide range of sectorial measures from the 'Public Expenditure Review’ (€1 bn):i. Healthcare reform and cost optimization (€207 mln);ii. Costs rationalization and processes redefinition on Security and Defense (€124 mln);iii. Reduction of SOE compensation (€90 mln);51

5) Public FinancesMeasures on the revenue side amount to €1 bnMeasures on the revenue side cover different specific distortions in the economyi. Increase in direct taxes, namely by raising the autonomous taxation of the service vehicles (€240 mln);ii.iii.iv.Measures on indirect taxation will raise additional revenue from the increase in the taxes on dieselvehicles and on tobacco and alcohol (€170 mln);Introduction of an extraordinary contribution on the energy sector (€100 mln) and increase in thecontribution of the banking sector (€50 mln);Increase in the civil servants contributions to the public health insurance systems, decreasing theexpenditure financed through public funding (€132 mln);These measures are partially offset by the negative impact of the reduction on compensation of employees andsocial benefits.Thus the overall impact amounts to about €0.5 bn.52

5) Public FinancesPublic debt remains on a sustainable pathPublic debt peaks at around 128% of GDP in 2013 Assumptions for public debt dynamics *[% GDP]1401201008094,02,2108,28,4124,110,0127,8 126,7 125,78,4 6,3 6,2122,95,9118,55,9YEAR 2012 2013 2014 2015 2016 2017Real growth rate (yoy %) -3.2 -1.8 0.8 1.5 1.8 2.2GDP deflator (yoy %) -0.3 1.9 0.9 1.2 1.7 1.5604020091,899,9114,0119,5 120,4 119,5 116,9112,62010 2011 2012 2013 2014 2015 2016 2017GenGov debt excl CentralGov depositsCentralGov depositsGenGov gross debtPrimary balance (% GDP) -2.1 -1.6 0.3 1.8 3.1 4.2Interest costs (% GDP) 4.3 4.3 4.4 4.3 4.4 4.4Implicit interest rate (%) 3.9 3.5 3.4 3.4 3.5 3.6* Assumptions compatible with the reduction of public debt to 60%of GDP in the next 20 years, in line with the EU Fiscal Compact rules.Source: Ministry of FinanceSource: Ministry of Finance53

5) Public FinancesRelatively low implicit interest rateEU/IMF loans with average interest rate of 3.2%Implicit interest rate[Estimates based on disbursements received until Sep-2013] [Interest cost / Previous year debt stock, %]98EntityAmountdisbursed(EUR bn)Estimatedall in costAveragematurity(years)To bedisbursed(EUR bn)EFSM 22.1 3.0% 19.5 3.9EFSF 21.1 2.4% 20.7 4.9IMF 22.7 4.0% 7.25 4.6Total EU-IMF 65.9 3.2% 15.8 13.4765432Euro areaPortugal1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016Source: IGCPSource: AMECO, IMF54

5) Public FinancesReduced risk on SOE debt outside of General GovernmentA significant number of these SOE will be sold under the privatization programme. Others are going through asignificant restructuring process, mostly in transports, and have achieved operational balance by end-2012.[Non-consolidated SOE financial debt as of Dec 2012, % GDP]12101,49,73,0862,20,4421,80,3 0,00,50AdP Group ANA Group CTT Group TAP Group CP Group Carris Parpública Other TotalEUR bn3.0 0.5 0.0 0.9 3.6 0.7 5.0 2.2 16.0Source: DGTF, Feb-201355

5) Public FinancesPrivatization programme revenues exceeds initial estimates2011 Energy RetailandProduction:EDP (21%)- EUR 2.7blnEnergy2012 Q1 2012 Q4 AirportNetworkCompany:REN (40%)– EUR 0.6bln(11%) – tobeprivatizedTotal of EUR 6.4 blni. Initial estimate of Privatization Revenues: EUR 5blnii. EDP/REN sold at a 54%/34% premium over market pricesNote: Percentage of General Government’s shareholding in brackets.Operator:ANA (100%)– EUR 3.08bln2013AirTransport:TAP (100%)MailDistribution:CTT (100%)WasteManagement: EmpresaGeral doFomento(100%)CargoHandling: CPCARGA(100%)Source: Ministry of Finance56


6) Banking Sector ChallengesDeleveraging the financial system while reinforcing banks' capitalReduction on loan-to-deposit to 120% by end-2014[Loan to deposit rate, %] [Core Tier 1, %]Capital requirements: Core Tier 1 of 10% by end-2012162 163167158 158 157150146-28%140137 136133120+45%9,6 9,611,2 11,3 10,07,9 7,8 7,88,0 8,18,48,78,54Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 Targ12Source: EC4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 Target 12Source: EC58

6) Banking Sector ChallengesBalanced deleveraging of the financial system2015Credit to the corporate sector is decreasing…[Loans outstanding, yoy, %] [Granted loans, yoy, %]…however, it has been maintained to largecompanies and to the export sector10105500-5-5-10-10-15May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13-15May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13Households - HousingNon-financial coporationsHouseholds - ConsumptionSource: Banco de PortugalNon-financial small and medium size companiesNon-financial large companiesExporting companiesSource: Banco de Portugal59

6) Banking Sector ChallengesStrong confidence on the Portuguese financial systemDespite a recent reduction, deposits are above severalEuropean peersHouseholds deposits are resilient[Index: 2008=100, %] [Index: 2008=100, %]150130140130120120110110100901008070Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13Spain Greece Ireland Italy Portugal90Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13Non-financial corporations HouseholdsSource: European Central BankSource: Banco de Portugal60

6) Banking Sector ChallengesFinancial Balance: Depositors’ trust in the Portuguese banking systemIn 2011 and 2012 the private sector has substantially decreasedthe placement of deposits in foreign institutions Banks’ financing has been replaced by ECB funding in 2012[Deposits/Borrowings in foreign institutions from otherresident sectors, EUR bln][Borrowings/Deposits from non-residents to Portugal, EURbln]6305204310-2-101--20-1-30-22005 2006 2007 2008 2009 2010 2011 2012 2013*-402005 2006 2007 2008 2009 2010 2011 2012 2013** As of July 2013Monetary Authorities Public Administration Other Financial InstitutionsSource: Banco de Portugal* As of July 2013Source: Banco de Portugal61

6) Banking Sector ChallengesReasonable reliance on ECB fundingECB funding for Portuguese banks has stabilized…… and in proportion to assets is in line with Europeanpeers[ECB funding for Portuguese banks, EUR mln] [Total liquidity provisions/total assets, %]45040035030025035302520200150100500Dec-08 Dec-09 Dec-10 Dec-11 Dec-12Portugal Ireland (incl ELA) ItalyGreece (incl ELA) SpainSource: National Central Banks151050Dec-08 Dec-09 Dec-10 Dec-11 Dec-12Portugal Ireland (incl ELA) ItalyGreece (incl ELA) SpainSource: National Central Banks and European Central Bank62

6) Banking Sector ChallengesHousing indebtedness is the bulk of households’ debt in a stable housingmarket price environmentHousing accounts to 32% of lending…… in a stable house prices environment[Loans consumption, Aug-13, %] Real House Price, yoy, %]2047%Non-financialcorporations49%CentralGovernment11%Other PA2%PublicAdministration12% 47%Households39%Other3%Consumption3%Housing32%151050-5-10-15-20-252006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1Germany Ireland Spain PortugalSource: Banco de PortugalSource: Eurostat63

6) Banking Sector ChallengesNon-performing loans in the household segment remain tame, despitethe spike in unemploymentDespite an increase in corporate non-performingloans…... total non-performing loans compare relatively wellwith European peers[Overdue loans in total loans, %] [Non-performing loans in total loans, %]141210HouseholdsNon-financialcorporations30252027,923,321,72010201120122013861513,74109,810,47,6254,33,50Dec-09 Dec-10 Dec-11 Dec-12 Aug-130Source: Banco de PortugalPortugal and Greece: Mar 2013; Belgium Jun 2012Source: IMF64

6) Banking Sector ChallengesBank recapitalization: banks have substantially improved their capitalpositionBalance sheet operations already conducted by the major banks…… reduce the needs presentedon the EBA results[Capital needs, EUR mln]BCPESFGBPICGDBCP ESFG BPI CGD•EUR 3 bln ofhybrid capitalsubscribed by thePortuguese State(June 2012)•EUR 500 mln ofrights subscribedby existingshareholders(September2012)•Both measuresincrease BCP'sCore Tier 1 wellabove the 10%target•EUR 500 mln ofcapital increasethough a group ofinstitutionalinvestors (April2012)• EUR 1.01 bln ofpreference rightsissued by BES(May 2012)•BES issued EUR750 mln 3Yr bondat 6% (in October2012) and EUR500 mln 5Yr bondat 4.9%•EUR 1.5 bln ofhybrid capitalsubscribed by thePortuguese State(June 2012)•EUR 200 mln ofcapital issuancewhich proceedswere used torepurchasehybrid capitalsubscribed by thePortuguese State(August 2012)•EUR 1.65 bln ofcore tier 1 capitalinjected by thePortuguese State(June 2012)•CGD issued EUR500 mln 3Yr bondat 5.75% (inNovember 2012)Capital Shortfall(EBA 9% - Dec 11)Sovereign Buffer(Dec 11)Additionalimpairments onsovereign exposures(Dec 11)Total Capital Shortfall(EBA - Dec 11)Capital Shortfallafter capitalization(Jun-12)377 249 45 1301,165 121 1,359 1,073-316 0 -175 01226 371 1,228 1,202-367 -405 -99 -448Source: EBA65


7) Debt ManagementAdditional borrowing needs for 2014 (€10.7 bn) to be financed by PGBand retail issuanceBorrowing needs and sources 2012-2017[EUR bln]2012 2013 E 2014 P 2015 P 2016 P 2017 PState borrowing requirements 34,5 19,6 25,5 20,4 14,8 11,1Net financing needs 18,0 13,4 11,8 5,4 2,2 -1,1Overall deficit * 8,9 8,9 7,4 4,3 2,1 0,4Private sector banks' recapitalizations 4,5 1,1Other acquisitions of financial assets ** 6,8 4,7 4,5 1,1 0,1 -1,5Privatizations (-) -2,2 -1,3 -0,1 0,0 0,0 0,0MLT Redemptions 16,5 6,2 13,8 15,0 12,5 12,2Tbonds 16,5 6,2 13,8 14,5 9,9 8,6IMF 0,5 2,6 3,6State financing sources 34,5 19,6 25,5 20,4 14,8 11,1Use of deposits -2,7 1,6 7,0 0,0 0,0 0,0Financing in the year 37,2 18,0 18,5 20,4 14,8 11,1EU-IMF 27,5 10,0 7,9Tbonds (incl exchange offer) 3,6 5,4Tbills (net) 5,3 2,4Retail debt (net) -1,6 0,5Other (net) 2,4 -0,4Additional financing needs - - 10,7 20,4 14,8 11,1Total additional financing needs 2014-17 57,0State Treasury cash position at year-end 15,0 13,4 6,4 6,4 6,4 6,4of which: deposits for bank recap 3,5 6,4 6,4 6,4 6,4 6,4* State sub-sector cash deficit in 2012-14. Projection for GG deficit in 2015-17 (Budgetary Strategy Document, Apr 2013).** Includes refinancing of other public entities within General Government (namely SOEs and regions), which do not translateinto higher GG debt. It also includes CGD recap, BPN resolution, ESM participation, and redemption of CoCos.Source: IGCP and Ministry of Finance67

7) Debt ManagementFunding Strategy: the use of multiple funding channels and extendingthe debt maturity allows a progressive recovery of market accessFunding ChannelsRedemption ProfileRetailFundingPGBMTNissuanceTreasuryBillsExchangeOffersOfficialSector• Improvepricingoffered inexisting retailproducts• Launch Newproducts• Returngradually to aregular PGBissuance• Reshape thePGB yieldcurve• Use ofsuperiorflexibility toaccess anenlargedinvestor base• Accessstrategicinvestors• Increase theinternationalinvestors’baseparticipation• Exploreopportunitiesto extend debtstock maturity• Extension ofassistanceprogrammesdebtmaturitiesContinuous communicationwith investors68

7) Debt ManagementIGCP recently changed the retail products’ remuneration, stemming thenet negative retail outflowsBanking system deposits rates and Retail Products’Rates[%] [EUR mln]Net Retail Products monthly issuance65Introduction of a275 bps fixedpremium1000AverageSep12-Jan13 =-34mln4-100Average 2010 =Average Jan-Aug12 =-208mln-20032-300-400Average 2011 =-313mlnSeries B Gross Rate + 1st year prize1Series C Gross Rate + 1st year prizeNew deposits interest rate (privates until 1y)0Jan-99 Jul-00 Jan-02 Jul-03 Jan-05 Jul-06 Jan-08 Jul-09 Jan-11 Jul-12-500-600New remunerationconditions of CA in placesince Sep12-700Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13Source: IGCP, Banco de PortugalSource: IGCP69

7) Debt ManagementPortuguese Government bonds presented the best returns in 2012Strong performance vs EU peers on bonds…[Portuguese 5yr yield spread vs peers, %]… and on CDS market also[Portuguese 5yr CDS spread vs peers, b.p.]20120018161000141257% return in201280010600864004220000PT vs IR PT vs SP PT vs ITSource: BloombergPT vs IR PT vs SP PT vs ITSource: Bloomberg70

7) Debt ManagementPortuguese Government bonds’ yields have tightened considerablePGB’s secondary market yields[%]2520153.10.2012Exchange PGB 2013 for PGB 2015(EUR 3,8 Bil; YTM 5,12%)23.01.2013Tap PGB Oct 2017(EUR 2,5 Bil; YTM 4,89%)7.05.2013New PGB Feb 2024(EUR 3 Bil; YTM 5,67%)1050Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-132Y 5Y 10YFonte: Bloomberg71

7) Debt ManagementPortuguese Government bonds’ daily average turnover is graduallyreturning to pre financial assistance programme levelsPGB Daily Average Turnover[EUR mln]800Under Financial Assistance Programme7006005004003002001000Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13Over-the-counter OT Platforms OT OT 3M Moving AverageSource: BTEC, eSpeed, MTS and : IGCP, HRF reports by Primary Dealers72

7) Debt ManagementNon-domestic investors presented net buying flows in the last 12 monthsSelling/buying net flows by geography[EUR mln]2.5002.0001.5001.0005000-500-1.000-1.500-2.000BuyingSelling-2.500Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13Portugal Germany UK USA ex-PortugalSource: IGCP, HRF reports by Primary Dealers73

7) Debt ManagementFirst OT syndication since February 2011, marking the sovereign’sreturn to the international long-term bond marketsThe final order book exceeded EUR 12 billion via approximately 300 accountsEUR 2.5 bn OT Syndicated Tap due 16 October 2017Distribution by GeographyDistribution by Investor Type11%9%15%7%2%25%31%USUKOTHER EUROPEGER./AUS./SWI.ASIAPORTUGALOTHER24%10%4% 2%60%ASSETMANAGERSHEDGE FUNDSBANKSINSURANCE/PENSION FUNDSOTHERSSource: IGCP74

7) Debt Management10-year transaction marked by a high-quality bookNordics and French investors increased substantially their participationEUR 3 bn New OT Syndicated due 15 February 2024Distribution by GeographyDistribution by Investor Type7%10%7%4% 2% 2% 1%27%UKUSPORTUGALSCANDINAVIAFRANCEGER./AUS./SWI.12%7%6%7%51%ASSET MANAGERSBANKSINSURANCE/PENSION FUNDSHEDGE FUNDSITALY10%14%16%SPAINOTHEREUROPEASIA17%CENTRAL BANKSOTHERSOTHERSource: IGCP75

EUR billion7) Debt ManagementEFSM/EFSF maturity extensions significantly reduce the refinancingneeds in the transition period that follows the adjustment programmeRedemption profile of MLT debt (before EFSF/EFSM maturity extension)[EUR bln]242118EFSF original maturityEFSM original maturityIMFOther medium and long term debt151296302014 2018 2022 2026 2030 2034 2038 2042Source: IGCP76

EUR billion7) Debt ManagementThe EFSF loans extension increases the average maturity of the financialassistance programme from 11.2 to 13.3 yearsRedemption profile of MLT debt[EUR bln]242118EFSFEFSM original maturity (*)IMFOther medium and long term debt151296302014 2018 2022 2026 2030 2034 2038 2042(*) The average maturity of EFSM loans will be extended by 7 years. Individual loans approaching maturity might be rolled over more thanonce. It is therefore not expected that Portugal will have to refinance any of its EFSM loans before 2026.Source: IGCP77

EUR billion7) Debt ManagementEFSM loans extension will only occur at maturity, but rolling over this loans withoutexceeding 19.5 years further increases the programme average maturity to 15.8 yearsRedemption profile of MLT debt (simulation including new maturity of EFSM loans - still to be defined)[EUR bln]242118EFSFEFSM (*)IMFOther medium and long term debt151296302014 2018 2022 2026 2030 2034 2038 2042(*) The final maturity date of the EFSM loans in orange is still not defined (maturity extension will be defined when approaching originalmaturity of the loans), but it is not expected that Portugal will have to refinance any of its EFSM loans before 2026.Source: IGCP78

Amount Outstanding (EUR Bln)Average Maturity (Years)7) Debt ManagementStable market demand for bills: increasing outstanding and the maturityprogrammeHigher average maturity and opening of 12 and 18 months maturities[Portuguese bill programme]0,8200,70,6150,5100,40,350,20,1003M 6M 9M 12M 18M Average maturity, years (rhs)Source: IGCP79

7) Debt ManagementThe Financial Assistance Programme led to a change in public debtholders’ profile ...Public debt holders by geography[EUR mln, % of gross General Government debt]250.000200.00034% 35%150.00046%100.00075%73%62%19%29% 30%50.000038% 35% 37% 35%25%27%2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 MarResidents EU-IMF Non residents excl EU-IMFSource: Banco de Portugal80

7) Debt Management… and the weight of EU/IMF loans (33% by Sep-2013) offset thereduction of bondsPublic debt composition[EUR bln and % of total State debt]220200180174,9194,5203,816014012010080118,515%11%132,713%13%151,811%13%21%7%7%32%33%6% 6%9% 11%EUR 67 blnEUR 11 blnEUR 22 bln604069%69%70% 59%48% 46%EUR 93 bln200Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Set 2013PGB Other MLT Tbills Other ST Retail EU/IMF Other non-tradable debt TOTALSource: IGCP81


In actual terms , the net exports positive contribution more than offsets thenegative domestic demand in 2014Net External Demand contribution to GDP growth keeps growing at a healthy pace[GDP growth and Contribution, %]6420,8 1,42,41,90,60-20,0-1,6-2,3-4-2,9-3,2-6-82005 2006 2007 2008 2009 2010 2011 2012 2013 P 2014 PDomestic demand Net external demand GDPSource: Statistics Portugal, Ministry of Finance83

Exports to non-Euro countries increase at higher rates…Portuguese goods exports’ growth[yoy, %]393537283024232418201516 14 1513 131415141212152010m.a.2011m.a.88 8910786 677555 75743654322 000-10-1-2-2-3-3 -3-3-6-4-4-6-6-7-8Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13INTRA-EU EXTRA-EU TOTALSource: Statistics Portugal84

… gaining importance in total exportsWeight of extra-EU on Portuguese goods exports[%]38363432302826242220Jan-11 Abr-11 Jul-11 Out-11 Jan-12 Abr-12 Jul-12 Out-12 Jan-13 Abr-13 Jul-13Source: Statistics Portugal85

Portuguese goods imports have also changed considerably[Industry weight on the Portuguese goods imports, %]2122201617141314111112107978888456661 1 211 1 1 1 1322Chemicals(incl.Pharma.)Plasticas andRubberBase Metals Fish, Fruits,Veg.,Tobacoand WineMineralProductsCement,Ceramic andGlassWood andCorkFootwareand otherproductsPulp of Eoodand PaperTextileProductsVhicles andparts,AircraftElec. andMec.Machinery2000 2005 Aug-13Source: Statistics Portugal86

EmploymentProtectionmWorking timeArrangementsUnemp.InsuranceWageSettingLabour market reformsIncentive Before AfterGoalUnemployment BenefitsCapped at :• 38 months• 3x IAS• Min. contribution period 15mthsCapped at:• 26 months• 2,5x IAS with 10% reduction after 6months• Min. contribution period 12 months• Extension to Self employed (1)• Reduce risk of long term unemployment• Encourage earlier return to labourmarket• Reduce contribution period that givesaccess unemployment insuranceSeverancePayment• 30 days per year• 36 days for fixed-term contracts• Now : 20 days per year• Nov: 8-12 days• Cap: 12 months• Improve efficiency and eliminate labourmarket dualityUnsuitabilityand Extinctionof WorkPosition• Unsuitability only possible withintroduction of new technology• Extinction follow pre-definedseniority order• Elimination of the newtechnology requirement• Elimination of the pre-definedseniority order• Implement flexibility on labour marketsthrough effective mechanisms of internalflexibility within companiesOvertime• Maximum additional pay forovertime 100%• Compensatory time equal to 25%overtime• Maximum additional pay forovertime limited to 50%• Elimination of compensatorytime off• Reduce overtime costs, increaseflexibility in production cycle (peakperiods)Bank ofHours• Bank of hours negotiated throughcollective bargaining, capped at200 hours• Introduction of individual bank ofhours, capped at 150 hours• Collective bank of hours• Improve production capacity adjustmentto peak periods without increasingpersonnel costsHolidays andVacations• Vacations: up to 25 days• Holidays: 13 days• Vacations: up to 22 days• Holidays: 13 days• Improve productivityCollectiveAgreements• Bargaining made through tradeunions• work councils can negotiate incorporations with more than 500employees• Trade unions can delegate onworking councils in corporationsabove 150 employees• Reinforce firm-level bargaining andpromote efficiency(1) Unemployment benefit has been extended to certain self employed categories (+80% of wage needs to come from one employer )87

Framework ConditionsProduct Market ReformsOther reformsIncentive Before AfterGoalCorporateinsolvencycode•Less than 1% of insolventcompanies are able tosuccessfully restructure•New code based on theinternational best practices•Similar to US Chapter 11• Allows the removal from courts of aset of processes• More flexible and agile framework forthe recovery of viable companiesArbitrationlaw•Slow resolution of conflits withaccumulating backlog•New arbitration procedurebased on international bestpractices• Fast resolution of conflicts outsidecourt• Reduce backlogCompetitionandPropertyRights law• No specialized courts on thespecified subjects•Creation of a specialized court inProperty rights•Creation of a specialized court incompetition•Reinforces the PortugueseCompetition Authority’s•Harmonizes the framework with EUlawCode of CivilProcedure•Slow resolution of conflicts withaccumulating backlog•Empower judges to expedite cases;•Before court settlement;•Enforce statutory deadlines• Fast resolution of conflicts;• Reduce backlogJudicialRoadmap•Low usage of courts capacity•Low HR mobility•Slow resolution of conflicts•Full restructure of thePortuguese Judicial system• Reduction of the Court numbers• Streamline court structure• Speed up judicial processNew UrbanLease Act• Minimum contract duration of 5y• 6 months minimum to evict thetenant• Termination of the lease contractfor major renovation works with atleast 2 years of compensations• No minimum contract duration• 3 months as maximum time to evictthe tenant• Limited compensation: 6 monthlyrents• Provide for an extrajudicial evictionprocedure for breach of contract• Harmonize and simplify housing marketaccess• Foster labor mobility• Reduce incentives for housing loans• Increase incentives for renovation worksEnergy• Substantial mark-ups overproduction costs• Elimination of Power GuaranteeMechanism• Reduced costs under theordinary and cogeneration regime• Reductions in electricity costs withdifferent electricity generators expectedto be 1.8bn EUR• Improve competitiveness of producers88

5) Public FinancesIn initial 2013 budget, expenditure reduction measures amounted toEUR 2.7 bln excluding the reversion of half of the 2012 pay cutExpenditure reduction measures in initial 2013 budget[EUR mln]3.0002.500181162982.6991.0422.0001.5002891.000927- 1.6741.0255000Finances andPublicAdministrationSOEs Social Security Health Care Education andScienceOthersTotal expendituremeasuresReversion of 1/2of 2012 pay cutExpenditurereductionSource: Ministry of Finance89

5) Public FinancesDespite de 2013 tax hikes, the personal income tax in Portugal is stillbelow EU averageRevenue increase measures in initial 2013 budget[EUR mln]4.5003734.3124.000143863.9393.5003401002453.0002.8102152.5002.000Personalincome taxCorporateincome taxReal estate tax Excise tax Stamp duty tax CGAcontributionsOthersTotal revenuemeasuresReversion of1/2 of 2012pay cutRevenueincreaseSource: Ministry of Finance90

SOE included in the fiscal perimeter[Debt stock, EUR bn]2010 2011 1H2012Debt of SOE 43.5 46.4 44.0Included in Central Administration 19.4 21.9 23.7Included in Local and Regional Administration 1.0 1.0 0.8Outside the Fiscal Perimeter 23.1 23.6 19.5Financial Debt 41.2 44.2 42.0Financial Debt of the main SOE included in the perimeter 15.5 17.3 17.6REFER 6.0 6.5 6.8Metrop. Lisboa 3.8 4.0 3.9Metro do Porto 2.3 2.6 2.7Estradas de Portugal 2.0 2.6 2.9Parque Escolar 0.7 1.1 1.1RTP 0.6 0.4 0.1Source: UTAO91

Residual term has increased under the Financial Assistance ProgrammeModified duration and Average residual term[years]5,07,54,57,04,03,53,06,56,05,55,02,54,52,04,0Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13Modified duration (LHS)Average residual term (RHS)Source: IGCP92

Yield curvePortuguese secondary market yield curve[%]141210864202 3 4 5 6 7 8 9 1030/04/2012 25/06/2013 09/10/2013Source: Bloomberg93

Portuguese Government Bond Outstanding[EUR mln]SecurityOutstandingPGB 4 3/8 06/16/14 6,000PGB 3.6 10/15/14 7,810PGB 3.35 10/15/15 13,406PGB 6.4 02/15/16 3,500PGB 4.2 10/15/16 6,185PGB 4.35 10/16/17 8,583PGB 4.45 06/15/18 6,887PGB 4 3/4 06/14/19 7,665PGB 4.8 06/15/20 8,551PGB 3.85 04/15/21 7,510PGB 4.95 10/25/23 7,228PGB 5.65 02/15/24 3,000PGB 4.1 04/15/37 6,973Source: IGCP94

Web site: www.igcp.ptBloomberg pages: IGCPReuters pages: IGCP0195

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