WASHINGTON (Reuters) – The worst of Portugal’s economic downturn could be over, though conditions remain challenging, Finance Minister Vitor Gaspar said on Saturday.
Portugal is in its worst recession since the 1970s, with unemployment in double digits and its government locked out of financial markets. It has received a 78 billion euro bailout, and the government expects the economy to contract by 3.3 percent slump this year, swinging to meager growth of 0.3 percent in 2013.
“If you look at conjunctural indicators, the latest available indicators suggest the pace of decline may have eased during or towards the end of the first quarter,” Gaspar said in an interview.
“We are on track” to achieve Lisbon’s economic forecasts, he said. “Or let me put it another way, the evidence we see is not inconsistent with being on track, which is more cautious.”
Such a path would be a relief to financial markets, with some investors concerned that Portugal will go the way of Greece and need additional bailout money. Yields on its 10-year sovereign debt shot above 17 percent in late January but now are trading around 11.69 percent.
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Gaspar ticked off a series of encouraging signs: tax collections are “unimpaired” despite the downturn, the current account deficit is narrowing, and bank credit remains available even as bank deleveraging progresses.
“Adjustment in some dimensions is progressing much faster,” he said.
But Gaspar said the improvements he is seeing suggest there is “no evidence” his country is getting sucked into that cycle. “It is clear in my mind while that is conceptually possible, it does not apply to Portugal,” he said.
Critical is the mix of spending cuts, tax increases and structural reforms and balancing the pace of fiscal consolidation with growth.
Portugal has relied two-thirds upon spending cuts, which Gaspar described as the level that was politically feasible.
“The political process is prominent and key to this process,” he said.
Separately on Saturday, the chief of the International Monetary Fund, Christine Lagarde, said that a review of the program that Portugal negotiated with the IMF “concluded that the program was on track.”
The IMF’s mission chief in Portugal, Abebe Selassie, earlier in April warned that Portugal might have to back away from deficit targets if economic conditions were to worsen, especially given a mild recession in the euro zone where Portugal sells most of its products.
“In that case, we think that chasing after fixed nominal deficit targets may not be the best policy,” Selassie said.
However, Gaspar said he was encouraged that recent European Commission revisions to growth forecasts lowered the outlook for Portugal by less than for the rest of the euro zone.
Portugal’s current account deficit narrowed by 35 percent in January from a year earlier, and data is due on Monday. Data on business confidence showed the first increase since late 2010, edging up to -4.8 in March from a record low of -4.9 in February, and consumer confidence rose for a second straight month in March.
(Editing by Leslie Adler)