Notes on the 2nd Supplementary Budget and other recent developments
Notes on the 2nd Supplementary Budget and other recent developments

On August 28th, the 2nd Supplementary Budget was presented, ensuring compliance with
the 4% of GDP deficit target for 2014, down from 4.9% in 2013 (under ESA1995)

The effects of negative Constitutional Court decisions and other identified pressures are
compensated by an upward revision of tax revenue, a better Social Security balance and
overall expenditure control

In 2014, GDP is expected to expand by 1%, while the unemployment rate should drop to
14.2% from 16.2% in 2013, according to the revised macroeconomic scenario

GDP posted a positive growth rate yoy for the 3rd consecutive quarter in 2014 Q2, with
capital expenditure (GFCF) showing signs of further improvement, while unemployment
declined to 13.9% in the same period, on the back of strong job creation

According to the budgetary outturn until August, the Budget execution is on track, as the
deficit declined €0.8 bn over the same period last year

IGCP has issued a syndicated 15-year bond, the first since 2008, at a reoffer yield of 3.92%
Economic recovery in 2014 more reliant on domestic demand
A gradual acceleration of economic activity is projected for the medium-term.
In the 2nd Supplementary Budget, GDP growth is estimated to stand at 1.0%
(vs 0.8% in the initial Budget (Oct 2013) and 1.2% in the Fiscal Strategy
Document (Apr 2014)). Moreover, growth composition changed substantially:
exports growth is now expected to slow down due to less robust external
demand, but this is compensated by the recovery in domestic demand. Private
consumption has stabilized on the back of improved labor market conditions. In
2014Q2, unemployment rate dropped to 13.9%, after peaking at 17.5% in
2013Q1. Investment is showing evidence of bouncing back, with acquisition on
equipment and machinery leading the uptrend.
Despite the less favorable evolution of net external demand, the current and
capital account is expected to remain in surplus, standing at 1.3% of GDP over
2014 (from 1.9% in 2013).
Growth composition is
now different than
forecasted in April:
i) exports growth is now
expected to slow down
namely due to less robust
external demand …
ii) … but this is
compensated by stronger
private consumption
growth, on the back of
better labor market
conditions
Forecasts for the
unemployment rate
decreased 3.5pp vis-à-vis
the initial Budget (Oct13) and 1.2pp compared
to the Fiscal Strategy
Document (Apr-14)
Source: Ministry of Finance, 2nd Supplementary Budget
September 29, 2014
1
Notes on the 2nd Supplementary Budget and other recent developments
In 2014 Q2 economic recovery gathered traction as GDP grew 0.3% qoq (under
the new ESA 2010 rules), mainly reflecting an increase in exports. The recent
rebound in exports has partially compensated the adverse GDP performance in
2014Q1 (-0.5%), which was negatively affected by some one-off factors,
namely the temporary shutdown of the car factory Autoeuropa and the main oil
refinery in Portugal for maintenance reasons.
In yoy terms, GDP grew 0.9% in 2014Q2, the third positive yoy growth rate in
a row, for the first time since 2010. Domestic demand gave a positive
contribution (1.8pp), driven mainly by private consumption (1.1pp).
GDP posted a positive
growth rate yoy for the
3rd quarter in a row
Investment is also showing encouraging signs of improvement, as expenditure
in other machinery and equipment was positive for the 4th consecutive quarter
and the negative contribution from construction is declining.
Gross Fixed Capital Formation (contributions to yoy growth, %)
12
8
4
2,3
0,4
1,3
0
2,3
-4
-3,5
-8
-7,2
-12
-6,0
-7,3
-10,4
-12,7
-16
-13,1
-13,2
-15,2
-15,8
-17,7
-20
-19,3
-24
2010.III
Investment is showing
signs of improvement,
with GFCF growing 2.3%
yoy, on the back of
investment in machinery
and transport equipment
2011.I
2011.III
2012.I
2012.III
2013.I
Other machinery and equipment
Construction
Gross fixed capital formation
2013.III
2014.I
Transport equipment
Others
Source: Statistics Portugal (GDP under new ESA 2010 rules)
High-frequency indicators are showing mixed signs, although the overall trend
is positive:

The activity coincident indicator (BdP), which traditionally shows a close
relationship with GDP, has turned negative since July (-0.6% in August)
after peaking at +0.9% in the turn of the year. However, the private
consumption coincident indicator is still running at a positive pace (1.2% in
August), close to the peak of 1.6% observed in April and May.

Confidence indicators (BdP) also seem to have reached a plateau since Q2,
after recovering steadily over the past couple of years from the trough
reached in late 2012.

Industrial production is showing signs of a positive performance and retail
sales keep a steady improvement, with the yoy growth rate (12m MA)
turning positive since April, for the first time since late 2010.
Industrial production
Retail sales
While the activity
coincident indicator has
recently turned negative
…
… hard data present
evidence of a positive
performance of the
industrial sector and an
acceleration of private
consumption
6
10
4
5
2
0
0
-2
-5
-4
-10
-6
yoy (%)
-15
-8
12m MA yoy (%)
yoy (%)
12m MA yoy (%)
-10
-20
May-07
May-08
May-09
May-10
May-11
May-12
May-13
May-14
-12
Aug-07
Aug-08
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Source: Statistics Portugal
September 29, 2014
2
Notes on the 2nd Supplementary Budget and other recent developments
The contribution of net external demand to real GDP growth has turned
negative over the 1st half of 2014, as imports growth has accelerated (+4.8%
yoy in Q2) and exports performance softened (2.4% yoy in Q2).
This translated into a deterioration of the balance of goods and services, from
about €1.6 billion in Jan-Jul 2013 to €0.7 billion in Jan-Jul 2014, according to
BdP figures. Over the same period, the current account turned negative, from
€0.5 bn to -€1.0 bn.
The current account
turned negative in the
first 7 months of 2014
Again, this is mainly explained by a stronger imports growth (+4.9% yoy in
Jan-Jul). Exports are still posting a positive performance, but at a slower pace
(+2.0% yoy), with the main contribution coming from the services sector
(+4.9%), as tourism is growing around 10%. Exports of goods have shown a
less robust performance, especially in March through May, but figures from
June and July have improved.
Exports (yoy% 3m MA)
Imports (yoy% 3m MA)
30%
30%
20%
20%
10%
10%
0%
0%
-10%
-10%
Goods
-20%
Goods and services
-30%
Goods
-20%
Services
Exports growth rate has
declined and is now
relying more on the
services sector
Services
Goods and services
-30%
Source: Banco de Portugal (Balance of Payments statistics; in nominal terms)
On the other hand, FDI is showing encouraging signs, with net FDI increasing
more than €6.8 bn in Jan-Jul over the same period last year. Gross FDI has
been highly concentrated in the financial and insurance sector and mainly
directed from EU countries and Brazil.
The unemployment rate declined 1.2pp in Q2 to 13.9%, after peaking at 17.5%
in early 2013. Importantly, the decline of unemployment over Q2 was
exclusively based on job creation (+2.0% qoq increase in employed
population), as the labor force increased over the same period (+0.5% qoq).
In yoy terms, employment growth rate continued to accelerate, standing at
+2.0%, after 1.7% in Q1. This is the3rd consecutive yoy increase, confirming
the reversion of a cycle of about 5 years of successive declines in employment.
Unemployment rate (% labor force)
20
3
17,5
18
15,1
13,9
16
14
Employment variation
1,7
0,7
2
1
2,0
Unemployment rate has
declined 3.6pp over the
past year, resulting from
strong job creation
0
12
-1
10
-2
8
6
-3
4
-4
2
-5
0
-6
2008Q2
1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14
qoq (%)
yoy (%)
2009Q4
2011Q2
-5,0
2012Q4
2014Q2
Source: Statistics Portugal
September 29, 2014
3
Notes on the 2nd Supplementary Budget and other recent developments
It is also worth noticing that employment creation is coming from full-time,
permanent jobs, and mainly employing high-skilled labor force:

Employment for people with higher education is growing by 16.8% yoy,
vis-à-vis basic education (-5.8%) and secondary and post-secondary nontertiary education (+8.2%);

permanent contracts have grown 4.9% yoy, while temporary jobs and
other contractual arrangements increased 2.4% and 3.5%, respectively,
and self-employed declined;

full-time workers are growing 4.1% yoy, whereas the number of part-time
workers decreased 9.8%.
Job creation is
concentrated in full-time,
permanent jobs, and is
mainly employing highskilled labor force
Inflation has remained in negative territory for the 7th consecutive month in
August. Harmonized yoy inflation (HICP) stood at -0.1% (preliminary
estimate), up from -0.7% July, while CPI yoy inflation stood at -0.4% (-0.9%
in July), and is expected to be 0% over 2014 on average.
The trend has followed closely the general downward trajectory observed in the
euro area, although the inflation differential between Portugal and the euro
area remained negative (between 0.5pp and 1.0pp) since early 2013, reflecting
unit labor costs trends and some recovery of price competitiveness. At this
stage, however, there is no evidence that consumers and businesses are
putting off their spending on account of the consumer prices downtrend.
Inflation Rate (yoy, %)
5,0
4,0
Inflation has shown a
steady downward
trajectory in the past 3
years, following the
general euro area trend
and domestic
competitiveness gains
3,0
2,0
1,0
0,0
-1,0
Euro area (18 countries)
Portugal
-2,0
-3,0
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Source: Eurostat
September 29, 2014
4
Notes on the 2nd Supplementary Budget and other recent developments
2014 Fiscal targets still on track, despite negative CC decisions
Budget execution for the end of 2014 is on track, given the budgetary outturn
in the year to August.
In the first eight months of the year, the General Government (GG) deficit, on
a cash basis, reached €4.7 bn, about €0.8 bn lower than in 2013.
General Government (GG) balance (EUR million, yoy change)
2.000
6.000
636
0
121
5.000
-48
-846
-273
-2.258
-1.442
-2.000
-1.009
-2.548
4.000
-1.738
-4.043
-4.000
-4.192
-6.000
-8.000
3.000
-4.686
-5.455
-5.435
-5.823
515
-7.530
769
729
595
1.607
291
225
The budget execution is
on track, with the deficit
declining €769 mln until
August (target decline for
the year of €1.6 bn)
2.000
1.000
-9.137
-10.000
0
-149
-12.000
Jan
Feb
Mar
Apr
May
Jun
YoY Change (right scale)
-389
Jul
-1.000
Aug
Sep
2014
Oct
Nov
Dec
2013
Source: Ministry of Finance
Over this period, overall expenditure increased 1.7% yoy (primary
expenditure +0.8%), on the back of higher compensation of employees
(+6.9%). This performance is explained by the reversion of wage cuts since
June (as determined by the Constitutional Court ruling on May 30th) and by
the payment of holiday bonuses in June/July (while in 2013 it was paid in
November).
On the other hand, overall revenue increased 3.9% yoy, on the back of a very
strong fiscal revenue performance (+7.1%).
On August 28th, the Government submitted the 2nd Supplementary Budget to
Parliament, restating its commitment to achieve the 4% of GDP deficit target
for 2014, while the primary balance is expected to be in surplus (+0.3% of
GDP) for the first time since 1997.
The structural deficit is expected to decline from 2.6% of potential GDP in
2013, to 2.1% in 2014, thus complying with a structural adjustment of 0.5pp.
Overall balance
Overall balance excluding one-offs
Structural overall balance
OVERALL BALANCE
2009
2010
-10,2
-9,8
-10,2
-9,1
-8,9
-8,6
2011
-4,3
-7,3
-6,2
2012
-6,4
-5,8
-3,5
2013
-4,9
-5,3
-2,6
2014
-4,0
-4,0
-2,1
Primary balance
Primary balance excluding one-offs
Structural primary balance
PRIMARY BALANCE
2009
2010
2011
-7,3
-7,0
-0,3
-7,3
-6,3
-3,3
-6,1
-5,8
-2,1
2012
-2,1
-1,5
0,8
2013
-0,6
-1,0
1,7
2014
0,3
0,3
2,3
The 2nd Supplementary
Budget maintains the 4%
target for the overall
deficit with no need for
additional fiscal
consolidation measures
Source: Ministry of Finance
September 29, 2014
5
Notes on the 2nd Supplementary Budget and other recent developments
Taking into account the Constitutional Court’s rulings on public servants’ wage
cuts, as well as the ongoing budget execution and the latest data on economic
activity, the executive concluded that the identified pressures are offset by the
upward revision of fiscal revenue, larger Social Security surplus and overall
expenditure control.
Therefore, the Government ensured that the target of 4% for the 2014 deficit
can still be met with no need for additional fiscal consolidation measures (apart
from the reinstatement of the wage cuts that were in place between 2011 and
th
2013 and which were deemed constitutional on August 14 ).
Negative impact of
Constitutional Court’s
rulings in 2014 budget
execution was
compensated by a
stronger fiscal revenue
and better Social Security
balance
On the revenue side, the main revision occurred in the VAT revenue and, to
less extent, in the Personal Income Tax, based on the improvement in labor
market conditions, the economic activity recovery and the crackdown on tax
evasion and underground economy.
On the expenditure side, the main changes reflect the revisions in
compensation of employees, which increased mostly due to the impact of the
CC ruling of May 30th, and the increased funds for severance payments arising
from the extension of the voluntary separation scheme. On the other hand, the
lower level of unemployment (vis-à-vis the initial projection) compensated part
of this increase.
IGCP expects to have pre-financed about 2/3 of 2015 borrowing needs by
year-end
On September 3rd, IGCP held a syndicated deal of PGBs maturing in February
2030, raising €3.5 bn out of a final order book that exceeded €8 bn.
This was the first 15-year syndicated transaction since 2008 and the first EURdenominated syndication since exiting the official EU-IMF program in May 2014.
The deal was priced at a coupon of 3.875% and a spread of 235 basis points
over mid-swaps, for a reoffer yield of 3.923%. The transaction enjoyed
particularly strong take-up from international real money investors, with
prominent presence of US, UK, and Scandinavia.
IGCP placed the first 15year syndicated bond
since 2008, with a YTM
below 4%
€3.5 bn syndication of PGB 3.875% 15 February 2030
5,9
3,9
5,7
0,3
North America
7,2
32,2
1,4 0,3
Asset Managers
13,0
UK
Inssurance/Pension Funds
Scandinavia
8,4
Banks/Private Banks
GER./AUS./SWI.
Other Europe
13,2
Hedge Funds
Portugal
13,0
Central Banks
Spain
Other
29,1
66,4
Others
Source: IGCP
This issuance adds to €11.7bn of MLT financing previously executed in the
current year, which broadly cover the initially projected financing needs for the
year.
September 29, 2014
6
Notes on the 2nd Supplementary Budget and other recent developments
On the other hand, the adoption of a resolution measure to BES impacted
negatively to the State’s borrowing needs, as the subsequent capitalization of
Novo Banco by the Resolution Fund was partly financed by a State loan
amounting to €3.9 bn. However, the net impact on borrowing needs was only
€2.4 bn, since IGCP’s projected financing needs (based on the initial Budget)
already included €1.5 bn destined to the capitalization of the Resolution Fund.
Moreover, this increase in the State’s financing needs was compensated by the
reimbursement of CoCo loans by BCP ahead of schedule (€1.85 bn) and an
increase of the estimate of retail issuance to €3.5bn (€3bn already executed by
August), implying no significant change in IGCP’s estimated year-end deposits.
The increase in financing
needs stemming from
BES resolution plan was
compensated by the
anticipation of the
reimbursement of CoCos
by BCP and an increase of
the estimate of retail
issuance for 2014
State’s net financing needs during the year are now projected to stand at
€16.1 bn. Gross borrowing requirements stand at €29.6bn, given MLT debt
redemptions of €13.5 bn (which already include buybacks on the PGB maturing
in 2015).
Taking into account:

the stock of deposits at end-2013 (€15.3 bn);

MLT debt market issuance already executed (€15.2 bn);

EU-IMF loans already disbursed (€4.8 bn);

and retail issuances already executed by end-Aug (€3.0 bn);
the financing needs in 2014 are fully covered and some pre-financing for 2015
has already occured.
State Treasury borrowing needs and sources (€ billion)
State borrowing requirements
Net financing needs
Overall deficit *
Private sector banks' recapitalizations
Other net acquisitions of financial assets **
Privatizations (-)
MLT Redemptions
Tbonds (PGB + MTN)
IMF
State financing sources
Use of deposits
Financing in the year
Executed
EU-IMF
Tbonds (PGB + MTN)
Tbills (net)
Retail debt (net)
Other flows (net)
To be executed
EU-IMF
Tbonds
Tbills (net)
Retail debt (net)
Other flows (net)
Additional financing needs
Total additional financing needs 2015-18
State Treasury cash position at year-end
of which: deposits for bank recap
2013 E
24,3
11,1
7,7
1,1
3,8
-1,5
13,1
13,1
2014 P
29,6
16,1
7,4
2015 P
15,6
7,1
4,3
2016 P
11,6
-0,9
2,7
2017 P
16,7
1,8
1,3
2018 P
16,6
1,4
0,0
8,8
-0,1
13,5
13,5
2,7
-3,6
0,5
1,4
24,3
-0,4
24,6
29,6
5,7
23,9
8,6
8,0
0,5
15,6
7,1
8,5
12,5
9,9
2,6
11,6
0,0
11,6
14,9
11,3
3,6
16,7
0,0
16,7
15,2
11,0
4,2
16,6
0,0
16,6
10,0
12,0
1,3
1,1
0,3
4,8
15,2
16,6
53,3
2,5
2,5
3,0
0,4
1,5
-1,5
0,5
-
-
8,5
11,6
16,7
15,3
6,4
9,6
2,5
2,5
2,5
2,5
2,5
2,5
2,5
* State sub-sector cash deficit in 2012-14. Projection for GG deficit in 2015-18 (Fiscal Strategy
Document, Apr 2014).
** Includes refinancing of other public entities (namely SOEs and regions), as well as ESM
participation, capitalization of the resolution fund, and redemption of CoCos.
Financing needs in 2014
are already covered and
2/3 of 2015 are expected
to be financed by end2014
Source: IGCP
Given additional retail issuance (€0.5bn), a final EFSM disbursement (€0.4mln)
to be received later this year, and additional MLT financing, IGCP plans to
reduce the stock of Tbills and have, by year-end, around €10 bn (from which
€2.5 bn are still earmarked for bank recap needs) to preemptively cover part of
2015’s borrowing needs(circa €16 bn).
September 29, 2014
7
Notes on the 2nd Supplementary Budget and other recent developments
Links related to the 2nd Supplementary Budget (only in PT):

Report

Ministry of Finance statement
Further information on the Portuguese economy can be obtained from:

Ministry of Finance
www.portugal.gov.pt/en/the-ministries/ministry-of-finance

Banco de Portugal
www.bportugal.pt

Statistics Portugal
www.ine.pt

Public Finance Council
www.cfp.pt

UTAO (only in PT)
Website

Portugal Economy Probe
www.peprobe.comi
Disclaimer:
The information and opinions contained in this document have been compiled or arrived at
from sources believed to be reliable and in good faith, but no representation or warranty,
express or implied, is made as to their accuracy, completeness or correctness.
All opinions and estimates contained in this document are published for the assistance of
recipients, but is not to be relied upon as authoritative or taken in substitution for the
exercise of judgment by a recipient and, therefore, does not form the basis of any contract or
commitment whatsoever.
IGCP does not accept any liability whatsoever for any direct or consequential loss arising from
any use of this document or its contents.
Tel: +351 217923300
Fax: +351 217993795
E-mail: [email protected]
September 29, 2014
Web site: www.igcp.pt
Reuters pages: IGCP01
Bloomberg pages: IGCP
8