Portugal : Eleventh Review Under the Extended Arrangement, and Request for Extension of the Arrangement and Waivers of Applicability of End-March Performance Criteria

EXECUTIVE SUMMARY The near-term outlook continues to improve and program implementation remains on track. Activity and employment have turned out better than expected, supported by reduced economic uncertainty and benign market conditions in the region. The authorities have scaled up their pre-financing strategy, successfully tapping the bond market at lengthening maturities. The end-December 2013 quantitative PCs were met by a significant margin, supported by strong revenue performance, and the authorities are on track to meet the end-March 2014 targets. While risks to the near term outlook are now more evenly balanced, Portugal still faces important challenges. The authorities have built a strong track record of program implementation. Nevertheless, sustained fiscal discipline, in the face of still significant legal and other risks, remains critical for debt sustainability and market confidence. Further structural reform efforts are also needed to support the ongoing rebalancing of the economy. These need to be complemented by stepped up efforts to complete balance sheet repair of banks and advance corporate debt restructuring. Discussions focused on program implementation and the authorities’ medium- term strategy. The review assessed progress with budget implementation, the authorities’ medium-term fiscal commitments, and the status of ongoing reforms under the program. Discussions were initiated on the main pillars of the medium-term strategy to support growth, anchor debt sustainability, and secure durable market access. Staff supports the authorities’ request for completion of the eleventh review, for extension of the arrangement, and for waivers of applicability of the end-March PCs. The purchase released upon completion of this review would be in an amount equivalent to SDR 760 million