The Portuguese have been warned: recovery is on track, yes — but it’s still not enough.
Portugal is often cited as the shining example of German-prescribed austerity policies in the eurozone, and officially exited its €78 billion bailout program last year.
The International Monetary Fund, which contributed €27.38 billion of that assistance and has been repaid a fifth of it already, has released a report putting pressure on Lisbon to avoid the temptation to drop its guard in the run-up to October’s elections.
“Portugal’s economic recovery remains on track in 2015, boosted by rising exports and consumption, together with a recent upturn in investment,” said the monitoring report.
However, it also casts doubt on the effectiveness of some reforms implemented by the current government, warning that “the public and private debt overhang is likely to constrain medium-term growth prospects as favorable cyclical factors weaken.”
Portugal has to reduce its debt and show a fiscal deficit of no more than three percent of GDP this year. The government has targeted a deficit of 2.7 percent, but the IMF is worried that without additional spending restraints, the deficit could reach 3.2 percent.
Portugal has largely managed to avoid turbulence related to the threat of a Greek exit from the euro, thanks partly to external factors such as favorable commodity prices, low interest rates and a weaker euro, said the IMF.
But if Lisbon does not intensify the reform drive, its relative immunity to the Grexit crisis could end — hence the IMF’s warning to whichever government takes over after the October 4 elections.
“With increased financial market volatility in the context of developments in Greece, it is crucial to ensure that investors retain confidence in the direction of economic policies,” it wrote, proposing a renewed effort on structural reforms such as more flexibility in the labor market.
The center-right coalition of Prime Minister Passos Coelho, who dismissively described the Greek government’s reform plans as a “fairytale,” will have a hard time selling this to the electorate.
Socialist challenger António Costa promises to reverse what he calls an “obsession with austerity.”