MNI INTERVIEW: Portugal To Weather APP End, Hikes: BdP Correia

--Rate Hike Impact On Portugal Debt Limited, Transmission "Slow" 

--Prudent Fiscal Policy Needed For The Longer Term

By Silvia Marchetti

     ROME (MNI) - Portugal's economy is in a good state to weather the European

Central Bank's ending of its asset purchase program and subsequent interest rate

hikes, provided the public debt reduction path is pursued with determination,

Isabel Horta Correia, Head of Economics and Research at Banco de Portugal, told

MNI in an interview.

     Correia noted how progress made in balancing fiscal and growth targets

allowed for significant headroom when the ECB's normalisation phase kicks in,

although the country's high public debt remained a vulnerability. 

     "The current Portuguese public debt structure allows for some resilience if

an interest rate shock occurs," Correia said. 

     The end of the APP, set for December, is seen as less critical than the

first hike in interest rates, even though not due before late Q3 2019. 

     "Available simulations show that a rise in interest rates by 100 bps would

imply an increase of interest payments, essentially through new issuance,

between 0.1 and 0.2 pp of GDP in the first year, and an additional 0.1 pp in the

following years. Overall, the full transmission, although depending on the

magnitude of the shock, would be relatively slow," she said. 

     --SOME VULNERABILITIES

     But in any case, she warned, "the fact that Portugal is a small open

economy with a high public debt ratio contributes to increasing the

vulnerability of the country". 

     According to Correia, the public debt ratio, despite being on a sustained

declining trend path thanks to the ongoing fiscal adjustment underway, remains

very high and could expose Portugal to externally-fed sovereign risks. 

     In its updated projections, BdP predicts GDP to grow 2.3% this year and

1.9% in 2019, while public debt, despite having fallen from 131.7% of GDP in

2017 to a current 126.4%, still shows some monthly upward fluctuations. In May,

debt rose modestly, up E0.3 billion to E250.3 billion.

     --NO NORMALISATION CONCERNS

     Correia acknowledged that Portugal's debt spreads had been significantly

contained by the ECB's accommodative policy stance, but brushed away concerns

that normalisation could act as a potential setback to growth and fiscal

targets, provided there was a continued effort to boost both fronts.

     Portugal had indeed benefitted from the ECB's measures but has also done

its homework in adjusting public finances, noted Correia. 

     The normalisation of debt spreads witnessed recently, particularly in

comparison to other southern European periphery states, was, in large part, due

to the prudent fiscal policy and structural reforms carried out by Lisbon's

government. 

     The only way therefore to avert risks from any post-APP normalisation phase

is to further boost fiscal efforts with a multi-year agenda, said Correia. 

     --GREATER REFORM NEEDED

     More still needs to be done to curb public debt and reassure investors, and

the only way to do so is by means of a long-term "prudent fiscal policy" that

takes into account a potentially less favourable pan-Eurozone outlook post-APP

and rate hikes. 

     Correia stressed that the ECB's pledge of continued accommodative support

to the bloc remained crucial, even once normalisation kicks in.

     "The continuation of an accommodative stance in monetary policy is

beneficial for the normalisation of credit conditions and the financing of

productive investment in the tradable sectors," she said. 

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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