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MNI (London)
--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. 
     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.
     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
     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. 
     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:
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