portuguese economy and the banking sector

Banco de Portugal

VÍTOR CONSTÂNCIO

January 2007

TheThe economyeconomy and and thethe bankingbankingsector: sector: recentrecent developmentsdevelopments

• Moderate but consistent economic recovery

• Consolidation of Public Finance

• Banking and Financial Stability

• Structural reforms and long term economic potential

Bank of Portugal’s Economic Forecasts

Growth rates (%)2005 2006(e) 2007

GDP 0.4 1.2 1.8

1.50.00.01.1

6.2

3.5

Inflation rate (HICP) 2.1 3.0 2.3 2.4

2.1

1.2-0.2-3.10.1

9.3

4.3

1.71.9-2.60.6

1.0

1.6

2008

Private Consumption 1.7Public Consumption 0.3Gross Fixed Investment 3.9

Exports of goods and services 6.1

1.9

4.7

Domestic Demand

Imports of goods and services

GDP growth rates

-3

-2

-1

0

1

2

3

4

5

96 97 98 99 2000 2001 2002 2003 2004 2005 2006 2007 2008

Euro Area

Portugal

Differential

Growth rates of GDP, Domestic Demandand External Demand

-14

-9

-4

1

6

11

16

90 91 92 93 94 95 96 97 98 99 2000 2001 2002 2003 2004 2005 2006 2007 2008

Domestic demand

GDP

External demand

External netborrowing in %

of GDP

INVESTMENT COMPONENTS: CONTRIBUTION TO GDP GROWTH (in p.p.)

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

2000

2001

2002

2003

2004

2005

2006

(e)

2007

(p)

2008

(p)

CorporatePublicHousingTotal (%)

INVESTMENT BY SECTOR (in % of GDP)

0

4

8

12

16

20

24

2819

95

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

(e)

2007

(p)

2008

(p)

0

2

4

6

8

10

12

14

Corporate (lhs)Public (rhs)Housing (rhs)Total (lhs)

EXPORTS AND EXTERNAL DEMAND

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2000

2001

2002

2003

2004

2005

2006

(e)20

07(p)

2008

(p)

Market shareExports of goods and servicesExternal demand

80

90

100

110

120

130

140

150

160

170

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

(Source: BP, AMECO and OECD)

80

90

100

110

120

130

140

150

160

170

ULC's (total)

CPI

Export prices

ULC's (manufacturing)

(a): 13 countries until 1999 and 22 countries after 1999.

Competitiveness: real exchange rates in terms of relative CPI, ULC’s and relative export prices (a) (1985=100)

Inflation and ULC’s differentials in relation to the euro area(in %)

Average of 1999-2005 CumulativeInflation ULC'S Inflation ULC'S

Portugal 1 2.1 6.2% 13.3%Greece 1.2 1.3 7.4% 8.1%Spain 1.1 1.5 6.8% 9.3%Italy 0.3 1 1.8% 6.2%Irleand 1.5 0.8 9.3% 4.9%Belgium -0.1 0 -0.6% 0.0%Germany -0.6 -1.1 -3.5% -6.4%France -0.2 -0.2 -1.2% -1.2%Austria -0.3 -0.8 -1.8% -4.7%Finland -0.4 -0.2 -2.4% -1.2%

Export quotas in U.E.-15 (in %)

0

1

2

3

4

5

6

7

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Spain

Portugal

Italy

Greece

China

10NM

(Source: BP based on Eurostat Comext)

Export quotas in U.E.-15 (Index 1995=100)

50

75

100

125

150

175

200

225

250

275

300

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Spain

Portugal

10 N. Members

Italy

China

Greecea

(Source: BP based on Eurostat Comext)

Structure of Exports

1986-1989 2005 Variação

Food, wood products, cork, paper, leather, textiles , clothing, footwear 61,1 % 35,0% -26,1 p,p

Machinery, optical & precision, transport equipment, rubberproducts, chemical, energy, plastics 28,0 % 48,4% +20,4 p,p

16,6% +5,7 p,p10,9 %Other



• Banking and Financial Stability


Public Administration AccountsIn % of GDP

Annualgrowthrates1995-20056.67.1

6.7

7.1

9.5

9.47.17.0

5.7-2.14.3

5.6

Capital expenditures 5.3 4.5BUDGET DEFICIT -5.5 -6.0

GDP 100 100

1995 2005

39.6 41.936.4

47,9

43,4

22.1

18.01.614.6

4.02.7

Tax receipts 33.5

of which: to households 13.2

Staff expenditures 13.6

Interest payments 6.3

Total Expenditure 45

Current transfers 16.2

33.5

1.3

3.7

Total Revenues

Current expenditures

to firms

Intermediate consumption

Macroeconomic policy

02468

101214161820

-3 -2 -1 0 1 2Primary deficit (cyclically adjusted without one-off measures)

Shor

t ter

m in

tere

st ra

t 1990

1995

1997

1999

20012002

1993

2003

1992

1991

2000

20042005 2006

Variation of primary deficits, revenues and expenditures, cyclically adjusted and without one-off measures

-1.5 -1 -0.5 0 0.5 1 1.5

2006

2005

2004

2003

2002

2001

2000

Var Pr Def Var revenues Var expenditures



• Banking and Financial Stability– Financial Sector Assessment Program with the IMF


IMF Financial System Stability Assessment

«Overall, Portugal’s financial system is sound, well managed and competitive, with shorter-term risks and vulnerabilities quite well contained for now, and with the system buttressed by a strong financial policy framework. Despite being relatively small and concentrated, Portugal’s banking system generally compares well with other European Union (EU) countries in terms of efficiency, profitability, and asset quality, with solvency also close to European levels.»

…..«Regulation and supervisionSupervision of financial institutions is active,

professional, well organized, and highly compliant with international standards.»

Source: IMF «Portugal: Financial System Stability Assessment », September 2006

Compliance with Basel Core Principles for EffectivweBanking Supervision

Portugal UK Italy Holland France SpainSeptember

2006July2003

May2004

September2004

June2005

June2006

Compliant 28 26 24 24 29 26LargelyCompliant 2 4 5 6 1 4MateriallyNonCompliant 0 0 0 0 0 0

Non Compliant 0 0 1 0 0 0

Source: IMF several Financial System Stability Assessment Reports

2004 2005

Capital Adequacy Ratio 10.2% 11,3%

Tier 1 Capital 7.0% 7.1%

109.1%

Liquid Assets to short term liabilities– Domestic Banks

127.3 % 126.5%

1.6 %

2.1%

0.6%

12.5%

99%

1.5%

2.2%

1.0%

16.9%

Liquid Assets to short term liabilities– total system

NPLs to gross loans (% do total)

Net Interest Margin (% of Assets

Return on Assets (ROA)

Return on Equity (ROE)

Banking Sector Indicators


Capital Adequacy ratio (%)

14.1

11.811.3

11.711.1

10.8

9.29.5 9.8 10.0

10.4

10.2

11.3

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Portugal: Banking System Indicators, 2005


CREDIT GROWTH (annual rates in %)

05

10152025303540

Dez-95

Dez-96

Dez-97

Dez-98

Dez-99

Dez-00

Dez-01

Dez-02

Dez-03

Dez-04

Dez-05

Dez-06

Total HouseholdsHouseholdsHousingHousing

Non-financialfirms

Source: European Commission (2006) “The EU economy 2006 review: Adjustment dynamicsin the euro area”

Scenario 1 ofDisruptive adjustment

Scenario 2 of Cyclicalasynchrony

Deviations in p.p from the baseline scenario

2006 2007

-1.7 -1.7

-1.5

0

0

1.1

-1.2

+24

-30

1.4

2008 2006

-1.4 -1.0

1.4

0

0

-2.6

-1.5

0

0

0.2

2007

2008

Real GDP growth -1.6

3-month interest rates 1.9 2.5

Dollar/euro exchange rate 0 0

0

Total credit -5.1 -5.9

-1.5

0Stock prices

Stress Tests Scenarios




• Banking and Financial Stability– Financial Sector Assessment Program with the IMF


1998 2003

General Index of product marketsPortugal 2.2 1.6

OECD average 2.1 1.5

Index of barriers to trade and investment

Portugal 1.2 0.8

OECD average 1.5 1.0

Portugal 1.8 1.3

Index of barriers to entreperneuship

1.9 1.5OECD average

Regulation Indexes of OECD

Source: Conway, P. Veronique Janod and G. Nicoletti (2003) «Product and market regulationin OECD countries: 1998 to 2003» OECD WP nº 419

Portugal: Comparison with OECD average (lower Bar)

World Bank Governance index (2005)

Percentile 85

Percentile 83

Percentile 84

Percentile 88

Percentile 99

Source: World Bank

World Bank Governance index (2005)

Percentile 68

Percentile 70

Percentile 88

Percentile 92

Percentile 95

portuguese economy and the banking sector

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