• Interview by:
  • Filipa Ambrosio e Pedro Carvalho

‘Removing Portugal from the most indebted list would be solving our Achilles heel’

Portugal’s finance minister Fernando Medina spoke to ECO about the current moment of the economy and recognises that "inflation is already having impacts that are visible in our country."

It was on the terrace of MAAT, in Lisbon, that we talked on Thursday with the minister of finance who had just attended a lunch with lawyers who will be at the Advocatus Summit, an event organised by ECO, which brings together the country’s largest law firms.

Fernando Medida spoke about the economic growth at the beginning of the year which surprised everyone, about inflation which he said was having a “stronger impact on lower income strata” and also about the interest rates of the European Central Bank (ECB) which will probably begin to increase in July.

The minister of finance does not give up talking about the right accounts and recognises that with the increase in ECB interest rates, “the cycle of budgetary consolidation processes carried out by reducing interest charges” will be “interrupted”.

Fernando Medina claims that the country has amassed a great deal of credibility in recent years, capital that may be useful in convincing the other Euro countries to choose his predecessor, João Leão, to lead the European Rescue Fund.

A fortnight ago, INE announced that GDP in the first quarter increased by 2.6% (quarter-on-quarter), above all analysts’ forecasts. Is the government’s estimate of 4.9% growth this year no longer out of date?

The growth figures for the first quarter are strong, they are the result and reflect a great confidence in the Portuguese economy, the result of the Portuguese workers, the Portuguese companies, the positive environment that is being experienced at this stage – a little bit of overcoming the most serious moments of the pandemic – and this is encouraging data.

But as these numbers become known, elements of uncertainty also emerge, and even elements that introduce conditioning factors in terms of the development of the country’s economy, such as the pre-announced increase in interest rates by the ECB, the slowdown in the economies of Eastern and Central Europe, and the uncertainty as to a swift political solution to the war in Ukraine.

This is therefore positive data that we must not underestimate, but we must also be prudent and read the whole picture of the reality with which we are faced, and no change in the policy that we have defined so far is therefore justified.

It’s a bit like the message you gave this week to socialist militants in a meeting to present the State Budget, that is, ‘things are going well, but it’s better to be cautious’.

Yes, I think that prudence is an important characteristic in governing, especially when the signs of risk and change are in front of us; they are visible, we cannot say that a rise in interest rates by the ECB, if it happens, is something that is not at all unexpected.

The growth figures for the first quarter are strong, they are the result and reflect a great confidence in the Portuguese economy.”

It was already pre-announced that this would happen and this will have an impact from the point of view of the cost of public debt, from the point of view of the Budget, from the point of view of the economy as a whole. Today, no observer is able to anticipate a positive political solution to the end of the conflict in Ukraine. In fact, we see underlined the factors and voices of those who point to a scenario that is perhaps more… that we are facing a scenario of prolonging the conflict.

Therefore, at a time when we have a very high growth rate, we are concerned about our future in the short and medium term, but with a prudent attitude.

Regarding inflation, it skyrocketed in Portugal to 7.2% in April. Is this already causing havoc in the economy? Portugal in April almost matched the average inflation rate in the Eurozone.

Inflation is already having impacts that are visible in our country. Either directly through fuel prices, on energy prices, or also on several goods that are more exposed from the point of view of the food chains; and that is precisely why we approved a set of measures to mitigate this effect.

It is true that inflation also has an asymmetric effect, which is significantly stronger in the lower income strata, which are those who, not having savings, not having the possibility to save, are more exposed due to the nature of their consumption basket.

Therefore, measures have already been taken in this regard, and so I hope the Budget will be quickly approved, that it may come into force, because there are more measures there to mitigate these effects.

The emergency support that is being given to the most disadvantaged groups, both now with the Budget and with the increase of the minimum subsistence amount – i.e. the enlargement of the number of families that are not subject to taxation – in addition to the price mitigation policies…

This week in Slovenia, ECB President Christine Lagarde came to point to a possible interest rate increase in the Eurozone in July, after 11 years without increases. You are worried about this from the point of view of the impact on public finances and from the point of view of the impact on Portuguese families. We are a very indebted country, on the State side but also on the household side.

The question deserves two answers. On the one hand, what the governor of the European Central Bank did was to reinforce what she had already announced more than once, and which I myself underlined very clearly when the State Budget was presented. Namely in view of the criticism of those who said that we should go further in terms of public expenditure, and in view of those who said that we had no rules to follow, I strongly emphasized the fact that we are a country with a very high level of public debt and that we are approaching the moment of reversal of monetary policy in more than a decade.

I am among those who advise and will always advise prudence regarding to interest rate hikes. The normalisation of monetary policy was natural in a context of solid growth and without particularly risky horizons. The framework we are already experiencing is one of slowing economies, in Eastern and Central Europe, and where there are several doubts on the horizon; the main one being the favourable outcome of the situation in Ukraine as a peaceful situation. In this context, a significant, rapid advance relative to rates seems to me to be a very significant risk move, because it will catch economies in a counter-cycle. And I think monetary policy has to have…

Do you think monetary policy should be more counter-cyclical now?

Yes, at least not pro-cyclical in the sense of not deepening the movements that are posed. That is why I am on the side of those who advise prudence in this movement, so as not to make mistakes like those made in the past.

Are we, the country, prepared for an interest rate increase, as forecast by the markets, i.e. an increase of about 1 point in the space of 12 months?

It will always be a demanding adjustment from the country’s point of view. It has two different dimensions. Regarding public accounts, public finances, the increase in interest rates has an impact, which is an impact that is increasingly felt as the years go by. It is an impact that is not sudden, nor is it immediate. Because the impact is only on new issues and not on the overall stock of debt that is contracted at a given rate.

The IGCP has even said that this year the cost of financing the country will go down, through the replacement of old issues, made 10 years ago, by other more recent ones with lower interest rates.

This is another dimension that gives us another time, which is the time to replace the debts that still have a higher average cost, and which will result from an increase in the rates that are now known and which already incorporate the ECB pre-announcement.

Now, if we think in a medium and long term framework, what we can say is that the cycle of fiscal consolidation processes is interrupted, interrupted by the reduction of interest charges and therefore this element must be taken into account. This explains why we have attached such importance to the reduction of debt and debt stock. Because in addition to the gain in our autonomy, in addition to the fundamental preservation of financing conditions for companies and individuals, we must be aware that the better the Portuguese debt is assessed, any small gain that we may achieve in reducing the burden on the Portuguese debt will be reflected in loans to companies and individuals.

Removing Portugal from the list of the most indebted countries would be resolving what is today an Achilles heel in terms of assessing our financial situation.”

It is evident that this then has an impact on the overall debt burden. Because if there is a period of rising interest rates, if we manage to reduce the debt stock, we will be able to reduce the impact of interest rates. The Stability Plan foresees a stabilisation of the interest burden over the reference period, mainly due to these two movements: the debt reduction and an adjustment of the rates.

Do you want to reach the end of the legislature with the banner of the least indebted Southern European country?

It is not a flag, I think that would be a very important element. Removing Portugal from the list of the most indebted countries would be resolving what is today an Achilles heel in terms of assessing our financial situation. Today, the country’s situation is widely known abroad, and I have had the opportunity to see this in meetings of the Eurogroup and also with representatives of international institutions. The path taken by Portugal in fiscal consolidation in recent years is widely recognised, valued and characterised as distinctive, in a market that today distinguishes much more between European countries than it did before the euro crisis, when these analyses were not made with such precision.

Does this capital of credibility that the country has amassed allow the name of João Leão to be presented with a high degree of confidence for an important position such as leader of the European Rescue Fund?

It is certainly one of the elements that underpin this candidacy and the way in which it is appreciated. The prestige that Portugal has today and the credibility that Portugal has built up, to which João Leão is ….

…somehow associated with ….

Not somehow, but strongly associated, both as secretary of state and as minister, he developed and was part of the execution of this policy strategy defined by the government and the prime minister. This obviously makes a very important point in relation to the prestige that Portugal has today.

Now, our prestige and what we have achieved is not enough for us not to focus on the fragile elements that we still have. And the level of debt is clearly this element of weakness. I think that the criticism that has been made for paying attention to this indicator reveals a certain very short term vision that does not incorporate elements that are already visible to us when we simply raise our eyes a little to the medium term.

Therefore, we will continue with determination and seek to reduce the debt. Last year was the most important reduction since the Second World War and the reduction that is planned [for this year] is a very significant one, of 7 percentage points, and it must continue in the following years.

  • Filipa Ambrosio
  • Pedro Carvalho