LISBON, May 13 (Reuters) – Portugal will maintain its strategy of reducing its deficit and high debt to protect against a new round of rate hikes by the European Central Bank (ECB), even if it is affected by the slowdown in growth in the euro zone, its finance minister said on Friday.
The rate hike cycle is difficult for Portugal, which is the third most indebted country in the European Union after Greece and Italy, and has benefited from historically low financing costs in recent years.
Finance Minister Fernando Medina said the prospect of an ECB rate hike is “increasingly evident and will, in the long run, impact funding costs as Portugal refinances its new debt”.
“The deficit and debt reduction objective aims to ease the burden of debt paid by all (citizens), to build (external) credibility and to gain a margin of safety for the difficult times ahead”, he told a parliamentary committee.
The government expects the debt-to-GDP ratio, which ended last year at 127.4% after falling from a record 135.2% in 2020, to stand at 120.7% at the end of this year.
It sees the budget deficit narrowing to 1.9% of gross domestic product this year from 2.8% in 2021, while projecting growth of 4.9%, the same as last year, despite the impact of the war in Ukraine.
Medina said “Portugal exceeded all expectations” in the first quarter, with GDP growth of 11.9% compared to a year ago and 2.6% compared to the fourth quarter of 2021.
He acknowledged that the euro zone as a whole, and the country’s main trading partners, Spain and Germany in particular, is growing at a “much slower” pace and that “Portugal is not at the shelter from this external environment”.
“But we must take advantage of this best moment in the Portuguese economy to protect ourselves for the future and remove Portugal from the podium of the most indebted countries,” he said. (Reporting by Sergio Goncalves; editing by Barbara Lewis)